WEBVTT - Surveillance: Recession Risk with Berro (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.160 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.759 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.120 and of course on the Bloomberg terminal. Right now, let 0:00:30.240 --> 0:00:33.000 us look at what matters to America, and it's far 0:00:33.080 --> 0:00:36.640 more than the economics, finance, investment. It's the stock market 0:00:36.680 --> 0:00:40.000 that we do. It's about housing. Let us take four 0:00:40.080 --> 0:00:44.240 days across four FED meetings of two thousand twenty two 0:00:44.760 --> 0:00:46.920 and look at the mortgage, the thirty year bank rate 0:00:47.120 --> 0:00:51.440 fixed mortgage, and the yield has gone up three point 0:00:51.479 --> 0:00:54.880 seven three percent, four point four seven percent, jumping up 0:00:54.920 --> 0:00:57.200 to five point five zero percent and on the six 0:00:57.280 --> 0:01:01.720 percent which Julian Cornado note last week, Kelsey Barrow joins 0:01:01.800 --> 0:01:05.080 US now with JP Morgan as well Lincoln the JP 0:01:05.240 --> 0:01:10.360 Morgan World of bonds, yield price dynamics into real estate 0:01:10.440 --> 0:01:13.360 in the third year fixed mortgage. Yeah, absolutely, So if 0:01:13.360 --> 0:01:15.440 you look at the FED funds rate, it's it's risen 0:01:15.480 --> 0:01:17.840 a hundred and fifty basis points. But the third year 0:01:17.840 --> 0:01:20.679 fixed mortgage rate has risen by double that three hundred 0:01:20.680 --> 0:01:23.479 basis points all the way to six percent UM, and 0:01:23.520 --> 0:01:26.520 we already are seeing the impact on the housing market 0:01:26.800 --> 0:01:29.319 from that move, and we will continue to see the 0:01:29.360 --> 0:01:32.800 housing market decline. But I think what's really important to 0:01:32.840 --> 0:01:36.920 note about this move, this move in financial conditions, is 0:01:37.120 --> 0:01:40.360 it's been so severe that in any other scenario, the 0:01:40.360 --> 0:01:43.160 FED would have paused. The reason that they haven't paused 0:01:43.200 --> 0:01:45.560 this time, despite the fact that mortgage rates are up 0:01:45.600 --> 0:01:48.760 three hundred basis points, is that the inflation environment is 0:01:48.840 --> 0:01:51.240 just not letting them. And I think what really spooked 0:01:51.360 --> 0:01:54.600 them UM last week on Friday is that University of 0:01:54.600 --> 0:01:59.400 Michigan sentiment Yester. Yeah, absolutely, he mentioned the University of 0:01:59.440 --> 0:02:01.960 Michigan sent meant tipping up, ticking up. Now, what we 0:02:02.040 --> 0:02:05.080 do know about the University of Michigan sentiment data UH 0:02:05.120 --> 0:02:08.120 and the University of Michigan inflation expectations is it's very 0:02:08.320 --> 0:02:11.480 correlated to gasoline prices, and some of that increase in 0:02:11.520 --> 0:02:14.520 gasoline prices is out of their control. So they're putting 0:02:14.560 --> 0:02:17.680 themselves in a very difficult situation, but one where they're 0:02:17.680 --> 0:02:22.000 clearly saying we're going to prioritize inflation overgrowth. I mean, Lisa, 0:02:22.040 --> 0:02:25.120 one of the stories here is oil has only gone 0:02:26.840 --> 0:02:29.519 eighteen on brent. I mean, we barely had a pullback, Lisa, 0:02:29.840 --> 0:02:32.919 in oil, and it isn't necessarily translating into a pullback 0:02:33.000 --> 0:02:35.880 at the pump because gas prices, refined goods are not 0:02:35.919 --> 0:02:38.440 getting cheaper because of a lack of refineries. How does 0:02:38.480 --> 0:02:40.919 this really bleed into credit, Kelsey, has been a question 0:02:40.919 --> 0:02:43.760 that we talked about with a lot of investors yesterday. 