Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Also Lignos Joints
Speaker 1: right now global head of FX Strategy at RBC Capital Markets.
Speaker 1: And we can go to her physics at Cambridge and
Speaker 1: look at fourteen topics. We're not gonna do that, Elsa.
Speaker 1: I want to look at the one true thing you're
Speaker 1: focused on, which is your e c B. You've provided
Speaker 1: huge research over the last decade on e c B.
Speaker 1: What does Laguard do is there is her degrees of
Speaker 1: freedom so shrunk down that she has limited choice. April fourteen,
Speaker 1: So this stage they'll be doing very little. Um, they're
Speaker 1: setting ourselves up for a normalization coming further in the year.
Speaker 1: But I think what gets really interesting is what they
Speaker 1: do further out. Because the market is pricing hikes and
Speaker 1: it's clear that's the direction of travel. But the question
Speaker 1: is how far do we just get to zero and stop?
Speaker 1: Do we go any further than that. And the reality
Speaker 1: is that unlike the US where you have this really
Speaker 1: strong domestic demand, in Europe it's a bit more about
Speaker 1: inflation without as much strength in the economy. How do
Speaker 1: you respond to the certitude that they will raise rates,
Speaker 1: begin to raise rates, or get out front of raising
Speaker 1: rates to keep up with the Fed. Well, the reality
Speaker 1: is they're not going to keep up with the FED,
Speaker 1: and I think that's what's going to just give increasing
Speaker 1: support to the your solo as the year goes on.
Speaker 1: I mean, our call for for euro dollar is still
Speaker 1: a trough around one oh seven, and quite comfortable with that.
Speaker 1: But you know, if I had to look at where
Speaker 1: the risks lie around that, you know, and less the
Speaker 1: FED change's course, or you know, something happens to derail
Speaker 1: the US tightening, and it may well happen later on
Speaker 1: in the year. Um, if things turn out as market
Speaker 1: surprised at the moment, we're going to have a really
Speaker 1: significant meld advantage for the US over the your area
Speaker 1: by the end of the year, and that in itself
Speaker 1: will be very meaningful for the currency. So what's a
Speaker 1: ramification for the dollar of this balance sheet reduction? That
Speaker 1: we're trying to game out and coming up with question marks.
Speaker 1: So I think it's a little bit more indirect than
Speaker 1: most people perhaps might think, because all of our research
Speaker 1: historically has found that there's no one for one link
Speaker 1: between the size of a central banks balance sheet and
Speaker 1: the domestic currency. A lot of it depends on the
Speaker 1: status of the currency as a haven or as a
Speaker 1: risk proxy. And because in the case of the dollar
Speaker 1: at the moment it is trading as a bit more
Speaker 1: of a haven, you do tend to find that if
Speaker 1: equities sell off, the dollar finds a little bit of
Speaker 1: a boost um to the extent that the market, like
Speaker 1: you said earlier, is not necessarily priced for a full
Speaker 1: one point one trillion of reduction and balance sheet per year.
Speaker 1: You may well see the weighing on equities and boosting
Speaker 1: the dollar as a result. Elsa, you talk about the
Speaker 1: global picture for the currency, and so I have to
Speaker 1: go to a philosophical point, especially as you see China
Speaker 1: start to pay for call from Russia and u N
Speaker 1: and you start to get this concern, especially as you,
Speaker 1: as Treasury Secretary Jenny Ellen yesterday said that they could
Speaker 1: actually actually impose some sanctions similar to what they did
Speaker 1: on Russia to China, should they invade Taiwan? How much
Speaker 1: are you looking at the diminishing of the dollars place
Speaker 1: as a result of what some people are saying the
Speaker 1: weaponization of its cloud on the global financial system? Right?
Speaker 1: You know, a lot of what we've seen with Russia
Speaker 1: in some ways has been unprecedented. But I think the
Speaker 1: key task is what's going to take its place. We
Speaker 1: had a really interesting conversation about this exact topic just
Speaker 1: a few hours ago with the client talking about de
Speaker 1: dollarization and that. Two big obstacles I think for China
Speaker 1: one is the closed capital account, you know, the fact
Speaker 1: that they don't allow free, unflanted access to their capital market.
