WEBVTT - Surveillance: 39-Year High Inflation with Gapen 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:30.160 dot com, and of course on the Bloomberg terminal. Michael 0:00:30.200 --> 0:00:32.720 Gapman joins us now the chief US economist a bad lease, 0:00:32.800 --> 0:00:35.440 and Mike, you've pointed out let's go in March. My 0:00:35.520 --> 0:00:37.479 question would be what would stop him? That's wait now 0:00:37.560 --> 0:00:40.800 and then, well, really not much. I mean you would 0:00:40.800 --> 0:00:43.479 need a major shift in terms of saying, oh Macron 0:00:43.560 --> 0:00:47.360 effect on the economy, geopolitical event that that would somehow 0:00:47.479 --> 0:00:50.919 disrupt um the economy, or risk taking sentiment. But in 0:00:51.000 --> 0:00:53.520 terms of where the feed is on their on their 0:00:53.640 --> 0:00:57.720 dual mandate inflation in the labor market, they're basically there. 0:00:58.560 --> 0:01:00.960 So coming out of the last employment report with the 0:01:01.000 --> 0:01:05.039 unemployment rated three point nine, another month of solid employment 0:01:05.080 --> 0:01:08.800 gains six tenths rise in average hourly earnings, that pretty 0:01:08.880 --> 0:01:11.560 much meets their bar. So I think in January, at 0:01:11.560 --> 0:01:13.240 the January meeting at the end of this month, they 0:01:13.240 --> 0:01:17.080 could very well declare we're at full employment. Yesterday Powell said, 0:01:17.480 --> 0:01:20.880 we are at or very close to full employment. They've 0:01:20.880 --> 0:01:23.360 already told us they're they're on the inflation side. So 0:01:23.480 --> 0:01:26.720 I don't really think anything stops them from going in 0:01:26.800 --> 0:01:29.440 March except one of these kind of outlier events. I 0:01:29.440 --> 0:01:31.480 think they're ready, Michael Gaping, You and I are the 0:01:31.520 --> 0:01:34.280 only ones that will understand. In two, I have the 0:01:34.319 --> 0:01:39.360 tiger reigns supreme. So inflations rising up back on the street. 0:01:39.640 --> 0:01:45.280 Is this the same inflation? Is two? No? Um? So 0:01:45.360 --> 0:01:49.880 that was rocky three? Right? So yeah, So the the 0:01:49.880 --> 0:01:53.640 age of the seventies and eighties inflation was a multidecade 0:01:53.760 --> 0:01:58.760 period of demand exceeding supply, creating wage price spirals, higher 0:01:58.800 --> 0:02:02.120 inflation expectation. It was very much a demand driven story, 0:02:02.120 --> 0:02:05.600 although there were certainly supply shock components to it, with 0:02:05.600 --> 0:02:08.360 with the oil market at the time. This is is 0:02:08.400 --> 0:02:13.120 a very different outcome. It's not necessarily from persistently easy 0:02:13.200 --> 0:02:17.240 policy over previous decades and expansionary fiscal policy. Obviously we 0:02:17.360 --> 0:02:20.359 have some of that in the response to the pandemic. 0:02:20.600 --> 0:02:24.240 We think it's still primarily a pandemic driven story that 0:02:24.480 --> 0:02:27.359 is likely to ease over time, And as you mentioned 0:02:27.360 --> 0:02:29.840 in the last segment, what can the FED do about that? 0:02:29.919 --> 0:02:33.200 I think a lot of this risk management positioning is 0:02:33.240 --> 0:02:37.880 about preventing second round effects, right, preventing those the impulse 0:02:37.919 --> 0:02:40.519 today from showing up in a lot higher longer run 0:02:40.560 --> 0:02:44.840 inflation expectation. So I do think it's a very different inflation. 0:02:44.880 --> 0:02:46.919 So how the FED responds to it should be different. 0:02:47.080 --> 0:02:49.359 And Michael, what's so important here is just a president 0:02:49.440 --> 0:02:52.200 and his will to survive. What does President Biden do 0:02:52.360 --> 0:02:57.200 with seven percent inflation? In part talk about that you 0:02:57.200 --> 0:02:59.360 you get it, you see it, you get it, you 0:02:59.440 --> 0:03:04.160 understand problem. It crimps real incomes. Households are very sensitive 0:03:04.200 --> 0:03:08.640 to changes in energy prices and food prices um. And 0:03:08.639 --> 0:03:11.040 then you also want to take some steps perhaps to 0:03:11.240 --> 0:03:14.240 help solve it. Make sure that your Federal Reserve chairman 0:03:14.240 --> 0:03:17.320 that you're appointing understands the issue and the importance of 0:03:17.320 --> 0:03:21.040 getting inflation lower. Uh, they unlock some of the strategic reserve. 