WEBVTT - Surveillance: International Stocks with Arnott 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.600 --> 0:00:30.760 the Bloomberg Terminal and the Bloomberg Business app. Robert not 0:00:31.240 --> 0:00:35.120 is absolutely unique out of the University of California at 0:00:35.120 --> 0:00:38.879 Finn Kitlin, also called Santa Barbarad. He did one of 0:00:38.880 --> 0:00:42.440 the hardest things you can do in research. He did 0:00:42.479 --> 0:00:46.520 brilliant research and then kept doing it. That is an 0:00:46.520 --> 0:00:50.880 extremely rare commodity in the racket. To say his Chairman 0:00:50.920 --> 0:00:55.520 of Research Affiliates barely describes his contribution to the Chartered 0:00:55.640 --> 0:00:59.680 Financial Analyst program and to thinking out there about what 0:00:59.720 --> 0:01:02.960 to do and what not to do, rob or not. 0:01:03.080 --> 0:01:05.000 Thank you so much, and you know someone's going to 0:01:05.040 --> 0:01:08.080 say you're barish and that we'll forget about that. What's 0:01:08.120 --> 0:01:11.280 the biggest mistake right now in a type two construct? 0:01:11.600 --> 0:01:17.720 What's a thing desperately not to do right now? I 0:01:17.760 --> 0:01:23.360 think the most serious mistakes investors make our performance chasing 0:01:23.680 --> 0:01:29.120 whatever has done well by more whatever has faltered shun it, 0:01:29.840 --> 0:01:37.520 and secondly blinders focusing strictly on domestic opportunities. I'm not 0:01:37.600 --> 0:01:40.800 barish when things are cheap. Stocks outside the US are 0:01:41.400 --> 0:01:45.840 reasonably cheap. Value stocks outside the US are very cheap, 0:01:46.240 --> 0:01:50.840 and we find all sorts of narratives relating to China, 0:01:50.960 --> 0:01:56.680 relating to Ukraine for not investing outside the US. But 0:01:56.840 --> 0:01:59.680 the US has priced it more than twice the valuation 0:02:00.120 --> 0:02:04.080 to pulls of non US stocks. And so to avoid 0:02:04.120 --> 0:02:08.360 those two mistakes, it's awfully useful to think in terms 0:02:08.360 --> 0:02:12.120 of forward returns, not past returns, and forward returns are 0:02:12.160 --> 0:02:15.280 simply a function of what's the yield, what's the historical 0:02:15.320 --> 0:02:19.840 growth in income? And if there's any valuation mean reversion 0:02:19.880 --> 0:02:21.920 towards historic norms, is that going to help you or 0:02:21.919 --> 0:02:25.280 her get Do you suggest that on a national basis, 0:02:25.440 --> 0:02:29.519 US basis, or even international basis, that we're going to 0:02:29.600 --> 0:02:33.240 have a regime shift in what our interest rate will 0:02:33.320 --> 0:02:37.080 be that will allow for the fiction of a better 0:02:37.160 --> 0:02:41.400 nominal GDP, a better animal spirit out there, but in 0:02:41.440 --> 0:02:44.320 the long run won't pay off. Does Rob or not 0:02:44.560 --> 0:02:47.960 have to shift up from an anchored two percent to 0:02:48.120 --> 0:02:53.280 some kind of new interest rate regime. I think we 0:02:53.360 --> 0:02:59.280 are in a transition from a failed experiment with near 0:02:59.440 --> 0:03:06.160 zero and negative interest rates. That effort to stimulate an 0:03:06.200 --> 0:03:12.679 already growing economy was beyond foolish, and I think we're 0:03:12.680 --> 0:03:16.360 seeing the beginnings of a regime shift back to a 0:03:16.440 --> 0:03:19.520 point where interest rates matter. Think of interest rates as 0:03:19.560 --> 0:03:23.680 a speed bump if you are. If you have a 0:03:23.720 --> 0:03:27.240 speed bump on a street that's too high, it stops 0:03:27.240 --> 0:03:30.799 the traffic. If you have a speedbump that's nonexistent, you're 0:03:30.800 --> 0:03:34.440 going to get the occasional reckless driver driving way too fast. 0:03:34.920 --> 0:03:38.720 And the same thing applies with interest rates. When interest 0:03:38.840 --> 0:03:42.760 rates are too high, the economy is shuttered. Interest rates 0:03:42.840 --> 0:03:46.720 now or back to some semblance of normal. People talk 0:03:46.760 --> 0:03:53.280 about Powell channeling his inner volcre pardon me, Vulcar took 0:03:53.760 --> 0:03:57.560 the short rate to five hundred basis points above the 0:03:57.600 --> 0:04:01.640 preceding peak in inflation today, that would mean making the 0:04:01.720 --> 0:04:05.840 Fed funds rate fourteen percent. He's not channeling an inner Volker. 