0:02:43.840 --> 0:02:46.640 They were seeing the prospect of wider credit spreads, of 0:02:46.680 --> 0:02:50.080 more credit losses kind of being implied despite the fact 0:02:50.080 --> 0:02:52.919 that you don't see near term maturities. Do you agree 0:02:53.160 --> 0:02:56.160 that it's the up and quality trade going to higher 0:02:56.280 --> 0:02:58.520 rated debt or do you think that there's some value 0:02:58.919 --> 0:03:00.560 given the eight and a half per that yields and 0:03:00.639 --> 0:03:04.160 high led Well, clearly financial conditions are tightening and the 0:03:04.280 --> 0:03:06.640 risk of recession is rising. But if you look at 0:03:06.639 --> 0:03:09.280 current default rates, obviously they're very low. They need to 0:03:09.360 --> 0:03:13.160 normalize somewhat. But corporate fundamentals are really strong, and companies 0:03:13.200 --> 0:03:15.440 have done a number of things to set them up 0:03:15.480 --> 0:03:18.880 for an environment where we're not particularly concerned about credit losses. 0:03:19.120 --> 0:03:22.320 They've done things like increase their cash, reduce their leverage, 0:03:22.480 --> 0:03:24.519 and also turn out their debt. So if I look 0:03:24.520 --> 0:03:27.240 at the high old market, for instance, less than six 0:03:27.360 --> 0:03:31.480 percent of the market is maturing in two or three 0:03:31.760 --> 0:03:34.880 So there's not that much sensitivity UH in the high 0:03:34.960 --> 0:03:38.320 old market, which has become much more higher in quality 0:03:38.320 --> 0:03:41.880 than it has historically to these higher rates. Now, I 0:03:41.920 --> 0:03:44.400 think that there is going to be volatility, and what 0:03:44.440 --> 0:03:48.120 we're focused on this summer is increasing the liquidity of 0:03:48.120 --> 0:03:51.440 our portfolios because the one thing that share Powell didn't 0:03:51.520 --> 0:03:55.200 talk about in the press conference was q T. But 0:03:55.360 --> 0:03:58.839 QT is happening. We're seeing massive moves, and we want 0:03:58.840 --> 0:04:01.600 to have the liquidity to sell it when it's expensive 0:04:01.960 --> 0:04:04.880 rather than need to buy it um when when there's 0:04:04.920 --> 0:04:08.960 a challenge. Lisa is quote unquote increasing liquidity the same 0:04:09.000 --> 0:04:11.840 as go to cash. Well, Kelsey, that's exactly what I 0:04:11.880 --> 0:04:13.640 was going to ask. How do you do that? Is 0:04:13.640 --> 0:04:15.040 is it with E T F S, is it with 0:04:15.120 --> 0:04:17.920 cash or is it with the securities that are most traded? 0:04:18.320 --> 0:04:20.919 I mean it is dependent on the portfolio. If you 0:04:20.960 --> 0:04:24.040 think at the very baseline we're thinking about, you know, 0:04:24.120 --> 0:04:26.839 going from off the runs to on their own treasuries, 0:04:26.960 --> 0:04:30.159 getting out of tips and into nominals. You know, things 0:04:30.240 --> 0:04:34.360 that are going to have less ability to be intermediated 0:04:35.040 --> 0:04:37.800 when markets are quiet, when people are going out on 0:04:37.839 --> 0:04:41.000 summer vacation, and things are more likely to trade more 0:04:41.080 --> 0:04:44.960 volat with more volatility um. So essentially the bond market 0:04:45.000 --> 0:04:48.040 has gotten much bigger, and dealer balance sheets have not 0:04:48.400 --> 0:04:51.400 risen to the same size to accommodate that, and so 0:04:51.560 --> 0:04:54.440 we want to be prepared when people need liquidity to 0:04:54.480 --> 0:04:56.880 be able to give it. This is shocking to me, Tom, 0:04:56.920 --> 0:04:59.080 and really a reversal of what we've seen for so 0:04:59.120 --> 0:05:02.240 long when people were seeking out illiquidity. We are looking 0:05:02.320 --> 0:05:06.359 at the prospect of a fed driven volatility cycle that 0:05:06.400 --> 0:05:08.240 we have not seen in a long time. And credit 0:05:08.640 --> 0:05:11.560 I'm just looking at the the you know that I've 0:05:11.560 --> 0:05:13.560 been to Kelsey. This has been a crusade of mine 0:05:13.960 --> 0:05:16.119 is we're in a bond bear market and nobody's talking 0:05:16.120 --> 0:05:19.000 about it because nobody's used to it. And the answer is, 0:05:19.040 --> 0:05:21.360 if I look at the Bloomberg, the Barclays, a Lehman 0:05:21.800 --> 0:05:28.040 Total return US aggregate bond portfolio, these are double digit losses, right. Absolutely, 0:05:28.040 --> 0:05:32.880 what's the plan? Absolutely? There's the two sides to that coin. Right, 0:05:32.920 --> 0:05:37.040 You've seen massive losses, particularly in long bonds. The moves 0:05:37.040 --> 0:05:38.960 and yields. You know, if I look at the move 0:05:39.000 --> 0:05:40.760 over the week or the move over the month and 0:05:40.839 --> 0:05:43.400 you compare them to the last five years, these aren't 0:05:43.440 --> 0:05:46.799 just two standard deviation moves. These are four, five, six, 0:05:46.960 --> 0:05:50.240 seven standard deviation moves. I mean, it's just incredible. But 0:05:50.279 --> 0:05:53.560 then on the other side you have the yield the 0:05:53.839 --> 0:05:56.920 new starting guild. If you were to invest fresh capital now, 0:05:57.240 --> 0:06:00.080 that is a lot more attractive, as Lisa mentioned, and 0:06:00.120 --> 0:06:03.520 a half percent on US high yield is very attractive 0:06:03.560 --> 0:06:06.560 and it's consistent with the long term returns um in 0:06:06.560 --> 0:06:09.160 the equity markets as well. We round up the digits 0:06:09.279 --> 0:06:13.120 negative in the US aggregate portfolio. Kelsey get the work, 0:06:13.200 --> 0:06:20.920 Kelsey Barrow. Where this is JP Morgan Asset Management as 0:06:20.960 --> 0:06:24.720 we dive into it with Andrew Chase, he's chief crosssset strategist. 0:06:25.000 --> 0:06:30.400 Hit Morgan Stanley really coalescing in mathematically statistically as his 0:06:30.480 --> 0:06:35.160 Brown University math of what the total, the whole view 0:06:35.360 --> 0:06:39.320 is and the summary Andrew is simple. Morgan Stanley thinks 0:06:39.400 --> 0:06:45.480 like Joe Stiglett's growth matters tell me why growth matters. Yeah, thanks, 0:06:45.800 --> 0:06:47.960 thanks Tom, and it's it's great to be here. So 0:06:48.600 --> 0:06:51.479 I think this is a backdrop where the FED is 0:06:52.040 --> 0:06:54.159 shown that it's going to have to be very data 0:06:54.200 --> 0:06:57.360 dependent over data that it doesn't necessarily have a great 0:06:57.400 --> 0:07:01.960 deal of control over because the actions that it's taking now, 0:07:02.080 --> 0:07:04.920 is you discussed earlier on your program, are not necessarily 0:07:05.000 --> 0:07:08.760 going to do anything about gasoline prices, airfares over the 0:07:08.800 --> 0:07:12.880 next month or three months that are driving these inflation 0:07:13.000 --> 0:07:16.960 surprises that share Powell mentioned. So you have a situation 0:07:17.000 --> 0:07:19.640 where I think the FED is somewhat captive to the 0:07:19.800 --> 0:07:22.880 incoming inflation data that matters a lot, and then the 0:07:22.960 --> 0:07:26.120 growth outlook is also very uncertain. I think the FED 0:07:26.160 --> 0:07:29.080 acknowledge that uncertainty. I think you know, we see it 0:07:29.120 --> 0:07:31.840 in our own forecasts, where there is a lot of 0:07:32.000 --> 0:07:35.880 different data point of different trajectors for the economy. Where 0:07:35.880 --> 0:07:37.400 we come out of all of that is to try 0:07:37.400 --> 0:07:40.760 to be relatively defensive, to try to keep positioning light 0:07:40.960 --> 0:07:43.720 as you continue to have a number of cross currents 0:07:43.720 --> 0:07:45.440 going on here. And it's amazing to me that we 0:07:45.480 --> 0:07:48.480 talk so much about the prospective recession and yet we've 0:07:48.480 --> 0:07:51.280 hardly talked about Dan grinning earnings. I beank channing with 0:07:51.280 --> 0:07:52.920 Deutsche Bank on yesterday. I think it was the first 0:07:52.920 --> 0:07:55.840 time I've spoken to someone on Wall Street and equity 0:07:55.840 --> 0:07:59.120 strategist who is actually cutting their earnings expectations, first time 0:07:59.160 --> 0:08:00.920 in a while. And I know that you and my 0:08:01.000 --> 0:08:02.840 Wilson have been on telpodes story too. What do you 0:08:02.880 --> 0:08:05.800 make give that that we haven't had the warnings from corporations, 0:08:05.840 --> 0:08:07.640 we haven't seen the straight down great earnings in a 0:08:07.680 --> 0:08:12.000 way that would match this recession conversation. Yeah, Jonathan, I 0:08:12.000 --> 0:08:14.120 think this is what's so fascinating about what's going on 0:08:14.200 --> 0:08:16.880 is I think that's exactly right in terms of the 0:08:16.920 --> 0:08:18.560 next thing to focus on. You know, when when we 0:08:18.600 --> 0:08:21.160 think about the market, in particularly the US equity market, 0:08:21.680 --> 0:08:23.960 you know, my colleague Mike Wilson thinks the market has 0:08:24.200 --> 0:08:28.640 generally adjusted to the rate rise that we've seen roughly. 