WEBVTT - Inflation, Energy, And Markets (Podcast) 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 0:00:11.520 --> 0:00:15.520 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.439 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.560 at Bloomberg dot com slash podcast. Let's get over to 0:00:22.800 --> 0:00:26.440 Megan Horneman. What an amazing day for me to come 0:00:26.480 --> 0:00:29.120 back here to these markets, Megan, and after these, you know, 0:00:29.200 --> 0:00:33.279 two big central bank decisions, what do you make of 0:00:33.640 --> 0:00:36.840 inflation right now? I mean, um, my first thought after 0:00:36.960 --> 0:00:40.200 reading that pal hike fifty basis points instead a couple 0:00:40.240 --> 0:00:42.159 more could be on the way, is it must be 0:00:42.200 --> 0:00:46.519 doing something to stop inflation already. Yeah, I mean, I 0:00:46.600 --> 0:00:48.960 think the biggest thing is the next couple of months 0:00:48.960 --> 0:00:51.239 will get a little bit of a better indication on 0:00:51.400 --> 0:00:54.280 it has inflation peaked and are we going to start 0:00:54.360 --> 0:00:57.480 rolling over and getting to some more I wouldn't say 0:00:57.520 --> 0:01:00.160 normal levels, but at least a little bit better than 0:01:00.200 --> 0:01:02.480 what we've seen over the past year. That's the biggest 0:01:02.480 --> 0:01:04.840 concern I think right now from an inflation story, and 0:01:04.840 --> 0:01:07.039 we just don't know that we'll get this this stuff 0:01:07.040 --> 0:01:09.520 over the next couple of months. Next week is a 0:01:09.520 --> 0:01:11.480 big week, we get both cp I and p p I, 0:01:11.760 --> 0:01:14.000 and then we'll look again in UM in June to 0:01:14.040 --> 0:01:16.560 see how that works out. And Megan, I'm still trying 0:01:16.600 --> 0:01:19.640 to make sense of the past twenty four hours or so. 0:01:20.040 --> 0:01:23.600 Obviously that enormous rally that we saw across risk assets 0:01:24.280 --> 0:01:27.759 during the FED presser yesterday. Now to see this really 0:01:27.800 --> 0:01:31.039 amazing give back. UM, I'd love to hear your perspective 0:01:31.120 --> 0:01:34.960 on whether you know markets misread what Pal was saying 0:01:35.120 --> 0:01:37.800 and we're seeing a rethink today, or how do you 0:01:37.840 --> 0:01:42.360 explain this hiccup. I think all of the the uncertainty 0:01:42.400 --> 0:01:44.880 that is kind of filtering into the market today was 0:01:44.920 --> 0:01:48.360 here yesterday. I just think what Pal did was he 0:01:48.880 --> 0:01:52.680 delivered a pretty good press conference, satisfying both both ends 0:01:52.680 --> 0:01:55.160 of the spectrum. So made it very clear that we 0:01:55.160 --> 0:01:57.680 were going to hike fifty basis points and it's on 0:01:57.720 --> 0:02:00.240 the table for the next few meetings. And he was 0:02:00.400 --> 0:02:04.080 pretty aggressive on on the inflation situation, but at the 0:02:04.120 --> 0:02:06.720 same time also said that there's not any discussion of 0:02:06.800 --> 0:02:09.160 seventy five basis point rate hikes, so it was kind 0:02:09.160 --> 0:02:11.359 of right down the middle. You know, they're pretty good 0:02:11.400 --> 0:02:14.240 at doing that. But today when you came in, you 0:02:14.320 --> 0:02:16.959 really got three different things driving the market today. First 0:02:17.000 --> 0:02:19.440 of all, this was discussed what happened with the Bank 0:02:19.480 --> 0:02:22.079 of England, and they're pretty I guess you could say 0:02:22.120 --> 0:02:25.520 pessimistic or realistic outlook on what inflation will look like 0:02:25.600 --> 0:02:28.720 this year in the UK and their economic situation that 0:02:28.880 --> 0:02:32.240 spooked markets. We got some dismal economic data here in 0:02:32.280 --> 0:02:34.600 the US as well, even though it was backward looking 0:02:34.639 --> 0:02:36.920 in part of the first quarter, it's not pretty to 0:02:36.919 --> 0:02:40.399 see some of those productivity numbers. And then lastly, don't 0:02:40.440 --> 0:02:43.440 forget that this morning we also finally broke through that 0:02:43.520 --> 0:02:47.000 psychological three percent level on the tenure and that's something 0:02:47.040 --> 0:02:49.119 that I think the market was looking for. So that's 0:02:49.160 --> 0:02:51.680 going to take some of the the wind out of that. 0:02:51.760 --> 0:02:54.200 You know, that optimism yesterday that we had in the 0:02:54.240 --> 0:02:57.200 big rebound that we had in specifically some of those 0:02:57.200 --> 0:03:00.320 growth and technology type of names. So this little bit 0:03:00.360 --> 0:03:03.840 of capitulation, I mean, when um, you know a central 0:03:03.880 --> 0:03:09.600 banker is honest with markets, is that, you know, peak pessimism. 