0:03:21.120 --> 0:03:24.320 In terms of oil supplies, there's discussions around do you 0:03:24.440 --> 0:03:27.920 do you reverse tariffs on imports from China? So what 0:03:27.960 --> 0:03:31.240 can you do to help bring inflation down and stabilize 0:03:31.280 --> 0:03:33.960 the situation. But certainly he has to say, we get it, 0:03:34.000 --> 0:03:37.200 and we understand it, and we're taking corrective measures. How 0:03:37.240 --> 0:03:39.360 do you get the wrong kind of inflation down while 0:03:39.440 --> 0:03:41.840 keeping the inflation that they want to see. As we've 0:03:41.840 --> 0:03:45.280 been hearing from John this morning, the administration perhaps going 0:03:45.320 --> 0:03:47.800 to be a looking much more at the wage increases 0:03:47.840 --> 0:03:50.960 and how this is possibly a good thing for the worker. 0:03:51.440 --> 0:03:54.960 Paint a picture of negative two point four percent real 0:03:55.320 --> 0:03:58.720 year over year hourly wages. What does that mean in 0:03:58.840 --> 0:04:01.800 terms of the wage increases we can expect going forward 0:04:02.120 --> 0:04:06.360 and the trajectory of economic momentum. Well, certainly, I think 0:04:06.360 --> 0:04:09.040 conditions in the labor market are are type. We still 0:04:09.080 --> 0:04:12.960 have roughly four million people sitting sitting on the sideline. 0:04:13.000 --> 0:04:17.200 Demand for labor is strong. I suspect labor market conditions 0:04:17.200 --> 0:04:20.479 will remain robust, and average hourly earnings will continue to 0:04:20.640 --> 0:04:23.920 take hire and then you would hope that some of 0:04:23.960 --> 0:04:26.400 the inflation comes down on on the other side. But 0:04:26.600 --> 0:04:28.400 in the moment, of course, what it means is it 0:04:28.520 --> 0:04:32.719 bites and crimps real real purchasing power. So disposable income 0:04:32.800 --> 0:04:35.120 was kind of all the story last year about government 0:04:35.120 --> 0:04:39.200 transfer payment supporting income. If you start to adjust for inflation. Now, 0:04:39.200 --> 0:04:42.000 disposable income the last few months has been taking lower, 0:04:42.080 --> 0:04:44.919 so it might feed in to a little less demand. 0:04:45.040 --> 0:04:47.880 And this is where the Fed's messaging has shifted. It 0:04:48.040 --> 0:04:51.400 used to be we need accommodative policy to keep labor 0:04:51.480 --> 0:04:54.800 market momentum going. Now what we need to do is 0:04:54.880 --> 0:04:59.479 stabilize inflation to keep labor markets going and income and 0:04:59.520 --> 0:05:02.920 purchase power elevated. So it has shifted the narrative from 0:05:02.920 --> 0:05:04.800 the Fed. Mike. Part of that effort is not just 0:05:04.880 --> 0:05:07.800 right highs this balance sheet reduction as well informing the analysis. 0:05:07.839 --> 0:05:09.640 At the moment, it's just a FED speak. Where on 0:05:09.640 --> 0:05:11.440 earth is this gummy? We have a balance sheet pushing 0:05:11.520 --> 0:05:13.880 nine trillion. We're all trying to work on the work 0:05:13.880 --> 0:05:16.840 out the month on month reduction. Mike, Have you've got 0:05:16.839 --> 0:05:18.680 any idea what that looks like through the back half 0:05:18.680 --> 0:05:20.320 of this year if they start this summer, what it 0:05:20.320 --> 0:05:23.359 looks like into next year? Sure? I think if you 0:05:23.520 --> 0:05:25.680 if most of us think the balance sheet run el 0:05:25.720 --> 0:05:27.560 is going to start in the second half of the year, 0:05:27.600 --> 0:05:30.320 we're in July. You can empower seem to say later 0:05:30.440 --> 0:05:32.479 this year. So if you if you look at the 0:05:32.480 --> 0:05:36.039 mature maturity schedule of the Fed's balance sheet roughly over 0:05:36.080 --> 0:05:39.760 the year. After that point, you're looking at let's let's 0:05:39.800 --> 0:05:42.400 call it