Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course, on the Bloomberg Terminal. Okay, what we're
Speaker 1: gonna do right now is bringing David Constant. He is
Speaker 1: chief US Equity Strategies for Goldman Sachs. We've got a
Speaker 1: whole bunch of questions as he resets for SMP five thousand,
Speaker 1: But David Constant, we must celebrate as you do at
Speaker 1: Goldman Sachs with a fully staffed team. Constant, today in
Speaker 1: the office, I want you to explain the path to
Speaker 1: get your team ascons at Goldben Sacks again. Well, I
Speaker 1: uh want to definitely congratulate all of our whole team.
Speaker 1: The entire team is here for the first time in
Speaker 1: fifteen US UH so we're pretty happy about that and
Speaker 1: the process has been halting. We had some density restrictions
Speaker 1: in terms of the seating arrangements, but given the way
Speaker 1: we've been able to use some extra offices. We're all
Speaker 1: here today, so I'm happy about that. We'll change is
Speaker 1: David for you. As the team gets back around the
Speaker 1: table together again, what's the big difference. Well, the difference
Speaker 1: is just the interaction and being able to have small
Speaker 1: conversations about different issues that come up on a computer
Speaker 1: screen and call someone over to point it pointed out. Uh.
Speaker 1: You know, some people wear masks still, but generally speaking,
Speaker 1: everyone everyone, everyone absolutely has been vaccinated, twice vaccinated and
Speaker 1: things like that. It's just a much more efficient way
Speaker 1: to communicate. Of course we're doing that before when people remotely,
Speaker 1: but just an incremental amount of communication. So I think
Speaker 1: that's really helpful on our teams were really happy about
Speaker 1: about that. And I think in my conversation with clients,
Speaker 1: you know, more and more of them seem to be
Speaker 1: to be coming back to UH working from their their
Speaker 1: their offices, and there's different portfolio managers have different time
Speaker 1: time frames UH to re reengage. But right here today
Speaker 1: my team US port follow strategy. We're all here. Well,
Speaker 1: let's shine a light on one of the debates at
Speaker 1: the moment. Imagine you the team happen right now. The
Speaker 1: nastacs made a bit of a bounce. David and early
Speaker 1: in the conversation, ely in the conversation on this program,
Speaker 1: we were talking about whether there is a correlation or
Speaker 1: a causation between what happens with rights and what happens
Speaker 1: with growth, Big tag, What are even the team saying
Speaker 1: about that? So, the interplay between growth and rates and inflation,
Speaker 1: it's obviously has a lot of different dynamics, and I
Speaker 1: would unpack that in sort of two ways. How does
Speaker 1: inflation affect the equity market broadly speaking? And then which
Speaker 1: sectors in particular? And so we think about it. The
Speaker 1: transmission mechanism, on the one hand, is on valuation, because
Speaker 1: the impact of higher inflation leads to generally higher rates
Speaker 1: and that has an impact particularly on the longer duration,
Speaker 1: longer expected growth stocks. But there's also a transmission mechanism
Speaker 1: through margins, and so I think we need to bring
Speaker 1: both of those together. Think about it. What is one
Speaker 1: of the attributes of the technology sector is they have
Speaker 1: extraordinarily high margins and they've been relatively immune upon intended
Speaker 1: their relative immune from the higher inflation curtailing their margins.
Speaker 1: Uh So, on the one hand, you have a suppressing
Speaker 1: or a depressing effect on valuation for inflation and what
Speaker 1: that means for rates and the valuation of that long
Speaker 1: term expected growth. And another hand, you have the durability
Speaker 1: of their margins as compared with some other more cyclical
Speaker 1: sectors where their margins may not be so robust in
Speaker 1: terms of ability to pass through those higher input costs.
Speaker 1: I think those are the two things that we are
Speaker 1: uh trading off one against the other, and I think
Speaker 1: are My view is that the margins are going to
Speaker 1: become the more dominant topic of conversation. The idea of
Speaker 1: transitory is a debate we will be having consistently until October. Right,
Speaker 1: we'll put a stake in the ground and say that's
Speaker 1: for six months, and so the Fed has indicated its view.
Speaker 1: My colleagues at Golden Sacks Economics team also have a
Speaker 1: view that the inflationary impulses a relatively transitory and then
Speaker 1: we'll receed back towards the two core pc next year.
