Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. This is important.
Speaker 1: It is that every equity strategist has a certain style.
Speaker 1: The acclaim of Jonathan Golloben credit sweet either courageous bull
Speaker 1: or right now with some real reticence is he dives
Speaker 1: into sector analysis over on page five. In page six
Speaker 1: of his reports, he darkens the door this morning. What
Speaker 1: does the sector analysis tell you right now? Well, we
Speaker 1: put out a note this morning on earnings that we're
Speaker 1: having a margin problem in the vast majority of the sectors,
Speaker 1: with the exception of surprisingly consumer discretionary is better, energies better,
Speaker 1: and industrials but shorter. That you're seeing margin contraction um everywhere.
Speaker 1: But if there's a if there's a big sector story,
Speaker 1: it's a tech is really weak compared to everything else,
Speaker 1: so broadly defined tech and that's just not something we're
Speaker 1: used to. The tech is the this earning season. If
Speaker 1: you take tech out or tech broadly, fine, you have
Speaker 1: a five EPs growth this quarter. I mean, who would
Speaker 1: think that tech is a thing that's holding everything back?
Speaker 1: And I think that this continues for longer than we think.
Speaker 1: And this is a hallmark of credit suite, this linkage
Speaker 1: between strategists and your securities analysis. Do you do your
Speaker 1: tech people as a whole feel newsmaking? Layoffs? Can adjust
Speaker 1: those margins? Can they heal that margin deterioration? Um? Well,
Speaker 1: you know, Tommy and we were talking before before we
Speaker 1: went on air, but what's going on in terms of
Speaker 1: layoffs and young people coming into labor market. A lot
Speaker 1: of this was an over exuberance when when we went
Speaker 1: into the pan Emmic and things were so strong, um
Speaker 1: for tech demand. The company's hired as if this was
Speaker 1: a new normal of really of strength and what it
Speaker 1: really is. And this is why text having a hard time.
Speaker 1: It was a pull forward of activity and everyone believed that.
Speaker 1: You know, the investment community bought into it, the companies
Speaker 1: bought into it, and now it's unwinding. Companies are laying
Speaker 1: those workers off. So do we work through this? Yes,
Speaker 1: but we saw this with y two K. It doesn't
Speaker 1: happen in two or three quarters. It takes a little
Speaker 1: bit of time to work through things. Now, White Tuk
Speaker 1: pull forward and you talked about this and go on
Speaker 1: longer than people think, So let's build on that. How
Speaker 1: much did we pull forward? One? And what gives you
Speaker 1: the sense that this can go on a whole lot
Speaker 1: longer than people think? And when you say that, what
Speaker 1: kind of duration are you thinking about? Oh, um, maybe
Speaker 1: this ends up being a six to eight quarter um period.
Speaker 1: I mean, just think about this. You know, Um, you
Speaker 1: bought a laptop because you're now working from home? When
Speaker 1: you buying the replacement for that? Not this year? You
Speaker 1: you went and you my mother started using a streaming
Speaker 1: service for the first time. Is she's signing up for
Speaker 1: the second streaming service now if she wasn't before? And
Speaker 1: it's not and or or you know, the move towards
Speaker 1: global advertising, which was has you know, kind of got
Speaker 1: pulled forward and so it's not as if things are
Speaker 1: the long term trend is necessarily a negative one. But
Speaker 1: there was definitely a bit of exuberance as we went
Speaker 1: to pandemic and it just takes a little while. We're
Speaker 1: also as an investment community, if you look at it,
Speaker 1: you know, hedge funds in particular. Growth in tech has
Speaker 1: been such a huge win from the time that the
Speaker 1: iPhone came out in two thousand eight to now, everybody
Speaker 1: staffed up their tech teams, everybody built processes around it.
Speaker 1: Nobody wants to be a value manager. Every want to
Speaker 1: be a growth manager. And so it takes a little
Speaker 1: while for, you know, for for this to kind of
Speaker 1: set used to this and you've mentioned this, this is
Speaker 1: not what we used to And with that in mind,
Speaker 1: this is the question of the moment. I think for
Speaker 1: a lot of people, how compromises the index story? Because
Speaker 1: what we are used to and what we condict' buy
Speaker 1: is just sitting at the index on the SMP passively
Speaker 1: and being very rewarded for it. How compromises that index
Speaker 1: story gonna beate for how long? I'm not sure it's
Speaker 1: it's compromise. I'll say so. I yesterday, I last night,
Speaker 1: I had dinner with ten head traders at at some
Speaker 1: of the bigger shops, and I said, if you had
Speaker 1: a choice between buying the tech basket cap weighted or
Speaker 1: the tech basket equal weighted, how many would buy the
Speaker 1: cap weighted? What are they say, not one hand went up,
Speaker 1: how many would you buy? The equal weighted all ten
Speaker 1: hands went up? And so there's a lot of great names.
Speaker 1: So if you're if you're trading, if you're looking for
Speaker 1: individual securities, there's a lot of a lot of interesting
Speaker 1: things going on. But these, you know, these really big
Speaker 1: listen to three years ago, all we were talking about
Speaker 1: was moats. These are these are impenetrable businesses, yes, exactly,
Speaker 1: and listen and some of these and they're great, but
Speaker 1: let's let's be honest. They're great businesses. But but there
Speaker 1: doesn't mean that they're impenetrable. So at the dinner last night,
Speaker 1: which I'm sure you slatted through credits zero expenses, did
Speaker 1: you finish is in the old days of credit suites
Speaker 1: with the Hennessey parodies, brandy or did you go a
Speaker 1: different direction now like get out of six package? Oh yeah,
Speaker 1: you know we were drinking light beer and and and
Speaker 1: that was so you know it tell us about this dinner.
Speaker 1: That's what I wanted. Well, you know it's it's we
Speaker 1: do this, we do this a fair beat. I mean
Speaker 1: next week it's your job. Yeah. But well, and if
Speaker 1: I look at where my ideas come from UM. So
Speaker 1: last night was ten head traders. Next week we're doing UM.