Speaker 1: It's and the second is liquidity and the ability to
Speaker 1: hedge exposure via the US dollar or via dollar leg
Speaker 1: funding markets. So I think until you get a very
Speaker 1: broadshift on both those topics, you're not really going to
Speaker 1: see a proper challenge. Of course, it's going to happen
Speaker 1: over the next decade or fifteen years, but most investors
Speaker 1: don't think on that horizon. Also, the bet here is
Speaker 1: on all these currencies amid massive uncertainty, can you make
Speaker 1: a big figure bet and dollar or a big figure
Speaker 1: bet and d x Y or the Bloomberg Dollar Index.
Speaker 1: Is that even feasible? Now, I've got to say, Tom,
Speaker 1: we've had a lot of success this year with quite
Speaker 1: short term tactical trades. Um. It's definitely paid off a
Speaker 1: lot better than trying to kind of position for those big,
Speaker 1: longer term trends. Uh. You know, at the moment, I
Speaker 1: think we've been watching your dollar kind of bounce around
Speaker 1: in that range. We obviously have the French election coming
Speaker 1: up that's attracting a lot more interest and attention. My
Speaker 1: bias longer term is still for a grind lower, but
Speaker 1: clearly there's a lot of risks around that. I look
Speaker 1: at the Pacific Rim and of Lisa mentions China and
Speaker 1: the challenges there as well. Is there an opportunity of
Speaker 1: surprise opportunity in the Pacific Rim here, given the COVID
Speaker 1: story in China, given sort of a Pacific Rim gloom
Speaker 1: out there, where's that opportunity? Yeah, it's a really interesting
Speaker 1: question because actually I see quite a lot of optimism
Speaker 1: baked into parts of the Pacific Rim. You know, if
Speaker 1: you look at the Australian dollar, even the new Zealand dollar.
Speaker 1: We model it based on the usual fundamental drivers two
Speaker 1: year yields, commodity prices and so on. And actually for
Speaker 1: the last few months there's been this big unexplained residual,
Speaker 1: so a lot of optimism kind of getting baked in
Speaker 1: to the top side. I do think that as the
Speaker 1: year goes on, you know, if the FED is really
Speaker 1: going to deliver as much as it says it will,
Speaker 1: as much as markets expect it might, Um, then that
Speaker 1: yield advantage for the US is going to undermine not
Speaker 1: just the Pacific rim, but global currencies will oddly else.
Speaker 1: Before we let you go, you're talking about some of
Speaker 1: your conversations with clients. What are the biggest concerns for
Speaker 1: clients right now? What is their biggest worry that they
Speaker 1: present to you? You know, I think there are a
Speaker 1: number of questions topics on people's minds. Um. Clearly, you're
Speaker 1: looking at the situation UK and everybody is sensitive to
Speaker 1: the fact that it can worsen materially at very short notice. UM,
Speaker 1: it's a political decision what extent of sanctions are imposed,
Speaker 1: and and that political pressure for further sanctions could change.
Speaker 1: Now beyond that, I think people are a little bit
Speaker 1: perplex you know, looking at the relative strength of equity markets,
Speaker 1: for example, and constructing their heads trying to figure out
Speaker 1: where that's coming from. Granted, you know, I'm talking to
Speaker 1: macro investors. Probably if you speak to an ext investor,
Speaker 1: they feel a lot more comfortable with it, but there's
Speaker 1: certainly a lot of anticipation of perhaps and weakness further
Speaker 1: out the line. Thank you RBC. Nobody owns it for
Speaker 1: almost a decade. Like Elena Paoliakova, when you are at
Speaker 1: Berkeley and write a thesis on the Dark Side of
Speaker 1: European Integration, you are a decade out front on the
Speaker 1: dark side of this war. Professor, Thank you so much
Speaker 1: for joining us this morning with the Center for European
Speaker 1: Policy Analysis. Elena cut to the chase. You nailed this
Speaker 1: ten years ago. How dark is this war and what
Speaker 1: does Ukraine have to do about it? Unfortunately, the threat
Speaker 1: that is Russia we now know. We tried to ignore
Speaker 1: it and we just can't, you know, in Russian Vida
Speaker 1: Crimea and then you know invaded Russia's sorry crane's eastern
Speaker 1: the dorn Bus. We put sanctions on Russia. Obviously sanctions
Speaker 1: didn't change Putin's calculus, and here we are. This is
Speaker 1: the most significant, most brutal war since we've seen since
Speaker 1: World War two. Um. And it is a dark moment
Speaker 1: for Europe. Absolutely, It's a dark moment for all of us,
Speaker 1: even here in the United States. Elena, I've got John
Speaker 1: Bolton on the right and Elena Farcas working with Obama
Speaker 1: on the left, both agreement that we weigh over estimate
Speaker 1: the ability to start World War three. Do you agree
Speaker 1: with them that we were overwrought in our worries about
Speaker 1: the ghosts of nineteen thirty nine? Uh? You know, it
Speaker 1: is rare to have someone like Bolton and Evelyn, whom
Speaker 1: I know as well, uh, to agree on this issue.