Speaker 1: So that's sort of the issue. We're going to have
Speaker 1: that repeatedly. I think the more interesting analytical debate with
Speaker 1: portfolio managers is around the durability of margins and margins
Speaker 1: Jonathan and Tom and Lisa have recovered now to their
Speaker 1: pre pandemic levels, So they're already back to where they
Speaker 1: were pre UH February of two thousand twenty. And so
Speaker 1: question is from here where we're going, And my view
Speaker 1: is margins are going to be relatively flat and a
Speaker 1: big variable there is the tax rate, the corporate taxes.
Speaker 1: If you told me for a moment we did not
Speaker 1: we will not have UH corporate tax reform, then would
Speaker 1: have earnest growth of around ten from this year into two.
Speaker 1: Now that's not our view. We expect there's going to
Speaker 1: be an increasing corporate taxes and that is going to
Speaker 1: mean that growth in earnings is gonna be around five.
Speaker 1: So they paid multiple for a five percent growth as
Speaker 1: opposed to tempercent growth. David, this has been the story
Speaker 1: that big tech can pass on pricing increases. Big tech
Speaker 1: reign supreme again and again and again, and that is
Speaker 1: why it is the top holding for so many companies,
Speaker 1: for so many investors. At what point do you start
Speaker 1: to worry about concentration risk yet again, as hedge funds
Speaker 1: double down on say Facebook positions after already having large,
Speaker 1: large positions outstanding, Well, it is interesting you mentioned UH
Speaker 1: Facebook as it is the largest stock in our hedge
Speaker 1: fund very important position to basket. We have on Bloomberg
Speaker 1: been tracking this now for twenty years. Every ninety days
Speaker 1: we're looking at around two point eight trillion dollars of
Speaker 1: long and short exposure. And that's the most uh, sort
Speaker 1: of most most important position. Uh. It's ap planted Amazon
Speaker 1: that previously had that position. We just published that last week.
Speaker 1: And so yes, it's a big topic of conversation just
Speaker 1: how sort of dominant these can be now right now, Lisa,
Speaker 1: these five stocks, the big five companies that we all
Speaker 1: know are comprising around or so of the spquity cap.
Speaker 1: But last September that was so the actual concentration is
Speaker 1: diminished slightly. Uh. And perhaps more importantly is in the
Speaker 1: growth index. If you look at to say, the Russell
Speaker 1: one thousand growth index. This was a big issue for
Speaker 1: diversified growth mutual funds where the passive index weight in
Speaker 1: the Russell one thousand of the five largest companies put
Speaker 1: a number of funds in excess or tripping if you will,
Speaker 1: the diversification requirements of the sec that has suppressed and
Speaker 1: that has come down a little bit. As these companies
Speaker 1: as big and dominants, they are relative to the rest
Speaker 1: of the market, they've receded a little bit in terms
Speaker 1: of their concentration. So the question we think about and
Speaker 1: the discussions with fund managers leases well, just how further
Speaker 1: can they run? If you think what happened year every
Speaker 1: year in revenue growth in the first quarter they were
Speaker 1: up forty one percent compared to the rest of the
Speaker 1: market where they were up modestly in terms of sales growth.
Speaker 1: And so the idea in a and even think of
Speaker 1: the worst part of the pandemic in the second quarter
Speaker 1: last year, the worst part of the pandemic. Year every year,
Speaker 1: these companies had eighteen percent revenue growth. Rest market was
Speaker 1: around seven. And so we're looking forward to ask ourselves, well,
Speaker 1: these companies are pre durable in terms of their growth.
Speaker 1: They're expected in terms of revenue growth three times faster
Speaker 1: than the rest of the market. In terms of top
Speaker 1: line sales. They trade at basically about five multiple points higher,
Speaker 1: uh multiple than the market markets like one times right now,
Speaker 1: uh these are six times. So they're trading at a
Speaker 1: premium valuation, no question about that. But they're also offering
Speaker 1: both growth. David, in the time we've got left, I've
Speaker 1: got any ways to go here and I do want
Speaker 1: to congratulate your team on their Amazon research of a
Speaker 1: couple of weeks ago. I thought it was great how
Speaker 1: you went to cash flow. There's a lot of people
Speaker 1: out there cautious short term or a constant long term view,
Speaker 1: and one of them is Douglas Cass. Doug Cass is
Speaker 1: cautious right now, and Doug Cass is saying, I don't
Speaker 1: care what constant thinks about the bull market. There's no
Speaker 1: volume out there. How does volume play into your view
Speaker 1: of the equity markets? Well, when I think about it
Speaker 1: in terms of liquidity, in terms of low versus high
Speaker 1: liquidity stocks and groups of companies that have more or
Speaker 1: less liquid from a from a trading perspective, and the
Speaker 1: markets actually awarded companies that have relatively lower liquidity. And
Speaker 1: that's just a factual statement in terms of the performance. Uh.