Speaker 1: Ten guys were either hedge fund founders or c I
Speaker 1: O at some of the want from you seriously? I
Speaker 1: mean we're making jokes about Kinna, forget about that. What
Speaker 1: do they want to know for you? What's the mystery
Speaker 1: for traders and hedge funds tycoons when they talk to John?
Speaker 1: If the expectations right now are for weaker If you
Speaker 1: look at strategist forecast this this maybe the weakest year
Speaker 1: I can I can remember in terms of forecasts. So
Speaker 1: the question is if you can't make this, if you
Speaker 1: can't make money to simply by jumping into the market
Speaker 1: and riding up a beta trade, how do you play
Speaker 1: the game? Where? Where's where's that edge that you get
Speaker 1: in this environment? Because because everyone around the table really
Speaker 1: struggled last year, managers had a really hard time, especially
Speaker 1: a hedge funds, So momentum traders have a harder time
Speaker 1: in this environment. We think there's gonna be a big movement.
Speaker 1: Last year the whole story was value people weren't there.
Speaker 1: We think the growth snaps back this year. There's a John,
Speaker 1: why you only at if you think you get that
Speaker 1: growth snap back given the white singer this index. Um, Well,
Speaker 1: there's a couple of things. One is is that this
Speaker 1: will be a rare year that earnings are down. I'm
Speaker 1: in the non recessionary camp, and we could talk about that,
Speaker 1: but I think this is gonna be the rare year
Speaker 1: that earnings are down in a non recessionary year, and
Speaker 1: it's because of margins. I would take this earning season.
Speaker 1: Revenues are up four and a half, margins down eight
Speaker 1: and a half. I don't remember an environment where we
Speaker 1: saw that much that much pressure st Okay Street, bat
Speaker 1: Will Street challenged Main Street. Okay, well you know it's this, Yeah,
Speaker 1: I guess, But I mean, look at what last year was.
Speaker 1: Wages went up slower than cp I, so companies didn't
Speaker 1: have to pay higher wages, but they got to move
Speaker 1: on pricing. That's a beautiful corporate environment. This year, wages
Speaker 1: are gonna be sticky. CPI coming down. They're paying the
Speaker 1: employees more, they can't pass it on, and so the
Speaker 1: the consumer, the individual is better off this year relative
Speaker 1: to companies. Last year, it was the opposite. Companies were
Speaker 1: better off. Want to take about that recession code. If
Speaker 1: you can stand at a bit longer. Tom and I
Speaker 1: just have one question. Can we come to the dinner
Speaker 1: next week? While we're getting an invite to the dinner,
Speaker 1: we can host well listen at least it has to like,
Speaker 1: you know, check our barrashness at the door. Though she
Speaker 1: can have the she can have the cone yak at
Speaker 1: the end. You just have to check this is this
Speaker 1: is important. I mean, if you're a Credit Suite stiner
Speaker 1: with Golub, you're getting one Oaks d V in your
Speaker 1: Coneyak and it's a splendid a copy. Could you give
Speaker 1: me a price on that? I I don't have a
Speaker 1: price that I get there right now. Good morning Zurich. John,
Speaker 1: I'm gonna full sate stars for a few momentutes. We're
Speaker 1: with Jonathan Gold. We're gonna continue right now, Global Wall
Speaker 1: Street giving a nice response with this a gentleman from
Speaker 1: Credit Sweez, John, I'm gonna go back, and of course
Speaker 1: we have to use the dal Jones Industrial average in
Speaker 1: honor of lou ru Kaiser seventy four. The bottom World's
Speaker 1: coming to an end sort of like now, sort of
Speaker 1: like sev the Doo six sixteen to eight fifty two
Speaker 1: and the next year we enjoyed going from eight fifty
Speaker 1: two topping out above one thousand. We were up thirty
Speaker 1: eight percent off the gloom of the seventy three seventy
Speaker 1: four Pittsburgh's Gonna Die recession. Is that where we are
Speaker 1: right now? You know what I would love to you know,
Speaker 1: I think what every strategist wants to see is that
Speaker 1: the FED crashes this thing. We get a really hard recession,
Speaker 1: get a V shape bounce, and you get a normal cycle.
Speaker 1: And I think, I mean, you know, we're talking about
Speaker 1: just a moment ago, how the strategy is, expectations for
Speaker 1: this year as week as you know, as we can see.
Speaker 1: And I think that the idea of a soft landing
Speaker 1: is way more likely than people think. But it's not
Speaker 1: something to get excited about because it also means that
Speaker 1: you're looking at anemic returns with a lot of volatility.
Speaker 1: But landing, does that express out to a thirty percent up? Like?
Speaker 1: I don't? I don't think so. I think that what
Speaker 1: you're looking at here is the FED doesn't raise rates
Speaker 1: enough to crush the Listen. Here's here's what people are
Speaker 1: getting wrong in this inflation story. It's the headline CPI
Speaker 1: is falling, but wages are not falling, services are not falling,
Speaker 1: and rents are not falling. It's goods that are falling,
Speaker 1: which means that we're not really addressing the underlying cause
Speaker 1: of this thing. So the market gets is getting very
Speaker 1: exuberant that the Fed is going to pause. They're not
Speaker 1: pausing because they're stopped. They're pausing because they need more data.
Speaker 1: They want to slow this down. It's any bit the
Speaker 1: streets looking at the wrong The market sees falling inflation,
Speaker 1: they're getting really excited about that. But it's good and
Speaker 1: that's that's a comps issue. It's a it's a one
Speaker 1: off thing. It's not that we've gotten rid of inflation,
Speaker 1: it's we've gotten ridden that component temporarily. And so what
Speaker 1: I think you're gonna see, like last year, a lot
Speaker 1: of chop without a lot of upward movement. And that's
Speaker 1: a hard time. You're saying this before. It's a hard
Speaker 1: investment environment for for most people, especially those are shorter
Speaker 1: the epicenter. Though, if your coal at is that you
Speaker 1: think recession is avoidable, you think we will avoid that.