Speaker 1: But it just tells you how Um at the end
Speaker 1: of the day, you know, we are so worried about
Speaker 1: escalating and worrying about what will Putin do if we
Speaker 1: give the Ukrainians more weapons, all we can do if
Speaker 1: we give the Ukrainians fighter jets. But you know the
Speaker 1: truth is we can't predict what Putin will do, and
Speaker 1: we should be worried more about how do we ensure
Speaker 1: that Europe is whole, free and a peace How do
Speaker 1: we ensure the United States, Um isn't going to get
Speaker 1: pulled in with troops and things of the nature into
Speaker 1: the war, and the best way to do that is
Speaker 1: to give you know, as a Swarmers could have said,
Speaker 1: to give the Ukrainians absolutely everything they need to be
Speaker 1: putin in Ukraine so we don't have to fight him
Speaker 1: as Nano in Poland or the Baltic States, because unfortunately,
Speaker 1: if Putin isn't stopped in Ukraine, there is a very
Speaker 1: good chance that he'll take that as an opportunity to
Speaker 1: keep going forward, keep going further into Europe. A leader
Speaker 1: to the sanctions work at a time when a lot
Speaker 1: of the opposition to Vladimir Putin within Russia has been squelched,
Speaker 1: where protests aren't really working if everyone's hauled off to
Speaker 1: jail or forced to leave the country. You know, economic
Speaker 1: sanctions are historically speaking, especially with Russia, have never worked
Speaker 1: to change the short term military behavior on the ground.
Speaker 1: You know, looking back at when Russia invaded in ins Crimea,
Speaker 1: we impose some significant sanctions on Russia, but it didn't
Speaker 1: change Putins calculus. How do we know that because he
Speaker 1: invaded Ukraine eight years later. So now we have an
Speaker 1: incredibly significant round of sanctions that we've imposed on Russia.
Speaker 1: We've never tried this before. It's affecting the global economy.
Speaker 1: The Russian economy is not like North Career orr on
Speaker 1: It's it's significant and we're seeing some of the effects
Speaker 1: of that, you know, in grain prices and oil prices obviously,
Speaker 1: But sanctions are a long term tool in themselves. They
Speaker 1: will not change what's happening day and day out on
Speaker 1: the battlefield. For that, we need the military and security assistance.
Speaker 1: Sanctions in themselves won't change behavior. And at the end
Speaker 1: of the day, the elite, the oligarchs, they're close to Prutin,
Speaker 1: They're not breaking ranks um, They're staying loyal to Mr. Prutin,
Speaker 1: and I don't think that's going to change. This is
Speaker 1: a really important point. The sanctions are not helping in
Speaker 1: the near term when it comes to the day and
Speaker 1: day out of the on the ground military actions. If
Speaker 1: that's the case, do policymakers realized that, Do they sort
Speaker 1: of recognize that, and if so, what are they doing
Speaker 1: to actually affect that at a time when they're talking
Speaker 1: about war crimes. Well, absolutely, I do think there's a
Speaker 1: recognition that sanctions have a way of taking a long
Speaker 1: time to work because we've never tried this level of
Speaker 1: economic sanctions that country as large as Russia. We're still
Speaker 1: waiting to see how they will all interlock and play out.
