WEBVTT - Surveillance: Fed's Rate Cycle With Greene 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 Leye. 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 --> 0:00:29.360 dot Com, and of course on the Bloomberg Terminal. Let's 0:00:29.360 --> 0:00:31.480 bring it back in great show. We Harvard Kennedy School 0:00:31.520 --> 0:00:34.280 Senior Fellow, Megan, do you think it's too premature to 0:00:34.320 --> 0:00:37.320 have that cycle conversation, a conversation about the cycle and 0:00:37.400 --> 0:00:41.000 maybe this Fed just never raise an interest rates. I 0:00:41.040 --> 0:00:43.280 think it is a little premature. There is a huge 0:00:43.560 --> 0:00:46.800 debate raging about you know, what kind of inflation we're 0:00:46.800 --> 0:00:49.440 going to get. We know we'll get some temporarily. The 0:00:49.479 --> 0:00:53.120 Fed has acknowledged as much um, but will it be sustained? 0:00:53.159 --> 0:00:55.720 That's a big question. I do think though, at the 0:00:55.800 --> 0:00:57.959 end of this year, if we have unemployment at four 0:00:58.000 --> 0:01:01.040 and a half percent, as the FED expect and as 0:01:01.080 --> 0:01:04.080 Secretary Yellen says, we should get to full employment next year, 0:01:04.480 --> 0:01:06.160 and if we have inflation a two and a half 0:01:06.160 --> 0:01:08.680 percent at the end of this year, which isn't impossible, 0:01:09.200 --> 0:01:11.640 it is going to be come increasingly untenable for the 0:01:11.640 --> 0:01:14.840 FED to argue that the appropriate policy rate in those 0:01:14.880 --> 0:01:17.840 conditions is zero. So I actually think that the FED 0:01:17.920 --> 0:01:21.360 will be pushed into hiking sooner rather than later. So 0:01:21.440 --> 0:01:23.600 I think the scenario where the FED just never hiked 0:01:23.600 --> 0:01:26.240 through this cycle is a pretty unlikely one. Can we 0:01:26.280 --> 0:01:29.880 put a number on sooner? Are you a camp type 0:01:29.880 --> 0:01:32.680 of coal? If you're on the FMC right now, Megan, Um, 0:01:33.160 --> 0:01:35.120 you know, if you forced me to, the FEED is 0:01:35.160 --> 0:01:37.120 said that they're going to go ahead and take her 0:01:37.160 --> 0:01:39.840 purchases first, and that they'll provide a long runway for 0:01:39.920 --> 0:01:42.800 investors to do that. Um. So you know, if we 0:01:42.920 --> 0:01:46.399 ended up having a FED hiking in two it would 0:01:46.400 --> 0:01:49.040 probably happen in in the latter part of that year. 0:01:49.040 --> 0:01:51.560 But I think that's certainly possible, and certainly I think 0:01:51.560 --> 0:01:54.880 it's it's likely before the FED zone forecast according to 0:01:54.920 --> 0:01:59.960 the dot plots, which isn't until the earliest and then 0:01:59.880 --> 0:02:02.320 applies also that they will start to taper that one 0:02:02.720 --> 0:02:05.520 and twenty billion dollars in bond purchases that they've been 0:02:05.520 --> 0:02:10.400 making monthly. How soon could we see tapering? So you 0:02:10.400 --> 0:02:12.320 could see them start to discuss it at the end 0:02:12.360 --> 0:02:14.639 of this year. Look, I think tapering is going to 0:02:14.760 --> 0:02:17.280 be really tricky. Even if the FED goes ahead and 0:02:17.360 --> 0:02:21.079 guide posts this very clearly well in advance, it represents 0:02:21.080 --> 0:02:23.919 a binary shift, and therefore I don't see the FED 0:02:24.000 --> 0:02:26.960 being able to taper without rolling the markets. And we 0:02:27.000 --> 0:02:29.680 know what happened last time we had a taper there 0:02:29.720 --> 0:02:32.640 there was a tantrum, especially through emerging markets, and I 0:02:32.680 --> 0:02:34.960 think this is something that investors really need to watch. 