WEBVTT - Surveillance: Peak Inflation With Carpenter 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.200 dot Com, and of course, on the Bloomberg Terminal. When 0:00:29.200 --> 0:00:32.640 you are Deputy Director of Monetary Affairs at the FED, 0:00:32.760 --> 0:00:36.479 you are known to write short, sharp notes. Seth Carpenter 0:00:36.479 --> 0:00:39.280 has been acclaimed at doing that across Wall Street for years, 0:00:39.520 --> 0:00:42.760 and he joins us for his first Bloomberg Conversation his 0:00:42.880 --> 0:00:47.319 chief global economist at Morgan Stanley. Seth, congratulation on your 0:00:47.320 --> 0:00:50.000 new position. You gotta go fly fishing with Alan Setner. 0:00:50.080 --> 0:00:53.960 That's the indoctrination it Morsha Stanley, I love the short 0:00:54.080 --> 0:00:58.760 sharp note. Everybody calmed down about inflation. Why should we 0:00:58.880 --> 0:01:04.040 calm down about inflation? I think if you look at 0:01:04.040 --> 0:01:07.800 the details about what's really driving the inflation, there's lots 0:01:07.800 --> 0:01:11.559 of reasons to believe the inflation and physical goods really 0:01:11.680 --> 0:01:14.480 is being driven by supply chain destructions. We've heard about 0:01:14.520 --> 0:01:17.080 that for a long time. I mean when we talk 0:01:17.160 --> 0:01:19.720 to our equity analysts. It seems like most of those 0:01:19.720 --> 0:01:22.480 supply chains are starting to get a little bit better 0:01:22.520 --> 0:01:24.800 and at best, you know, and at least not get 0:01:24.800 --> 0:01:27.720 any worse. And so that means that the price level 0:01:27.760 --> 0:01:30.200 increases for those physical goods should be coming to their 0:01:30.319 --> 0:01:32.679 end pretty soon. We think we've actually peaked in the 0:01:32.760 --> 0:01:35.759 US when it comes to inflation now. Maybe a little 0:01:35.800 --> 0:01:38.679 bit later for Europe. But the point is the price 0:01:38.840 --> 0:01:42.000 level for those goods effected has probably peaked. They're gonna 0:01:42.000 --> 0:01:44.160 start to ease off a little bit. That's gonna pull 0:01:44.240 --> 0:01:47.240 down inflation for the index overall. It's maybe not a 0:01:47.240 --> 0:01:50.680 global question, but I have to go to America. John 0:01:50.720 --> 0:01:56.680 Ferroll mentioning this earlier real estate homes rents folds into 0:01:56.760 --> 0:02:00.200 this call, certainly for G G ten or maybe even 0:02:00.240 --> 0:02:04.000 G turning to how does housing fold in to a 0:02:04.080 --> 0:02:09.400 subsiding inflation, it is the force that's pushing in the 0:02:09.400 --> 0:02:12.960 opposite direction, especially here in the US. The Morgan Stanley 0:02:13.000 --> 0:02:16.160 team you mentioned, Alan Zentner of the who runs US 0:02:16.200 --> 0:02:18.880 economics for US for a long time, has pointed to 0:02:19.320 --> 0:02:22.360 a really bullish attitude we've had on commercial real estate, 0:02:22.440 --> 0:02:27.200 multi family home sector, so strong rent increases really will 0:02:27.280 --> 0:02:31.480 help booie uh those inflation measures. So you've got two 0:02:31.520 --> 0:02:35.000 forces pushing against each other. Rents are gonna be creeping up, 0:02:35.120 --> 0:02:37.920 but we're gonna essentially be where we were pre COVID 0:02:37.960 --> 0:02:41.200 on sort of the underlying run rate on on rent inflation, 0:02:41.240 --> 0:02:43.280 and sort of surged a bit coming out of COVID 0:02:43.320 --> 0:02:46.080 after some ups and downs. Now we're settling into you know, 0:02:46.240 --> 0:02:51.560 fairly firm, fairly robust housing market that's gonna lift inflation. 0:02:52.000 --> 0:02:55.560 The reversion though, when it comes to those consumer goods themselves, 0:02:55.680 --> 0:02:58.000 that's going to be the things that keeps inflation from 0:02:58.120 --> 0:03:01.320 rising further from here overall, since said that inflation had paid, 0:03:01.360 --> 0:03:03.640 can you help me understand where we stipilize? Do we 0:03:03.680 --> 0:03:06.840 stipilize at a higher level than why we were pre pandemic? 