Speaker 1: Right now, the strategy is too pronged. It's one to
Speaker 1: make it really hard for Russia to sustain the war
Speaker 1: effort financially forced Russia potentially to default. This seems to
Speaker 1: be what the United States is pursuing right now. Close
Speaker 1: all avenues of financing for the Russian government so they
Speaker 1: can no longer pay down on their debts. But you know,
Speaker 1: they'll have a thirty day great spirit if they even uh,
Speaker 1: stop payments on their debts. So it's really not a
Speaker 1: short term solution. So the second prong of the strategy
Speaker 1: has to be making sure that you know, we are
Speaker 1: supplying Ukrainians and what they need on the ground, I mean,
Speaker 1: and together that should contain Russia if we do it rapidly,
Speaker 1: if we do what it takes, and if we don't,
Speaker 1: you know, kind of pursue a very cautious tentative policy
Speaker 1: where you know, we may do eggs, we won't do
Speaker 1: why so if we go in full, we give the
Speaker 1: Ukrainians what they're asking for. We ramp up those economic sanctions.
Speaker 1: You know, the war will eventually have to come to
Speaker 1: a halt by you know, eventually. How many more deaths
Speaker 1: would that mean? How many more brutal images are we
Speaker 1: going to see like we've beens in the last couple
Speaker 1: of days. That's really the where we are right now,
Speaker 1: calculating those costs, and it's it's painful. It's quite painful,
Speaker 1: incredibly painful for the people of Ukraine. Elena, Thank you.
Speaker 1: Elena Polla cover the of the Center for European Policy Analysis.
Speaker 1: Olivia Blanchard joins us this morning. Professor Blanchard, thank you
Speaker 1: so much for joining us. You were just out at
Speaker 1: Washington University with all of the heritage of Murray Weidenbaum
Speaker 1: and all the optimism of Washington University and growth. Can
Speaker 1: you be optimistic about the American economic experiment at this time?
Speaker 1: It depends which one, but the count one one we're
Speaker 1: all thinking about is how we're going to basically decrease
Speaker 1: inflation and get back to to a low level. In
Speaker 1: that I'm not as optimistic as as most people. I
Speaker 1: still think it's going to be viat. I think inflation
Speaker 1: has a lot of momentum. I think wage golf is
Speaker 1: you know, there's a very tight labor market. Wedge golf
Speaker 1: is very strong. The fect is going to have very
Speaker 1: hard time stewing down the machine and it has to
Speaker 1: admit that it has to stow the machine a lot.
Speaker 1: And we don't want a recession. But you know, there's
Speaker 1: this term come golf recession. I think that this will
Speaker 1: have to come with some increasing unemployment and maybe some
Speaker 1: increasing ways beyond what is currently priced in. With all
Speaker 1: of your work, and particularly with the firepowered M I
Speaker 1: T and the seventies you live the dismal seventies and
Speaker 1: the debate over trenched entrenched inflation. You have a chart
Speaker 1: at Peterson Institute of the seven or eight year battle
Speaker 1: to extract ourselves from nine eighteen. Is that our future
Speaker 1: out to two thousand? Now it's the past, it's not
Speaker 1: the future, but it's a warning. Uh. You know, basically
Speaker 1: what happened is that that just delayed doing what it
Speaker 1: had to do, and pull Voca came very late in
Speaker 1: the game and just want at it. But you had
Speaker 1: to increase rays by first in a hundred basis points
Speaker 1: to actually get to where he wanted, We're not going
Speaker 1: to go there with feed is much smart. Facial expectations
Speaker 1: are not as bad. But you know, the hope that
Speaker 1: we can do all this by having rays going to
Speaker 1: two point five or even three, I think it is
Speaker 1: a hope, not not in my my book of forecast.
Speaker 1: The hope is underscored by the mystery of some of
Speaker 1: the tools that the FET is using. And I'm thinking
Speaker 1: most importantly of the federals Ers balance sheet, possibly reducing
Speaker 1: it by one point one trillion dollars over a year.