Speaker 1: What gives you the indication that we will. The big
Speaker 1: surprise this year is that if the consumer gets what
Speaker 1: looks like, let's say a five percent raise, or or
Speaker 1: for that matter, retiree gets an eight point one percent cola,
Speaker 1: so they're they're getting a lot more money. And we
Speaker 1: end the year with you know, two and a half
Speaker 1: or two percent inflation, which is roughly what the break
Speaker 1: evens are saying, or the Bloomberg surveys saying, this will
Speaker 1: be a great year for consus consumer purchasing power. Their
Speaker 1: wages are going up higher than inflation, and in that
Speaker 1: environment you've seen now we're six months in a row
Speaker 1: of consumer confidence rising, and we're going to see that
Speaker 1: all year long this year, and that well, we'll just
Speaker 1: think about it. Jobs are abundant, your raise is going
Speaker 1: to be running at three percent above your cost of
Speaker 1: you know, a cost of purchasing things, um, and that
Speaker 1: is going to keep us out of this recession. Now,
Speaker 1: from a profit perspective, companies have to pay those higher
Speaker 1: wages and don't get pricing power. So you have this
Speaker 1: weird thing that consumers, Okay, the recession gets pushed off,
Speaker 1: but corporate profits are really in emic, and investors are
Speaker 1: shaking their head because they don't know what to do
Speaker 1: with it. So pick a sector discretion ary, Yes, West discretionary.
Speaker 1: In that world, UM, if you are a company that
Speaker 1: like a retailer, that has a lot of labor, you're
Speaker 1: gonna have a harder time. If you have a business model,
Speaker 1: UM that is less labor intense, you you do pretty nicely.
Speaker 1: You know. I took the down Maath that we were
Speaker 1: just doing here in percent in ninete and that obscures
Speaker 1: that over a forty nine year period without diving ends,
Speaker 1: the DOW or the SMP was up five point four percent.
Speaker 1: You overlay on dividend reinvestment. I get it when you
Speaker 1: go to work or when you have a fancy dinner
Speaker 1: with ten fancy people like John Farrow. Is it a
Speaker 1: single digit return world for you? Or can we get
Speaker 1: back to nine or ten or eleven a small double
Speaker 1: digit return? It's a lower return world you. So we
Speaker 1: talked about what what was the group saying. I surveyed
Speaker 1: the group. I asked how many of you have taken
Speaker 1: some of your equity money personally and moved it towards
Speaker 1: something that looks like a bond, and I you know,
Speaker 1: the majority of the table said, how do you not?
Speaker 1: And it doesn't mean they weren't saying I'm panicked about equities.
Speaker 1: But if you can get you know, after tax equivalent
Speaker 1: a four and a half percent on IMMUNI bond, do
Speaker 1: you put something and is that attractive compared to a
Speaker 1: world where where you're looking at negative art? Does anybody
Speaker 1: in the dinner look at the Dow Jones Industrial average
Speaker 1: and the only look at the standard force five? Yeah?
Speaker 1: Only you know, I don't want to say dinosaur, but oh,
Speaker 1: you know there's not a lot of people. Can I
Speaker 1: have that on the record? Can you actually just say that,
Speaker 1: because I'd love that. It's a less MP t K
Speaker 1: you know that that's all lessence with But the SMP story,
Speaker 1: and I want to finish on this because it is important,
Speaker 1: has become the dominant story, particularly over the last decade,
Speaker 1: because it's rewarded investors so handsomely. You mentioned the equal weight.
Speaker 1: If you had to pick the tech sector right now,
Speaker 1: would you take it market can't waited or equal weight?
Speaker 1: That was a conversation you were having about these investors
Speaker 1: at these hedge funds. Can you tell me about where
Speaker 1: you'd leave that story now? At the index level on
Speaker 1: the SMP five hundred, would you want a market cap
Speaker 1: waited exposure, waiting for the tech snap back that you're
Speaker 1: looking for. Would you want something more equal way? How
Speaker 1: would you get your exposure? I don't have a bias
Speaker 1: against a cap way to benchmark, but but the outlook
Speaker 1: has to be for the at least the next twenty
Speaker 1: four months has to be an equal way that benchmark
Speaker 1: does does better. And and it's because I think that
Speaker 1: some of these larger companies it's harder for them to
Speaker 1: deliver an above average growth rate given their size, you know,
Speaker 1: in perpetuity um but um, and I think that you know,
Speaker 1: there are areas that are smaller in the benchmark. Energy
Speaker 1: for example, underrepresenting the benchmark really low p. If energy
Speaker 1: does well, the capwaight to benchmark will lack. And so yeah,
Speaker 1: you have to you have to go that way, John,
Speaker 1: this was great, Lovett. What restaurant we picking? What cuisine?
Speaker 1: What did you choose? He's thinking he's picking take castend
Speaker 1: to drinks, So we choose about That's what he always does.
Speaker 1: Usually at the hotel, it's always a hotel bomb. What
Speaker 1: is it with you in the hotel? They're just really
Speaker 1: good service as a general rule, they're quiet and critically
Speaker 1: with a lot of the conversations I have, particularly with
Speaker 1: the wonderful people of Bloomberg LP. You know, I don't
Speaker 1: want to be sitting next to somebody taking notes from
Speaker 1: you know somebody. I mean, they're just quieter. They're unlike
Speaker 1: the trashy disco scenes you're going. You said, I got
Speaker 1: to the discuss to like, you know, they got the
Speaker 1: ball going around and they're downs. Have you that the
Speaker 1: thin the thin high you can miss Andrew Holland Horse
Speaker 1: with a spectacular call last year on a regime of
Speaker 1: higher interest rates, and that's where we are, except it's
Speaker 1: City group. They went from fifty beeps to a quarter
Speaker 1: of a percent beeps on the February first derby. So
Speaker 1: what this is about is Holland Horse that U c
Speaker 1: l A learning that one day at u c l A.