Speaker 1: You know Doug. I know Doug. I haven't talked to
Speaker 1: him in a while, but he's generally more on the
Speaker 1: bare side and the short side. So it wouldn't be
Speaker 1: surprised you have a more more cautious take on the
Speaker 1: on the world. To be fair, the market right now
Speaker 1: in SMP has four thousand, two hundred Our target for
Speaker 1: the end of the year is around fourth and three hundred,
Speaker 1: so pretty modest upside to be very clear, and that
Speaker 1: is likely to be shifting from more cyclicals, which has
Speaker 1: done really really well so far, towards more of the growth.
Speaker 1: And the idea behind this intuition Tom is the economy
Speaker 1: is peaking this quarter in terms of growth rate like
Speaker 1: ten percent, and that's gonna decelerate, still grow, but at
Speaker 1: a slowing pace, and that's where the transition and handoff
Speaker 1: to some of the companies that are positioned to grow
Speaker 1: at a more extended level. And the intuition behind that
Speaker 1: is the companies that are investing in their business and
Speaker 1: that is what makes some companies differentiated from others. The
Speaker 1: techical company invests eleven percent of its cash FUF from
Speaker 1: operations to grow its business. And there's a portfolio of companies,
Speaker 1: whether it's seventy and so it's big companies that we
Speaker 1: talked about earlier around so it's an enormous amount of
Speaker 1: investment to grow into two and make no mistake about it,
Speaker 1: all of the conversations with fund managers are about the
Speaker 1: growth prospects in to right. David love catching up with
Speaker 1: because David, We're excited to have around this table at
Speaker 1: one point in the future, maybe in the next time.
Speaker 1: Lean over, Oh, Lisa, Lisa, could you plass me the
Speaker 1: tank please? Right now, Let's go to Marvin Lowe. He
Speaker 1: has the State Street and their senior global macro strategists
Speaker 1: always writing really cogent notes linking FED policy into the markets. Marvin,
Speaker 1: I want to go from Mr Gorman and Morgan Stanley
Speaker 1: gaming out two thousand twenty two to the chairman with
Speaker 1: a way to the world on his shoulders to what
Speaker 1: it means for the equity market. I want you to
Speaker 1: explain to our radio and TV audience what this FED
Speaker 1: babel means for stocks. You know what. It's as simple
Speaker 1: as how much liquidity and how ultimately dumbased the FED
Speaker 1: makes it for the market. UM with negative really guilds,
Speaker 1: you've got to you've got a repressive financial system, and
Speaker 1: equities benefit from the fact that there aren't that many alternatives.
Speaker 1: If you're buying UM a church of security at this point,
Speaker 1: you're buying into the view that you're going to lose
Speaker 1: money after inflation. Ultimately, UM in terms of how you
Speaker 1: part the FED, in terms of whether or not they're
Speaker 1: correct that inflation will be trenditory. Is the key that
Speaker 1: all of us are asking right now? Yeah, I think
Speaker 1: this is so important, Johnny for a radio audience, we've
Speaker 1: really got a state that we go from Gorman to
Speaker 1: Powell and then the jargon is dj I and john
Speaker 1: I did that for you. That's the Jones. Thank you.
Speaker 1: Industrial Marvin. When you responded to that question, you weren't
Speaker 1: talking about a shift in the FET's reaction function. You
Speaker 1: were talking about the data may become again hotter than
Speaker 1: they anticipate. Do you think that's the lower bar here
Speaker 1: to disagree with their forecast, to say that actually it
Speaker 1: will look a little different in the future to the
Speaker 1: way they anticipate. Yeah, I mean, I think I think
Speaker 1: the real challenge is that the FETE is giving us
Speaker 1: a message that um it has it hasn't believed in
Speaker 1: the forecast in the past. That's why they become outcomes based.
Speaker 1: But everything is based on their view, UM that data
Speaker 1: is going to be transitory. So from one instance, believe
Speaker 1: us that you know, the numbers are are going to
Speaker 1: get back to normal into something that is um much
Speaker 1: more familiar to what we've seen before. But at the
Speaker 1: other side, we don't necessarily believe what we've seen in
Speaker 1: the past is accurate. Um. The risk is that the
Speaker 1: risk is that not only the data comes in hotter
Speaker 1: remains hotter. I think is kind of the important part
Speaker 1: of it. UM. And the FED is so far behind
Speaker 1: the curve UM that it's hard for them to catch up. Um.