0:03:09.639 --> 0:03:13.480 I think there is I would say peak pessimism, or 0:03:13.520 --> 0:03:15.880 at least some parts of the market that are pricing 0:03:15.880 --> 0:03:19.560 in the most pessimistic situation. It's rare a central bank 0:03:19.639 --> 0:03:22.720 or forecasting contraction, right or a recession. Yeah, it is, 0:03:22.919 --> 0:03:25.200 it is rare. And um, you know we didn't get 0:03:25.200 --> 0:03:27.920 that yesterday. There still is the chance that he can 0:03:28.040 --> 0:03:30.240 orchestrate a soft landing, although he didn't make it very 0:03:30.240 --> 0:03:32.680 clear it will be difficult to do that. He also 0:03:32.760 --> 0:03:36.120 pointed out a lot of the positive aspects of the 0:03:36.240 --> 0:03:39.080 U S economy that he thinks can withstand some of 0:03:39.080 --> 0:03:42.360 this monetary tightening. But keep in mind, the Federal Reserve 0:03:42.400 --> 0:03:44.640 and central banks around the world can only do so 0:03:44.760 --> 0:03:48.840 much with inflations out of there's certain parts of it 0:03:48.880 --> 0:03:50.800 that are out of their control, whether it's the war 0:03:50.880 --> 0:03:54.720 between Russian and Ukraine as well as the supply change disruptions. 0:03:54.760 --> 0:03:57.640 They really can't fix that issue, and that has been 0:03:57.680 --> 0:04:00.640 some of the contributory factors to inflay stion this year. 0:04:01.520 --> 0:04:05.000 And Megan, I mean, pal seemed to pretty definitively take 0:04:05.040 --> 0:04:07.720 a seventy five basis point hike off the table. But 0:04:07.760 --> 0:04:09.920 if we think about, you know, the past few months 0:04:10.240 --> 0:04:14.120 of the dot plot of fed communication. Uh, you could 0:04:14.160 --> 0:04:17.360 make an argument that they've had to chase inflation here, 0:04:17.360 --> 0:04:19.599 and I'd love to hear your thoughts on whether we 0:04:19.640 --> 0:04:22.400 could see that seventy five basis point hike come back 0:04:22.440 --> 0:04:25.719 on the table. I think I think it's too early 0:04:25.880 --> 0:04:28.240 to say that. I would I would say that the 0:04:28.320 --> 0:04:31.360 probability is low for seventy five basis point heights because 0:04:31.440 --> 0:04:33.279 keep in mind, not only are they going to raise 0:04:33.320 --> 0:04:35.320 fifty basis points, which I think they'll do in the 0:04:35.360 --> 0:04:38.599 next couple of meetings at a minimum, but that reduction 0:04:38.600 --> 0:04:41.920 in the balance sheet is also pretty intense as well. 0:04:42.040 --> 0:04:44.560 So I think seventy five basis points is a little 0:04:44.560 --> 0:04:47.359 bit of a stretch now, especially since most of the 0:04:47.440 --> 0:04:51.880 forecasts are expecting that inflation will have either already peaked 0:04:52.400 --> 0:04:54.560 or peak in the next couple of months. So how 0:04:54.560 --> 0:04:57.840 does this make I mean, you're now chief investment officer 0:04:58.760 --> 0:05:03.920 at verdant Um Capital Advisors on the investment committee, obviously there, 0:05:03.960 --> 0:05:09.440 I guess leading discussions. How difficult does this make your job? With? 0:05:10.440 --> 0:05:14.400 You know, inflation is transitory, Okay, it's not transitory. They're 0:05:14.400 --> 0:05:17.559 gonna hike twice five times, They're gonna like fifty basis 0:05:17.560 --> 0:05:22.080 points seventy five base points like constantly moving. So there's 0:05:22.120 --> 0:05:24.880 two different sizes that from from the fixed income perspective, 0:05:25.240 --> 0:05:28.240 regardless of whether or not, you know, coming into this 0:05:28.360 --> 0:05:32.039 year inflation was transitory or not transitory, we were very 0:05:32.040 --> 0:05:34.960 defensive with fixed income and we still are. That meant 0:05:35.000 --> 0:05:38.040 we reduced a lot of our credit exposure, if not 0:05:38.080 --> 0:05:41.279 all of it, So we reduced investment investment grade credit. 