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Speaker 1: Let's get to our guest. Paul Christopher is with as

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Speaker 1: Paula's head of Global market Strategy at the Wells Fargo

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Speaker 1: Investment Institute. He joins us from St. Louis. Thanks for

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Speaker 1: being with us, Paul. If I told you today that

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Speaker 1: we got more hawk ish FED speak, you would probably say,

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Speaker 1: so what I mean, what's new about that? We've been

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Speaker 1: getting this this litany of FED speakers who have basically

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Speaker 1: been saying, look, we're not ready to dial back on tightening,

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Speaker 1: And today Jim Bollard looking at a terminal rate maybe

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Speaker 1: of five and a quarter percent. But that's really not

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Speaker 1: new news, is it at all? No, not really at all.

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Speaker 1: Five and a quarters are very close to where the

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Speaker 1: market has been pricing over the last month. So if

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Speaker 1: you had to say what the outlook for equities are

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Speaker 1: in in the face of this notion that a lot

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Speaker 1: of this has already been discounted by the market, where

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Speaker 1: do we go from here? Well, the problem for the

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Speaker 1: market is that they believe. The market believes that inflation

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Speaker 1: is on the downtrend. We also believe that. But but

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Speaker 1: the fact of inflation having peaked is not a reason

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Speaker 1: for the Fed to turn and cut rates, and that's

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Speaker 1: the fundamental disconnect that still exists between the Fed and

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Speaker 1: the market. That's why the market was up and down

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Speaker 1: all day today. While we think four thousand is not

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Speaker 1: a sustainable rate right now for the market. There needs

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Speaker 1: to be better agreement that that the Fed can taper

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Speaker 1: their rate hikes, but they're gonna still hike and then

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Speaker 1: they're gonna hold those hikes and the economy is going

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Speaker 1: to go into recession and the market just doesn't believe

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Speaker 1: that the Fed will hold rates until the economy goes

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Speaker 1: into recession. That that's just a fundamental disconnect. You look

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Speaker 1: at earnings forecasts, for example, still around two a share

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Speaker 1: for the S and P in the consensus. That's way

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Speaker 1: too high. That has to come down. Well, the thing is,

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Speaker 1: what people are having really a problem getting their heads around, arguably,

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Speaker 1: is just how much pain that the Federal Reserve is

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Speaker 1: willing to inflict on the economy exactly, and uh, five

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Speaker 1: and a quarter when we were at zero a year ago.

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Speaker 1: UH is quite a lot, especially when you haven't seen

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Speaker 1: the full impact of those rates yet. We're already seeing

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Speaker 1: housing close to our intersepct, and we're seeing the retail

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Speaker 1: side very shaky. Real incomes have been negative now for

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Speaker 1: many months. That this is an economy that's showing all

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Speaker 1: the signs of being pre recessionary UH and the FED

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Speaker 1: needs that recession to help it bring inflation back down

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Speaker 1: to that two percent target. The market just is not

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Speaker 1: in a position yet where it wants to believe that

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Speaker 1: the Fed won't blink, won't pivot before we get the recession.

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Speaker 1: But if you look at the way US corporati have

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Speaker 1: been performing, there's an unevenness here. I mean, we heard

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Speaker 1: from Nvidia yesterday positive news, the day before, Micron with

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Speaker 1: a very cautious outlook, and that's just in the semiconductor space.

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Speaker 1: Look at retail earlier this week Walmart with very very

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Speaker 1: good numbers, and then yesterday it was Target that disappointed.

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Speaker 1: So there's just a lot of divergence here. There truly is,

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Speaker 1: and again in a pre recessionary environment that's not at

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Speaker 1: all unusual. What I would ask investors to remember, is

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Speaker 1: it in a bear market. The first thing you have

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Speaker 1: happened is the multiple compression. We've seen that all year long.

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Speaker 1: And then the second shooter drop is that earnings finally

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Speaker 1: do come in much lower and direct and validate that

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Speaker 1: earlier multiple compression. So we've seen the first you you

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Speaker 1: haven't seen the second one yet that's coming in twenty three.

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Speaker 1: But we were talking about the possibility of a recession

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Speaker 1: in the last segment. I sort of finished that thought

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Speaker 1: of by asking whether actually a recession is something that,

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Speaker 1: unfortunately the American economy may need. Yeah, we think it

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Speaker 1: does need it. You've still got some stickiness in those

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Speaker 1: services prices, CPI prices, uh, and that's what it's going

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Speaker 1: to take to to to really break the back up

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Speaker 1: the service inflation numbers going forward. We think it will

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Speaker 1: happen and we'll be back down considerably enough for the

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Speaker 1: FETE to cut rates later in the year, but first

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Speaker 1: we have to have the pain. So I'm trying to

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Speaker 1: understand an investment strategy that you may be using right