0:08:29.280 --> 0:08:33.680 What it has not adjusted to is earnings downgrades, which 0:08:33.679 --> 0:08:36.640 you usually get when you've had this sort of reduction 0:08:36.679 --> 0:08:39.959 in financial conditions, when you have had these sort of 0:08:40.080 --> 0:08:42.760 risks around growth, when you have the declines in p 0:08:42.960 --> 0:08:45.400 m I s that we think are likely. So I 0:08:45.400 --> 0:08:47.880 think that's now where the rubber meets the road. There 0:08:47.920 --> 0:08:50.800 there is a scenario that's more positive than ours, where 0:08:51.320 --> 0:08:55.080 the companies are continue companies are able to continue to 0:08:55.120 --> 0:08:58.160 earn profits and and hit those consensus numbers, and in 0:08:58.200 --> 0:09:01.400 that case, the market could stabilize around current levels if 0:09:01.400 --> 0:09:03.720 they cut earnings as we expect, and then we still 0:09:03.760 --> 0:09:06.000 think that there's some downside risk here, and it's too 0:09:06.000 --> 0:09:08.640 early to try to enter the market, Andrew, which is 0:09:08.640 --> 0:09:11.319 the reason why perhaps you're looking elsewhere. I was kind 0:09:11.320 --> 0:09:15.080 of surprised to see where else you're looking Japan. Why, 0:09:15.240 --> 0:09:16.920 based on the fact that you've seen that the end 0:09:16.920 --> 0:09:20.680 appreciate so significantly and a lot of people expect that 0:09:20.720 --> 0:09:23.200 they will eventually the Bank of Japan will eventually have 0:09:23.280 --> 0:09:28.240 to follow its fellow developed market central banks. Yeah, that's 0:09:28.240 --> 0:09:31.240 a that's a fair question. So it's pretty apparent that 0:09:31.240 --> 0:09:34.079 that every major global equity market in the world has 0:09:34.080 --> 0:09:37.960 its own particular challenges. We just discussed the US. Europe 0:09:38.040 --> 0:09:42.440 has active ECB hiking, it has the war in Ukraine, 0:09:42.640 --> 0:09:46.400 China has the challenge of a zero COVID policy, and 0:09:46.600 --> 0:09:51.640 Japan also has very easy central bank policy that's increasingly 0:09:51.720 --> 0:09:54.920 disconnected from the more hawkish policy elsewhere, but we think 0:09:54.960 --> 0:09:57.280 for the moment that's one of the better challenges to have. 0:09:57.559 --> 0:10:00.880 We think the Japanese market is not priced for the 0:10:01.040 --> 0:10:03.760 end appreciation that we've seen so far. We think that 0:10:03.760 --> 0:10:05.960 that if the end were to stay around one thirty five, 0:10:06.080 --> 0:10:09.600 or move higher, move weaker, that would result in earnings 0:10:09.679 --> 0:10:12.240 upgrades at a time when other regions can be seen 0:10:12.640 --> 0:10:16.959 earnings downgrades. Japan is derated significantly. It's not nearly as 0:10:16.960 --> 0:10:20.560 expensive versus history as some other markets are. And we 0:10:20.679 --> 0:10:23.280 do think that the Bank of Japan will stay patient 0:10:23.400 --> 0:10:26.600 a little while longer because the inflationary pressures in Japan 0:10:27.040 --> 0:10:29.880 not not only aren't a severe right now, they've been 0:10:30.040 --> 0:10:33.360 so much lower for so much longer than the US. 0:10:33.480 --> 0:10:35.920 So when you talk about creating some sort of ballast 0:10:35.920 --> 0:10:39.280 to the portfolio, I understand the bet on Japan to 0:10:39.360 --> 0:10:42.480 some degree. However, there's got to be some bigger pool 0:10:42.600 --> 0:10:44.560 of securities that have to come from a place like 0:10:44.640 --> 0:10:47.120 the United States or like Europe. If you don't like 0:10:47.280 --> 0:10:50.160 stucks right now because of that earnings uncertainty, how much 0:10:50.160 --> 0:10:52.680 conviction can you have around the long bond at a 0:10:52.720 --> 0:10:56.360 time when the Fed is going really aggressive yeah, no, 0:10:56.600 --> 0:10:58.400 I think