Speaker 1: You know, not not necessarily saying an eighties type of
Speaker 1: environment again, UM, but we're talking massive balance sheets with
Speaker 1: the potential for for slip ups. Shure, absolutely, Mom. And
Speaker 1: do you think in one way that contradicted themselves when
Speaker 1: they say we're an outcome based federal serve, but also
Speaker 1: we will give you a long enough late time to
Speaker 1: know when we're thinking about talking about talking about whatever
Speaker 1: when it comes to type rink. Yeah, yeah, absolutely. And
Speaker 1: I think and I think what we saw earlier this
Speaker 1: year in terms of yields, in terms of real yield
Speaker 1: UM kind of coming off the bottom feel being less
Speaker 1: negative fuel UM is an example that the market is
Speaker 1: not necessarily a hundred and comfortable with the Fed's ability
Speaker 1: to do everything that it says. UM. Having said that,
Speaker 1: to push against the FED UM where it does have
Speaker 1: covered to remain where it is now, is something that
Speaker 1: kind of keeps us in the range even though we've
Speaker 1: had data on really both sides in terms of surprise
Speaker 1: to the upside and downside. Marvin, where's the bigger risk
Speaker 1: right now that yields go up or that yields go
Speaker 1: materially lower. I think it's materially lower, to be honest
Speaker 1: with you, because to get materially materially lower, you've got
Speaker 1: to really um abandon the growth that we expect to
Speaker 1: have not only from reopening, but from the fact that
Speaker 1: we've got as much savings as we have and we're
Speaker 1: predicting above trend for at least the next year year
Speaker 1: and a half or so. If that's the case, and
Speaker 1: a lot of people would agree with you, that isn't
Speaker 1: the FED doing exactly what people would hope the FED
Speaker 1: would do. I mean other words, run the economy as
Speaker 1: hot as possible, because the downside risk to the economy,
Speaker 1: the downside risk to yield, is way worse and more
Speaker 1: difficult for them to combat than the alternative. Yeah. Absolutely,
Speaker 1: and I think that's why risk assids remained um as
Speaker 1: supported as supportive as they have been over the course
Speaker 1: of the last couple of months. Despite you know whether
Speaker 1: it's of medical virus volatility and or inflation volatility, kind
Speaker 1: of making twins in the market, Marvin, So much of
Speaker 1: the exercise right now, and I take this at a
Speaker 1: macro level, is all this news slow coming out of
Speaker 1: an original natural disaster into something original a boom economy.
Speaker 1: We haven't seen this in forty seven. What should our
Speaker 1: listeners and viewers do given a boom economy? How do
Speaker 1: they allocate given the macro flow of news? Well, um,
Speaker 1: you know, and I think and I um rates and
Speaker 1: the FED is the backdrop around that. So so long
Speaker 1: as we've got these negative yields in a booming economy,
Speaker 1: it's really supportive for risk assets. It's really supportive for
Speaker 1: taking that equity risk. And I think that becomes part
Speaker 1: of the asset allocation discussion. Um. And then and then
Speaker 1: we start to pars things that this has been a
Speaker 1: market where we're looking for those that might benefit more
Speaker 1: than others. Yeah, John from Coventry says, go Matthew, right now,
Speaker 1: let's go Matthew Marvin. When you see the real yield
Speaker 1: come up from a substantial negative level towards zero as
Speaker 1: it did in Switzerland, because they're seeing German tenure. Is
Speaker 1: that a linear flow or is John's using this phrase
Speaker 1: reaction function? Is that a linear or quadratic movement? I
Speaker 1: think I think that the market should be able to
Speaker 1: handle zero percent really yields UM. You shouldn't need a
Speaker 1: repressive financial system for companies to do well. There is
Speaker 1: a level with within kind of that really yield discussion
Speaker 1: when it becomes much more positive than zero that UM
Speaker 1: you wind up with alternatives UM and the risk reward
Speaker 1: amongst different asset classes are coming to play. But a
Speaker 1: zero really yield, which is at this point from a
Speaker 1: tenure perspective, still eighty basis points away, shouldn't be enough
Speaker 1: to derail how companies are able to still perform well
Speaker 1: UM in an environment where you've got positive growth, mom,
Speaker 1: And do you think Europe can handle zero row yots? Yeah,
Speaker 1: that's that's certainly a much different type of UM equation.