0:04:06.960 --> 0:04:14.760 He's dabbling with increasing rates in a fashion that hopefully 0:04:14.760 --> 0:04:17.359 won't do too much damage. And it's all based on 0:04:17.400 --> 0:04:21.200 a very naive neo Kinsian view that you have to 0:04:21.680 --> 0:04:24.960 you have to wreck the economy in order terranean inflation. 0:04:25.240 --> 0:04:28.200 Rob or not help me with the idea of my 0:04:28.320 --> 0:04:30.880 theme for twenty twenty three, which is, if we get 0:04:30.920 --> 0:04:34.039 a normal rate regime, something many of our listeners and 0:04:34.120 --> 0:04:36.400 viewers have never experienced. Let's say we get back to 0:04:36.440 --> 0:04:40.440 a regime of sixteen, seventeen, even twenty years ago, that 0:04:40.600 --> 0:04:43.440 we will see what I call the great zombie roll up, 0:04:43.800 --> 0:04:46.880 and that there's all sorts of companies out there, domestic 0:04:46.960 --> 0:04:51.120 and international that just aren't going to make it. How 0:04:51.160 --> 0:04:54.920 can you profit from that? Well, you can profit from 0:04:54.920 --> 0:05:00.279 that by investing broadly diversified into markets that are cheap, 0:05:00.360 --> 0:05:04.560 and we'll cush in the damage of those. You can 0:05:06.040 --> 0:05:09.640 avoid that damage by looking at quality metrics and not 0:05:09.760 --> 0:05:13.440 investing in companies that are highly likely to go bust. 0:05:14.800 --> 0:05:19.640 You can measure interest rate sensitivity for companies and companies 0:05:19.640 --> 0:05:24.360 that have large debt, be very wary. Don't own them 0:05:24.400 --> 0:05:27.000 unless they're really cheap. And there's a lot of companies 0:05:27.600 --> 0:05:32.040 in the meme stock community that have huge debt, and 0:05:32.400 --> 0:05:36.760 as that debt gets repriced, they're likely to struggle so 0:05:36.800 --> 0:05:40.040 the notion that high interest rates are going to hurt 0:05:40.080 --> 0:05:43.920 the value stocks is actually way too simplistic. I look 0:05:43.960 --> 0:05:46.240 at one of the great quotes last year, something I 0:05:46.320 --> 0:05:50.520 think that you will appreciate Nasiemtoleb always controversial, saying, well, 0:05:50.560 --> 0:05:53.320 the physics is back, the gravity's back, and the equations, 0:05:53.520 --> 0:05:56.920 and you've certainly alluded to that, Rob. What I notice 0:05:57.040 --> 0:06:01.480 also is we've become addicted in our modern to bringing 0:06:01.480 --> 0:06:05.919 in our hold period of average investments from years into months, 0:06:06.279 --> 0:06:09.400 if dare I say not even days as well. If 0:06:09.400 --> 0:06:12.120 we get the tile up gravity, if we get the 0:06:12.160 --> 0:06:15.520 world you talk about, obviously I agree with you, are 0:06:15.520 --> 0:06:17.159 we going to learn that we have to have a 0:06:17.240 --> 0:06:25.360 longer holding period for our investments. I think holding period 0:06:25.440 --> 0:06:28.479 should be a function of where your personal skill set is. 0:06:29.839 --> 0:06:33.320 If your skill is in short term trading, I would 0:06:33.360 --> 0:06:37.000 never advocate that Kim Griffin take up the idea of 0:06:37.360 --> 0:06:40.679 bicycle investing. He's doing the rest of us a huge 0:06:40.680 --> 0:06:44.320 favor by trying to scalp a fraction of a penny 0:06:44.720 --> 0:06:48.160 off of every trade you make. It gives you great liquidity, 0:06:48.800 --> 0:06:53.039 and so focus on what you're good at. I'm focused 0:06:53.040 --> 0:06:57.360 on long term I'm a long term investor. I want 0:06:57.640 --> 0:07:02.120 short term investors to be there to provide the liquidity, 0:07:02.480 --> 0:07:06.679 and folks who are not do it a short term 0:07:07.240 --> 0:07:10.800 but playing the short term game. They're also providing liquidity, 0:07:10.880 --> 