0:02:36.400 --> 0:02:38.760 How does financial stability way in on this? The idea 0:02:38.880 --> 0:02:42.480 that the markets are supported by the Fed's ultra easy 0:02:42.560 --> 0:02:45.440 policies at a time when we do have a new 0:02:45.480 --> 0:02:50.440 boom supposedly underway, Well, that's certainly, you know, one of 0:02:50.480 --> 0:02:52.880 the reaction functions of the FED, even though it's not 0:02:52.960 --> 0:02:56.080 part of their official mandate, it is indirectly and so 0:02:56.160 --> 0:02:58.240 the FED is looking at this. But even if you 0:02:58.320 --> 0:03:02.200 get rates starting to go very gradually over the next 0:03:02.240 --> 0:03:05.840 couple of years, it's it's from zero, and so while 0:03:05.880 --> 0:03:08.440 a bunch of the markets could look frothy, there might 0:03:08.480 --> 0:03:12.040 be room for the FED to start um to normalize rates. 0:03:12.200 --> 0:03:14.480 I don't think we'll ever fully normalize rates, but at 0:03:14.520 --> 0:03:17.200 least start to hike them. Um So, you know, it's 0:03:17.200 --> 0:03:19.600 a consideration. But I think that that's a balance that 0:03:19.639 --> 0:03:21.120 the Fed's going to have to get and they had 0:03:21.200 --> 0:03:25.360 to get it right in the last hiking cycle as well. Megan, 0:03:25.400 --> 0:03:27.280 looking forward, do you think that's what shaping the views 0:03:27.280 --> 0:03:31.240 of the likes of President Caplan on financial stability and right? 0:03:31.320 --> 0:03:34.359 Do you think he's tying the two things together? Yeah, 0:03:34.440 --> 0:03:36.920 I mean, look, Kaplan's the markets guys. So I think 0:03:36.920 --> 0:03:39.760 he's absolutely tying the two things together. But you know, 0:03:39.840 --> 0:03:42.720 I think it's not just financial stability. It's also the 0:03:42.840 --> 0:03:46.240 robust growth forecast that we have as well, the bond 0:03:46.240 --> 0:03:48.320 market moves that we've seen so far this year. I 0:03:48.360 --> 0:03:50.560 think it's it's all of it together. But he's certainly 0:03:50.560 --> 0:03:53.560 looking at the markets and thinking that some of them 0:03:53.560 --> 0:03:56.400 are frothy. He's come out and said that before. Um So, 0:03:56.560 --> 0:03:58.640 I'm sure that's a part of his his reaction. He 0:03:58.760 --> 0:04:00.920 said that repeatedly on this a gram. I just wonder 0:04:01.040 --> 0:04:04.200 how lonely he is on the FMC right now. Megan, 0:04:04.240 --> 0:04:05.520 it's good to catch up. It's good to see you, 0:04:05.600 --> 0:04:12.880 as always have a Kennedy School senior scholars, A lot 0:04:12.880 --> 0:04:15.880 of people joining the dots from what's happening Kia safe 0:04:15.920 --> 0:04:18.640 from the commodity market, back to what has happened in Europe, 0:04:18.800 --> 0:04:21.279 where the lockdowns now are said to be extended in 0:04:21.320 --> 0:04:24.799 places like Germany for several extra weeks, and the question 0:04:24.839 --> 0:04:27.160 can we get a global recovery where you get that 0:04:27.279 --> 0:04:30.560 sort of incredible demand for precious metals and oil if 0:04:30.640 --> 0:04:33.520 you don't have one of the major areas of economic 0:04:33.560 --> 0:04:36.800 growth firing at all, which is Europe, and they've been 0:04:36.839 --> 0:04:39.800 lagging behind, and I do wonder whether people are adequately 0:04:39.839 --> 0:04:43.000 pricing in the ripple effects of that delay in getting 0:04:43.000 --> 0:04:45.200 back up to speed. Let's have that conversation about the 0:04:45.200 --> 0:04:48.919 pandemic right now with Dr Amish Adalgia JOHNS. Hopkins Center 0:04:48.960 --> 0:04:51.720 for House Security Senior Scholar, doctor. Typically you and I 0:04:51.760 --> 0:04:55.200 would start a conversation by discussing the latest data cases, deaths, 0:04:55.440 --> 0:04:57.480 the vaccine rollout. I want to do something a little 0:04:57.480 --> 0:04:59.839 bit different this morning and talk about the things that 0:05:00.000 --> 0:05:02.279 we need to address after this pandemic is behind us. 0:05:02.600 --> 0:05:04.599 And one of those things in America is a delicate issue. 0:05:04.880 --> 0:05:07.480 It's a basicity, it's a complex issue, and what we're 0:05:07.520 --> 0:05:10.159 seeing through this pandemic due to the the lightest studies informing 0:05:10.240 --> 0:05:13.560 US doctors that people have gaged white through this pandemic. 