0:05:41.320 --> 0:05:43.760 We don't own any direct investment grade credit right now. 0:05:43.880 --> 0:05:47.160 That's taken a big brunt of this rise in interest rates. 0:05:47.440 --> 0:05:51.120 We've been very short duration, so we're not completely abandoning 0:05:51.160 --> 0:05:54.279 fixed income, but we've been very defensive with the fixed 0:05:54.320 --> 0:05:58.200 income sector and UM. The other area that it's impacted 0:05:58.240 --> 0:06:01.200 the most has been in specifically your US large cap 0:06:01.240 --> 0:06:04.400 growth UM. That has definitely been hit because we're having 0:06:04.440 --> 0:06:08.920 this reset of multiples and multiple the the reset of 0:06:09.000 --> 0:06:12.080 the lack of multiple expansion going forward because of higher 0:06:12.080 --> 0:06:16.640 interest rates and higher inflation. So we have instead started 0:06:16.680 --> 0:06:18.360 to look at some of these opportunities that have been 0:06:18.360 --> 0:06:20.080 given to us this year to look at some of 0:06:20.080 --> 0:06:22.400 the small and MidCap area of the market. Those areas 0:06:22.440 --> 0:06:24.080 have been beaten up the most and pricing in a 0:06:24.120 --> 0:06:27.080 lot of that pessimism. Megan, thanks so much for joining us. 0:06:27.080 --> 0:06:30.800 Megan Horneman there she is the chief investment officer over 0:06:30.880 --> 0:06:39.279 at Verdant's Capital Advisors. Let's bring in right now. I 0:06:39.320 --> 0:06:42.599 guess Jonathan Maxwell. He is the CEO and co founder 0:06:42.640 --> 0:06:49.000 of Sustainable Development Capital. After years moving infrastructure around and 0:06:49.080 --> 0:06:52.000 investment banks on the street, he founded this firm in 0:06:52.440 --> 0:06:55.320 two thousand seven. And I think really no better time 0:06:55.360 --> 0:06:58.080 to talk to you, Jonathan than now about what you 0:06:58.160 --> 0:07:01.160 do in terms of your energy in for structure deals, 0:07:01.200 --> 0:07:08.320 but also um the current financial situation, especially considering comments 0:07:08.360 --> 0:07:11.720 from Andy Bailey. I mean, what do you make of 0:07:11.760 --> 0:07:14.520 a pound at one three? How does that affect the 0:07:14.520 --> 0:07:17.600 business that you do? Yeah, so thank you for having 0:07:17.640 --> 0:07:19.920 me back on. And what an amazing set of numbers 0:07:19.920 --> 0:07:24.280 we've just heard of global markets, and I think it 0:07:24.400 --> 0:07:28.280 helps to look at the current market environment A is 0:07:28.560 --> 0:07:32.920 so dominated by competition for natural resources, and that's one 0:07:32.960 --> 0:07:38.400 of the key themes that's really driven the political gyrations recently. 0:07:38.560 --> 0:07:41.840 So you know, you've got huge competition for natural gas 0:07:42.040 --> 0:07:46.760 and for for other resources. Of the world's energy system 0:07:46.760 --> 0:07:49.880 relies on all gas and Callum and I think that 0:07:50.000 --> 0:07:53.920 emanating out of the Ukraine crisis, we've now seen massive 0:07:54.160 --> 0:07:58.760 increases in energy prices which are having the worldwide reple effects. 0:07:59.440 --> 0:08:04.200 The were itself having serious political implications for people, but 0:08:04.400 --> 0:08:09.480 the economic implications globally affecting hundreds of millions and billions, 0:08:09.480 --> 0:08:11.840 So fundamentally, I think the question that we need to 0:08:11.840 --> 0:08:15.360 look behind all of these numbers is where is the increase, 0:08:15.400 --> 0:08:17.760 whereas the pressure coming from and the pain point is 0:08:17.800 --> 0:08:20.160 really around the energy market as one of the key areas, 0:08:20.560 --> 0:08:23.200 And what are the solutions to those problems? You know, 0:08:23.720 --> 0:08:26.600 is it producing more supply or is it even looking 0:08:26.600 --> 0:08:30.200 at alternative solutions? Well, I saw I saw Bailey talking 0:08:30.240 --> 0:08:34.200 to reporters today and saying that the biggest driver is 0:08:34.240 --> 0:08:37.840 this real income shock which is coming from the change 0:08:37.920 --> 0:08:42.720 in the terms of trade, coming particularly from energy prices. 