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Speaker 1: now given everything that we've been talking about, and whether

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Speaker 1: any of that thinking includes moving money offshore and looking

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Speaker 1: at opportunities in em or maybe not emerging markets, uh necessarily,

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Speaker 1: but looking at places like Japan or even South Korea. Sure. Now,

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Speaker 1: when when we think about overseas markets, we think of

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Speaker 1: highly trade oriented cyclical economies, Uh, they're outperforming the US,

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Speaker 1: highly cyclical salt small cap index in the Russell two

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Speaker 1: thousand for the last several weeks. But we think that's

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Speaker 1: really a function of the dollars slide in the last

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Speaker 1: several weeks, and which in turn has been a function

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Speaker 1: of this again, this misunderstanding, latest misunderstanding of the markets

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Speaker 1: regarding the Fed. The dollar dropped three after the November

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Speaker 1: two FED meeting, thinking that the Fed was going to

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Speaker 1: be pivoting to great cuts, and then after the CPI report,

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Speaker 1: which we talked about in the last segment, the dollar

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Speaker 1: dropped another three percent, again on this misunderstanding that that

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Speaker 1: inflation missing low by a couple of ticks would be

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Speaker 1: enough for the FED to start cutting rates. It's just

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Speaker 1: not the case. So your out performance overseas is really

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Speaker 1: due to that six percent give back on the dollar.

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Speaker 1: We think the dollar bounces back and emerging and developed

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Speaker 1: markets give back all their gains by the end of

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Speaker 1: the year. So we would really stick with the US

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Speaker 1: first sort of investment strategy. How did you, you know,

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Speaker 1: look at valuations at the moment given the storm clouds

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Speaker 1: of economic glue. Yes, still pretty high out there, and

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Speaker 1: and a lot of that is being driven by a

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Speaker 1: lot of liquidity uh and uh and and the fact

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Speaker 1: that those earnings estimates just haven't come down. So every

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Speaker 1: time we get a pullback, let's say the thirty five thirty,

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Speaker 1: the market wants to buy on any sort of suggestion

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Speaker 1: that the FED might be in the future cutting rates.

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Speaker 1: And and it's a it's a sequel, it's a bad

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Speaker 1: sequel to a bad movie. You should just avoid that

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Speaker 1: sort of thinking. Altogether, I'm going to depart and talk

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Speaker 1: a little bit about the crypto space only because this

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Speaker 1: ft X story just keeps on giving. Every day we

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Speaker 1: get another layer, it's being pulled back and more um

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Speaker 1: is revealed. I guess the advisors who are basically overseeing

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Speaker 1: the ruins of this firm are struggling to locate the

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Speaker 1: company's cash and it's crypto holdings. What is this doing

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Speaker 1: to market psychology right now as you see it, is

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Speaker 1: there this severely detrimental Well, it's a it's a it's

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Speaker 1: a setback for sure, and it's a it's a reminder

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Speaker 1: of something that we wrote about a year and a

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Speaker 1: half ago, which is that that you're going to continue

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Speaker 1: to see volatility in this digital assets space. I'll call

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Speaker 1: it broadly digital assets, and you're going to see additional regulation.

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Speaker 1: Both of those were cautions that we offered investors, But

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Speaker 1: we do think that just as you've seen volatility and

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Speaker 1: then recoveries in the past, we think you'll see the

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Speaker 1: same kind of pattern going forward. More regulation will come out,

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Speaker 1: We'll see more adoption of of blockchain, will see more

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Speaker 1: adoption of digital ledgers. It's it's inevitable, we think, and

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Speaker 1: so there are opportunities out there, but the investor just

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Speaker 1: really has to be ready for a lot of very

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Speaker 1: big ups and downs and even shocking stories like the

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Speaker 1: one we've seen playoff this one. Well, well, the thing

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Speaker 1: is okay, yes, it's certainly blockchain has a future, etcetera.

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Speaker 1: But you know, with all the regulation and all the

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Speaker 1: other things that you're coming on and we've seen a

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Speaker 1: reputational damage, you've gotta ask you the question, what's the

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Speaker 1: point of crypto? If you if you look at if

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Speaker 1: you look at it as more than just a currency,

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Speaker 1: and and maybe more as a as a new system

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Speaker 1: of exchange. We think, going why do we need it?

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Speaker 1: Then you you don't. You don't need twenty thou of them,

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Speaker 1: that's for sure, But which ones will survive? That's going

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Speaker 1: to be the question going forward. It's always the case

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Speaker 1: when you have a new innovation that's so so breathtaking

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Speaker 1: like this one, you have to sort out the space first,

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Speaker 1: all right. That, Paul, thank you so much for joining

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Speaker 1: us to enjoying your company. That Paul Christopher, head of

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Speaker 1: Global market Strategy at Wells Investment Institute,