Speaker 1: How much do we understand how this reduces inflation? Well,
Speaker 1: you know, it's likely to make the long rates a
Speaker 1: bit higher than they would otherwise be so to the
Speaker 1: extent that long rates affect activity, that's going to basically
Speaker 1: slow down again the machine. And that's the way you
Speaker 1: reduce inflation is basically by making the labor market less
Speaker 1: type than it is now exactly how it works, I
Speaker 1: think when it comes to the policy rate, I think
Speaker 1: we have some understanding of how it affects the economy.
Speaker 1: When it comes to quee or QT, now I think
Speaker 1: were we know much less And if I have a
Speaker 1: father would denounce some path but not feel that I'm
Speaker 1: committed to it if it turns out to be the
Speaker 1: stronger weaker than expected. Do you think we're heading into
Speaker 1: a period of time where inflation is structurally higher than
Speaker 1: it has been over the previous few decades because of
Speaker 1: the globalization and because of some of the shifts that
Speaker 1: we've seen that were accelerated during the pandemic. No, I
Speaker 1: don't think so. I don't think there's any close link
Speaker 1: to say, between productivity goal for globalized or any of
Speaker 1: these structural elements and the rate of inflation that the
Speaker 1: economy has. The rate of inflation can be anything. You
Speaker 1: just have to to have it flat. You basically have
Speaker 1: to uplay the economy at for employment, not hotter than that,
Speaker 1: not colder than that. But you can have any rate
Speaker 1: of inflation you want. Olivier, you have lived the vogues
Speaker 1: and the religions of the moment. You and I remember
Speaker 1: where the world stopped. I believe it was on a
Speaker 1: Thursday afternoon at three pm, and we'd all count M one,
Speaker 1: M two, M three. There's been any number of other
Speaker 1: religions of economics. What's the religion right now that we
Speaker 1: need to be aware of that? We need to fear well.
Speaker 1: I was never kind of in the m one and
Speaker 1: to m free religion. I always thought that was that
Speaker 1: was the religion and not not not not science. I think,
Speaker 1: you know, the way to think about how much peoples
Speaker 1: he works is to have to look at the yelk
Speaker 1: of and so of the of economic activity depends on
Speaker 1: the short end of the curve, some of economic activity
Speaker 1: depends on the long ends the mortgage rates and basically
Speaker 1: the however yield curve the more tightening, Okay, is I
Speaker 1: think that you know, if I had to choose one
Speaker 1: object as opposed to say I'm one or I'm two
Speaker 1: or whatever, I would say, just look at the yeld curve,
Speaker 1: and the yel curve, I think is telling us rates
Speaker 1: are going to go work for a while, then maybe
Speaker 1: they'll come down a bit, at least adjusted for inflation. Uh.
Speaker 1: And I think that's you know, that's the tool that
Speaker 1: the FED has. I mean, the old days it only
Speaker 1: played you know, at the short end. Now it plays
Speaker 1: all the way through the yeld curve. But that's the object.
Speaker 1: I think we have to look at, what's the tool
Speaker 1: of real yields. Olivier and I talked about this as
Speaker 1: the real yields, the inflation adjusted yield anten your treasuries
Speaker 1: moves to the highest the least negative, I should say,
Speaker 1: going back to March, Yes, I mean you have to
Speaker 1: realize that we're still in in an era of very
Speaker 1: very low bial rate UH. At the short end of
Speaker 1: the yield curve, bill rates are very large negative. At
Speaker 1: the long end, they are less negative than they used to.
Speaker 1: I think they are getting closer to zero. I think
Speaker 1: that's what's needed to get the economy going in the
Speaker 1: long run. We don't exactly know what the long run
Speaker 1: equilibrium rate, if you want to call it this way, is,
Speaker 1: but it's probably around zero at this point. So if
Speaker 1: we were you know, if we are cruising along with
Speaker 1: no more inflation than target, then I would say zero
Speaker 1: is probably the right number. But we have before we
Speaker 1: get there. We have to get inflation down, so we
Speaker 1: have to go above zero in terms of real rates. Olivia,
Speaker 1: We've better leave it there. Thank you so much, really
Speaker 1: looking forward to your work with the Peterson Institute, particularly
Speaker 1: on the new inflation level. Professor Blanchard. Right now we
Speaker 1: hold court with this colleague severta Supermannian head of Equity
Speaker 1: and derivative strategy at b of a. Buried in your
Speaker 1: note sa Vida is the mathewiness of your Berkeley, which
Speaker 1: is followed the money, follow the cash to borrow from Colbert.