0:08:42.760 --> 0:08:45.440 So I guess you know, the question is then, what 0:08:45.440 --> 0:08:48.280 what can be done, what should have been done previously, 0:08:48.360 --> 0:08:50.559 and what are you working on to do now? Right, 0:08:50.640 --> 0:08:53.000 we'll go back to the point that I made of 0:08:53.000 --> 0:08:55.160 the world's energy system is all gas and coal. But 0:08:55.240 --> 0:08:58.960 the extraordinary factor, the extraordinary thing about this is that 0:08:59.360 --> 0:09:03.200 so much it is wasted thermal energy generation using oil, 0:09:03.240 --> 0:09:06.800 gas and coal involves enormous losses of energy primary energy 0:09:07.040 --> 0:09:10.120 between the point of through the points of generation, transmission, 0:09:10.120 --> 0:09:13.760 and distribution. And the United States it's extreme. Up to 0:09:13.880 --> 0:09:18.440 seventy of energy can be lost through thermal losses by 0:09:18.600 --> 0:09:22.480 burning fossil fuels through to the transmission and distribution losses 0:09:22.520 --> 0:09:25.160 even before it gets to buildings like this, and then 0:09:25.200 --> 0:09:27.000 more energy can get lost when it gets to the 0:09:27.040 --> 0:09:29.840 point of view. So we're in immense loss of energy. 0:09:30.240 --> 0:09:32.240 Both in the United States and in Europe. It's about 0:09:32.280 --> 0:09:34.440 the same two thirds energy lost from the point of 0:09:34.480 --> 0:09:37.560 generation to the end use. So the burning question literally 0:09:37.640 --> 0:09:41.520 is how do we replace fossil fuels natural gas in particular, 0:09:41.600 --> 0:09:46.439 and speaking from a European context coming from Russia, actually 0:09:46.720 --> 0:09:48.760 the question that needs to be asked at the same 0:09:48.800 --> 0:09:52.160 time is how can we stop losing wasting so much energy? 0:09:52.520 --> 0:09:55.400 And for every dollar we invest in new supply and 0:09:55.600 --> 0:09:57.960 every plan I've seen coming out of the US governmental 0:09:58.040 --> 0:10:01.280 or even the Diamond proposal today is about supply, new gas, 0:10:01.440 --> 0:10:04.520 new news, new hydrogen, union, newables. It's great, it's going 0:10:04.559 --> 0:10:08.199 to take five fifteen years. The only solution that is 0:10:08.240 --> 0:10:10.080 going to work in the next six twelve to thirty 0:10:10.200 --> 0:10:14.079 six months is attacking that problem reducing energy waste? Well, 0:10:14.080 --> 0:10:16.240 that's what I wanted to ask. Obviously, you know, when 0:10:16.240 --> 0:10:19.480 it comes to producing new energy supply, possibly drilling more. 0:10:19.520 --> 0:10:22.160 Like you said, that's on a long time frame, but 0:10:22.440 --> 0:10:26.080 for the immediate future, that twelve month time frame, a 0:10:26.080 --> 0:10:28.959 little bit beyond. I mean, what is the focus? Are 0:10:29.000 --> 0:10:32.400 people asking that question? How do we know recoup some 0:10:32.480 --> 0:10:35.440 of the energy that we're wasting or you know, do 0:10:35.480 --> 0:10:37.880 you think that the focus is too much on these 0:10:37.920 --> 0:10:42.839 immediate solutions? I think the world sorry, these medium term solutions, Well, 0:10:42.840 --> 0:10:44.400 I think you know, I think the focus for the 0:10:44.440 --> 0:10:46.520 first point of the focus has been how big this 0:10:46.559 --> 0:10:50.680 problem is. You know, this is a huge, massive challenge 0:10:50.720 --> 0:10:53.960 to try and replace these sorts of fuels. Now, of course, 0:10:53.960 --> 0:10:56.320 the first one is to switch to alternative sources like 0:10:56.360 --> 0:10:59.160 the United States, you know, made the other countries in 0:10:59.200 --> 0:11:02.040 the Middle East for fuel supply. But there are solutions, 0:11:02.280 --> 