about a trillion, and treasuries running off and 0:05:42.560 --> 0:05:46.159 prepay estimates on on MBS portfolios will give you somewhere 0:05:46.160 --> 0:05:49.159 around another three hundred billion, So I think you could 0:05:49.160 --> 0:05:52.120 have at least half of that fifty billion, maybe up 0:05:52.160 --> 0:05:54.000 to a trillion in terms of how much the FED 0:05:54.080 --> 0:05:56.600 wants to take out of the balance sheet over kind 0:05:56.640 --> 0:05:59.040 of the first twelve months, so let's call it six 0:05:59.680 --> 0:06:01.800 billion a month. They may need to ratch it up 0:06:01.839 --> 0:06:04.839 to that level over time, start with their cap that's lower, 0:06:04.839 --> 0:06:07.440 and move higher. But I do think that they want 0:06:07.480 --> 0:06:10.400 to get to the balance sheet sooner than later, and 0:06:10.480 --> 0:06:13.080 with the trillion and a half sitting in the reverse 0:06:13.080 --> 0:06:15.359 repo facility, I think they feel they can do a 0:06:15.360 --> 0:06:18.359 lot of draining of reserves without having, you know, a 0:06:18.480 --> 0:06:22.960 negative effect on on front end financing conditions. So I 0:06:23.000 --> 0:06:25.719 think they may try to get a fairly fast pace 0:06:25.800 --> 0:06:28.000 of of runoff in the beginning and last point, if 0:06:28.000 --> 0:06:30.320 I can make it, there's about three hundred and twenty 0:06:30.320 --> 0:06:33.480 five billion and T bills on the Fed's balance sheet. 0:06:33.560 --> 0:06:36.760 This time. We had almost zero in the last expansion 0:06:36.760 --> 0:06:39.120 when the FED was doing this, So you may see 0:06:39.160 --> 0:06:42.359 different run operates for the T bills and the remainder 0:06:42.640 --> 0:06:46.159 of the coupon issues or the coupon holdings that they have. 0:06:46.320 --> 0:06:48.760 You could get a lot of runofs every quickly just 0:06:48.800 --> 0:06:51.279 by letting TEA bills go. That's a very interesting point, 0:06:51.320 --> 0:06:53.560 Mike Gape, and thank you Mike Gap, and of Barclay's 0:07:00.200 --> 0:07:02.839 right now this is very important. Stephen Roach joining a 0:07:02.920 --> 0:07:05.960 senior fellow at Yale University. We'll talk about the FED 0:07:06.080 --> 0:07:08.200 here and what we're doing in America. But Steve Roach, 0:07:08.279 --> 0:07:10.320 I've got to go back to the heart of your 0:07:10.360 --> 0:07:12.640 work on Asia, and the fact is you get off 0:07:12.760 --> 0:07:16.520 Cathay Pacific long ago and far away a Terminal one 0:07:17.120 --> 0:07:20.760 Hong Kong International Airport, and there was the big Morgan 0:07:20.880 --> 0:07:24.080 Stanley sign that you personally put up there as you 0:07:24.160 --> 0:07:28.440 came down the ramp at terminal run. Those days are gone. 0:07:29.080 --> 0:07:34.960 Your new view on the new China, well, those were 0:07:35.000 --> 0:07:38.000 the days. Tom. I probably will never go on Cathay 0:07:38.080 --> 0:07:45.840 Pacific again. Sadly, UM look like China is UM. Clearly 0:07:46.160 --> 0:07:52.120 UH embracing a different type of approach to UM. The 0:07:52.160 --> 0:07:57.480 balance between ideology, policy and economic growth than at any 0:07:57.560 --> 0:08:02.920 point since I've been covering the tree. Ideology is the 0:08:03.080 --> 0:08:08.360 dominant force under a Shijin ping Uh. And what has 0:08:08.400 --> 0:08:12.400 really been disturbing and shocking to some of us is 0:08:12.440 --> 0:08:16.400 how he used the ideology to go after what had 0:08:16.440 --> 0:08:20.200 been the most dynamics sectors of the Chinese economy UH, 0:08:20.280 --> 0:08:25.200 the internet platform companies, UH and um UH. At the 0:08:25.240 --> 0:08:28.720 same time he's doing that, he's he's got this income 0:08:28.760 --> 0:08:35.720 redistribution wealth redistribution program called Common Prosperity, and so it's 0:08:35.760 --> 0:08:40.640 a it's a twin pincher movement on the dynamism of China. 