0:03:08.040 --> 0:03:10.440 So I don't think so. And the one point we've 0:03:10.440 --> 0:03:12.640 been trying to stress to clients is there's actually two 0:03:12.720 --> 0:03:16.120 sided risk. I find the the story the narrative to 0:03:16.200 --> 0:03:20.880 be inflation is high. It's probably transitory, but there's always 0:03:20.880 --> 0:03:23.080 the upside risk. And to be sure, we are in 0:03:23.360 --> 0:03:26.160 very different times, and anyone who has a hundred percent 0:03:26.200 --> 0:03:29.120 conviction on the outlook is either lying to themselves or 0:03:29.160 --> 0:03:31.919 they're lying to you. Uh. That said, I think there 0:03:32.040 --> 0:03:34.680 is the chance of downside risk as well. So if 0:03:34.680 --> 0:03:37.400 you think of supply chain disruptions, if they get fixed 0:03:37.520 --> 0:03:40.360 sooner than we think, if some businesses have started to 0:03:40.400 --> 0:03:44.000 add capacity on the hopes of this COVID rebound, then 0:03:44.040 --> 0:03:48.080 you can actually see those prices fall more than anticipated. 0:03:48.080 --> 0:03:49.840 And so you've got two way risk of the outlook 0:03:49.880 --> 0:03:51.800 for inflation. So where does it end. I think for 0:03:51.840 --> 0:03:54.480 the US middle of next year, on a twelve month 0:03:54.560 --> 0:03:57.200 change basis, you could be looking at two percent, could 0:03:57.200 --> 0:04:00.600 be a bit lower that outcome. That post ability was 0:04:00.680 --> 0:04:03.280 highlighted in the minutes to the last fe C meeting 0:04:03.280 --> 0:04:07.040 where the staff forecast has their PC measure of inflation 0:04:07.040 --> 0:04:09.119 going below two percent in the middle of next year. 0:04:09.160 --> 0:04:12.320 I think that's a realistic possibility. Reminds me that famous quote, 0:04:12.360 --> 0:04:13.800 what was it? Seth? I forget who said it. If 0:04:13.800 --> 0:04:16.280 you interrogate the data for long enough, it will confess 0:04:16.360 --> 0:04:18.800 to anything. It's like the moment we're in right now, 0:04:18.839 --> 0:04:20.400 doesn't it. If I look at the labor market, I 0:04:20.400 --> 0:04:22.279 can get this labor market dates to town we thinks 0:04:22.279 --> 0:04:24.159 are very tight. I can get it to tell me 0:04:24.240 --> 0:04:26.000 that things are very loose. When you look at it, 0:04:26.120 --> 0:04:28.760 what does it tell you? Uh So I look at 0:04:28.800 --> 0:04:31.280 a few things. One, I look at where things happening, 0:04:31.320 --> 0:04:34.800 so decompose issues. In the shortfall we had in in 0:04:35.240 --> 0:04:38.760 last week's data, which was pretty surprising for us on 0:04:38.800 --> 0:04:41.479 the town side. A lot of shortfall in hospitality and 0:04:41.600 --> 0:04:46.520 leisure not surprising, Delta expost not surprising. The delta variant 0:04:46.560 --> 0:04:49.160 surging means that a lot of those industries they're just 0:04:49.200 --> 0:04:52.120 seeing a pullback. We think it's temporary. We think delta 0:04:52.160 --> 0:04:54.360 will have peaked and will come down in the recovery 0:04:54.440 --> 0:04:56.920 will continue. But for me, that's one of the key 0:04:56.960 --> 0:05:01.040 points in terms of thinking about demand on the supply side. 0:05:01.080 --> 0:05:05.400 I look at UM labor force participation, especially prime major 0:05:05.480 --> 0:05:08.480 labor force participation. It's been creeping up for the past 0:05:08.560 --> 0:05:11.599 three months. It's well below pre COVID levels. I think 0:05:11.640 --> 0:05:14.919 there's every reason to suspect it will continue to rise 0:05:15.360 --> 0:05:18.880 overcoming quarters and possibly even years if we get continued 0:05:18.920 --> 0:05:21.440 strong growth. So if we just tie this all together, 0:05:21.560 --> 0:05:23.919 when you say that inflation has peaked in the US, 0:05:24.160 --> 0:05:26.440 do you include wage inflation in that or is it 0:05:26.600 --> 0:05:31.320 entirely a supply chain story. A very good distinction, very 0:05:31.320 --> 0:05:35.120 important distinction. I was talking about consumer prices there, and 0:05:35.160 --> 0:05:36.880 that's the part that's going to matter the most for 0:05:37.000 --> 0:05:42.440 monetary policy. Explicitly. Wage inflation is in fact a different phenomenon. 0:05:42.480 --> 0:05:45.400 I think one key point that gets lost, and you 0:05:45.440 --> 0:05:47.359 can look at some of the research coming out of 0:05:47.360 --> 0:05:49.599 the FED from some of their top economists in the 0:05:49.600 --> 0:05:53.360 Research and Statistics division, not a huge amount of evidence 0:05:53.400 --> 0:05:57.440 in the United States of this wage push inflation phenomenon. 