that's that's one of the challenges. I mean, 0:10:58.400 --> 0:11:01.760 I think this is an environment where are overall exposures 0:11:01.800 --> 0:11:05.080 gross exposures. Investors should be trying to keep those lower 0:11:05.120 --> 0:11:07.520 and to stay more liquid because as we've just seen 0:11:07.559 --> 0:11:10.719 over the last twenty four hours, the price action can 0:11:10.720 --> 0:11:13.800 be extremely volatile, it can be extremely harder to manage 0:11:13.840 --> 0:11:16.640 those risks, and there's large amounts of uncertainty. So I 0:11:16.679 --> 0:11:19.920 think keeping you know, lower exposures generally in this environment 0:11:20.000 --> 0:11:22.320 makes a lot of sense. I think it's trying to 0:11:22.400 --> 0:11:26.000 look for kind of relative value, putting more relative risk 0:11:26.080 --> 0:11:30.480 into relative value strategies than than directional strategies. At the moment, 0:11:30.559 --> 0:11:33.200 as I think we are seeing a number of instances 0:11:33.200 --> 0:11:37.120 where relative value is working despite the volatile environment. And 0:11:37.120 --> 0:11:39.520 then it would be something like oil, which is an 0:11:39.520 --> 0:11:42.760 asset that we like, where you have an inflation hedge 0:11:42.840 --> 0:11:45.719 that pays you quite well to hold it given how 0:11:45.760 --> 0:11:48.079 backwardated that oil curve is. And so that's the way 0:11:48.080 --> 0:11:50.920 to generate some yield wall also providing some protection and 0:11:51.000 --> 0:11:52.880 to just to kind of five thirty four hundreds still 0:11:52.880 --> 0:11:56.400 the number for you guys on SMP. Yeah, that's where 0:11:56.480 --> 0:11:58.439 that's where we think the risk reward starts to look 0:11:58.480 --> 0:12:02.280 more compelling. Okay, shakes that Morgan Stanley. Some downside still 0:12:02.320 --> 0:12:04.240 to come then for the team over a Morgan Stanley. 0:12:04.240 --> 0:12:07.000 Andrew sets the working closely with Mike Wilson, of course, 0:12:07.000 --> 0:12:15.200 and Morgan Stanley too. It's right now, Andrew Sliman joins 0:12:15.280 --> 0:12:19.280 us senior portfolio manager, Morgan Stanley, someone who was inequities, 0:12:19.640 --> 0:12:24.120 someone who was congenitally long and optimistic, except maybe he's not. 0:12:24.320 --> 0:12:27.080 He joins us. Now amid the gloom, Come on, Andrew, 0:12:27.160 --> 0:12:30.800 the gloom, there's blood on the streets. Do you load 0:12:30.840 --> 0:12:35.080 the boat here? Uh? You know, Look, I think there's 0:12:35.080 --> 0:12:37.880 an opportunity coming. I just think it's too early. It's 0:12:37.920 --> 0:12:40.559 the stock market. Regardless of your view of the economy. 0:12:41.200 --> 0:12:43.880 My view is basically, the stock market's got a hard 0:12:43.920 --> 0:12:47.360 time with tenure where it is given the multiple from 0:12:47.360 --> 0:12:50.880 that remains on the market until we get resolution in 0:12:50.960 --> 0:12:55.400 terms of interest rates and inflation. I just think it's 0:12:55.440 --> 0:12:58.080 too early to get aggressive. But you know it's out there. 0:12:58.200 --> 0:13:00.480 It's just it's just too early. Amid the loom. What 0:13:00.640 --> 0:13:02.640 is a lesson on use of cash? We saw d 0:13:02.720 --> 0:13:06.080 E Sha go after FedEx. They've amended. We saw targ 0:13:06.360 --> 0:13:09.400 with a big dividend increase as well. How does use 0:13:09.440 --> 0:13:13.720 of cash change given the gloom that's the Bremo like 0:13:13.800 --> 0:13:17.680 gloom that's out there. Well, it is interesting that you 0:13:17.679 --> 0:13:21.520 know you are seeing companies increased stock buy backs. You 0:13:21.520 --> 0:13:24.680 know you're seeing insider buying. So I think there is 0:13:25.200 --> 0:13:29.680 some reason to believe that the collapse in earnings won't 0:13:29.760 --> 0:13:31.920 be there. Uh, And I think that's a lot to 0:13:31.960 --> 0:13:36.240 do with inflation. Frankly, that companies can pass along there 0:13:36.679 --> 0:13:40.720 there you know, inflationary costs to the consumer. The question 0:13:40.840 --> 0:13:45.280 becomes will they may be able to maintain the margins 0:13:45.360 --> 0:13:50.520 or will consumers push back before their costs come down? 0:13:51.040 --> 0:13:54.679 And right now that has not happened. So companies feel 0:13:54.679 --> 0:13:59.200 pretty good about their business and they're raising dividends, buying backstock. 