0:08:41.160 --> 0:08:44.280 We all know the growth rate is slowed. I'm not 0:08:44.320 --> 0:08:48.240 concerned about evergrand I think they can definitely manage that. 0:08:48.920 --> 0:08:53.960 There's zero COVID policy is also very restrictive on a 0:08:54.000 --> 0:08:56.080 short term basis, but I think they can get through 0:08:56.120 --> 0:08:58.880 that as well. I'm more concerned about the medium, the 0:08:58.960 --> 0:09:03.280 longer term of Jina. I've been positive for decades and 0:09:03.320 --> 0:09:06.160 I'm much less so today. Stephen, you helped build the 0:09:06.200 --> 0:09:08.920 modern of Hong Kong. What should be the Western bank 0:09:09.000 --> 0:09:12.240 response to all this? How does the Western banks adapt 0:09:12.280 --> 0:09:17.199 and adjust in Hong Kong. Well, being in Hong Kong 0:09:17.360 --> 0:09:21.200 now UH and in the future is just like being 0:09:21.280 --> 0:09:25.760 in UM mainland China. There's there's really no functional difference 0:09:25.800 --> 0:09:30.720 between UH, you know, Hong Kong as a Chinese city 0:09:30.840 --> 0:09:35.600 and UH operating in Shanghai or Beijing. So to the 0:09:35.640 --> 0:09:40.480 extent that Western banks are comfortable operating in Greater China, UH, 0:09:40.520 --> 0:09:42.360 you know, Hong Kong still has a good deal of 0:09:42.400 --> 0:09:46.040 attraction to them. I understand that, UM, you know, there's 0:09:46.040 --> 0:09:49.760 a lot of concern because of the traumatic shift from 0:09:49.800 --> 0:09:52.280 what Hong Kong had been to what it is right now, 0:09:52.800 --> 0:09:54.439 but you just have to look at it as another 0:09:54.440 --> 0:09:57.559 big Chinese city. Stephen, you said you are much less 0:09:57.600 --> 0:10:01.719 optimistic right now about China as trajectory going forward, and 0:10:01.840 --> 0:10:04.320 you have been in decades. Can you play out what 0:10:04.360 --> 0:10:07.480 the ramifications are at a time when you see inflation 0:10:07.600 --> 0:10:10.320 is becoming more intriged, that we see supply chains that 0:10:10.400 --> 0:10:15.920 originate in China becoming more and more disrupted. Well, the 0:10:16.040 --> 0:10:23.520 supply chain issue, LISA is clearly critical to UH the 0:10:23.559 --> 0:10:26.400 inflation outlook, and so much of the global supply chains 0:10:27.200 --> 0:10:31.320 run through through China that any disruptions there as we've 0:10:31.360 --> 0:10:36.600 seen have a critical bearing on the supply side of 0:10:37.840 --> 0:10:41.480 you know, most large goods producing markets around the world. 0:10:42.240 --> 0:10:44.520 But you know, and I wrote about this, you know 0:10:44.559 --> 0:10:48.079 a few years ago when I first warned of stagflation. 0:10:48.160 --> 0:10:50.080 But little did I know what was going to happen 0:10:50.080 --> 0:10:54.520 on the demand side. UM. The supply supply side was 0:10:54.600 --> 0:10:57.640 very fragile, to be sure, but the demand side went 0:10:57.679 --> 0:11:01.040 into lockdown. And then the post low down snap back, 0:11:01.640 --> 0:11:05.920 fueled by the FED, who was now desperately behind the curve, UH, 0:11:06.320 --> 0:11:10.880 really over over strip stripped UH what a limited supply 0:11:10.960 --> 0:11:14.520 side could produce. So the result is UM, you know, 0:11:14.679 --> 0:11:18.600 very high inflation rate UM and the lowest FED real 0:11:18.840 --> 0:11:22.400 federal funds rate in recorded history of federal funds rate 0:11:22.440 --> 0:11:26.760 today that is further into negative territory than it was 0:11:26.840 --> 0:11:31.480 in the nineteen mid nineteen seventies, in early nineteen eighties, 0:11:31.840 --> 0:11:35.959 when we had a terrific or a should I should say, 0:11:35.960 --> 0:11:39.960 a horrific UH inflation problem. So to say the FEDS 0:11:40.000 --> 0:11:44.040 behind the curve is putting it very kindly, well Steven, 0:11:44.360 --> 0:11:45.959 to build on that, and to go back to the 0:11:46.120 --> 0:11:49.800 idea where you said the demand side was rather unexpected 0:11:49.800 --> 0:11:52.240 in its plays to this elegant maya culpa that you 0:11:52.280 --> 0:11:55.640 wrote last year in August in Project Syndicate, where you 0:11:55.679 --> 0:11:57.720 talked about how your call for a double dip recession 0:11:58.160 --> 0:12:01.280 didn't come to fruition because of this, How