0:05:13.600 --> 0:05:15.000 What do we need to address and how can we 0:05:15.040 --> 0:05:17.880 address it in America given what we've learned over the 0:05:17.920 --> 0:05:21.400 last twelve months. So I think that this pandemic virus, 0:05:21.480 --> 0:05:24.120 because of its ability to really prey on people with 0:05:24.160 --> 0:05:27.600 other risk factors, really had an easy time finding victims 0:05:27.600 --> 0:05:30.040 in the United States. And that's because we have very 0:05:30.120 --> 0:05:34.000 high rates of obesity, cardiovascular disease, and diabetes. Those three 0:05:34.200 --> 0:05:37.480 conditions really were kindling for this virus to be able 0:05:37.520 --> 0:05:39.880 to find victims and land them in the hospitals and 0:05:39.920 --> 0:05:42.520 put all our hospitals into crisis. That coupled with the 0:05:42.520 --> 0:05:46.279 way our nursing homes have been handled, really explain the 0:05:46.279 --> 0:05:49.400 trajectory in many parts of what happened with this with 0:05:49.480 --> 0:05:52.080 this pandemic. So I do think we have to address 0:05:52.080 --> 0:05:54.440 these other public health concerns, and these are things that 0:05:54.480 --> 0:05:56.919 are going to be difficult because their lifestyle diseases. That 0:05:56.960 --> 0:05:58.800 means that we have to tell people that need they 0:05:58.800 --> 0:06:01.960 need to diet, they need exercise, which are very hard 0:06:02.000 --> 0:06:04.760 to do because people have been have been telling uh 0:06:04.880 --> 0:06:06.599 doctors have been telling people to do that for so long, 0:06:06.600 --> 0:06:08.000 it's just very hard to do. I think that this 0:06:08.040 --> 0:06:10.359 really lays bare the problem that we have in the 0:06:10.440 --> 0:06:14.000 next pandemic. Even influenza seasons are exacerbated by these co 0:06:14.120 --> 0:06:16.080 morbidities that we have. So I do think we have 0:06:16.200 --> 0:06:18.280 to really think about how do we make our country 0:06:18.279 --> 0:06:22.200 resilient to pandemics. And that's not just diagnostics, vaccines, medications, 0:06:22.200 --> 0:06:25.840 and hospital preparatives. It's also getting the population as as 0:06:25.920 --> 0:06:29.200 fit as healthy as possible so that this virus or 0:06:29.240 --> 0:06:32.360 any other virus doesn't have so many easy victims around. 0:06:32.560 --> 0:06:34.280 This is an issue that's been on the public's right 0:06:34.320 --> 0:06:36.080 down in this country. And now swear for a long 0:06:36.120 --> 0:06:38.360 long time doctor as you know, where do you think 0:06:38.440 --> 0:06:40.479 we have fallen short? And if you'd like to see 0:06:40.560 --> 0:06:43.320 renued effort out of the capital at a federal level, 0:06:43.680 --> 0:06:45.159 how would you like to see that develop in the 0:06:45.160 --> 0:06:47.560 months to come. I think it's very hard to come 0:06:47.640 --> 0:06:49.720 up with a program that's going to be effective against 0:06:49.760 --> 0:06:52.760 these types of lifestyle diseases because it's so multi factorial, 0:06:53.160 --> 0:06:56.040 and the government can't really tell people or expect them 0:06:56.040 --> 0:06:58.800 to diet or exercise as they say. But I think 0:06:59.000 --> 0:07:01.240 what what you you want to do is maybe launch 0:07:01.279 --> 0:07:03.920 an education campaign about how this happens in the schools 0:07:04.080 --> 0:07:06.480 to get people to to be more healthy about their 0:07:06.600 --> 0:07:09.880 their the choices that they make. I don't know how 0:07:09.960 --> 0:07:11.720 much of this can be done from a top down approach. 0:07:11.720 --> 0:07:14.600 It's very very hard to do. It's not my expertise 0:07:14.600 --> 0:07:16.800 about how to how to change behavior this way, but 0:07:16.840 --> 0:07:19.840 it's clearly something we need to to UH to fix 0:07:20.000 --> 0:07:22.520 and it's going to take all out effort to really 0:07:22.960 --> 0:07:25.440 address these problems which have been chronic and long standing 0:07:25.440 --> 0:07:28.240 in this country. Yeah, and I will say there has 0:07:28.280 --> 0:07:31.440 been discussion about whether we are under emphasizing some of 0:07:31.440 --> 0:07:34.320 the side effects from some of the shutdowns and the 0:07:34.400 --> 0:07:36.840 prolonged bouts of