Speaker 1: It's a cashiness moment. How much cash is our cashiness? Cash? Well, listen,
Speaker 1: I think that what we're seeing in the in the
Speaker 1: overall investment landscape is a reallocation towards the short end
Speaker 1: of the curve. I mean, we've seen it with Wall
Speaker 1: Street strategists. They amped up their cash recommended cash allocations
Speaker 1: and took down equity allocations. I think that's actually net
Speaker 1: bullish for equities, because what we found is that when
Speaker 1: Wall Street gets barished, that's generally assigned to get bullish.
Speaker 1: But when you think about the overall market, I think
Speaker 1: the reason that you want to buy stops right now
Speaker 1: is the cashiness of the market. And you know, the
Speaker 1: good the good news about the government and the FED
Speaker 1: being in debt is that they passed on a whole
Speaker 1: bunch of liquidity to consumers and corporate Something like nineteen
Speaker 1: trillion dollars of cash went from the public sector to
Speaker 1: consumers and corporates. And that's good that cash. Like you said,
Speaker 1: it is going to be worth It's going from worthless
Speaker 1: right now yieldless to three percent by the end of
Speaker 1: the year. That's a huge move in terms of the
Speaker 1: return profile, especially against a backdrop. Well, we don't think
Speaker 1: that equities are going to return anything close to that
Speaker 1: on a on a longer term basis. UM. So, I
Speaker 1: think all of this conspires to create an environment where
Speaker 1: some equities are going to do well and those are
Speaker 1: the most cashy of the equities and um and we
Speaker 1: can talk about sectors in a moment, but I think
Speaker 1: that there are a lot of parts of the SMP
Speaker 1: five hundred that look incredibly attractive from a free cash
Speaker 1: flow perspective and are also relatively inexpensive versus say tech
Speaker 1: or you know, high growth stops. At this point, de civated.
Speaker 1: That takes us strike to energy. Why stick with it
Speaker 1: after the massive move we've had here today, Dick with energy.
Speaker 1: I know it sounds crazy because the set has basically
Speaker 1: doubled or tripled, but you know, look, if you look
Speaker 1: at at the world around us, everybody still hates energy,
Speaker 1: and um what we found in our work is that
Speaker 1: energy is still a massive underweight, and the average long
Speaker 1: only portfolio same underweight that we started last year with
Speaker 1: something close to you know, over at ten percent underweight.
Speaker 1: But the sector has basically doubled in its size in
Speaker 1: the benchmark. So last year it didn't necessarily hurt to
Speaker 1: be out of the best performing sector. This year, it
Speaker 1: is probably going to hurt a lot more. And our
Speaker 1: view is that energy is still incredibly inexpensive, still offers
Speaker 1: a very high free cash flow, real free cash flow
Speaker 1: relative to other sectors. Um the free the earnings have
Speaker 1: kept up with its price moves, and it's it's really
Speaker 1: a sector that's gotten capital discipline. It's playing nice with
Speaker 1: E s G investors. I said this all before on
Speaker 1: your show. I think energy is now finally investable again.