0:07:15.240 but they're likely to get badly hurt, and they often do. 0:07:16.680 --> 0:07:19.520 Let me finish up, Rob with the arch question. All 0:07:19.520 --> 0:07:21.840 my radars up on this is I've got the usual 0:07:21.920 --> 0:07:25.440 active managers trotting out telling me this is the time 0:07:25.440 --> 0:07:28.640 for active to outperform, and many of them ascribe to 0:07:28.720 --> 0:07:33.320 your international view, Rob, are not an update on active 0:07:33.400 --> 0:07:38.000 versus passive? Please, I think the whole active versus passive 0:07:38.040 --> 0:07:44.320 thing is a complete distraction active managers. The passive managers 0:07:44.440 --> 0:07:48.880 own the market. That means that if you take them 0:07:48.880 --> 0:07:51.160 out of the equation, what you're left with is that 0:07:51.200 --> 0:07:54.720 same portfolio. That's what the active managers did. You out 0:07:55.200 --> 0:07:59.720 so the active an active manager can win, but generally 0:07:59.720 --> 0:08:03.960 only if another active manager is losing. So it's a 0:08:04.000 --> 0:08:06.640 silly game to say this is a great environment for 0:08:06.680 --> 0:08:10.960 active investors or a great environment for passive. The before 0:08:11.160 --> 0:08:16.240 fee performance of actively manage mutual funds is nearly identical 0:08:16.320 --> 0:08:19.560 to that of passive and it always has been and 0:08:19.640 --> 0:08:22.760 it always will be. So the key question is can 0:08:22.800 --> 0:08:26.840 you choose active managers who are likely to have an 0:08:27.040 --> 0:08:32.600 edge and whose success will be funded by other active 0:08:32.640 --> 0:08:37.720 managers who bets don't work. Look for that in your investing, 0:08:38.520 --> 0:08:40.440 rob We got to leave it there. Robert Not, thank 0:08:40.440 --> 0:08:42.800 you so much with research affiliates, and I really can't 0:08:42.800 --> 0:08:46.839 say the uniqueness of his research energy. No one has 0:08:46.880 --> 0:08:50.120 done more in securities research over a longer time than 0:08:50.240 --> 0:08:52.520 Robert Not. Check out so much of his work with 0:08:52.600 --> 0:09:06.880 the CFA program in Charlottesville, Virginia, joining us now always 0:09:06.960 --> 0:09:09.880 lecturing on econ one on one. Francis Donald Global Chief 0:09:09.880 --> 0:09:14.160 Economists Strategists Manual Life of Canada and America. Francis, good 0:09:14.160 --> 0:09:16.920 to see you again. Let me cut to the chase. 0:09:17.000 --> 0:09:21.120 We have a fed in action. They are wildly expost 0:09:21.600 --> 0:09:26.839 what is the data after the fact that matters. There's 0:09:26.880 --> 0:09:29.400 a lot of data that matters. But I suspect we're 0:09:29.400 --> 0:09:32.680 going to be moving away from the traditional what is GDP, 0:09:32.920 --> 0:09:35.480 what is the unemployment rate? What is CPI? We're going 0:09:35.559 --> 0:09:38.080 to have to get a lot deeper moving forward. And 0:09:38.120 --> 0:09:40.920 that's because well, the nature of growth and how the 0:09:40.960 --> 0:09:43.040 slowdown in the pack in the economy is likely to 0:09:43.120 --> 0:09:45.800 be uneven. Yes, we are probably going to see a 0:09:45.880 --> 0:09:49.120 lower unemployment rate than we have and past slowdown orbit sessions, 0:09:49.120 --> 0:09:52.480 but the composition of it will matter. For example, during 0:09:52.520 --> 0:09:55.680 COVID we had millions of millions of job losses, but 0:09:55.679 --> 0:09:58.360 they were a low wage job that didn't hit GDP. 0:09:58.800 --> 0:10:01.480 In the coming we might those tech in finances having 0:10:01.520 --> 0:10:04.760 a larger impact, and inflation will be problematic because it's 0:10:04.760 --> 0:10:07.080 not about the headline number anymore. It's going to be 0:10:07.120 --> 0:10:10.679 about what segment of remaining inflation is interest rate sensitive 0:10:10.800 --> 0:10:13.760 or not. So Unfortunately, that level one data is not 0:10:13.880 --> 0:10:16.160 going to be enough to tell the story or what 0:10:16.200 --> 0:10:18.320 the Fed's going to do anymore. We're gonna have to 0:10:18.320 --> 0:10:21.199 work a little bit harder. In twenty twenty three, explain 0:10:21.280 --> 0:10:26.559 the goods services partition of inflation. Explain those two vectors. 