isolation. I mean, I was looking at 0:07:36.880 --> 0:07:40.679 this one study that showed that of Americans reported gaining 0:07:40.720 --> 0:07:43.920 unwanted weight and the average weight gain was twenty nine 0:07:43.960 --> 0:07:46.360 pounds during the pandemic, just to give some sense, and 0:07:46.360 --> 0:07:49.840 its people isolated, not having anywhere to go, drinking more, 0:07:50.120 --> 0:07:53.320 feeling like they are trying to fill their time with 0:07:53.400 --> 0:07:57.160 prolonged stress, very difficult period of time. As we move 0:07:57.280 --> 0:08:00.480 towards the end, it is understandable that people want to 0:08:00.520 --> 0:08:02.720 be done with this, which is why we're seeing crowds 0:08:02.760 --> 0:08:04.880 on Miami Beach, which is why would we go see 0:08:05.360 --> 0:08:08.880 restaurants they're people packed in even before the pandemic has lifted. 0:08:09.200 --> 0:08:11.880 Do we really have a big risk of a third 0:08:11.920 --> 0:08:15.360 wave as people are just tired of the pandemic and say, 0:08:15.400 --> 0:08:19.360 at this point, whatever happens happens. I think the United 0:08:19.360 --> 0:08:22.320 States is going to have some uptick in cases. Whether 0:08:22.400 --> 0:08:24.720 or not it looks like Europe, I think it remains 0:08:24.760 --> 0:08:27.040 to be seen. I think what was better in the 0:08:27.080 --> 0:08:29.200 United States and New York is we have a much 0:08:29.240 --> 0:08:32.520 more robots vaccination program and the goal is to get 0:08:32.520 --> 0:08:34.960 as many people vaccinated as possible, and we're doing that, 0:08:35.000 --> 0:08:37.840 getting to three million people vaccinated. So I do think 0:08:37.880 --> 0:08:41.640 we're probably able to stay ahead of the worst consequences 0:08:41.640 --> 0:08:44.800 of people's lack of social distancing. And the other thing 0:08:44.880 --> 0:08:47.120 is what we're seeing is a decoupling of cases from 0:08:47.160 --> 0:08:50.520 hospitalizations and deaths because we've now got a lot of 0:08:50.520 --> 0:08:52.720 people who are living in nursing homes, a lot of 0:08:52.720 --> 0:08:55.400 people that live in the community with high risk factors vaccinated. 0:08:55.600 --> 0:08:58.040 So we are going to see cases go up, but 0:08:58.160 --> 0:09:01.400 hospitalizations and deaths. They we remain the same or go down, 0:09:01.400 --> 0:09:03.440 which is happening in most of the country right now, 0:09:03.640 --> 0:09:05.200 and I think that's going to change the way people 0:09:05.200 --> 0:09:08.640 think about this disease. It becomes a more manageable respiratory infection. 0:09:08.840 --> 0:09:10.800 So the goal is, we know people are going to 0:09:10.800 --> 0:09:13.480 be doing this. Our solution is to keep vaccinating as 0:09:13.520 --> 0:09:16.439 quickly and as fast as possible so that those individuals 0:09:17.120 --> 0:09:19.040 are less likely to spread this virus and we're not 0:09:19.120 --> 0:09:21.160 impacted the way Europe is. I don't think it's We're 0:09:21.160 --> 0:09:23.920 going to have a European trajectory based on just our 0:09:23.960 --> 0:09:26.720 vaccination numbers alone. This is really important. Do you think 0:09:26.720 --> 0:09:29.920 that health officials have to nuance their message to say 0:09:30.000 --> 0:09:32.760 at this point, yeah, we could seem more spread, but 0:09:32.840 --> 0:09:36.240 it's less harmful just because the most at risk individuals 0:09:36.240 --> 0:09:39.440 have been largely vaccinated in the United States, So you 0:09:39.440 --> 0:09:42.560 know what, please try to be careful, but we're not 0:09:42.600 --> 0:09:45.640 going to crack down as hard as perhaps in other areas. 