Speaker 1: You know, their demographics are different, UM. Certainly the amount
Speaker 1: of fiscal stimulus that they have is different. It's going
Speaker 1: to be it's going to be harder. And I think
Speaker 1: that's the conundrum that ECB has UM as they try
Speaker 1: to sound as dubbish as they can, but ultimately you know,
Speaker 1: is moving along the same normalization path without as much
Speaker 1: of a without much much of a growth response that
Speaker 1: that we're seeing here. Ultimately the mom and isn't then
Speaker 1: the tension the issue hit the the U S treasury
Speaker 1: market can't trite and a vacuum that it's the global
Speaker 1: on market and then you've got to move towards zero
Speaker 1: real yield. It's on a ten year treasury. Can you
Speaker 1: imagine what it looks like cover in Europe? It's it's
Speaker 1: the conundrum of the ECB Um. You know, it's still
Speaker 1: a lot of different economies with a lot of different speeds,
Speaker 1: and you've got one organization trying to keep it all
Speaker 1: together with one number. Whereas you know, certainly for us
Speaker 1: with the dollar um and a more cohesive economy, it's
Speaker 1: it's much easier. Good luck, Jane tent and the next
Speaker 1: day see may sink. Yes, yes, absolutely, Um. You know
Speaker 1: the focus is going to be on what they what
Speaker 1: they do with PEP. It's going to be um. You know,
Speaker 1: everyone certainly is looking at the size of the balance
Speaker 1: sheets and that being the first stage of normalization. The
Speaker 1: envelope themselves, the envelope structure itself leads itself to a
Speaker 1: natural tapering process unless we hear differently. So um, it's
Speaker 1: an important meeting in the middle of summer. Absolutely, Mom
Speaker 1: and gonna catch up as always, Mom and love that
Speaker 1: given straight the global Macrost strategical they've tweeted up to
Speaker 1: eleven times this morning. No, it's not President Trump of
Speaker 1: a few months and quarters ago. It is Lizanne Saunders
Speaker 1: piece of advice. Folks, if you haven't signed up for Twitter,
Speaker 1: your single reason is the early morning chart set up
Speaker 1: of liz Ane Saunders l I Z A N N
Speaker 1: S O N D E R S. And the biggest problem, Paul,
Speaker 1: is not one single tweet is average. That's smart. Smart.
Speaker 1: Do you do this yourself or your kids helping? You know? Well,
Speaker 1: not not my kids. But I have an incredible UM
Speaker 1: research associate, Kevin Gordon, who's uh two years out of
Speaker 1: college and joined the two years ago, and he puts
Speaker 1: a lot of the charts together. Rich Kevin Gordon g
Speaker 1: O R to be sure, And by the way, thank
Speaker 1: you for selling my Twitter handle because I have had
Speaker 1: a rash of the posters. YEA, well, I can understand
Speaker 1: with your claim over the years. Listen, I'm gonna go
Speaker 1: to your right, which shows under performance by tech and
Speaker 1: consumer discretionary. We're talking big tech under performing others. David
Speaker 1: Costan says, a renaissance occurs is a thing is going
Speaker 1: to have a good Q three. So I think we're
Speaker 1: we're already seeing a bit of movement back into some
Speaker 1: of those what were oddly the defensive areas of the market.
Speaker 1: Last year. You know, big tech in the Big five
Speaker 1: became the covid eras defense because it was pretty much
Speaker 1: the only ecosystem that was operational and helpful in that environment.
Speaker 1: And I think given what's happened with the tenure yield
Speaker 1: stalling a bit here, uh, economic growth a bit weaker.
Speaker 1: I think the view that maybe inflation actually is transitory,
Speaker 1: I think you've got a bid back toward the growth
Speaker 1: side of the equation. I think it's still be choppy.
Speaker 1: I think we'll see kind of value in growth factors
Speaker 1: volleyball a bit much like we'll the consumer discretionary and
Speaker 1: tech on one end of the spectrum, energy and financials
Speaker 1: on the other end. And that's been the name of
Speaker 1: the game for quite a few months now. But growth
Speaker 1: factors are finding a bit of a bit. Yeah, so
Speaker 1: we've noticed the town. I were just discussing that. The
Speaker 1: Over the last couple of days, the inflation talk is
Speaker 1: kind of quieted down a little bit. What is your view,
Speaker 1: Lasann about kind of where we are with inflation. I mean,
Speaker 1: the Fed obviously has had a very consistent message about
Speaker 1: it being transitory. What are your thoughts, Well, look up
Speaker 1: transitory and the Oxford Dictionary. It's not permanent. With that
Speaker 1: basic definition, you could you could find that you could
Speaker 1: call the seventies there of of inflation transitory based on
Speaker 1: that fairly simple definition. So I suppose it's all a
Speaker 1: function of how long you define that. We know the
Speaker 1: base effects will say it as early as June, we're
Speaker 1: seeing some of the supply disruption start to ease a
Speaker 1: little bit. We some of the speculative froth has come
Speaker 1: a bit out of a certain segments of the commodities market.