0:10:26.920 --> 0:10:30.400 As we look at the vectors to march, well, this 0:10:30.440 --> 0:10:33.440 one in some ways of straightforward. We know the unlined 0:10:33.480 --> 0:10:35.600 from COVID is going to push down on the good 0:10:35.640 --> 0:10:38.600 side and services where you have that remaining component. But 0:10:38.640 --> 0:10:40.599 I'm looking a little bit further than that, which is 0:10:40.720 --> 0:10:43.880 right now, we still have inflation that is interest rate sensitive, 0:10:43.920 --> 0:10:47.040 it matters. We're really pulling down on that excess savings 0:10:47.080 --> 0:10:49.160 the demand side of the equation. But it's not so 0:10:49.280 --> 0:10:51.280 much goods and services that keeps me up at night. 0:10:51.480 --> 0:10:55.280 It's supply versus demand. And when we get to later 0:10:55.320 --> 0:10:57.560 this year, how is the FED going to be commenting 0:10:57.679 --> 0:11:01.280 we're combating the remaining inflation which is food price inflation 0:11:01.360 --> 0:11:04.320 centric or do you a political driven or ESG driven. 0:11:04.480 --> 0:11:06.040 We're going to have to have a moment, not just 0:11:06.040 --> 0:11:08.680 from the Fed but from global central bankers, and I 0:11:08.720 --> 0:11:11.120 think it's going to start this year. So they have 0:11:11.160 --> 0:11:14.320 to admit their ability to control that CPI number is 0:11:14.360 --> 0:11:17.440 waging both on a cyclical factor in this year and next, 0:11:17.440 --> 0:11:19.840 but also on a structural basis. And franstis with that 0:11:19.880 --> 0:11:22.200 in mind, when nice I we want to get sufficient 0:11:22.200 --> 0:11:26.320 and restrictive, what does that mean? Your guess is as 0:11:26.320 --> 0:11:28.360 good as mind. But I think what they're looking for 0:11:28.559 --> 0:11:31.440 is more balanced in the economy, and of course they 0:11:31.440 --> 0:11:32.960 are getting it. They got a lot of it in 0:11:33.040 --> 0:11:35.559 twenty twenty two. Here we are talking about what does 0:11:35.559 --> 0:11:38.440 the landing look like? I'm looking backwards at twenty twenty 0:11:38.480 --> 0:11:40.600 two and saying that looked like the landing. To me, 0:11:40.760 --> 0:11:43.600 we had significant drawn down and housing a bear market 0:11:43.600 --> 0:11:45.840 in the s and P. Did that not qualify as 0:11:45.880 --> 0:11:49.240 the significant slowdown? Now we're looking down, we're saying we're landed. 0:11:49.400 --> 0:11:51.600 The question is do we hit the wall at the 0:11:51.679 --> 0:11:55.040 end of this runway. That's what we're focusing on moving forward. 0:11:55.200 --> 0:11:56.839 What is the wall at the end of the run wife, 0:11:56.880 --> 0:11:58.839 recession or the fact that you think they're going to 0:11:58.880 --> 0:12:01.880 have to accept the hire and fly right. Yeah, I 0:12:02.200 --> 0:12:03.880 think it's a little bit of the two of them, 0:12:03.880 --> 0:12:06.679 but it depends on your timeline. When I look at 0:12:06.679 --> 0:12:08.760 the wall at the end of the runway, what concerns 0:12:08.840 --> 0:12:11.760 me actually isn't two quarters of negative growth that hasn't 0:12:11.800 --> 0:12:14.160 been for the last year. It's this concept of something 0:12:14.200 --> 0:12:16.960 we've been discussing internally which puts a pit in my stomach, 0:12:17.040 --> 0:12:20.160 a concept like rolling recessions or when you look back 0:12:20.200 --> 0:12:23.160 in history sometimes we see these periods of expansion downturns 0:12:23.200 --> 0:12:26.880 that fluctuate very quickly, very difficult to manage money in 0:12:26.880 --> 0:12:29.200 that type of environment. And if we're heading into a 0:12:29.280 --> 0:12:33.120 period where GDP is oscillating around zero, slightly above slightly below, 0:12:33.320 --> 0:12:35.200 we're going to spend all our time arguing over whether 0:12:35.280 --> 0:12:38.240 or not it qualifies as a recession or not focusing 0:12:38.240 --> 0:12:40.840 on the big story, which is we are not in reflation. 