0:09:45.880 --> 0:09:49.760 Is that more of legitimate message from healthcare professionals. I 0:09:49.800 --> 0:09:51.680 do think it is. I think that that actually meets 0:09:51.679 --> 0:09:54.480 people where they are. It actually uh covers the whole 0:09:54.480 --> 0:09:56.600 concept of harm reduction that what we've been trying to 0:09:56.640 --> 0:09:58.760 do with this virus is removed its ability to cause 0:09:58.760 --> 0:10:02.600 serious disease, hospitalization, and death. And that's what the vaccine 0:10:02.640 --> 0:10:05.280 is doing. So we're going to not get to COVID zero. 0:10:05.320 --> 0:10:07.680 We're still going to see blips and cases, but those 0:10:07.800 --> 0:10:10.439 lips and cases are not gonna end up landing, hopefully 0:10:10.440 --> 0:10:12.360 on a vulnerable person and putting them in the hospital 0:10:12.640 --> 0:10:14.760 because we've vaccinated so much. So that's why we have 0:10:14.800 --> 0:10:16.800 to kind of keep the gas the pelt to the 0:10:16.800 --> 0:10:20.199 metal basically when we're vaccinating, in order to make sure 0:10:20.200 --> 0:10:21.920 that this doesn't happen. And I think we have to 0:10:21.920 --> 0:10:24.160 be more nuanced. We can't keep telling people that this 0:10:24.200 --> 0:10:25.560 is going to go on forever and ever. They're not 0:10:25.559 --> 0:10:27.560 gonna they're not gonna listen to and they're not listening. 0:10:27.559 --> 0:10:30.320 So I think we have to say this is our goal. Doctor, Really, 0:10:30.360 --> 0:10:32.520 well put and good to see you again. Thanks for everything, 0:10:32.559 --> 0:10:35.800 Dr Mchadalage. There JOHNS. Hopkin's sense of a house security, 0:10:35.840 --> 0:10:43.400 Senia Scott, let's bring in and letty while it's not 0:10:43.400 --> 0:10:46.320 going mast the management head of Active Strategy and salt 0:10:46.360 --> 0:10:48.760 to me about this moment. We're in for active management 0:10:48.800 --> 0:10:50.880 for the rotation and help me understand whether it's just 0:10:50.920 --> 0:10:53.280 a moment in time or something that kind of endure 0:10:53.640 --> 0:10:59.200 beyond one into two into twenty three. Well, Johnathan, I 0:10:59.240 --> 0:11:02.000 think it's a great question. Um, certainly, we're going to 0:11:02.120 --> 0:11:04.720 see a lot of strength in the economy. Like you 0:11:04.760 --> 0:11:08.840 mentioned earlier, that surge is going to cause earnings growth 0:11:09.000 --> 0:11:11.400 in several companies, but it's not going to be across 0:11:11.440 --> 0:11:14.000 the board. And this is where I think active management 0:11:14.000 --> 0:11:17.720 can really play a role where fundamentals are going to matter. 0:11:18.000 --> 0:11:21.520 The dream is the dream, but now it becomes the reality, 0:11:21.600 --> 0:11:25.720 and so who can really capitalize on building cash flow 0:11:25.960 --> 0:11:28.640 and earnings and those will be the companies that are 0:11:28.679 --> 0:11:31.600 rewarded more in the next cycle. Give me a better 0:11:31.640 --> 0:11:34.160 understanding of your process than your approach right now to 0:11:34.360 --> 0:11:36.480 bottom up analysis and still picking down what do you 0:11:36.520 --> 0:11:40.800 look for? Yeah, so certainly, you know we have portfolio 0:11:40.840 --> 0:11:47.000 managers and investment teams that have value focus and growth focus, UM, 0:11:47.080 --> 0:11:50.440 emerging markets, etcetera across the board. But I would say 0:11:50.480 --> 0:11:54.680 that instead of focusing on value or growth, what they're 0:11:54.679 --> 0:11:59.520 focusing on more is ciglicality and secular trends and those 0:11:59.559 --> 0:12:03.000 are really what's changing almost on a daily basis. The 0:12:03.080 --> 0:12:07.680 leadership of the market. Certainly the recovery and GDP is 0:12:07.720 --> 0:12:10.960 pushing that secular trend that we're seeing in value in 0:12:11.000 --> 0:12:14.840 small cap stocks, but the UM, sorry, the cyclical trend, 0:12:15.280 --> 0:12:19.880 but the secular trends are really driving what we're seeing 0:12:20.080 --> 0:12:25.280 across almost every industry. Innovation really has led the way, 0:12:25.480 --> 0:12:28.160 especially over the last year, and it's going to continue 0:12:28.200 --> 0:12:30.559 to be an important driver for earnings in cash flow 0:12:30.880 --> 0:12:35.680 for all industries. So you talked about facing some of 0:12:35.720 --> 0:12:39.440 the purchases on fundamentals and it's philosophy tuesdays. I'm gonna 0:12:39.480 --> 0:12:41.840 doub this as philosophy tuesdays. What are fundamentals at a 0:12:41.880 --> 0:12:44.720 time when so much as being driven by policy, whether 0:12:44.760 --> 0:12:49.240 it be fiscal or monetary. You know, fundamentals really are 0:12:49.679 --> 0:12:54.680 how companies are investing for the future. And certainly capital 0:12:54.720 --> 0:12:59.840 has been very, very cheap. That liquidity has um made 0:12:59.840 --> 0:13:04.480 it possible for almost every company to survive this past year, 0:13:05.120 --> 0:13:08.760 but also for them to do relatively well in the marketplace. 