Speaker 1: There are longer term issues. I think the problems and
Speaker 1: semiconductors probably don't get solved imminently. And then it's a
Speaker 1: question of the psychology of inflation that doesn't get enough attention. Uh.
Speaker 1: It ends up this when it turns into a spiral.
Speaker 1: It has a lot to do with psychology. The psychology
Speaker 1: of workers demanding higher wages, the psychology of companies deciding
Speaker 1: to try to pass those on consumers in turn um
Speaker 1: feeding that into wages, so that spiral comes not just
Speaker 1: based on the math, but also based on psychology. So
Speaker 1: I think watching labor market indicators and then trying to
Speaker 1: uh to gauge that psychology will be key to whether
Speaker 1: this truly is just a short term phenomenon that set
Speaker 1: to fade imminently. I think the pay attention to the
Speaker 1: bondo market. I think the bondo market is a more
Speaker 1: rational um viewer of what goes on in the economy
Speaker 1: than at times the stock market is. So I think
Speaker 1: the stalling and the tenure yield may be indicative of
Speaker 1: inflation problem that is not quite as dire as some
Speaker 1: equity market watchers might suggest. So lazy, and that labor
Speaker 1: market point is I think really telling here if we
Speaker 1: you know, you really have to have wage inflation have
Speaker 1: any meaningful inflation in this economy. So when you see
Speaker 1: the McDonald's of the world raising their minimum wage to
Speaker 1: thirteen and Amazon to fifteen, is that just anecdotal points
Speaker 1: or do you think there really is something to that
Speaker 1: wage inflation story that we need to keep an eye on, well,
Speaker 1: it's more than just anecdotal, but I don't think it's
Speaker 1: yet a sign of significant and sustainable upward pressure. I
Speaker 1: can do what was part of the equation back in
Speaker 1: the the nineteen seventies, because if you look more broadly
Speaker 1: other than those one off and they're big companies, and
Speaker 1: I think that it's important that they're boosting wages more broadly,
Speaker 1: more industries are whether you look at indeed on Monster
Speaker 1: postings are actually sub two thousand and nineteen levels. I
Speaker 1: also think we have to look at myriad wage data metrics.
Speaker 1: I'd say put at the bottom of your list average
Speaker 1: hourly earnings because of the mixed shift issue that came
Speaker 1: into play last year. In April last year, average howlely
Speaker 1: earnings were up a point to in a month where
Speaker 1: we lost twenty million jobs. That was simply because the
Speaker 1: jobs lost skewed towards the lower and the wage spectrum,
Speaker 1: which boosted the average. The exact opposite is happening now,
Speaker 1: so unit labor costs, employment cost index of those would
Speaker 1: be the metrics. Atlanta FED has immediate measure called wage Tracker,
Speaker 1: so those would be the labor market metrics I would
Speaker 1: focus on, and then they're still all generally fairly tamed. Listen,
Speaker 1: profit is so in people will say, well, I only
Speaker 1: want to invest in companies that are profitable. How do
Speaker 1: you define? How do you study the profit of an
Speaker 1: individual company? For that matter? Is sec here? I mean?
Speaker 1: Do you do? You do you do Graham doubt and
Speaker 1: coddle and go down to net income or do you
Speaker 1: go up the income statement? Or well, beautifully for me,
Speaker 1: I don't have to do that anymore. I I know,
Speaker 1: I know you don't do it. But what what what
Speaker 1: Saunders one oh one? And how you measure profit? Well?
Speaker 1: I think certainly in this environment you have to do
Speaker 1: some normalization. Um. I like the methodology that I saw
Speaker 1: first pioneered by Steve Luthold, which is five year normalized earnings,
Speaker 1: and it's it's actually a couple of interesting combos in there.