0:12:41.080 --> 0:12:43.840 We're much closer to stagflation. We are not in the 0:12:43.880 --> 0:12:46.520 roaring twenties. We're going to be in a slower growth 0:12:46.559 --> 0:12:48.800 environment with a lot of particularities that we have not 0:12:48.840 --> 0:12:51.320 seen in the past. What is your when on this, Francis? 0:12:51.360 --> 0:12:54.040 I mean, we had Matt Lazettian from Deutsche Bank who 0:12:54.120 --> 0:12:57.520 was brilliant on a delayed recession call when is the 0:12:58.480 --> 0:13:02.480 is the when not of recession or nbeer recession, but 0:13:02.640 --> 0:13:07.720 what is the when of outright stagflation? I heard that interview, 0:13:07.760 --> 0:13:09.120 I thought it was great, and I'm going to agree 0:13:09.160 --> 0:13:11.400 with Matt that it's towards the end of twenty twenty 0:13:11.440 --> 0:13:14.640 three is the problem, and especially around June July. This 0:13:14.679 --> 0:13:17.199 is when the year over year comps for inflation get 0:13:17.240 --> 0:13:19.199 a little bit trickier and a concerned. That's when the 0:13:19.280 --> 0:13:22.800 momentum and disinflation begins to pause out and based on 0:13:22.800 --> 0:13:26.640 our traditional leading indicators of the economy, by the mid 0:13:26.720 --> 0:13:29.360 to end of twenty twenty three, that's when we're probably 0:13:29.360 --> 0:13:31.240 going to start to see the consumer and the jobs 0:13:31.240 --> 0:13:34.280 picture begin to decline. But at the same time, Tom, 0:13:34.360 --> 0:13:37.600 we have to evaluate those leading indicators. Should we rely 0:13:37.679 --> 0:13:39.840 on them the same way that we have in the past. Francis, 0:13:39.880 --> 0:13:42.680 I want to segui here over to your knowledge of 0:13:42.760 --> 0:13:48.120 Canadian macroeconomics. What could your own Powell learn from the 0:13:48.160 --> 0:13:52.000 Bank of Canada. I look at select developed nation banks 0:13:52.760 --> 0:13:56.160 and they're taking a different path than the FED. What's 0:13:56.160 --> 0:14:01.040 a lesson learned from the Bank of Canada for Washington. Well, 0:14:01.160 --> 0:14:04.000 here's the challenge in Canada and then many of the 0:14:04.120 --> 0:14:08.240 smaller developed economies. You have even less ability to control 0:14:08.280 --> 0:14:10.960 inflation with your domestic interest rates. And this is what 0:14:11.080 --> 0:14:13.360 the bigger bind for the FED going into the next 0:14:13.440 --> 0:14:16.280 year is that if you're Australia or Canada, you're at 0:14:16.280 --> 0:14:18.920 the point where your impact on your economy from higher 0:14:18.960 --> 0:14:22.400 interest rates becomes much more severe, particularly because of the 0:14:22.480 --> 0:14:26.120 housing reliance, and your ability to control inflation begins to decline. 0:14:26.360 --> 0:14:28.320 So when I think about the FED versus the Bank 0:14:28.360 --> 0:14:31.160 of Canada, what I see is the problematic situation where 0:14:31.200 --> 0:14:34.200 the FED can tighten global financial conditions, but the Bank 0:14:34.240 --> 0:14:37.160 of Canada cannot. It's going to create a much bigger 0:14:37.200 --> 0:14:39.920 divide between these secial banks moving forward. I mean, John, 0:14:39.960 --> 0:14:41.360 this is what it's about. I set her up with 0:14:41.440 --> 0:14:43.640 that question to go to. You imagine the Bank of 0:14:43.760 --> 0:14:46.760 England and what they have to do or ECB. If 0:14:46.840 --> 0:14:50.320 Jerome Powell legs it out with inversion of ninety five 0:14:50.400 --> 0:14:53.400 one hundred basis points, with the thirty year mortgage going 0:14:53.440 --> 0:14:56.120 through to new high interest rates, or the Bloomberg Total 0:14:56.160 --> 0:14:59.920 Return INDECKS moving down in price to under October level, 0:15:00.240 --> 0:15:02.240 what does that mean for the other banks? They were 0:15:02.280 --> 0:15:04.800 all wrestling with similar issues though, And I think Francis 0:15:04.800 --> 0:15:07.640 you've touched on it the character of