Speaker 1: But folks haven't necessarily moved into the sector as aggressively
Speaker 1: as we would have expected it. And a lot of
Speaker 1: people would agree with you. You're seeing an increasing number
Speaker 1: of notes coming out saying that it's frankly, there's an
Speaker 1: under allocation to commodities. What about big tech though? And
Speaker 1: I do want to shift there just because this morning
Speaker 1: has been the bulls and the bears on Apple, with
Speaker 1: Dan Ives coming out and saying this is the most
Speaker 1: attractive time to go all in since two thousand fifteen,
Speaker 1: and then JP Market actually cutting their earnings forecast for
Speaker 1: Apple based on a consumer appetite. Where do you sit
Speaker 1: on this, Well, I'm not a stock analyst, but I
Speaker 1: would say that there are parts of big tech and
Speaker 1: there's a more yield quality, maybe old boring tech areas
Speaker 1: that have sold off enough to become expensive. So, you know,
Speaker 1: I think every week after big moves in the market,
Speaker 1: what we recommend to investors is to just run a
Speaker 1: simple screen of free cash flow to enterprise value and
Speaker 1: look for the cheapest UH tech stops and and they
Speaker 1: you know, the good ones rise to the top, and
Speaker 1: those are the ones that I think are are likely
Speaker 1: to outperform. So look for free cash flow at a
Speaker 1: reasonable price, because, as you mentioned, cash is king. I mean,
Speaker 1: we're moving from zero to three percent on cash. That's
Speaker 1: all you need to know in this type of a
Speaker 1: market environment. Soveta just to found a question the index
Speaker 1: CO year and forty six hundred. Where are we now
Speaker 1: only have some pages short of forty undred? What are
Speaker 1: you telling clients about your index co? You know, look,
Speaker 1: I mean we're neutral on equities. I think the market's
Speaker 1: going to bounce around a lot. You know, I think
Speaker 1: it's gonna hit our target a few times this year
Speaker 1: and then move higher and lower. It's gonna be a
Speaker 1: year where I believe there are gonna be opportunities to
Speaker 1: add exposure to tech, to energy, to areas of the
Speaker 1: market that get punished by you know, the vagaries of
Speaker 1: fat expectations, et cetera. But forty s dred to me
Speaker 1: still seems like a reasonable target. UM I would watch
Speaker 1: corporate and consumer confidence. If those two measures in the
Speaker 1: US start to ail and we see capex, you know,
Speaker 1: expectations start to drop, that's when we would get a
Speaker 1: little bit more bearished on ciplicals. But so far, so
Speaker 1: good to Beta. Wonderful to catch up with you, as always,
Speaker 1: always enjoy the rating of the research out of Bank
Speaker 1: America's vatasive amounting the bit of execuities. We continue with
Speaker 1: this discussion and a lot to talk about in a
Speaker 1: divisive debate on the American economy, and there's no one
Speaker 1: more qualified than Vincent Reinhardt with his heading of economic
Speaker 1: research at the FED and particularly the Greenspan FED Chief
Speaker 1: economist at Venerable Dreyfuss and Melon were thrilled at Vince
Speaker 1: rightin Erica, join us this morning. Vince, A personal note
Speaker 1: after I finished reading every word of the minutes yesterday.
Speaker 1: Who writes the minutes for the FED? When you were
Speaker 1: at the FED, were you the guy that wrote the minutes?
Speaker 1: I finned him for the best six or seven years,
Speaker 1: and was involved in drafting for a decade and a
Speaker 1: half before that. But the reality is is that a
Speaker 1: group does it, and that ultimately it's the responsibility of
Speaker 1: the Secretary of the FOM seat at claus now. But
Speaker 1: every draft is seen by every person who was in
Speaker 1: the half m c room for those two days, so
Speaker 1: it really is a group effort. Interesting, Vince, let's talk
Speaker 1: about this interesting economy. We've seen group a massive division
Speaker 1: this morning. Bloomberg surveillance over glass half full, half empty.
Speaker 1: When you see claims where they are, what does that
Speaker 1: signal to you about a fully employed America? The glass
Speaker 1: is more than half full, and the Federal Reserve is
Speaker 1: gonna have to uh take a little bit out and
Speaker 1: that is a difficult pivot that they're trying to undertake
Speaker 1: right now. Uh and uh, just you know, what was
Speaker 1: your conversation in the last five minutes. It's really hard
Speaker 1: to read the data. It was distorted by the pandemic depression. UH.
Speaker 1: The the experts have no idea what the seasonals are.
Speaker 1: You have to really appreciate eight that the information we're
Speaker 1: getting in real time UH is is somewhat suspect. Vince it.