Speaker 1: They actually taught John Maynard Keynes. When the facts change,
Speaker 1: I change in Holland Horse said, what do you do?
Speaker 1: What did you do yesterday to go from fifty beeps
Speaker 1: to beeps? Well thanks a lot of time. Yeah, that's right.
Speaker 1: When the facts change, you do change. And I think
Speaker 1: we saw in the data a little bit of softness
Speaker 1: in the price data. Certainly we've had software core CPI
Speaker 1: readings UM and then Producer Price Index usually doesn't get
Speaker 1: a lot of attention. It definitely got our attention. That
Speaker 1: was a little bit softer Also, UM, it means core
Speaker 1: pc inflation is going to be a little bit softer.
Speaker 1: So I think there's enough softer price and wage data
Speaker 1: for this FED two. I think the way they're feeling
Speaker 1: now is comfortable that they've may be done enough or
Speaker 1: getting close to having done enough. I am quite uncomfortable
Speaker 1: that they've actually done enough here, and I think we're
Speaker 1: gonna see that in some of the upcoming data. Let's
Speaker 1: talk about the uncomfortable reality of the X axis and economics.
Speaker 1: So you've adjusted for February one, but the cumulative path
Speaker 1: out into two thousand twenty three, does that still give
Speaker 1: you your high newsmaking terminal rate. So we're still at
Speaker 1: five to five fifty on the terminal rate, And I
Speaker 1: would just highlight relative to what I'm hearing FED officials
Speaker 1: talk about relative to what markets are pricing, it would
Speaker 1: seem to me that that is at the lower end
Speaker 1: of what would be a reasonable terminal poll see rate
Speaker 1: for this Federal reserve. So it's it's very possible. It's
Speaker 1: our base case that they're getting to this, you know,
Speaker 1: five point two five to five point five percent range um.
Speaker 1: But just like your previous guest was talking about, if
Speaker 1: we see wage growth that picks back up again, and
Speaker 1: we think it will over the course of this year,
Speaker 1: if we see service inflation that stays sticky, then we
Speaker 1: may see this federal reserve reassessing is that really the
Speaker 1: appropriate policy rate to get to. So, although we're hearing
Speaker 1: Fed officials saying we're gonna stay the course um, and
Speaker 1: it maybe makes sense to move at a slower pace
Speaker 1: now to figure out where that that rate is, will
Speaker 1: we really be seeing the policy response that you need
Speaker 1: to slow down the economy sufficiently to loosen the labor
Speaker 1: market tearing down inflation. I don't know if Phil Bower,
Speaker 1: who founded Modern City Group economics, on to Catherine Man
Speaker 1: and on to you, but I'm going to suggest Professor Bowder,
Speaker 1: studied as a W. Phillips curve over at LC a
Speaker 1: long time ago, linked this to unemployment. And if I
Speaker 1: get holland Horst gloom of a higher rate, what is
Speaker 1: due to the unemployment rate and the societal change that
Speaker 1: will bring Yeah, So I think that that is something
Speaker 1: that I think FED officials need to be really honest
Speaker 1: about when they talk to the public. The idea that
Speaker 1: the way monetary policy works is through things like the
Speaker 1: unemployment rate. It is by slowing down the economy, is
Speaker 1: by creating slack in the economy, and is damping demand
Speaker 1: through those channels. So if you think that this is
Speaker 1: an economy where demand is outstripping supply, you will need
Speaker 1: to lean against that with higher policy rates, and that
Speaker 1: probably will increase the unemployment. Right now, they have that
Speaker 1: in their forecast, but they have the unemployment rate coming
Speaker 1: up to maybe four and a half percent. When you're
Speaker 1: running substantially above target inflation, we still are, even though
Speaker 1: we've had a few months of software core inflation, we
Speaker 1: still are substantially above target. You probably need that unemployment
Speaker 1: rate to move further than four and a half percent.
Speaker 1: So we're probably going to need to see a five
Speaker 1: percent plus unemployment rate to bring inflation down. Um, sort of,
Speaker 1: can we be hopeful? Could we be hoping that going
Speaker 1: to get a better scenario where the unemployment rate doesn't
Speaker 1: need to move as high? Certainly, And you know, I
Speaker 1: think I would hope for that. Everybody would hope for that.
Speaker 1: But the honest answer to your question, the basic macroeconomics
Speaker 1: is that to bring wage growth down you need to
Speaker 1: loosen the labor. But we gotta remember the gentleman from
Speaker 1: U c O. A. Alan Meltzer wrote a modest three
Speaker 1: thousand page history. You're the only one I know is
Speaker 1: read it is Mike McKee, And they come on, Andrew,
Speaker 1: if we societally coming out of this pandemic shift from
Speaker 1: three and a half percent up to the Holland Horse
Speaker 1: five percent, there's gonna be a societal scream about that. Politically,
Speaker 1: how does a fellow reserve adapt to that? Yeah? I
Speaker 1: think this is This is one of the reasons that
Speaker 1: central banks globally and in the US have been made
Speaker 1: independent and the idea that they're supposed to operate outside
Speaker 1: of politics because politically this is a very difficult thing
Speaker 1: to do. Now. The education that needs to happen. Is
Speaker 1: it happening now with these speeches in the silly micro
Speaker 1: parlor game that we're doing. I don't think so. I
Speaker 1: don't think so that that and so so. First, you know,
Speaker 1: be honest, there were large errors and policy making that
Speaker 1: led to much too high inflation we're now recovering from
Speaker 1: that period of time, and the recovery from that period
Speaker 1: of time means much tighter monetary policies. So we're in
Speaker 1: a bad position, right We should acknowledge that, now that
Speaker 1: you're in this bad position, how you're going to get
Speaker 1: out of it. We could say, let's just accept higher
Speaker 1: inflation r and this was in some ways, this is
Speaker 1: what happened in the nineteen seventies, so we know from
Speaker 1: that experience that that actually leads to worse longer term outcomes.