0:13:09.080 --> 0:13:12.120 But now there's gonna be some separation of winners and losers. 0:13:12.480 --> 0:13:17.960 It's who has focused taken um that liquidity and invested 0:13:17.960 --> 0:13:19.920 it for the future. And who's going to continue to 0:13:20.000 --> 0:13:23.040 do that. If you don't invest for your future, you're 0:13:23.080 --> 0:13:26.360 going to die. And that's what we've seen. Um, that's 0:13:26.360 --> 0:13:29.479 what we're going to see more and more. Just innovation 0:13:29.600 --> 0:13:36.559 trends continue, digitalization continues, and all the companies almost across 0:13:36.600 --> 0:13:40.120 the board are going to have to invest. And do 0:13:40.160 --> 0:13:42.560 you think that the market is accurately picking up on 0:13:42.600 --> 0:13:45.880 the companies that are investing well in their future? And 0:13:45.880 --> 0:13:47.920 I'm saying this at a time when we're expecting game 0:13:47.960 --> 0:13:50.520 Stoff to come out with earnings and yeah, they're expected 0:13:50.559 --> 0:13:52.200 to not lose money for the first time in a 0:13:52.240 --> 0:13:54.920 long time. And yet people might argue that might not 0:13:54.960 --> 0:13:57.920 be enough to justify the tremendous rally that we've seen. 0:13:57.960 --> 0:14:02.640 I mean, is the market after efficiently you know, Lisa, 0:14:02.640 --> 0:14:04.760 I think it's fair to say we're seeing some very 0:14:04.800 --> 0:14:08.400 strange things. I mean, certainly in my third year career, 0:14:08.760 --> 0:14:10.840 I have not seen some of the things that I've 0:14:10.840 --> 0:14:13.319 seen over the last you know, six months, even over 0:14:13.360 --> 0:14:17.240 the last year. So there there are inefficiencies in the market. 0:14:17.559 --> 0:14:22.120 And whenever you have this much stimulus thrown into the market, 0:14:22.480 --> 0:14:25.560 you're going to see things happen like we're seeing today. 0:14:25.920 --> 0:14:29.160 But what's really driven the market over the last decade 0:14:29.680 --> 0:14:32.760 is all of this stimulus. It's almost like everyone can 0:14:32.800 --> 0:14:37.080 survive because capital is so cheap. That trend has to 0:14:37.160 --> 0:14:41.440 stop at some point, and that's when fundamentals really will matter, 0:14:41.600 --> 0:14:44.960 and and quite honestly, they still have mattered. For the 0:14:45.040 --> 0:14:50.200 most part. Investors are focused on cash flow. They're focused 0:14:50.240 --> 0:14:53.920 on earnings growth, and that's going to become more important, 0:14:54.080 --> 0:14:58.760 especially when we get to a rising rate environment. Um 0:14:58.800 --> 0:15:02.000 those are the companies that need to produce earnings. If 0:15:02.000 --> 0:15:04.880 you have a high multiple now, it might be okay 0:15:04.920 --> 0:15:07.680 as long as you can rapidly grow your earnings. And 0:15:07.720 --> 0:15:09.200 before we let you go, I want to finish where 0:15:09.240 --> 0:15:10.880 we started. I think you did a brilliant job there. 