this new economy 0:15:07.920 --> 0:15:10.600 that we might face labor hoarding. Can you work a 0:15:10.640 --> 0:15:12.280 little bit more on that, Francis, just go through it 0:15:12.320 --> 0:15:15.800 piece by piece, the post pandemic labor market realities. What 0:15:15.880 --> 0:15:18.200 are they? Do you think that just haven't been accepted 0:15:18.240 --> 0:15:21.880 just yet. Well, let's keep it simple. Take a look 0:15:21.920 --> 0:15:25.800 at the employment to population ratio. What percentage of Americans 0:15:25.880 --> 0:15:30.080 are working? Forty percent of Americans are not working. Move 0:15:30.120 --> 0:15:33.440 aside the labor first participation rate in all of its equivalence. 0:15:33.920 --> 0:15:36.360 We're also looking at an economy where we have fewer 0:15:36.400 --> 0:15:40.000 people than before the pandemic. We're missing over two million workers. 0:15:40.240 --> 0:15:42.200 Where did they go? A lot of them retired early, 0:15:42.240 --> 0:15:44.240 a lot of them got set up with this market, 0:15:44.360 --> 0:15:46.920 a lot of them are dealing with cuttlecare and health issues. 0:15:47.240 --> 0:15:49.120 We have not come to the reality yet that our 0:15:49.160 --> 0:15:53.720 concepts of demand and supply for labor for wages may 0:15:53.760 --> 0:15:56.680 not work the same way our textbooks told them told 0:15:56.760 --> 0:15:59.480 us they did for the last several decades. So our 0:15:59.560 --> 0:16:02.760 new questions on how evaluate what brings labor back to 0:16:02.840 --> 0:16:04.560 the market, I think those are going to have to 0:16:04.640 --> 0:16:07.480 change pretty significant. Francis, what is it do you think 0:16:07.760 --> 0:16:12.680 that brings labor back to this market? Well, we know 0:16:12.840 --> 0:16:15.440 from history if you make people poor enough, they will 0:16:15.480 --> 0:16:17.800 have to go back to work. But is that what 0:16:17.800 --> 0:16:19.800 we should be doing? And is that what central banks 0:16:19.800 --> 0:16:21.800 should be doing? And this is the big challenge I 0:16:21.840 --> 0:16:24.000 have when I hear central bank saying we're going to 0:16:24.040 --> 0:16:26.880 reduce demand to bring him back into supply. But when 0:16:26.880 --> 0:16:30.240 you have supply shops that are continuous, is really the 0:16:30.760 --> 0:16:34.320 medicine worth secure in this particular environment? What is the 0:16:34.400 --> 0:16:36.840 rule of the the central bank control insleation and employment or 0:16:37.120 --> 0:16:39.560 make the lives of the citizens of this country better. 0:16:39.760 --> 0:16:41.960 This is going to be a problematic question for central 0:16:41.960 --> 0:16:44.960 banks moving Forwarding the next question further down the road, 0:16:45.240 --> 0:16:48.440 do you think politically that these institutions are going to 0:16:48.520 --> 0:16:51.920 come into some real trouble once people start to figure 0:16:51.960 --> 0:16:54.400 out the electrics starts to fick around, that their vote 0:16:54.400 --> 0:16:57.480 in the election is perhaps less important than what happens 0:16:57.600 --> 0:17:02.760 across the road the feder Reserve. Well, we're certainly, i 0:17:02.800 --> 0:17:06.199 think already beginning to see the challenges associated there that 0:17:06.520 --> 0:17:09.480 when you begin to recognize what impacts your mortgage and 0:17:09.800 --> 0:17:12.480 how much things cost, that really that's more of a 0:17:12.520 --> 0:17:15.760 monetary policy question. We're all not just a general public, 0:17:15.800 --> 0:17:18.040 but financial services are also going to have to have 0:17:18.080 --> 0:17:21.520 a moment where we realize monetary policy dominance, which has 0:17:21.720 --> 0:17:24.240 ruled so much in the way that we invest money 0:17:24.240 --> 0:17:27.760 and live our lives. Maybe see that challenging, especially because 0:17:27.840 --> 0:17:30.720 moving forward, the insallation in the system is likely to 0:17:30.800 --> 0:17:34.280 become less interest right sensitive, not more. We're gonna have 0:17:34.359 --> 0:17:36.600 to have a moment where we come and recognize that 0:17:36.800 --> 0:17:39.159 central banks need to do it, investors need to do it. 0:17:39.280 --> 0:17:42.080 Eventually the general public will do it too. Francis, we've 0:17:42.119 --> 0:17:44.040 missed you. It's good to have you back. And happy 0:17:44.040 --> 0:17:46.080 birthday for last week because we didn't get to do 0:17:46.119 --> 0:17:48.640 this last week. Thank you. Francis Donald a manual Life 0:17:48.680 --> 0:17:55.520 Investment Management. It is joy to bring in out Jay Bryson. 