Speaker 1: So if we try to pivot too strongly towards worrying
Speaker 1: about issues regarding growth and unemployment, of course we care
Speaker 1: about those things, but the bigger risk right now is inflation.
Speaker 1: And that's why it's been interesting in the in the
Speaker 1: FED speak right, because we've heard FED officials saying, yes,
Speaker 1: inflation is still the bigger risk um But meanwhile we
Speaker 1: see markets that are pricing out future FED hikes, pricing
Speaker 1: out more hawkish policy, and FED officials being relatively upping
Speaker 1: of that. And so I think, you know, we're not
Speaker 1: there yet, but but this is kind of the early
Speaker 1: stages of something that could end up looking like the
Speaker 1: nineteen seventies, where you essentially declare victory before that victory
Speaker 1: is really attained. Well, we got a lot to talk
Speaker 1: about it. We would expand this interview out to three
Speaker 1: hours a norse as we buy back to the seventies.
Speaker 1: I don't want to get you in trouble with a
Speaker 1: general council, city group or with MS Fraser, But I'm
Speaker 1: gonna ask a delicate question. Your giant and one of
Speaker 1: my heroes, Katherine Man of m I T is overholding
Speaker 1: court at the Bank of England. I would perceive as
Speaker 1: a hawk. Is there a Catherine Man at the FED
Speaker 1: right now? Is anybody at the Federal legitimate Catherine Man? Hawk?
Speaker 1: I think what the FED is trying to do is
Speaker 1: be data dependent, and I think that is the right
Speaker 1: thing to do. You want to watch the data as
Speaker 1: it comes in. Certainly, if we are going to get
Speaker 1: inflation and wage growth cooling off and we can keep
Speaker 1: the unemployment rate at a fifty three year low, that's
Speaker 1: something that we would love to have happen. And you
Speaker 1: have to put some probability on these kind of surprising
Speaker 1: but possible outcomes, right, and the data most recently has
Speaker 1: been favorable for that type of outcomes. So I think
Speaker 1: that that it's not incorrect to be paying the data
Speaker 1: it's due attention on. On the other hand, I think
Speaker 1: what we've heard in the rhetoric, I think Terre Powell
Speaker 1: has actually been quite on message in terms of talking
Speaker 1: about resolve in the face of higher inflation. On the idea,
Speaker 1: if you looked at those last minutes from the December
Speaker 1: fl MC meeting, and they talked about our markets misperceiving
Speaker 1: our reaction function, our markets thinking that we're more dovish
Speaker 1: than we are, and they're concerned about that. So so
Speaker 1: you see that level of concern there. You see that
Speaker 1: kind of hawkishness. I think the issue for FED officials
Speaker 1: is that as soon as you get a short period
Speaker 1: of time, which we've had a short period of time
Speaker 1: where the data comes in a little bit more favorably,
Speaker 1: it's very hard to maintain that messaging. And that's that's
Speaker 1: what they're struggling with with time. I got like eight
Speaker 1: ways to go here, folks, so we are just joining
Speaker 1: us on television and radio. Andrew Holland Horst the City
Speaker 1: Group with one of the great calls of two thousand
Speaker 1: twenty two for this FED meeting, he shifts fifty beats
Speaker 1: down to hurdle a little bit of yeah, but they're
Speaker 1: maybe back to fifty. But he maintains this higher interest
Speaker 1: rate regime. Is Dr Hilarion and Dr Dudley speak about,
Speaker 1: is well, I've got to go, I guess because of
Speaker 1: time to the glide path and presumption of disinflation. Is
Speaker 1: it even if it's curve linear down to two percent?
Speaker 1: Or dare I say, oh Olivier Blanchard three, are the
Speaker 1: kinks along the way or is there a good force
Speaker 1: here to keep disinflation smooth and stable as a trend.
Speaker 1: So they're they're always kinks along the way, And that's
Speaker 1: important to keep in mind. The softer core CPI prints
Speaker 1: that we've had, softer core inflation prints that we've had
Speaker 1: most recently. That has a lot to do with used
Speaker 1: car prices coming down, goods prices stuff that's yeah, chunky
Speaker 1: good stuff, those used car prices. We monitor the wholesale
Speaker 1: prices for used cars and we've seen those stabilized and
Speaker 1: now start to go higher. Actually, um so when we're
Speaker 1: looking at January core inflation February core inflation, you won't
Speaker 1: have that same disinflationary factor from used car prices, what
Speaker 1: what what does help you glide down to shelter prices
Speaker 1: later this year? I think that will cool. With a
Speaker 1: lot of evidence that that's gonna cool non shelter services.
Speaker 1: It's a mouthfull full to say that that is the
Speaker 1: area we should be concentrated on, because that's where that
Speaker 1: wage pressure matters. That's where tight labor market. Take the
Speaker 1: disinflation dynamic, and this non shelter which I can't pronounce, Okay, great,
Speaker 1: bring that over to an initial claim statistic where you
Speaker 1: would begin to see evidence of FED success. I'm going
Speaker 1: to suggest that numbers way more ginormous than a four
Speaker 1: week moving amorhage of two D six thousands. Incredibly low
Speaker 1: initial jobless claims, incredibly high rates of people quitting their jobs.
Speaker 1: And that's important. I think when we look at some
Speaker 1: of these headlines about layoffs, if you have layoffs, that
Speaker 1: showing you that, yes, there's some areas, some sectors where
Speaker 1: maybe you're getting some loosening in labor markets. But if
Speaker 1: you have very few people filing for jobless claims filing
Speaker 1: front of him in insurance, if you have people that
Speaker 1: are very willing historically willing to quit their job because
Speaker 1: they feel so good about the labor market. That's saying
Speaker 1: to me, this is a very very tight labor mark.