0:13:59.360 --> 0:14:02.960 That's what's happening. Aroun Now, we haven't seen the collapse 0:14:03.080 --> 0:14:06.560 in margins that many of the bears and predicted. So Andrew, 0:14:06.800 --> 0:14:09.319 let's say that we do get a continued sell off 0:14:09.320 --> 0:14:11.960 as many people to expect. Is the real yield, not 0:14:12.000 --> 0:14:14.200 only the nominal yield, but the real yield in the 0:14:14.280 --> 0:14:16.680 United States resets to levels that we have not seen 0:14:16.720 --> 0:14:19.080 since two thousand and eighteen and earlier, depending on which 0:14:19.120 --> 0:14:22.040 measure you look at, When are we there? When do 0:14:22.080 --> 0:14:24.760 you start saying we have baked in the depth of 0:14:24.760 --> 0:14:29.000 the pain? Let's go well, I think first of all, timing, 0:14:29.160 --> 0:14:30.800 you know, it would be nice to be a little 0:14:30.800 --> 0:14:34.160 bit later into this summer because I suspect another seventy 0:14:34.240 --> 0:14:38.400 five basepoint increase will cause further catharsis. It would be 0:14:38.480 --> 0:14:40.560 nice when you guys are out having your burger and 0:14:40.720 --> 0:14:42.760 y over or whatever you said top, you know, if 0:14:42.760 --> 0:14:44.680 the FED were to you know, ease up, I think 0:14:44.720 --> 0:14:47.520 that would be good. So timing first Number two is 0:14:47.920 --> 0:14:50.400 where did the market go if it gets down you know, 0:14:50.440 --> 0:14:54.320 it's sixteen times forwarderings, if we start to see fourteen 0:14:54.480 --> 0:14:56.480 times you know, in the you know, kind of mid 0:14:56.520 --> 0:14:59.560 three thousands, I think that would be helpful. Or if 0:14:59.560 --> 0:15:03.120 you saw rates back off to uh closer to three percent, 0:15:03.160 --> 0:15:06.760 which clearly is not happening today. We're starting to see 0:15:07.000 --> 0:15:10.920 some inflationary inputs we can, but certainly not oil, and 0:15:11.000 --> 0:15:15.120 that's there's too much, too many things driven by oil prices, 0:15:15.160 --> 0:15:19.680 so inflation backs off, rates back off or the market 0:15:19.720 --> 0:15:23.640 comes down to a multiple that's more reasonable with three 0:15:23.640 --> 0:15:25.960 and a half percent. I think those are the two scenarios, 0:15:26.200 --> 0:15:29.400 and I suspect all that will happen going into it 0:15:29.480 --> 0:15:31.680 later this summer. I just think it's too early, so 0:15:31.720 --> 0:15:34.520 you remain defensive until then. Andrew, what does it mean 0:15:34.560 --> 0:15:38.680 to remain defensive when you have to be fully invested? Yeah, 0:15:38.680 --> 0:15:41.240 I mean for me, look, I think we want Okay, 0:15:41.320 --> 0:15:44.360 So number one, what's amazing is you know what is 0:15:44.440 --> 0:15:50.360 working here today? Energy utilities, defensive stocks. Those are late 0:15:50.680 --> 0:15:56.000 cycle stocks. The market has told you that we're into 0:15:56.200 --> 0:16:00.960 a you know, a slow down. The way you position 0:16:01.000 --> 0:16:05.080 as long equity managers, make sure that you aren't your 0:16:05.120 --> 0:16:07.800 beta isn't above the market. Make sure you have plenty 0:16:07.840 --> 0:16:12.720 of these defensive stocks and energy. The however, though, Lisa 0:16:13.480 --> 0:16:17.720 is early cycle is a consumer sucks and those have 0:16:17.920 --> 0:16:23.360 been absolutely crushed. There are a ton of opportunity in 0:16:23.440 --> 0:16:26.040 consumer stocks, and as I said before, when the consumer 0:16:26.120 --> 0:16:28.960 sentiment is at an all time low, you have to 0:16:29.040 --> 0:16:31.960 stand up and say, huh, the rate of change at 0:16:32.080 --> 0:16:35.720 some point is going to be uh, you know, positive. 