0:11:05.040 but all of those solutions that are going to increase 0:11:05.400 --> 0:11:10.319 volumes of supply are going to take years, decades. Yes, absolutely, 0:11:10.600 --> 0:11:13.640 the question now everybody understands how big the problem is, 0:11:13.640 --> 0:11:16.360 what are the solutions for the next six twelve thirty 0:11:16.400 --> 0:11:19.839 six months, and that's what we're investing in. And there 0:11:20.000 --> 0:11:23.960 is no solution at the kind of scale and pace 0:11:24.080 --> 0:11:27.960 needed other than decentralizing energy, building energy on site or 0:11:28.000 --> 0:11:31.520 close to where it's needed, by investing in energy demand 0:11:31.520 --> 0:11:34.000 reduction projects, not by asking people to wear a wooly 0:11:34.040 --> 0:11:37.560 squat sweater and turned down their demostatic but by changing 0:11:37.640 --> 0:11:40.360 the loss of energy use in the seventy of the world, 0:11:40.440 --> 0:11:43.480 energy that's used in buildings, industry and transport, so much 0:11:43.480 --> 0:11:47.520 of it is wasted because inefficient infrastructure. Solution was one 0:11:47.559 --> 0:11:53.280 that I had, you know, high hopes for this water well, 0:11:53.720 --> 0:11:55.199 you know, I think go back to what I've said, 0:11:55.240 --> 0:11:57.040 and it's a very serious point there. You know, there's 0:11:57.080 --> 0:11:59.160 so much of what you hear about energy efficiencies like 0:11:59.240 --> 0:12:01.400 it's from the ninety in seventies, like there should be 0:12:01.440 --> 0:12:04.240 some sort of sacrifice. People should use less drive, less 0:12:04.360 --> 0:12:07.880 heat their homes, less seventy of energies used in buildings, 0:12:07.920 --> 0:12:11.040 industry and transport. That's where the real problem is, and 0:12:11.080 --> 0:12:14.559 the solutions lie there. Make them more efficient, generate energy 0:12:14.559 --> 0:12:18.240 where they needed, and invest in infrastructure that reduces energy demand. 0:12:18.400 --> 0:12:20.560 But it's got to be doubly hard, Jonathan, when you 0:12:20.600 --> 0:12:23.920 see this kind of not only the gyrations and currency markets, 0:12:23.920 --> 0:12:30.200 but also just you know, the massive inflation in other commodities. 0:12:31.080 --> 0:12:33.320 In order to get those electric cars on the road, 0:12:33.400 --> 0:12:37.400 or to get you know, some more efficient hydrogen trucking solution, 0:12:37.880 --> 0:12:40.920 you've got to build them first, and you've got you've 0:12:41.000 --> 0:12:43.720 got to have the chips. I mean, the whole supply 0:12:43.840 --> 0:12:47.320 chain has to make this so much more difficult. So 0:12:48.000 --> 0:12:52.000 let's start on the demand side. Replacing lights with LEDs, 0:12:52.040 --> 0:12:56.760 replacing heating ventilation, air conditioning equipment, introducing better software, building 0:12:56.760 --> 0:13:00.760 management systems and controls. These are all technologies and applications 0:13:00.760 --> 0:13:04.439 that are low cost, abundant in supply, and able to 0:13:04.480 --> 0:13:07.720 be introduced incredibly quickly in days, months, certainly within the 0:13:07.760 --> 0:13:10.480 next year on the demand side. On the supply side, 0:13:11.240 --> 0:13:18.320 locally produced local generating sets, turbines, engines, solar and storage assets. 0:13:18.320 --> 0:13:22.160 On the supply side can at least be installed on 0:13:22.360 --> 0:13:26.319 site much quicker, with much slower so much less of 0:13:26.760 --> 0:13:30.600 problematic planning applications and long term supply chain is using 0:13:30.720 --> 0:13:33.480 letter learn resource consumption. And the last point I make 0:13:33.640 --> 0:13:37.400 is a national as well as corporate issue. By using 0:13:37.480 --> 0:13:41.320 less energy for the same economic output, it improves performance. 0:13:41.400 --> 0:13:42.800 Go back to what I said at the beginning. If 0:13:42.800 --> 0:13:45.199 we're wasting most of the energy at the world, no 0:13:45.320 --> 0:13:49.079 wonder we're unproductive. By cutting energy demand, you cut costs, 0:13:49.120 --> 0:13:53.040 improved productivity. It's better business, it's better for the country, 0:13:53.559 --> 0:13:57.320 and it's also the largest source of greenhouse gas emissions reductions. 