do you 0:12:01.440 --> 0:12:05.040 gauge the forecasting the potential for forecasting errors at such 0:12:05.080 --> 0:12:08.320 an unprecedented time, which the FED is grappling with as well, 0:12:10.320 --> 0:12:15.120 fair point um. Look, you can't even forecast the forecasting errors, Lisa, 0:12:15.240 --> 0:12:18.559 they're so far off the map. I was just reading 0:12:18.559 --> 0:12:21.520 an article a few minutes ago about, you know how 0:12:21.600 --> 0:12:26.080 some of the best uh A of real time high 0:12:26.120 --> 0:12:31.560 frequency forecasters missed the employment UM numbers last Friday by 0:12:31.600 --> 0:12:35.760 a factor of two, three and four. You know, forecasting 0:12:35.840 --> 0:12:39.160 is always hazardous, especially as Yogi told us, when it 0:12:39.240 --> 0:12:43.280 involves the future. But this time is ridiculous. Steve Roach 0:12:43.559 --> 0:12:47.480 Alexander became very close to nailing that forecast at Morgan 0:12:47.640 --> 0:12:50.560 Stanley and I want to talk, as Lisa mentions about 0:12:50.640 --> 0:12:53.440 all the miscalls that were made in the pandemic, we 0:12:53.559 --> 0:12:57.040 need to look forward. You own the high ground on 0:12:57.120 --> 0:13:01.880 the macroeconomic analysis of saveings. When you hear people talk 0:13:01.920 --> 0:13:05.160 about we have an abundance of savings, or they talk 0:13:05.200 --> 0:13:08.200 about we're using our savings up too quickly. How do 0:13:08.280 --> 0:13:11.160 you respond to what that means for two thousand and 0:13:11.200 --> 0:13:16.199 twenty four. Well, I'm looking at it again right now, Tom. 0:13:16.760 --> 0:13:20.679 What I prefer to look at is UM, the overall 0:13:20.920 --> 0:13:26.400 domestic savings rate, which is the sum of business, household 0:13:26.520 --> 0:13:31.480 and government dis savings reflecting these large deficits. I look 0:13:31.520 --> 0:13:33.360 at it in net terms because I want to take 0:13:33.360 --> 0:13:36.320 out the depreciation that goes for the wear and tear 0:13:36.360 --> 0:13:38.360 of capital stock, and so I look at the net 0:13:38.880 --> 0:13:42.280 domestic savings rate as a gauge for how we can 0:13:42.640 --> 0:13:48.120 domestically fund economic growth going forward. UH. And you know 0:13:48.200 --> 0:13:53.440 it's exceptionally low. It's about running about two over the 0:13:53.520 --> 0:13:58.240 last year. Ticked up a little bit UH to UH 0:13:58.400 --> 0:14:02.760 slightly above three percent in the third quarter of last year. 0:14:03.440 --> 0:14:07.800 But you know that that's less than half the average 0:14:08.160 --> 0:14:11.200 net domestic savings rate in the final three decades of 0:14:11.200 --> 0:14:15.560 the twentieth century. So lacking and saving UH and wanting 0:14:15.600 --> 0:14:18.880 to invest in grow, we have to import surplus savings 0:14:18.920 --> 0:14:23.280 from abroad. We run these massive current account deficits to 0:14:23.400 --> 0:14:28.320 attract the capital UM and that will eventually not last 0:14:28.400 --> 0:14:32.880 year as I another bad forecast of mine. Uh incorrectly 0:14:32.920 --> 0:14:36.800 felt that the current account would put pressure downward pressure 0:14:36.800 --> 0:14:39.440 on the dollar. But that's coming. Hold on, you will 0:14:39.480 --> 0:14:42.440 see it. Stephen Ruch, we will waite gry to catch up. 0:14:42.480 --> 0:14:45.240 Ass O white A University, Thank you very much said 0:14:50.920 --> 0:14:55.560 what was Monday and Tuesday? Gloom gloomish? Gloomish? I like it. 0:14:55.760 --> 0:14:59.040 That's a I've never heard that gloomish. It was gloomish. 