Speaker 1: You're becoming a pro like Catherine Man. You didn't answer
Speaker 1: my damn question. Answer. What's the initial jobless claims number? Andrew?
Speaker 1: That equates into a constructive FED policies it to fifty?
Speaker 1: Is it three hundred? Yeah? I think you. I think
Speaker 1: you'd expect to see that coming up to something more
Speaker 1: like three hundred, and you'd see that coming up over
Speaker 1: time consistently, and we just we really haven't seen anything
Speaker 1: like that in the data. Extraordinary. What are you gonna
Speaker 1: write about this weekend? We're gonna think about this weekend.
Speaker 1: I'm reading Olivia Blanchard's new book cover to cover, every
Speaker 1: footnote what are you doing? We are thinking about what
Speaker 1: this process will be between the tight labor market and
Speaker 1: wage relationship, and then between that wage and price relationship.
Speaker 1: And I think those are kind of the big unknowns
Speaker 1: right now. So it's it's not hard to believe in
Speaker 1: very tight labor markets pushing up wages. Is that wage
Speaker 1: pressure then going to push up prices further? We we
Speaker 1: think so, But margins are also wide, right, So maybe
Speaker 1: you talked to Suvean Horowitz and the other criminals, City
Speaker 1: Group and Securities Analysis. Are you they telling you these
Speaker 1: corporations have pricing, especially in the services sector. That's where
Speaker 1: we still see the pricing power. So goods maybe not
Speaker 1: so much services. Yes, this has been great. Andrew Holland
Speaker 1: or's with a clinic there on how you get to
Speaker 1: a basis point idea for February one. I think on
Speaker 1: the SCANNO manager Cassie's wonderful to catch up. You've had
Speaker 1: all this communication from central banks worldwide, from the c B,
Speaker 1: from the Federal Service as well. Have we seen peak rights?
Speaker 1: And how fucking this fete Takee thinks. Yeah, so I
Speaker 1: do believe we've seen peak rates, particularly as it relates
Speaker 1: to the long end tens and thirties. But there's this
Speaker 1: motto higher for longer, right, I think this higher for
Speaker 1: longer motto could be the new transitory. So let me
Speaker 1: explain it exactly why. So the FED was saying transitory transitory,
Speaker 1: transitory inflation is transitory. The market didn't believe it. They
Speaker 1: looked through it, They priced ahead of the Fed. They
Speaker 1: pushed the Fed to hike more. Now we're seeing actually
Speaker 1: the reverse. The market is saying, let's rates higher for longer,
Speaker 1: higher for longer, higher for longer. And what is the
Speaker 1: market saying, I don't believe you. It's cutting in, it's
Speaker 1: pricing in rate cuts. It's already seeing the data roll over,
Speaker 1: and so the Fed's going to keep trying to communicate
Speaker 1: higher for longer, but the market is already looking through
Speaker 1: it the Fed. The market is leading the FED on
Speaker 1: the way up and leading the FED on the way
Speaker 1: down as well. Yeah, I do think the market is right.
Speaker 1: I think the market is seeing things in the data
Speaker 1: you highlighted. Is a manufacturing it's been below fifty for
Speaker 1: two months. We don't just look at the headline index.
Speaker 1: We dig into the numbers. For instance, you look at
Speaker 1: the ratio of new orders to inventories. New orders is falling,
Speaker 1: inventories is rising. Not a good situation for companies. That
Speaker 1: level has never been this depressed outside of recession. I
Speaker 1: think it's just a matter of time before we see
Speaker 1: in the initial jobless PLAIE numbers what we're seeing in
Speaker 1: the rust of the economy. What do you see in
Speaker 1: vanilla corporate debt? You don't remember when there was a
Speaker 1: blue SMP book and you thumb through it to see
Speaker 1: what boys Cascade was doing with their massive three percent coupon.
Speaker 1: But corporate debt matters, and now there's a lot of
Speaker 1: issuance as well. What's that dynamic? How do we take
Speaker 1: advantage of that? Yeah, so we do see a lot
Speaker 1: of opportunity in investment grade credit. Um, we think that
Speaker 1: the yields there are attractive to get invested, and we're
Speaker 1: staying very high Quality's a typical yield. They're very high
Speaker 1: quality corporate. So you can get between five and six percent,
Speaker 1: you know, depending on the maturity, depending on exactly. That's
Speaker 1: almost a triple average all cash does. I mean it's
Speaker 1: not there yet. That's that portfolio I do, and it's
Speaker 1: doing good. I mean it's really out there with a
Speaker 1: nice pop, but not to the two twos twenties. Take it.
Speaker 1: It was amazing. But if you take out the two
Speaker 1: and twenty fee on the triple average dot cash, it
Speaker 1: doesn't get down to Kelsey's need to talk about never mind,
Speaker 1: I G. You've talked about where you're at on this economy.
Speaker 1: Some people might be different. They might look at jobless
Speaker 1: claims and say, we're still resilient. What recession. You're on
Speaker 1: the other side of that, gets it. It's try to
Speaker 1: re yields of paint you and cultimately the FED can't
Speaker 1: come as far as it goes. Got all of that,
Speaker 1: what business does high yield have rallying in that world?
Speaker 1: So we were talking to our portfolio managers within our
Speaker 1: high yield desk this week and yeah, I mean we
Speaker 1: were getting that same sense. We're not seeing huge demand
Speaker 1: into high yield so far this year. What we're seeing,
Speaker 1: I think is more technically driven. There's no supply, so
Speaker 1: essentially the people who are looking to get invested are
Speaker 1: just driving spreads tighter. Um. It is incongruent with the
Speaker 1: data that we're seeing. I think it is more technically oriented. Um.