0:15:10.880 --> 0:15:13.680 Have taken us away from growth versus value to focus 0:15:13.680 --> 0:15:16.040 on the cyclical aspects of this market and a more 0:15:16.080 --> 0:15:18.960 secular aspects of this market as well. Some people might 0:15:19.000 --> 0:15:21.840 go another step further. The cyclical story is a story 0:15:21.920 --> 0:15:24.600 for me to buy and hold on the short term horizon, 0:15:25.040 --> 0:15:28.800 and the secular story is something longer time horizon. And 0:15:28.840 --> 0:15:31.200 I'm trying to understand for you and whether there is 0:15:31.200 --> 0:15:34.080 a cyclical story that you'd like to hold beyond just 0:15:34.120 --> 0:15:38.160 say the next twelve months. Yes, I think there are. 0:15:38.400 --> 0:15:43.000 There are several industrial companies in the manufacturing space and 0:15:43.120 --> 0:15:47.640 other places that will that are benefiting both from the 0:15:47.720 --> 0:15:52.840 cyclical trends but also the secular story we have manufacturing 0:15:52.920 --> 0:15:55.640 coming back to the US. We need to build more 0:15:55.800 --> 0:15:58.720 in the US that started, you know, over the past 0:15:58.760 --> 0:16:01.840 four years, that's going to continue into this into this 0:16:02.320 --> 0:16:06.640 presidential term as well, and so that the secular and 0:16:06.760 --> 0:16:10.720 the cyclical can emerge in a lot of companies together 0:16:10.840 --> 0:16:14.080 and that can last, and that could create a cyclical 0:16:14.120 --> 0:16:16.560 story that lasts much longer than we've seen in the past. 0:16:16.720 --> 0:16:18.200 That's the one thing we need to talk more about 0:16:18.280 --> 0:16:20.080 that could get really interesting in the year ahead. And 0:16:20.120 --> 0:16:22.440 it's great to catch up. Come back soon. Love to 0:16:22.480 --> 0:16:25.560 catch up and Letty last Faro, Asset Management, Head of 0:16:25.560 --> 0:16:33.200 Activity Strategy. We spent this morning talking about monetary policy, 0:16:33.200 --> 0:16:35.600 fiscal policy, the kind of things we always do. We've 0:16:35.600 --> 0:16:38.160 also talked about looking back twelve months and the lessons 0:16:38.240 --> 0:16:39.680 learned in the equity market. I think we need to 0:16:39.720 --> 0:16:41.360 do the same in credit now and we've got the 0:16:41.360 --> 0:16:43.880 perfect guests to do that with Don Moulin, pretty m 0:16:43.920 --> 0:16:46.880 CEO and founder. Don Let's start there the look back 0:16:46.960 --> 0:16:50.480 twelve months, the lessons learned how residient credits being compared 0:16:50.520 --> 0:16:53.040 to what you expected. What was the big lesson for you, Don, 0:16:54.560 --> 0:16:57.040 I think the big lesson that we learned is that 0:16:57.560 --> 0:17:00.520 when the FED decide to do credit que e, which 0:17:00.560 --> 0:17:03.680 it really did the first time in this crisis, where 0:17:03.680 --> 0:17:06.440 it made a decision to invest in investment great bonds, 0:17:06.840 --> 0:17:10.199 would have a dramatic effect all throughout credit and that 0:17:10.320 --> 0:17:13.000 as a result, don't fight the Fed at a common 0:17:13.040 --> 0:17:15.680 phrase in the past, was more true this time than 0:17:15.680 --> 0:17:20.040 ever before, particularly when you pile on fiscal policy, which 0:17:20.160 --> 0:17:23.880 was extraordinary this time around. UM I think the challenge, 0:17:24.200 --> 0:17:27.000 referencing some of your other comments is that I think 0:17:27.080 --> 0:17:30.400 strong expectations of high GDP growth for the latter half 0:17:30.440 --> 0:17:34.120 of this year and going into next year are our consensus, 0:17:34.160 --> 0:17:36.600 but people are ensure how that's going to be spent, 0:17:37.200 --> 0:17:40.639 and so the ability to understand evaluations and credit and 0:17:40.640 --> 0:17:44.480 evaluations in the equity market, as well as the fact 0:17:44.560 --> 0:17:48.520 that so many companies have different balance sheets today than 0:17:48.560 --> 0:17:52.000 they did in two thousand nineteen. No one knows which 0:17:52.000 --> 0:17:54.679 companies will be, which companies will be the ones that 0:17:54.720 --> 0:17:58.080 don't benefit, and so there's a challenge right now in 0:17:58.080 --> 0:18:01.359 credit markets, what's the right narrative of structure? You know, 0:18:01.560 --> 0:18:04.920 how will movies recover? How will Jim's recover? Do they 0:18:04.960 --> 0:18:07.440 have too much debt? Do I have too little equity? 