0:14:59.320 --> 0:15:02.080 For those of you the want to push against gloomish, 0:15:02.280 --> 0:15:05.000 what you need is someone who chisels a sixty forty 0:15:05.120 --> 0:15:08.720 portfolio and says climb on board and made me think, 0:15:08.840 --> 0:15:14.240 see that's a concision of the Northern Trust Company. And 0:15:14.280 --> 0:15:17.480 we are thrilled that Jim McDonald can join us and 0:15:17.600 --> 0:15:20.920 this one. Jim, I love, love, love your research. Note 0:15:21.440 --> 0:15:23.880 that says the way you can act in this market 0:15:23.960 --> 0:15:26.240 is to put it down on paper. How do you 0:15:26.280 --> 0:15:34.320 get from sixty to equity? Something else? Short time? Thank 0:15:34.320 --> 0:15:37.400 you for the time this morning. So it really is 0:15:37.440 --> 0:15:41.520 comprised of three primary bets. We like the emerging the 0:15:41.600 --> 0:15:45.119 developed markets over emerging markets. So we want equity exposure 0:15:45.200 --> 0:15:49.920 with robson corporate earnings and relatively steady interest rates. The 0:15:50.000 --> 0:15:54.000 second pieces that we like the credit exposure over duration, 0:15:54.120 --> 0:15:57.200 so we like how you bonds over mcgrade. And then 0:15:57.240 --> 0:16:00.680 the final pieces we like natural resources here for tips 0:16:01.040 --> 0:16:03.560 as an inflation hedge. So you had all those up 0:16:03.560 --> 0:16:07.640 and you get to our belief is that while inflation 0:16:07.880 --> 0:16:11.040 is the biggest risk facing the markets, that people are 0:16:11.040 --> 0:16:13.840 being a little superficial in their analysis, so that what 0:16:14.000 --> 0:16:19.320 really matters is what will inflation lead to earnings problems? 0:16:19.600 --> 0:16:21.960 Where it will lead to interest rate problems, and right 0:16:22.000 --> 0:16:26.120 now we're reasonably comfortable on both fronts. Superficial, Paul is 0:16:26.240 --> 0:16:30.560 cocktail talk for static analysis. I used to be, Jim. 0:16:30.680 --> 0:16:34.040 I had such a beleaguered childhood. My mother was at 0:16:34.160 --> 0:16:36.520 New Trier or one of those schools out there that 0:16:36.640 --> 0:16:38.920 I would be lectured at the dining room table on 0:16:39.040 --> 0:16:43.600 static versus dynamic analysis explains a lot, a lot. That 0:16:43.720 --> 0:16:47.160 was the agony and geek. Hey, Jim, you know, we 0:16:47.160 --> 0:16:49.680 we got that inflation data this morning right kind of 0:16:49.720 --> 0:16:53.360 in line with expectations, but a big headline number. How 0:16:53.360 --> 0:16:56.120 do you think our Federal Reserve is gonna kind of 0:16:56.120 --> 0:16:59.760 interpret the data we saw this morning? Well, in some 0:17:00.000 --> 0:17:03.880 respects they're probably a little bit happy in that it 0:17:04.000 --> 0:17:07.280 really makes their job very simple. In the March meeting, 0:17:07.880 --> 0:17:11.160 there is a very very high likelihood that they're going 0:17:11.200 --> 0:17:14.480 to raise rates and that they're going to take what 0:17:14.560 --> 0:17:17.120 the market gives them. We think that that's a critical 0:17:17.200 --> 0:17:19.800 part of analyzing what the Fed's gonna do is realizing 0:17:19.840 --> 0:17:23.840 the market does have some constraining impact on them. And 0:17:24.160 --> 0:17:26.440 I think that actually they're probably pretty happy right now 0:17:26.480 --> 0:17:28.760 with where rates are because it's so relarly clearing the 0:17:28.800 --> 0:17:32.520 path for them to start their hip cycle. We're gonna 0:17:32.560 --> 0:17:35.840 get some earnings starting up in just a matter of days, Jim, 0:17:36.000 --> 0:17:38.880 I mean, and that kind of brings back into focus 0:17:38.920 --> 0:17:42.080 for some folks evaluation And how do you think evaluation 0:17:42.160 --> 0:17:45.000 in this equity market? Do we need these earnings to 0:17:45.240 --> 0:17:51.280 really blast through expectations to support the evaluation here? Well, 0:17:51.280 --> 0:17:53.080 it's kind of funny. The longer I've been doing this, 0:17:53.200 --> 0:17:55.840 the more I've come to the conclusion that valuations a 0:17:55.880 --> 0:17:59.639 result of people's actions as opposed to a driver of 0:17:59.680 --> 0:18:05.280 people actions. We have found no statistical relationship between valuations 0:18:05.400 --> 0:18:08.560 and one year returns in the equity markets. You've got 0:18:08.560 --> 0:18:10.720 to go out to five years before it starts to 0:18:10.760 --> 0:18:13.760 register in the ten years. It's it's pretty good. The 0:18:13.880 --> 0:18:16.560 interesting thing about the earning season is we're gonna see 0:18:16.600 --> 0:18:19.880 really good revenue growth and margin expansion, and that's really 0:18:19.920 --> 0:18:23.719 what underpens are continued constructive view on the equity markets 0:18:23.840 --> 0:18:28.160 is one percent margin expansion in this inflationary environment is supportive. 