0:16:36.040 --> 0:16:38.000 And I think those are the types of stocks you 0:16:38.080 --> 0:16:41.760 want to start to prepare do the analysis on because 0:16:41.800 --> 0:16:43.960 I think that's the next what I would call the 0:16:43.960 --> 0:16:47.080 next fat pitch UH is to move into more of 0:16:47.120 --> 0:16:50.520 these early cycle stocks. I just think it's too early. Andrew. 0:16:50.560 --> 0:16:52.280 Are you saying that it might be time to think 0:16:52.280 --> 0:16:54.720 about fighting some of the energy move then? After the 0:16:54.800 --> 0:16:58.640 months the running we've seen in energy stocks? Yeah, well so, Jonathan, 0:16:58.680 --> 0:17:03.400 what's Here's what's interesting. So the utility sector through May 0:17:03.880 --> 0:17:07.800 had outperformed the SMP by base points. You to day 0:17:08.119 --> 0:17:12.760 utilities are fading, right, So they have faded going into June. 0:17:13.040 --> 0:17:15.240 So I just wonder whether we're going to look back 0:17:15.280 --> 0:17:18.520 and say we were in a recession. We're already in 0:17:18.520 --> 0:17:22.960 a recession, and the playbook would say, then you want 0:17:23.000 --> 0:17:28.360 to start to fade the late cycle. If you tell me, Jonathan, 0:17:28.400 --> 0:17:32.400 their recession is, you know, end of the year, next year, Oh, 0:17:32.480 --> 0:17:35.280 that is too early to sell energy. It's too early 0:17:35.320 --> 0:17:38.159 to begin to reduce the defensive. If you tell me 0:17:38.200 --> 0:17:41.639 we're in it now or it's happening, then yeah, I 0:17:41.720 --> 0:17:43.680 want to get you know, I want to start to 0:17:43.720 --> 0:17:47.359 fade those that if we were in a recession and 0:17:47.440 --> 0:17:50.280 let's say it was right now, whatever that means what 0:17:50.560 --> 0:17:52.800 kind of recession would you be expecting. I see that 0:17:52.840 --> 0:17:56.679 our world gets run around all the time, would be 0:17:56.720 --> 0:18:02.119 expect Well, well, we're uh, you know, the problem with 0:18:02.240 --> 0:18:05.440 the d procession right now, right now is you're not 0:18:05.600 --> 0:18:11.679 getting the fundamental drop off that the big earnings destruction. 0:18:11.720 --> 0:18:14.640 Now It's what scares me is you're starting to see 0:18:14.680 --> 0:18:18.600 some of these financial issues like Swiss bank raising rates. 0:18:18.920 --> 0:18:22.359 You know, my contention has always been ultimately, uh, you know, 0:18:22.440 --> 0:18:25.880 something unfortunately, something breaks in the system and a kind 0:18:25.880 --> 0:18:28.200 of perverted not a very nice way of saying about 0:18:28.200 --> 0:18:30.760 a dead body floes to the surface. That's the kind 0:18:30.800 --> 0:18:33.960 of thing that you know, Marx bombs in you know, recessions. 0:18:34.000 --> 0:18:38.320 But I you're right now, as we said, if it 0:18:38.520 --> 0:18:41.359 is going to be a shallow recession because we haven't 0:18:41.359 --> 0:18:45.679 had the drop off in fundamentals to the magnitude of 0:18:45.720 --> 0:18:48.680 a deeper recession. Andrew swimming Nuance for you as always 0:18:48.720 --> 0:18:52.480 certain to catch out with you from Morgan Stanley Investment Management. 0:18:56.840 --> 0:19:00.439 Right now, a gentleman from the Republican persuasion and from Arkansas, 0:19:00.520 --> 0:19:05.359 french Hill joins us on Uh, this aut economy. French Hill, 0:19:05.440 --> 0:19:07.680 I believe in Arkansas, you have a three point two 0:19:07.680 --> 0:19:12.040 percent inflation rate. You are the Kings of Chicken. Chicken 0:19:12.400 --> 0:19:17.080 is in ascendant in this nation because of the price 0:19:17.119 --> 0:19:22.680 of beef, etcetera. Can things get any better for Arkansas? Well, 0:19:22.800 --> 0:19:27.640 Arkansas consumers tom good morning or really hurting from high 0:19:27.720 --> 0:19:30.560 gas prices. Were a rural, rural state. And when I 0:19:30.600 --> 0:19:33.560 was in private business before I came to Congress, I 0:19:33.560 --> 0:19:36.400 had many employees in my company that drove almost an 0:19:36.400 --> 0:19:39.479 hour every day to work. And so gas prices are 0:19:39.520 --> 0:19:43.600 really hurting our families. They woke up Monday morning and 0:19:43.680 --> 0:19:47.240 Little Rock to crossing the five dollar mark on gas. 0:19:47.720 --> 0:19:49.840 And so inflation is the top thing I hear about 0:19:49.840 --> 0:19:53.000 when I'm talking both the small businesses and families. And 0:19:53.080 --> 0:19:55.720 the second thing, and this is the irony in the economy. 