0:17:55.640 --> 0:17:58.000 He is chief economist at Wills Figer with a truly 0:17:58.080 --> 0:18:01.800 international band. Jay, let me start with the basic idea. 0:18:02.080 --> 0:18:05.240 Is Jerome Powell the banker to the world? Is he 0:18:05.320 --> 0:18:07.399 the central banker to the world now in honor of 0:18:07.440 --> 0:18:10.720 Bill Rhodes? Yeah, I mean I think in general, I 0:18:10.760 --> 0:18:13.760 think you know, the Chairman of the Federal Reserve over 0:18:13.840 --> 0:18:18.160 or the number of years, has been the most important banker. Now, 0:18:18.440 --> 0:18:20.760 you know, is he banker to the world? Is he 0:18:20.760 --> 0:18:23.000 here to bail out the rest of the world? No, 0:18:23.119 --> 0:18:26.640 not necessarily right, they only have really two objectives. That's 0:18:26.920 --> 0:18:29.320 inflation in the United States and the unemployment. Right, but 0:18:29.359 --> 0:18:32.280 clearly the central of the Federal Reserve is the most 0:18:32.280 --> 0:18:34.960 important central bank in the world. My recollection is you 0:18:35.040 --> 0:18:38.760 memorize the tailor rule watching March Madness down at Chapel 0:18:38.840 --> 0:18:42.720 Hill many many years ago. I miss this Today one 0:18:42.720 --> 0:18:45.600 of our previous guests, Jay had it out how distorted 0:18:45.640 --> 0:18:49.680 the tailor rule is once again Towardsten Slock, suggesting up 0:18:49.720 --> 0:18:53.399 near a nine even ten percent Taylor rule. What's the 0:18:53.560 --> 0:18:58.399 Powell rule right now? What's the equation Jerome Powell's using 0:18:58.680 --> 0:19:02.840 if the Tailor rule is busted? Well, so you think 0:19:02.840 --> 0:19:05.200 about the Taylor role. I mean there's you know, two 0:19:05.640 --> 0:19:08.159 two variables in there. Well, one would be inflation and 0:19:08.280 --> 0:19:11.120 one would be you know, the unemployment rate or the 0:19:11.200 --> 0:19:15.880 gap there I'll put gap and I think there, Um, 0:19:16.280 --> 0:19:20.960 the the overwhelming weight is on inflation right now. Yeah, Um, 0:19:21.160 --> 0:19:24.080 that's that's and it's you know, the FED right now 0:19:24.240 --> 0:19:27.240 is much more reactionary than forward looking. I mean, you know, 0:19:27.280 --> 0:19:30.080 if you think back to uh Jackson Hole a few 0:19:30.119 --> 0:19:33.440 years ago, I mean essentially throughout the forward looking sort 0:19:33.440 --> 0:19:36.719 of stuff, our square starred et cetera, et cetera. It's 0:19:36.760 --> 0:19:38.720 it's all about where is the economy right now? And 0:19:38.720 --> 0:19:41.160 they're kind of really trying to feel their way in. 0:19:41.240 --> 0:19:44.880 But again, it's all about inflation right now. Um, we're 0:19:44.920 --> 0:19:47.520 all the big all the weight is, it's so much 0:19:47.600 --> 0:19:52.480 of this is our complete focus on the FED. Are 0:19:52.520 --> 0:19:54.560 we going to be doing this all year? I mean 0:19:54.600 --> 0:19:58.520 the fed derby, the dots derby, the Michael McKee, Derby J. Bryson. 0:19:58.520 --> 0:19:59.880 Are we going to be doing this for the rest 0:19:59.880 --> 0:20:02.760 of of the year, you know? I think so, Tom. 0:20:02.840 --> 0:20:04.840 I think it's going to be a high weight on 0:20:05.000 --> 0:20:07.280 what the FED is doing now. If we get in, 0:20:07.320 --> 0:20:09.160 you know, a few months from now and it looks 0:20:09.200 --> 0:20:12.720 like the economy is really starting to slip, I think 0:20:12.720 --> 0:20:16.480 what really becomes important now or initial jobless claims and 0:20:16.520 --> 0:20:19.760 other labor market sort of variables. But for the foreseeable future, 0:20:19.760 --> 0:20:21.439 I think it's really all about the Fed. Can we 0:20:21.720 --> 0:20:24.920 I'm looking into this almost as domestic final sales, can 0:20:25.000 --> 0:20:28.960 we quote unquote slip or can we just say it's 0:20:28.960 --> 0:20:33.399 the housing market and other financial distortions slipping and the 0:20:33.440 --> 0:20:36.320 rest of it does pretty well? Like durable goods just showed. 