Speaker 1: And we're still staying defensive um, looking forward to to
Speaker 1: what the data is telling us and and what company
Speaker 1: earnings are going to say, which you know we're not
Speaker 1: particularly constructive on. So this is just the salesforce of
Speaker 1: all these big asset managers going around. Same. By fixed income,
Speaker 1: it's all the inflows in the new year coming into
Speaker 1: fixed income funds. Ultimately, you think that's going to fight
Speaker 1: for some of these credit stories. So when we say
Speaker 1: by fixed income. We're focused on high qualities. So when
Speaker 1: you think about somebody investing into the aggregate that's in
Speaker 1: that's generally treasuries, mortgages, and investment grade UM and so yeah,
Speaker 1: the whole spectrum of the fixed income universe is going
Speaker 1: to benefit from those flows undeniably UM. But you know,
Speaker 1: when we're thinking about adding duration to portfolios, you have
Speaker 1: to think about not just the mathematical calculation of duration,
Speaker 1: but the empirical duration. So how does it actually trade?
Speaker 1: When treasuries rally and there's a flight to quality, safe
Speaker 1: haven bid, investment grade is going to get capital appreciation,
Speaker 1: prices are going to go up on those bonds when
Speaker 1: it's risk off high yield. If spreads are blowing out,
Speaker 1: you're not going to get that. And you expect how
Speaker 1: you spreads to blow out this year. So we are
Speaker 1: still anticipating a widening of high yield spreads when that
Speaker 1: recession comes, and timing that recession is difficult. But when
Speaker 1: we do see that recession, UH spreads tend to wide
Speaker 1: into at least eight hundred basis points. Guys like square
Speaker 1: feet Kelsey, I love to go to the individual. I'm
Speaker 1: looking at a high quality piece which I bought John
Speaker 1: it's like this close as I get to god. No, no, no,
Speaker 1: it was better than that. And I've enjoyed the Google
Speaker 1: piece of fifty this century. Okay, fifty, So I'm out
Speaker 1: thirty years ish two point two percent coupon two point
Speaker 1: zero five and I've seen a price reduction of a
Speaker 1: hundred down to sixty four? Is that an opportunity something
Speaker 1: like that? Is that high quality corporate when a ginormous
Speaker 1: company like Google is on sale for under where it was. Yeah,
Speaker 1: so you know, within the bond market, to kind of
Speaker 1: translate that, one of the attractive opportunities that we've been
Speaker 1: finding is when yields are rising, you're having a lot
Speaker 1: of bonds that you can buy below par at very
Speaker 1: discounted uh discounted dollar prices. And so yeah, those those
Speaker 1: are opportunities. Um. And we want to be investing in
Speaker 1: companies where we have vision on the cash flow, we
Speaker 1: we know what they're doing in terms of leverage. I mean.
Speaker 1: And then I want to be fair here and that
Speaker 1: Bob and Kelsey are not in the individual name. That's
Speaker 1: not their mandated. JP Morgat is not to give us
Speaker 1: individual names. I'm just picking this out John, I don't
Speaker 1: think our audience understands yields up one to sixty three
Speaker 1: on a thirty year piece at Google, which is not
Speaker 1: do want to take the thirty year pace at a
Speaker 1: tech company? Can? We might get bored in that? Is
Speaker 1: that the kind of risk you'd want to take. So
Speaker 1: I think that we were generally all of last year
Speaker 1: very focused on keeping both our duration risk and our
Speaker 1: spread risk concentrating in the front end of the curve,
Speaker 1: so minimizing the interest rate sensitivity of our portfolios. We
Speaker 1: thought yields would be rising, and of course those longer
Speaker 1: in bonds are going to get hit the most. UM.
Speaker 1: Now that we're kind of in the reverse of that story,
Speaker 1: I think that you can feel more comfortable extending out
Speaker 1: the curve and extending duration of your portfolios to those
Speaker 1: tenure and those third year high quality UM instruments. Tough
Speaker 1: times ahead. Fifty at the next meeting, that's it, everyone
Speaker 1: say five five, done, deal And again Holland Horst with
Speaker 1: us here in the next hour from fifty said this
Speaker 1: was great. Have you ever watched Wednesday on Netflix? That's
Speaker 1: all we want to know. I've never heard of it.
Speaker 1: Have I never heard of Family? It's just the who's
Speaker 1: in it? Do you know who's in it? I don't know.
Speaker 1: It's what is it called Wednesday? Because that's the character
Speaker 1: of the American culture, Adams family and very good. I've
Speaker 1: got it nailed that, right, that was great Wednesday. And
Speaker 1: you know my afterthoughts calling me, you know, she's a
Speaker 1: dinner calling me and I'm like, what's that about? But
Speaker 1: it's just another example. Is is Getha said of their
Speaker 1: narrow casting to what does Kelsey Barrow want to watch?
Speaker 1: I mean they're in Hollywood Wednesday? Apparently, Well, I don't know,
Speaker 1: there's others. So what does a portfolio manager watch on Netflix? Netflix?
Speaker 1: What does the PM do? Does Bob keep you too busy?
Speaker 1: You don't watch Netflix? You know? I like the more
Speaker 1: mindless stuff when I'm watching, right, what is the mind
Speaker 1: of stuff? You know, a baking show like a bacon show,
Speaker 1: cocktail company? What's the British baking show for instance, British
Speaker 1: bake off? That thing? Yeah, that thing. They moved networks,
Speaker 1: they change the cast kind of fell off the clip.