0:19:55.760 --> 0:19:58.880 You're a percent right. The second thing that's brought up 0:19:59.040 --> 0:20:03.600 is quality workforce. Trying to fill these open jobs in business? Well, 0:20:03.600 --> 0:20:05.960 do you fill them by raising wages? I mean, what 0:20:06.160 --> 0:20:09.840 is the prescription? It's the oddest thing, folks, All this 0:20:10.000 --> 0:20:13.040 day to day crisis we're reporting on, and yet the 0:20:13.160 --> 0:20:16.399 joy of a fully employed Arkansas, Right, how do we 0:20:16.520 --> 0:20:21.359 solve this conundrum? Well, first, I think Arkansas spending a 0:20:21.400 --> 0:20:23.840 lot of time, and I've contributed in every way I can, 0:20:23.960 --> 0:20:27.320 both in my business career and now in Congress to 0:20:27.520 --> 0:20:32.320 better workforce preparation, better skill training for those coming out 0:20:32.400 --> 0:20:36.080 of incarceration, those coming out of high school, those still 0:20:36.200 --> 0:20:38.120 in high school, to make sure they have a path 0:20:38.200 --> 0:20:41.600 to the pursuit of happiness that's not a college degree. 0:20:41.960 --> 0:20:44.879 So we've got to do more workforce preparation, and believe me, 0:20:45.000 --> 0:20:48.760 our state and our counties are doing that every day. Secondly, 0:20:49.080 --> 0:20:52.080 I think there's a real issue with getting people back 0:20:52.119 --> 0:20:54.680 to work and you raise pay and let me give 0:20:54.680 --> 0:20:58.600 you a quick example from Central Arkansas. Amazon has recently 0:20:58.640 --> 0:21:02.639 come into a little with one point three million square 0:21:02.680 --> 0:21:07.040 feet purchased, opening up their major logistics operations and they're 0:21:07.040 --> 0:21:10.520 offering about eighteen dollars as a starting wage there. So 0:21:10.600 --> 0:21:14.920 that is also really disrupting that full time, forty hour 0:21:15.040 --> 0:21:18.200 a week person that's at a starting career. So you're 0:21:18.240 --> 0:21:21.600 seeing rising wages at the bottom in Central Arkansas. Congress 0:21:21.640 --> 0:21:24.639 been how crucial is it to increase immigration to the 0:21:24.720 --> 0:21:27.080 United States and open up some of the pathways for 0:21:27.119 --> 0:21:29.320 people to come in At a time where you're talking 0:21:29.359 --> 0:21:32.640 about such a labor shortage. Yeah, at least, it's such 0:21:32.640 --> 0:21:35.440 an important question, and it's been something where America has 0:21:35.480 --> 0:21:38.879 been stuck for a number of years of trying to 0:21:38.920 --> 0:21:42.320 do that in a smarter way by doing more merit 0:21:42.359 --> 0:21:46.320 based immigration policy as well as clearing the decks on 0:21:46.359 --> 0:21:48.879 people who have been waiting ten years or so with 0:21:48.960 --> 0:21:54.119 a professional degree waiting for a permanent residency status. So 0:21:54.200 --> 0:21:56.439 we let about a million people in legally in this 0:21:56.520 --> 0:21:59.479 country every year, it's something that we always look at 0:21:59.560 --> 0:22:02.040 rebound on seeing that on the legal admissions, I would 0:22:02.080 --> 0:22:05.120 think more merit based admissions would be good to get 0:22:05.119 --> 0:22:07.960 our our markets more in line with the talent that 0:22:08.040 --> 0:22:10.919 we need. Yeah, Congressman, how difficult is that for some 0:22:11.040 --> 0:22:14.600 of your fellow Republican congress members to swallow considering the 0:22:14.600 --> 0:22:17.000 fact that for so long there was a discussion about 0:22:17.000 --> 0:22:20.840 reducing immigration or limiting much more substantially. I mean, how 0:22:20.920 --> 0:22:23.800 much are you representative of the mainstream of the Republican 0:22:23.880 --> 0:22:27.960 Party versus an outlier? Right? Well, thanks for that question, 0:22:28.000 --> 0:22:30.560 because it all centers on the fact that just as 0:22:30.560 --> 0:22:33.560