0:18:07.760 --> 0:18:12.040 Because nobody knows what the new normal is. That's true 0:18:12.200 --> 0:18:14.679 in both stocks and bonds, and you're seeing in stocks 0:18:14.720 --> 0:18:17.199 people starting to question the cyclical trade. I'm wondering if 0:18:17.240 --> 0:18:20.480 you're seeing a similar move in credit. This idea that 0:18:20.560 --> 0:18:22.879 it's been so good and it's been backed by a 0:18:22.960 --> 0:18:26.520 really easy FED that's now second guessing some of its 0:18:26.520 --> 0:18:28.960 policies and how applicable they are to a future that 0:18:29.000 --> 0:18:31.640 looks brighter. I mean, basically, are you starting to get 0:18:31.680 --> 0:18:36.000 more cautious on credit from here? Well, I think we're 0:18:36.000 --> 0:18:39.879 going to see the trader's market rather than an investors market, 0:18:40.520 --> 0:18:45.640 and so less beta, more volatility and credit. We'd hope 0:18:45.680 --> 0:18:49.439 to see some dispersion there. Certainly shouldn't be more dispersion 0:18:49.520 --> 0:18:52.960 in the lower quality and the smaller cap names where 0:18:53.000 --> 0:18:56.720 capital has a harder time accessing. With all the large 0:18:56.800 --> 0:19:00.720 numbers of money managers, all raising huge amounts of opportunistic 0:19:00.800 --> 0:19:03.840 capital and distress capital. We think the larger names is 0:19:03.920 --> 0:19:07.679 certainly priced to perfection, and so more the inefficiencies are 0:19:07.720 --> 0:19:10.480 on the bottom parts of the market of the smaller sizes. 0:19:11.119 --> 0:19:13.000 But yeah, it's we're going to see a lot more 0:19:13.080 --> 0:19:17.160 volatility and credit spreads as the narrative develops. As I said, 0:19:17.160 --> 0:19:20.439 we don't really know where the consumer dollars are going 0:19:20.480 --> 0:19:22.840 to be spent. We know clearly they're going to be 0:19:22.880 --> 0:19:25.800 different than they were in two thousand nineteen, and so 0:19:25.840 --> 0:19:28.560 as a result, we see opportunity coming. But I think 0:19:28.560 --> 0:19:32.480 it's the early days of opportunity in this nanosecond. In 0:19:32.560 --> 0:19:35.639 this moment, I think we're price closer to perfection, but 0:19:35.680 --> 0:19:40.080 I see opportunity on the horizon. Where is there distress 0:19:40.119 --> 0:19:44.320 at a time of four percent high old bond yields, Well, 0:19:44.320 --> 0:19:47.240 we still have businesses that if you look through that, 0:19:47.320 --> 0:19:50.520 we had a very high default rate UH in two 0:19:50.560 --> 0:19:54.119 thousand and in twenty and we continue to see an 0:19:54.200 --> 0:19:57.040 above average default rate coming in. And don't forget that 0:19:57.200 --> 0:20:00.800 last year we had default rates at almost seven percent 0:20:00.920 --> 0:20:04.600 in bonds and an excessive four percent in loans and 0:20:04.680 --> 0:20:08.439 lower recoveries. Uh. You know, we obviously had some gyms 0:20:08.440 --> 0:20:12.199 who survived as an example, or we had restaurants and 0:20:12.440 --> 0:20:16.320 quick serve restaurants all suffered and many defaulted. So as 0:20:16.320 --> 0:20:20.920 a result, the areas that really had the declines in revenue, 0:20:20.960 --> 0:20:25.120 which was at the leisure, travel and entertainment category, certainly 0:20:25.200 --> 0:20:29.720 experienced de faults. The companies with access to capital will 0:20:29.760 --> 0:20:32.159 be the ones. That's similar to your earlier comments on 0:20:32.160 --> 0:20:35.840 the show talked about Americans who have gained the COVID 0:20:35.920 --> 0:20:40.000 nineteen pounds. We have many companies that have a much 0:20:40.119 --> 0:20:43.760 larger balance sheet with the amount of debt and equity, 0:20:43.880 --> 0:20:46.800 and will the new cash flow that plays out in 0:20:48.400 --> 0:20:52.800 be adequate to service that valuation or that level of debt. 0:20:53.320 --> 0:20:55.840 I think there will be many who boomed as a result. 0:20:55.880 --> 0:20:57.679 That's what we think. The new defaults will be that 0:20:58.280 --> 0:21:01.480 growth as it changes. I thought so the announcement today 0:21:01.520 --> 0:21:06.840 that the streaming window for theaters has been shrinking, that's 0:21:06.880 --> 0:21:09.360 only going to affect the ability for theaters to generate 0:21:09.440 --> 0:21:11.840 cash flow. And as a result, an area that we 0:21:11.920 --> 0:21:15.639