Speaker 1: Can we bring up to date on my portfolio? Maybe
Speaker 1: Kelsey had here around TV? Hold my hand, it's not
Speaker 1: an HR violation Austria nineties seven year. I bought it
Speaker 1: that stuff when you reflect, causey just to finish there
Speaker 1: on the last decade and what's taking place in this
Speaker 1: fixed income mark? Tom will look back at the sentry bomb,
Speaker 1: what will look what will you look back on to
Speaker 1: say this was crazy? Okay, um eighteen trillion of negative
Speaker 1: yielding debt at one point um in the last decade
Speaker 1: now completely wiped out. That's pretty crazy. And and thinking
Speaker 1: about this idea of structurally higher yields, are we moving
Speaker 1: into an error of that? And you know you spoke
Speaker 1: to Bob about that earlier in the week. You know what,
Speaker 1: what we noticed this rate hiking cycle, the first time
Speaker 1: that we've peaked at a higher level than the prior cycle,
Speaker 1: first time in thirty years the market here, somebody else
Speaker 1: had this. This goes back to the establishment of Nevermore
Speaker 1: Academy in Jericho. Vermont was the last current. To Cassie's point,
Speaker 1: what Bob said earlier in the week, the first time
Speaker 1: that we've had a higher high and how many psychless
Speaker 1: thirty years And Bobby is basically suggesting that he thinks
Speaker 1: we can have a series of higher lows and higher
Speaker 1: highs at each additional cycle where we get a right
Speaker 1: hiking cycling a rate cutting cycle. I think that's fascinating
Speaker 1: just to think about unwinding the last a few decades. Cassie,
Speaker 1: this was great. We're gonna salve into the show and
Speaker 1: get you to your weekend thinking and weekend reading about
Speaker 1: what to do in a multi asset strategy. And we
Speaker 1: need Bangana deals with this each and every day at
Speaker 1: Columbia thread Needle and all my radars up on Winny
Speaker 1: because so many people are telling me bonds is the
Speaker 1: only comfort zone. Is that a consensus call? And does
Speaker 1: that concern you? Tom? Thanks for having me, Um. It
Speaker 1: is appearing to be a consensus call, um Um. You
Speaker 1: know for two reasons. I think it makes a lot
Speaker 1: of sense. One, the economic data so far, including the
Speaker 1: one that came out this week on producer price index,
Speaker 1: is indicating that inflation has peaked. So all of last
Speaker 1: year was to watch inflation bad for bonds. This year,
Speaker 1: very simply put, inflations peaked, fields are likely to peak,
Speaker 1: and that's what we have witnessed in the last six
Speaker 1: weeks or so, yields coming off pretty sharply. The second
Speaker 1: point from a multi asset perspective is that there once
Speaker 1: again acting like a hedge. So this week we saw
Speaker 1: Wednesday massive sell off and equity space and bonds rallied,
Speaker 1: So the old ballast question is back on the table again.
Speaker 1: They are attractive because data is indicating this and they're
Speaker 1: acting as a hedge. Let me go right to multi
Speaker 1: asset then, so many of our viewers and listeners are
Speaker 1: going to say, okay, but I'm pitched by advisors and
Speaker 1: such this tranch a fixed income or that. How do
Speaker 1: you look at the choices to make in fixed income?
Speaker 1: Is it a duration choice? Is it a credit quality choice?
Speaker 1: What's the most important factor there? Both are two um
Speaker 1: leavers that bond managers use in trying to beat the
Speaker 1: index UM. The fixed income duration is the hedge part
Speaker 1: right now, because as you'll come down, duration rallies that
Speaker 1: provides positive returns. And credit is something that we are
Speaker 1: quite nervous about right now because all indications are that
Speaker 1: we're having whatever the might be a soft landing or
Speaker 1: some sort of UM recession this year, and you want
Speaker 1: to stay in good quality credits. So we are underweight,
Speaker 1: how yell, we are underweight sort of the riskier trenches
Speaker 1: of credit and staying in investment great credit. What are
Speaker 1: your equity people say, I mean Clumbia thread Needle does
Speaker 1: it all, And I'm interested in the equity prism that
Speaker 1: you have more focused on multi asset and fixed income. Sure,
Speaker 1: that's a great question. In equities things are a little
Speaker 1: more um hard to pin down really because if we
Speaker 1: look at the valuation lens on equities, they don't seem
Speaker 1: to have fully priced in this recession fear that's out
Speaker 1: there for this year. So in the U S space,
Speaker 1: our managers are staying fairly defensive. They like um good
Speaker 1: quality components of the U S stock markets. But from
Speaker 1: a multi asset space, we are seeing attractive opportunities to
Speaker 1: actually hold emerging market equities where we have a massive
Speaker 1: valuation cushion that's built up in the last decade or so.
Speaker 1: And at the same time there are improvement in sort
Speaker 1: of the dollar view and the growth prospects from China.
Speaker 1: So we be from a multi asset desk, are liking
Speaker 1: emerging market, particularly emerging market Asia UM. But in in
Speaker 1: the develop market we're staying high quality. So we're trying
Speaker 1: to stagger to Q two. I think there's a huge
Speaker 1: unknown on Q two. You've been doing this for a
Speaker 1: few cycles. Are you able to frame out the fourth
Speaker 1: quarter of this year in terms of earnings? You know,
Speaker 1: the markets doing the standard kabuki it does every earning
Speaker 1: season's expectations are brought down pretty sharply and then they're beaten.
Speaker 1: And so far that's all we are seeing in data,
Speaker 1: and I would say it's early days. UM expectations for
Speaker 1: four Q is that earnings will be down about two
Speaker 1: percent or show. And so far, with about ten percent
Speaker 1: or so of earnings UM that have been released, they're
Speaker 1: beating those expectations. So we might end up if this
Speaker 1: current run rate continues with you know, flat earnings to
Speaker 1: Miley positive, but expectations for the remainder of the year
Speaker 1: for two thousand twenty three are quite bleak. Earnings are
Speaker 1: supposed to go down. Thank you so much, and we
Speaker 1: Boghano with us here this morning with Colombia thread Needle.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
Speaker 1: us live weekdays from seven to ten am Eastern on
Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six
Speaker 1: to nine am for insight from the best in economics. Finance, investment,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on
Speaker 1: the terminal. I'm Tom keane In. This is Bloomer h