0:20:36.640 --> 0:20:40.800 How does that Nick's play out? Yeah, So, you know, 0:20:41.000 --> 0:20:44.240 if you think about the consumer right now, the consumer 0:20:44.320 --> 0:20:47.680 is very very strong financially, and so you could have 0:20:47.720 --> 0:20:51.600 a recession this year in say manufacturing, you know, strong dollar, 0:20:51.800 --> 0:20:54.120 weaker growth than the rest of the world. You could 0:20:54.119 --> 0:20:56.159 have weakness in the housing market. I mean, that's what 0:20:56.160 --> 0:20:58.920 we've seen for the last you know, almost year now. 0:20:59.200 --> 0:21:02.439 But consumer spending could continue to hold in there, and 0:21:02.520 --> 0:21:05.439 given the fact that consumer spending is seventy percent of 0:21:05.440 --> 0:21:07.679 the economy, you could have a few sectors in the 0:21:07.680 --> 0:21:10.959 economy in kind of a recession and the overall economy 0:21:11.000 --> 0:21:13.840 wouldn't necessarily to tip into recession. I mean, I mean, 0:21:13.840 --> 0:21:15.240 it's right where I wanted to go, as you got 0:21:15.280 --> 0:21:19.480 an nbeer recession here, and I note yield's coming in 0:21:19.560 --> 0:21:22.120 abruptly here. Two year yield into four point seven eight 0:21:22.160 --> 0:21:25.440 percent down three basis points. Ten year yield migrates away 0:21:25.480 --> 0:21:28.639 two down two basis points with a little bit, just 0:21:28.720 --> 0:21:30.800 a little bit of curve in version. I don't oversell 0:21:30.920 --> 0:21:34.280 that future is up thirty jay, I look at the 0:21:34.400 --> 0:21:38.119 stew as Lisa would say that we're in and to me, 0:21:38.240 --> 0:21:41.160 I want to just as you said, partition it. If 0:21:41.160 --> 0:21:45.560 we slow down, we don't all slow down, do we. No, 0:21:45.760 --> 0:21:47.720 that's right. I mean, you know the economy. You know, 0:21:47.800 --> 0:21:50.640 there's lots of different sectors in the economy. You think 0:21:50.720 --> 0:21:53.520 back tom about you know, back to two fifteen, two 0:21:53.400 --> 0:21:57.000 thousand sixteen, China was having some real problems. The manufacturing 0:21:57.000 --> 0:21:59.360 sector back then was in a recession. The overall US 0:21:59.440 --> 0:22:02.080 economy was not in a recession, so you can have 0:22:02.200 --> 0:22:05.920 different sectors going down and not the whole ship going down. Now, 0:22:06.320 --> 0:22:08.919 if some of those sectors go down a lot, like 0:22:09.000 --> 0:22:12.200 manufacturing and housing, and then you start to get job 0:22:12.240 --> 0:22:14.600 losses in there, then it does start to bleed into 0:22:14.640 --> 0:22:17.280 other sorts of sectors in the economy. So it's a 0:22:17.320 --> 0:22:20.640 really tricky situation that the FED finds itself in right now. 0:22:20.960 --> 0:22:24.160 Ja Bryson to the global footprint, which you commanded for 0:22:24.280 --> 0:22:28.679 years at Wells Fargo. How urgent is it for IMF 0:22:28.800 --> 0:22:31.080 right now? You've got the Nigerian elections in that, But 0:22:31.760 --> 0:22:34.960 how how of a moment is it right now for 0:22:35.000 --> 0:22:39.360 the International Monetary Fund? Well, you know, if you look 0:22:39.400 --> 0:22:41.560 around the world right now, you know, most of the 0:22:41.600 --> 0:22:45.320 world is slowing down right now. You know, if you 0:22:45.359 --> 0:22:47.239 look at Europe and now, it's not as bad as 0:22:47.359 --> 0:22:50.040 what it was saying, you know six months ago when 0:22:50.160 --> 0:22:53.440 energy prices were through the roof over there. You know, fortunately, 0:22:53.440 --> 0:22:56.680