Speaker 1: It's it's four and a half years of a historic earnings,
Speaker 1: not as far back as Schiller, but reasonable. You can
Speaker 1: skip over some of the extremes, like a COVID situation
Speaker 1: two quarters of forward earnings, so you get a little
Speaker 1: bit of that embedded forward and then takes the midpoint
Speaker 1: between operating earnings and reported earnings, and I have found
Speaker 1: that that's a pretty smooth way of looking at earnings,
Speaker 1: that that blends that necessity of looking at what they've
Speaker 1: actually earned, Understanding the market tends to be forward looking,
Speaker 1: also understanding, especially in extreme environments, that the spread between
Speaker 1: reported and operating can be significant. And that's about the
Speaker 1: cleanest way I've seen to analyze the overall market an
Speaker 1: individual company or a broad sector. Lissene Saunders on Twitter
Speaker 1: at l I z A n N S O N
Speaker 1: d E r S. I think I got the spelling right.
Speaker 1: Twelve thirteen charts every morning really quickly. She's a small firm.
Speaker 1: Charles Schwab is their chief investment strategists. It's now time
Speaker 1: to frame the FED. We can do that with Julia
Speaker 1: Corneto macro policy perspectives, a president and founder. Julia, the
Speaker 1: equity market is voting, it has been up. Maybe it's
Speaker 1: a raging rally, is Doug Cast calls it? How do
Speaker 1: you use the stock market within your FED economics to FED?
Speaker 1: The stock market rather is voting optimism right, right and share.
Speaker 1: Powell is a financial conditions guy, so he does use
Speaker 1: financial conditions broadly to calibrate how easy or how supportive
Speaker 1: policy is. And right now the markets are saying, yes,
Speaker 1: policy is supportive and it's gonna work, and it's going
Speaker 1: to create a strong recovery. And I think that's exactly
Speaker 1: where they wanted to be within the equation. Where do
Speaker 1: you see that with an investment We don't talk enough
Speaker 1: about it. It's a smaller number than consumption, but investment, well,
Speaker 1: it's got a volatility. What is that volatility right now
Speaker 1: into the end of the year. Well, we saw a
Speaker 1: very strong investment recovery last year. In fact, investment ended
Speaker 1: up stronger at a higher level than pre pandemic by
Speaker 1: the end of the year. So UM, I think that's
Speaker 1: that bode dwell for or gains in productivity this cycle,
Speaker 1: and also for that optimism you talked about earlier. Companies
Speaker 1: are putting capital to work. They obviously see prospects for
Speaker 1: making money by doing so. So I think that that's
Speaker 1: a very good signal. As you say, there is some volatility,
Speaker 1: and it probably won't keep rising at the pace we
Speaker 1: saw on the second half of last year, um, but
Speaker 1: it does seem to be on a positive track. Judy,
Speaker 1: how do you gauge productivity and how easy is it
Speaker 1: to get a clean rate on what is happening in
Speaker 1: this economy. It's really hard right now. I mean it's
Speaker 1: gonna be hard for a while. Everything is going to
Speaker 1: be extremely noisy this year. UH, with the reemployment of
Speaker 1: a lot of people, with the shifting in the mix
Speaker 1: of workers. UM, we've seen as we usually see a
Speaker 1: strong productivity UH performance during a recession as companies struggle
Speaker 1: to survive by squeezing every bit of efficiency out of
Speaker 1: their operations that they can. UM. But I think, you know,
Speaker 1: so it's gonna take a little bit of time to
Speaker 1: see whether we settle at a higher trend in productivity
Speaker 1: than we did last mile. Last like always saw pretty
Speaker 1: disappointing performance throughout the recovery and expansion UH. And I
Speaker 1: think that there is some thought that you know, the
Speaker 1: pandemic accelerated business transformation. It brought forward a lot of
Speaker 1: plans UH, and that could result in higher productivity. And
Speaker 1: then the question is how do we balance that against
Speaker 1: the frictions associated with dealing from Where does work from
Speaker 1: home go from here? How do companies navigate and manage
Speaker 1: their workforce with some employees wanting to stay remote and
Speaker 1: others wanting to come back to the office. That's going
Speaker 1: to be a management challenge. Judy, how do you think
Speaker 1: about what's happening in DC and how you plug that
Speaker 1: into your forecast your outlook for this economy. I think
Speaker 1: a lot of what we're seeing right now is sort
Speaker 1: of the political theater around the infrastructure bill. We're not
Speaker 1: adjusting our forecast because we do think it's going to
Speaker 1: get past. And the question really for us is how
Speaker 1: big is it and how much of it is paid
Speaker 1: for through higher taxes? Uh, and that still seems to
Speaker 1: be in a state of flux. But overall, we do
Speaker 1: think that the bulk of the infrastructure proposals goes through.