0:13:58.240 --> 0:14:00.760 And Jonathan, we have about twenties seconds left with you, 0:14:00.880 --> 0:14:03.280 but I'm curious in this environment, where are you seeing 0:14:03.280 --> 0:14:06.760 the most opportunity for your firm for Sustainable Development Capital whatever. 0:14:06.840 --> 0:14:09.839 The last few years, we've invested two billion dollars in 0:14:10.280 --> 0:14:13.719 investment opportunities associated with exactly what I'm saying. So these 0:14:13.720 --> 0:14:16.679 are not just nice ideas, they are highly profitable. And 0:14:16.800 --> 0:14:19.720 we've gotten an investment vehicle listed on the London Stock Exchange. 0:14:19.760 --> 0:14:22.960 We've got private investment vehicles, so that's where we're seeing 0:14:23.000 --> 0:14:26.400 the opportunities. Jonathan. Great to have you, and thanks so 0:14:26.480 --> 0:14:29.000 much for joining us. Jonathan Maxwell there, he is the 0:14:29.480 --> 0:14:34.000 co founder and the CEO of Sustainable Development Capital, helping 0:14:34.480 --> 0:14:37.360 firms make these changes that we talk about so much, 0:14:37.440 --> 0:14:40.600 especially lately. Great to have you with us, Jonathan Maxwell. 0:14:44.240 --> 0:14:47.040 Let's get over right now to Dave Rainy joining us 0:14:47.120 --> 0:14:52.400 to talk about these insane markets. UM. He is a 0:14:52.440 --> 0:14:57.040 portfolio manager at Hennessy Focus Fund. And Dave, you know, 0:14:57.280 --> 0:15:00.320 we can't really keep up with the moves down today. UM, 0:15:00.400 --> 0:15:02.480 it felt kind of like this on the upside yesterday. 0:15:02.960 --> 0:15:08.160 What do you do in moments of incredible volatility like this, Well, 0:15:09.200 --> 0:15:13.520 you understand that it's going to happen over a lifetime 0:15:13.600 --> 0:15:17.560 of investing. Um. The markets obviously very concerned today about 0:15:17.600 --> 0:15:20.200 the level and the rate of change in short term 0:15:20.320 --> 0:15:22.240 interest rates and also what the FED is going to 0:15:22.360 --> 0:15:24.120 do on the long end of the curve and when 0:15:24.160 --> 0:15:26.480 it's going to start there. So I was a little 0:15:26.560 --> 0:15:30.440 surprised that the market rallied the way it did after 0:15:31.680 --> 0:15:34.960 Chairman Pale said there wasn't a seventy five basis point 0:15:35.000 --> 0:15:38.320 increase in the offering. And I'm honestly, I'm not surprised 0:15:38.360 --> 0:15:41.000 to see markets reverse the way they have this morning. 0:15:42.200 --> 0:15:44.480 And Dave's something I've been thinking about a lot is 0:15:44.720 --> 0:15:49.640 financial conditions, because we've heard Pal repeatedly stressed that financial conditions, 0:15:49.680 --> 0:15:52.800 a tightening of those conditions, that is the mechanism through 0:15:52.840 --> 0:15:57.840 which monetary policy actually touches the real economy. And something 0:15:57.920 --> 0:16:00.840 I was thinking about watching markets just take off yesterday 0:16:00.920 --> 0:16:04.680 was that this is only going to further ease financial conditions. 0:16:04.760 --> 0:16:06.680 And if we end up in a situation like that 0:16:06.800 --> 0:16:10.280 where the feed is hiking, but you know, stocks are rallying, 0:16:10.440 --> 0:16:13.440 risk is rallying, financial conditions are easing. I mean, does 0:16:13.480 --> 0:16:15.960 the Fed have to be even more hawkish than they 0:16:16.040 --> 0:16:20.000 might have been otherwise? Well, it depends how far behind 0:16:20.120 --> 0:16:22.840 the curve the fet is. I think it's easy to 0:16:22.920 --> 0:16:26.240 make an argument today that the set is easily twelve 0:16:26.360 --> 0:16:31.400 months behind the snugging or the tightening curve. UM. FED 0:16:31.480 --> 0:16:33.760 funds should be much higher today. A matter of fact, 0:16:33.840 --> 0:16:37.640 I think the recently confirmed vice chair the FED said 0:16:37.680 --> 0:16:40.400 a couple of weeks ago that she didn't think that 0:16:40.680 --> 0:16:44.320 we would really get to a point around neutrality