0:18:28.840 --> 0:18:33.040 Dial up hundred four points sixteen thousand. Excuse me, thirty 0:18:33.119 --> 0:18:35.320 six thousand. My eyes are failing me, folks. It's because 0:18:35.520 --> 0:18:37.680 I'm the only one in the room that actually remembers 0:18:37.680 --> 0:18:41.560 I have the tiger thirty six thousand, three six on 0:18:41.640 --> 0:18:45.440 the nastack up almost one percent. You know, I look 0:18:45.480 --> 0:18:47.840 at this gym and you allude there to revenues, which 0:18:47.880 --> 0:18:52.119 to me is nominal GDP And David Bianco DWS was 0:18:52.200 --> 0:18:54.439 brilliant on you know, we're trying to get back to 0:18:54.440 --> 0:18:57.760 the golden ratio of one point six percent excuse me, 0:18:57.840 --> 0:19:01.240 one point six ratio real g d P and a 0:19:01.320 --> 0:19:04.480 lesser inflation of one one point six to one, sort 0:19:04.520 --> 0:19:08.320 of a traditional gold ratio of a good economy. What's 0:19:08.320 --> 0:19:10.600 your wedeness on that? When do we get back to 0:19:10.880 --> 0:19:14.440 normal that gives you that revenue impulse in the equity 0:19:14.480 --> 0:19:18.520 markets well, actually, if you go out five years in 0:19:18.600 --> 0:19:22.120 our capital market assumptions, we actually don't have that expectation. 0:19:22.520 --> 0:19:25.440 We think that we're gonna see inflation and nominal GDP 0:19:25.560 --> 0:19:29.680 relatively comparable. And if you look at what's happening today, 0:19:29.720 --> 0:19:32.919 we're gonna we're gonna seecent revenue growth in the fourth quarter. 0:19:33.200 --> 0:19:36.919 That's probably not that that's definitely higher than nominal GDP, 0:19:37.320 --> 0:19:39.840 but as a reflection of the higher inflationary environment. But 0:19:39.880 --> 0:19:41.960 you're talking about four or five years out on an 0:19:41.960 --> 0:19:46.000 institutional basis or paulse Sweeney's lousy four own k the bait. 0:19:46.080 --> 0:19:48.879 Excuse me, I should say, John Tuckers, we haven't had 0:19:48.920 --> 0:19:51.639 the opening of the envelope recently. We have to have 0:19:51.720 --> 0:19:55.040 that ceremony with John Tucker. But to the under investor 0:19:55.119 --> 0:19:59.120 Jim McDonald, this is critical. You're talking about a revenue 0:19:59.160 --> 0:20:04.560 impulse to drive stock market optimism due to an elevated 0:20:04.880 --> 0:20:11.800 nominal GDP. Sure that say, it's absolutely what's driving economics 0:20:11.920 --> 0:20:14.920 right now, and as as we look at over the 0:20:15.000 --> 0:20:18.120 intermediate to longer term rise and that's where the valuations 0:20:18.160 --> 0:20:20.960 that you mentioned definitely do come into play. The only 0:20:21.000 --> 0:20:23.720 thing I will caution and we were similar to others 0:20:23.800 --> 0:20:26.320 five years ago, and we thought that US equities would 0:20:26.320 --> 0:20:30.119 only deliver about a five or six percent return annually 0:20:30.119 --> 0:20:34.840 over the next five years. What did they deliver? Eight? Now? 0:20:35.119 --> 0:20:39.080 Four percent of that annually was pre pandemic, and it's 0:20:39.119 --> 0:20:42.639 because companies did better than expectations and we had some 0:20:42.720 --> 0:20:46.080 valuation expansion. It's unrealistic to think we're gonna get a 0:20:46.119 --> 0:20:49.840 further level of valuation expansion from here though. Hey, Jim, 0:20:49.920 --> 0:20:55.960 in your seventy one percent equities, what's the real core 0:20:56.000 --> 0:20:59.600 of that? Are you kind of along the traditional growth 0:20:59.720 --> 0:21:02.200 names have worked so well for so long, or are 0:21:02.240 --> 0:21:04.760 you in that cyclical camp again that that's a camp 0:21:04.840 --> 0:21:06.880 that's worked really well over the past couple of years. 