0:05:57.560 --> 0:06:00.919 The link between wage inflation and contin is consumer price 0:06:00.960 --> 0:06:03.960 inflation in the US has actually been pretty weak over 0:06:04.000 --> 0:06:08.159 the past couple of decades. Wage inflation is clearly strong. 0:06:08.360 --> 0:06:11.280 There's been lots of disruptions their businesses having to pay 0:06:11.360 --> 0:06:13.719 up to hire people back. I think we want to 0:06:13.720 --> 0:06:16.120 be very very cautious, however, and look at some of 0:06:16.160 --> 0:06:19.120 the measures that do a better job of adjusting for composition, 0:06:19.200 --> 0:06:22.599 because again for the last employment report, we saw this 0:06:22.960 --> 0:06:26.479 big chick up in wage inflation. It was biggest in 0:06:26.600 --> 0:06:29.040 hospitality and leisure, which is also where we know the 0:06:29.120 --> 0:06:32.240 under performance was. So when you're not hiring back the 0:06:32.240 --> 0:06:34.400 people who are at the middle and lower end of 0:06:34.440 --> 0:06:37.839 the income distribution, that calculated average hourly learning is going 0:06:37.920 --> 0:06:39.640 to get biased upwards. So I think we want to 0:06:39.640 --> 0:06:42.719 be super cautious here about any sort of medium and 0:06:42.800 --> 0:06:46.160 longer term inference about wage inflation. It was Ronald Coast 0:06:46.839 --> 0:06:50.520 just in case, thanks you, good to catch up, sets 0:06:50.560 --> 0:06:53.359 really good to hear from you. Seth confidence to Morgan Stanley, 0:06:53.520 --> 0:07:00.720 chief Global Economists, did you and it's now it's our 0:07:00.800 --> 0:07:03.400 global market strategist, Ben. I want to start with Bank 0:07:03.440 --> 0:07:05.560 for America's cool Cevita is going to join us a 0:07:05.560 --> 0:07:07.440 little bit later this morning. She goes to fully two 0:07:07.520 --> 0:07:10.440 fifty by year end. That implies six percent downside. It's 0:07:10.440 --> 0:07:13.040 an upgrade from thirty eight hundred, but let's be clear, 0:07:13.520 --> 0:07:17.040 the bear is still slightly bearish. Here's the line, euphoric sentiment, 0:07:17.200 --> 0:07:21.480 margin risk, record duration, pose additional risk. Then as a bull, 0:07:21.880 --> 0:07:23.720 as an echoy market bull, yourself, what do you say 0:07:23.720 --> 0:07:28.040 back to that? Yeah, sentiments sentiment is pretty full, right, 0:07:28.160 --> 0:07:30.880 But I think the fundamentals keep delivering as I think 0:07:30.880 --> 0:07:34.800 they're going to um and bonds stay reasonably low, which 0:07:34.800 --> 0:07:36.600 I think they're going to. I think that gives you 0:07:36.640 --> 0:07:40.040 that clear roadmap two over five thousand for next year. 0:07:40.360 --> 0:07:44.120 You know, um, I think we're gonna gets growth next year, 0:07:44.160 --> 0:07:46.280 which is which is double consensus, and I think that's 0:07:46.280 --> 0:07:48.960 both top line and margins, and we can get into it. 0:07:49.000 --> 0:07:51.160 But I think you have very good visibility, you know 0:07:51.240 --> 0:07:54.560 on that, and bondyld's gonna move up a little bit 0:07:54.560 --> 0:07:56.200 and they're gonna be a fraction of where they were 0:07:56.200 --> 0:07:58.040 and when we come out of the last couple of recessions, 0:07:58.280 --> 0:08:00.120 so it's going to stay, you know, reasonably dark is 0:08:00.280 --> 0:08:02.720 I think to take sort of insurance on that this 0:08:02.760 --> 0:08:06.160 economy is really recovering and that's going to keep valuation type. 0:08:06.160 --> 0:08:08.880 Put that together and you know, I know, you know, 0:08:08.920 --> 0:08:11.360 I'm very comfortable with over five thousand with the next year. 0:08:11.440 --> 0:08:14.560 Then the narratives that are being written are written of caution, 0:08:14.640 --> 0:08:18.640 maybe not gloom, but caution. How's a ball market happen 0:08:18.960 --> 0:08:23.600 given caution and that gloom? Yeah, I I think it 0:08:23.600 --> 0:08:25.520 happens because of caution, right, I mean, this is this 0:08:25.560 --> 0:08:29.080 wall of worry that you know, we're now continuing to climb. Right, 