until 0:16:44.440 --> 0:16:48.200 the end of this year. So whether whether it's the 0:16:48.280 --> 0:16:53.480 FED funds rate still well below UM the neutral rate 0:16:53.560 --> 0:16:56.040 that set talks about it, you know, around two and 0:16:56.040 --> 0:16:59.480 a half percent UH, and or the fact that the 0:16:59.560 --> 0:17:04.359 Fed really hasn't begun to unwind their their nine fillion 0:17:04.480 --> 0:17:07.600 dollar balance sheet on the long end of the curve. Um, 0:17:08.480 --> 0:17:11.919 the risk here is that the FED has to overcreate 0:17:12.800 --> 0:17:16.359 because it's taken so long to start moving rates up. 0:17:17.119 --> 0:17:19.200 And so this is I think over the last few 0:17:19.240 --> 0:17:22.320 weeks you've seen a number of cell side firms UM 0:17:22.840 --> 0:17:27.119 increase their talk about the risk of an inflation, of 0:17:27.880 --> 0:17:31.119 of a recession over the next eighteen to two years. 0:17:31.600 --> 0:17:35.920 Why because we have an unemployment rate that's already fully recovered, 0:17:37.000 --> 0:17:40.320 and so typically the FED starts sugging or raising rates 0:17:40.880 --> 0:17:43.800 when the unemployment rate is you know, four to five 0:17:43.880 --> 0:17:46.399 to six, not at three and a half. And so 0:17:46.880 --> 0:17:50.320 this is the difficulty of a soft landing in here 0:17:50.720 --> 0:17:53.440 at this time. Well, you know what a lot of 0:17:53.480 --> 0:17:56.440 people have been worried about, Dave, is that the FED 0:17:56.920 --> 0:18:01.720 um essentially causes a recession here and then has to 0:18:01.840 --> 0:18:05.120 turn tail and go back. You know, you talked about, 0:18:05.160 --> 0:18:08.000 for example, the nine trillion dollar balance sheet. I remember 0:18:08.000 --> 0:18:10.600 when it was only four trillion and it seemed eye 0:18:10.640 --> 0:18:13.440 popping at that point, and they were gonna reduce it 0:18:13.560 --> 0:18:17.720 and they got, you know, half a trillion down and 0:18:17.800 --> 0:18:21.399 all of a sudden had to triple it. So you 0:18:21.480 --> 0:18:26.520 know what does that mean? Well, um, I think the 0:18:26.800 --> 0:18:30.200 term that people are talking about is a growth recession. 0:18:31.160 --> 0:18:34.560 Um not necessarily a hard recession or a severe recession, 0:18:34.600 --> 0:18:37.800 but a growth recession. And so you know, the FEDS 0:18:37.920 --> 0:18:41.960 comments UM over the last few weeks have been we'd 0:18:41.960 --> 0:18:44.439 have FED think that we can engineer what we need 0:18:44.560 --> 0:18:49.080 to do, which is bringing down UM inflation, you know, 0:18:49.440 --> 0:18:51.560 which is running somewhere between six and eight and a 0:18:51.600 --> 0:18:53.520 half percent, however you want to measure it, and we 0:18:53.600 --> 0:18:55.080 need to bring it down to the two or three 0:18:55.160 --> 0:19:02.200 percent level um. HM. The the the risk in here 0:19:02.600 --> 0:19:05.200 is that having waited so long, they're gonna have to 0:19:05.280 --> 0:19:10.560 bring FED funds up much higher and push spending down, 0:19:10.640 --> 0:19:14.960 consumer spending down, and unemployment up. The question is whether 0:19:15.040 --> 0:19:18.000 or not they can do it just enough to begran 0:19:18.160 --> 0:19:23.040 the to break the back of inflation UM and yet 0:19:23.119 --> 0:19:28.639 still have a pretty good unemployment or employment environment. We 0:19:28.720 --> 0:19:32.159 have an excellent employment environment today. The problem is is 0:19:32.240 --> 0:19:35.960 that wage gains aren't keeping up with inflation, and inflation 0:19:36.080 --> 0:19:38.920 is the biggest macro risk to the economy and the 0:19:39.000 --> 0:19:43.240 market today. So I'm I'm not surprised by the market's 0:19:43.320 --> 0:19:46.800 reaction today. After yesterday, we're still going to have an 0:19:46.800 --> 0:19:50.560 additional hundred, probably hundred and fifty basis points of rate 0:19:50.640 --> 0:19:53.760 increases between now and the end of the year on 0:19:53.880 --> 0:19:56.280 top of what the FED did, and there will probably 0:19:56.359 --> 0:20:01.000 be more next year. Um. But