0:21:06.880 --> 0:21:12.200 How do you think about that as we start up here? Sure? So, 0:21:12.240 --> 0:21:15.800 I would definitely be much more balanced in two And 0:21:15.800 --> 0:21:18.520 the reason for that is, well, it seems like value 0:21:18.520 --> 0:21:22.600 should have another good year because we're having higher interest 0:21:22.720 --> 0:21:26.160 rates and a cyclical recovery, et cetera. The Russell one 0:21:26.200 --> 0:21:32.760 thousand growth earnings expectations are at Russell Value at just 0:21:32.960 --> 0:21:36.480 seven Now. Part of that's artificial because it's being held 0:21:36.520 --> 0:21:40.320 back by very strong earnings from reserve releases out of 0:21:40.320 --> 0:21:44.080 the banks in the market will look through that. So 0:21:44.200 --> 0:21:48.000 the fourteen versus seven is exaggerated, but it does point 0:21:48.040 --> 0:21:50.480 out that the big earnings games on the value stocks 0:21:50.480 --> 0:21:52.919 are probably behind us. Jim McDonald, thank you so much, 0:21:52.960 --> 0:21:55.320 State Warm in Chicago, Jim McDonald with a Northern Trust 0:21:55.359 --> 0:22:04.480 their chief investment strategist BACTI, and Saudi with a snow 0:22:04.480 --> 0:22:09.639 on this pandemic. Associate Professor Emergency Medicine at Johns Hopkins University. 0:22:09.800 --> 0:22:12.439 Back to a completely unfair question, but it came up, 0:22:12.480 --> 0:22:17.159 I think three times yesterday. What is your timeline of 0:22:17.280 --> 0:22:22.320 when amacron ends? Is it weeks? Is it months? Is 0:22:22.359 --> 0:22:25.360 it all of two thousand twenty? What's your what's your 0:22:25.440 --> 0:22:30.480 scope of the the X axis of a macron? Absolutely 0:22:30.520 --> 0:22:32.560 so if you look at South Africa, I would have 0:22:32.560 --> 0:22:36.080 said thirty days. However, we've peaked much higher and our 0:22:36.160 --> 0:22:40.520 population is inherently different, So I'm really thinking months. I 0:22:40.520 --> 0:22:42.240 am not thinking that this is going to affect my 0:22:42.280 --> 0:22:45.439 summer plans um so I remain hopeful. Right then we're 0:22:45.440 --> 0:22:48.600 gonna get past this peak soon. So seriously, you think 0:22:48.600 --> 0:22:52.880 I'm acron will be wiped away by the fourth of July. Absolutely, 0:22:53.760 --> 0:22:55.560 Why do you say absolutely? How do you get to 0:22:55.680 --> 0:22:58.560 that certitude? So? I think the fact is that when 0:22:58.560 --> 0:23:01.560 it peaks so quick clear, we expect the full to 0:23:01.640 --> 0:23:04.640 be just as significant. Um, we're already seen in New 0:23:04.720 --> 0:23:07.760 York and in Washington, d C. That there is now 0:23:07.800 --> 0:23:10.760 a reduction in cases, which you know, it's very very early, 0:23:11.160 --> 0:23:13.680 but it makes me hopeful. Plus, you know, again we're 0:23:13.680 --> 0:23:17.400 looking at South Africa and United Kingdom. So United Kingdom 0:23:17.440 --> 0:23:20.719 of started seeing a tape South Africa from the first 0:23:20.960 --> 0:23:24.600 rise in the peak to the end was around thirty days. Um, 0:23:24.640 --> 0:23:27.480 you know, so the viral transmission cycle here is smaller, 0:23:27.520 --> 0:23:31.600 which makes us more hopeful that this will end sooner. 0:23:31.840 --> 0:23:34.640 As we are more hopeful that the pandemic will end 0:23:34.720 --> 0:23:37.720 more broadly and become endemic. We're left with a health 0:23:37.720 --> 0:23:41.159 care system that has been transformed. I'm struck by the 0:23:41.240 --> 0:23:44.359 number of employees who have left the profession about the 0:23:44.400 --> 0:23:47.359 wage increases that they're demanding in order to stay there. 0:23:47.680 --> 0:23:51.479 How much does this healthcare sector look completely different than 0:23:51.520 --> 0:23:55.119 what we saw two years ago. So I think like 0:23:55.200 --> 0:23:58.240 the healthcare workforce is just one piece of this puzzle. 0:23:58.320 --> 0:24:01.240 The health system here in the United States extremely complicated 0:24:01.680 --> 0:24:04.160 with what is the role of insurers right and how 0:24:04.160 --> 0:24:07.480 have they supported the COVID ninating response UM. Now we're 0:24:07.520 --> 0:24:10.000