Speaker 1: The question is just as a bipartisan or a party
Speaker 1: line vote. Well, but Julia, there's a question of how
Speaker 1: much this higher inflationary regime that people talk about hinges
Speaker 1: on this presumption that you talk about the infrastructure will
Speaker 1: get past something resembling where it is right now in
Speaker 1: the proposals. Yeah, No, I think it is an important
Speaker 1: contributor to the outlook. Although you know, I think remember
Speaker 1: that infrastructure is something that gets spread over ten years,
Speaker 1: so it's not a replacement for a fading fiscal impulse. Um,
Speaker 1: we are going to see a fading fiscal impulse. We've
Speaker 1: had a tremendous recovery push that has been stoking a
Speaker 1: lot of the supply chain pressures. That's going to ease
Speaker 1: back as we move through the year and into next year.
Speaker 1: But underlying that is a pretty decent recovery so far.
Speaker 1: So UM, we we expect given the GDP tracking, we're
Speaker 1: gonna see a nice bounce back in May hiring. I
Speaker 1: think April was the outlier. Uh. Maybe we do have
Speaker 1: some frictions reconnecting people to employers and some sectoral reallocation,
Speaker 1: but there's a lot of demand out there and I
Speaker 1: think ultimately that's going to lead a strong labor market
Speaker 1: recovery and you won't need we won't be as reliant
Speaker 1: on the fiscal impulse to get a decent economic performance
Speaker 1: next year. So I don't think it's the be all
Speaker 1: and end all. I do think it's UM, it will
Speaker 1: cause sectoral reallocation. You're pulling in resources for this infrastructure, uh,
Speaker 1: you know, agenda, and that will move resources towards that
Speaker 1: from other sectors, so that that might be different otherwise,
Speaker 1: But I think we are going to hand the baton
Speaker 1: back to the natural expansionary dynamic towards the end of
Speaker 1: this year and internet. Julia, can you elaborate a little
Speaker 1: bit about April being the outlier and expecting hiring to
Speaker 1: really pick up what has been responsible for this labor
Speaker 1: market shortage at a time when there are still so
Speaker 1: many people out of work. Yeah, I think there's a
Speaker 1: lot of frictions. There was actually a really nice article
Speaker 1: on on restaurant workers in the Washington Post this morning
Speaker 1: that was talking to the workers themselves. We're coming out
Speaker 1: of the pandemic, and we shouldn't forget that a lot
Speaker 1: of people have made changes in their lives. They think
Speaker 1: about their work differently. Now is forever changed. If you
Speaker 1: are on the front lines, Um, you don't look at
Speaker 1: your sector the same and so you're making decisions about
Speaker 1: where do I want to be, what do I want
Speaker 1: to be doing, and what am I willing to work for?
Speaker 1: And so we're seeing that negotiation happening right now that
Speaker 1: it's not a question of whether people will return to work,
Speaker 1: it's where they'll return to work at what wage and
Speaker 1: then how that all sort of settles out in coming months.
Speaker 1: But we've got millions of people who are actively looking
Speaker 1: for work, Julie. Very quickly, you're one final question to
Speaker 1: your point on wages, are they transitory? Yeah. I think
Speaker 1: what we're seeing Tom is something similar to what we're
Speaker 1: seeing on the price side. So you've got a a
Speaker 1: excess demand for workers in certain sectors that's going to
Speaker 1: lead to a level shift up in their wage race.
Speaker 1: We're seeing that very clearly, uh in the leisure and
Speaker 1: hospitality sector, so uh, and I think that's long overdue.
Speaker 1: So that's great news for those workers. That could be
Speaker 1: a relative price shift, right, we could see less buoyant
Speaker 1: wage gains uh if that's compressing profits in other at
Speaker 1: the top end of the wage spectrum. And that's something
Speaker 1: we saw at the end of the last cycle pre COVID,
Speaker 1: when we were in a very strong labor market. We
Speaker 1: saw the lower wage workers getting the strongest gains, the
Speaker 1: biggest raises, and the top end workers seeing their wage
Speaker 1: gains flow a bit and that kept the overall wage
Speaker 1: bill UH sort of moderate, the growth in wages moderate.
Speaker 1: And I don't see any reason why we shouldn't see
Speaker 1: that same kind of dynamic with a relative shift with
Speaker 1: lower wage workers, especially frontline workers, getting the biggest raises
Speaker 1: as we reopen the economy. Jenny always enjoy catching out
Speaker 1: with you, particularly this morning, Jenny carting out of that
Speaker 1: of macroid policy perspective. This is the Bloomberg Surveillance Podcast.
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Speaker 1: Keene and this is Bloomberg