German OWL once again 0:20:01.080 --> 0:20:04.919 reiterated the fact that the economy is strong. Employment growth 0:20:05.760 --> 0:20:09.560 is obviously very good, wage growth is strong on a 0:20:09.960 --> 0:20:16.160 phenomenal basis, and there's their their their lots of job openings. Stave, thanks, 0:20:16.280 --> 0:20:18.800 you know, Dave, thanks so much for joining supporttionally. That's 0:20:18.800 --> 0:20:21.439 all we have time for. But I think really uh 0:20:22.200 --> 0:20:26.119 interesting points and insightful knowledge from Dave Rainey, their portfolio 0:20:26.200 --> 0:20:30.600 manager over at Hennessy Focus Fun talking to us about, um, 0:20:30.720 --> 0:20:33.720 the FED and the gyrations that we're seeing as a 0:20:33.800 --> 0:20:36.240 result of well, the FED and the Bank of England 0:20:36.320 --> 0:20:44.080 and the ECB. In markets today, let's get over to 0:20:44.520 --> 0:20:47.359 Vince Signarella joining us right now to talk about what's 0:20:47.359 --> 0:20:51.119 going on in currencies and and markets. These are global 0:20:51.160 --> 0:20:54.760 macro strategist at Bloomberg News. Um. But Vince, I you know, 0:20:54.840 --> 0:20:59.080 I emphasized the the f X because you traded it 0:20:59.160 --> 0:21:03.879 for so long on the street, and um, the dollar 0:21:03.960 --> 0:21:07.000 strength that we're seeing right now is really quite remarkable. 0:21:07.119 --> 0:21:10.400 One of five is it against the pound? One? Uh? Sorry, 0:21:10.440 --> 0:21:13.280 one of five against the euro against the pound. Is 0:21:13.359 --> 0:21:17.680 this gonna stick? Well? You know what I will tell 0:21:17.720 --> 0:21:19.600 you is if you look at the dollar and you 0:21:19.640 --> 0:21:22.159 look at equities, you see this in firset relationship. So 0:21:22.320 --> 0:21:24.040 for the dollar to continue to rally, we're going to 0:21:24.119 --> 0:21:26.440 need to see the equity markets continue to sell off. 0:21:27.040 --> 0:21:29.760 And I think that's actually more the question. Um you 0:21:29.840 --> 0:21:33.040 know that the dollars is reacting to this sell off 0:21:33.119 --> 0:21:37.440 in equities um and and poised to be sort of 0:21:37.560 --> 0:21:40.520 the the asset to go to in a risk of 0:21:40.920 --> 0:21:43.200 in a risk off environment, given what's going on in 0:21:43.320 --> 0:21:46.280 Ukraine and what the FETE is doing, etcetera. So it 0:21:46.400 --> 0:21:48.560 does appear that it will it will last for a 0:21:48.640 --> 0:21:51.040 little bit longer as we as we take into account 0:21:51.119 --> 0:21:53.160 what the FETE is doing. But you know, interest rates 0:21:53.200 --> 0:21:57.920 alone aren't what's aren't just what moves the the FX market. 0:21:57.960 --> 0:22:00.920 You're looking at the proximity of what's going on in 0:22:01.000 --> 0:22:03.600 Eastern Europe to Europe, and I think that's what's also 0:22:03.920 --> 0:22:07.840 weighing on European currencies and that's helping a dollar out 0:22:07.960 --> 0:22:10.639 quite a bit. And then I am dying to get 0:22:10.680 --> 0:22:13.040 your thoughts on the pound, because what a move in 0:22:13.119 --> 0:22:17.120 sterling it's down to its lowest in two years versus 0:22:17.160 --> 0:22:20.760 the dollar looks like off two percent that pair. Uh. 0:22:20.960 --> 0:22:23.159 That's of course after the Bank of England issued the 0:22:23.280 --> 0:22:26.080 most gloomy outlook of any major central bank this year. 0:22:27.200 --> 0:22:30.520 How unusual is it to see the currency fall after 0:22:30.920 --> 0:22:34.760 its central bank actually hikes rates. Well, you know, that's 0:22:34.760 --> 0:22:38.000 actually a really good question. It's the expectation, obviously, is 0:22:38.040 --> 0:22:40.399 currencies rise when the central bank's raising rates. But in 0:22:40.480 --> 0:22:43.920 the case of the UK, um, because they do import 0:22:43.960 --> 0:22:48.600 a great deal of product um. When there is inflation globally, um, 0:22:48.880 --> 0:22:51.400 it's it's the wrong kind of inflation. It's the wrong 0:22:51.480 --> 0:22:54.480 kind of inflation for every country really, but for the 0:22:54.600 --> 0:22:57.560