Speaker 1: Do you agree with Bill Dudley that if if we
Speaker 1: do not see more of US sell off and equities,
Speaker 1: and if we continue to see inflation run as hot
Speaker 1: as it's been, that the Fed is going to have
Speaker 1: a more aggressive action against directly trying to torpedo where
Speaker 1: equity valuations are at this point. I wouldn't put it
Speaker 1: that bluntly, but the reality is monetary policy works through
Speaker 1: financial markets, and unless financial conditions tightened, UH they're not,
Speaker 1: they will be removing policy accommodation and putting restraint on
Speaker 1: the economy. The reality is that the overnight federal funds rate,
Speaker 1: the policy rate of the f MC, doesn't matter a
Speaker 1: whole lot for anything. It matters how it gets priced
Speaker 1: in through the yield curve and into other financial asset prices,
Speaker 1: and unless those prices move in a way to tighten
Speaker 1: financial conditions, the film seeing will not have accomplished UH
Speaker 1: slowing the growth of aggregate demand to something more sustainable
Speaker 1: given the level of where we are. So if the
Speaker 1: market is pricing in several series of fifty basis point
Speaker 1: rate hikes in a row from the Federal Reserve, as
Speaker 1: well as potentially one point one trillion dollars a Federal
Speaker 1: Reserve balance sheet reduction over the course of a year,
Speaker 1: then how much further would the Fed have to go
Speaker 1: in terms of signaling or even rate hikes to actually
Speaker 1: tightening conditions enough. Well. Uh, One thing to point out
Speaker 1: is even those succession at half point hikes imply the
Speaker 1: real federal funds rate denominal federal fund graded less inflation
Speaker 1: will still be negative. And that's the measure of policy impetus.
Speaker 1: So a lot of what the Fed has to do
Speaker 1: initially is just catch up. And until they have passed
Speaker 1: the catch up stage, Uh, then it's it's time to
Speaker 1: the questions you just did. At a pace of a
Speaker 1: half point point point over the next couple of meetings,
Speaker 1: the committee will still have to be tightening well into
Speaker 1: next year. It's not a fordom. You have maybe lived
Speaker 1: the FED more than anyone we speak to and from
Speaker 1: Volker and with all a lile brainers in the uproar
Speaker 1: two days ago. From Voker to where we are now,
Speaker 1: is you look at it is the Great Moderation over? Uh? Yes,
Speaker 1: I think that's right. We have one way to put
Speaker 1: it is we've had two generational shocks, a great finding,
Speaker 1: a pandemic, and uh European war in the space of
Speaker 1: two and a half years. And that's within a decade
Speaker 1: of what we have fought was the Great financial contraction. Uh,
Speaker 1: We've We've added a lot more to volatility. Importantly, the
Speaker 1: Great Moderation was the great anchoring of inflation expectation. We
Speaker 1: achieved what Volker and Greenspan talked about a situation in
Speaker 1: which households and firms were concerned about a changeable price
Speaker 1: level in making their decisions. Were out of that range.
Speaker 1: And we're probably out of the Great Moderation as well.
Speaker 1: So Vince right at the money question is if the
Speaker 1: moderation is over? Greenspan invented with you along the X
Speaker 1: axis this word measured. Are we done being measured? Remember?
Speaker 1: Greenspan also produced the policy tightening of that included uh,
Speaker 1: started with quarters, then put in intermeding actions, then fifties
Speaker 1: and seventy five. Uh. So I think he was willing
Speaker 1: to do what was appropriate. I think you're right. I
Speaker 1: think that being measured at this point, uh has some drawback.
Speaker 1: I think a better word than measured is predictable. The
Speaker 1: fact could do a lot, but they could let everybody
Speaker 1: know about what they're going to do. A feature of
Speaker 1: ninety four ninety five that we forget is markets were
Speaker 1: really volatile. There are a number of blow ups, including
Speaker 1: Orange County and prominent and prominent hedge funds. So uh,
Speaker 1: if you have a more assertive and changeable fed to
Speaker 1: address macroeconomic concerns, we might just get a lot more
Speaker 1: financial market volatility. To Vincent Ran, how that of dry
Speaker 1: for cementa Vincent great to catch out with you said.
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