0:08:29.120 --> 0:08:31.400 we have some back to school nerves, you know into 0:08:31.440 --> 0:08:34.360 the market. We've had this sort of remorseless rally since November, 0:08:34.400 --> 0:08:36.839 which is sort of worrying people. And we have sort 0:08:36.840 --> 0:08:39.600 of have this trio of sort of you know, event 0:08:39.720 --> 0:08:41.959 risk coming out of DC, whether it's you know, the 0:08:42.160 --> 0:08:44.960 the renomination of Ventcha Powell, or the or the budget 0:08:45.000 --> 0:08:48.560 limit or sorry, the dead limit, or or this you 0:08:48.559 --> 0:08:50.559 know three point trillion that the Democrats trying to sort 0:08:50.559 --> 0:08:52.640 of you know run through Congress. I mean, all that 0:08:52.960 --> 0:08:55.720 may introduce some noise, introduce some volatility. I think none 0:08:55.720 --> 0:08:59.400 of that will derail de rail of this market. Um, 0:08:59.600 --> 0:09:01.840 it's really you know, it's all about the fundamental saying 0:09:02.480 --> 0:09:06.400 earnings expectations are still rising, companies are getting more visibility 0:09:06.440 --> 0:09:08.480 back and they're talking about it more. I mean, that's 0:09:08.480 --> 0:09:11.360 pushing all these earnings numbers up. And at the same time, 0:09:11.840 --> 0:09:15.200 the Fed is you know, gradually pushing back, um, you know, 0:09:15.280 --> 0:09:18.640 expectations for the taper and for the increasing interest rates. 0:09:18.640 --> 0:09:20.760 And I think you know that's that goldie lots combination. 0:09:20.760 --> 0:09:23.640 Can you say the fundamentals we're talking about the fundamentals 0:09:23.640 --> 0:09:26.920 of the earnings of specific companies that dominate the SMP 0:09:27.000 --> 0:09:30.559 five hundred in particular, that actually have perhaps fewer employees 0:09:30.840 --> 0:09:34.280 relative to their overall business. How much is that a 0:09:34.360 --> 0:09:37.200 feature that you actually celebrate that you basically want to 0:09:37.280 --> 0:09:40.320 go into the dominant players in the SMP because perhaps 0:09:40.320 --> 0:09:43.240 they're a little bit more removed from this stagflationary light 0:09:43.360 --> 0:09:45.400 environment that we saw out of the bag book and 0:09:45.440 --> 0:09:49.040 out of a whole host of other data. Yeah. I mean, 0:09:49.120 --> 0:09:51.600 the stock market is not the economy, and we've certainly 0:09:51.600 --> 0:09:54.120 saw that a lot last year, and we've enjoyed some 0:09:54.200 --> 0:09:56.079 of that this year. But I think, you know, look forward, 0:09:56.640 --> 0:09:59.280 where does the you know, where does the incremental earnings 0:09:59.320 --> 0:10:02.280 come from. It comes from those reopening stops, It comes 0:10:02.320 --> 0:10:03.920 from that, you know, it comes from there's a real 0:10:03.920 --> 0:10:06.960 economy which is under representing the stock market. That's where 0:10:06.960 --> 0:10:12.560 earnings are, you know, still down from from pre pandemic levels. 0:10:12.720 --> 0:10:14.120 And I think that's what I think you should be 0:10:14.120 --> 0:10:16.440 focusing on right now. I mean, the sort of growth 0:10:16.480 --> 0:10:19.120 nerves now, the sort of backward looking sort of jobs 0:10:19.120 --> 0:10:21.680 report we had on you know, on on on Friday, 0:10:21.720 --> 0:10:24.560 I mean that's a reflection of sort of peak virus cases. 0:10:24.600 --> 0:10:26.880 But virus cases have been coming down for three weeks 0:10:26.880 --> 0:10:30.240 in a row globally and uh and potentially peaking now 0:10:30.280 --> 0:10:32.320 in the US. So I'm actually looking forward to that 0:10:32.400 --> 0:10:34.240 next step. You know, where are we going to start 0:10:34.240 --> 0:10:36.360 seeing that growth re acceleration. When are we going to 0:10:36.440 --> 0:10:39.400 start talking about all these companies that are you not 0:10:39.440 --> 0:10:41.240 making any money now? When are they going to start, 0:10:41.240 --> 0:10:42.839 you know, making money? And that delta is going to 0:10:42.880 --> 0:10:45.080 be enormous. I'm seeing the worst of it. Ben Allen 0:10:45.160 --> 0:10:47.680 Center and Morgan Stanley would agree with you. Andrew sheis 0:10:47.720 --> 0:10:50.480 and Morgan Stanley underweight us? Could he stough? He's looking 0:10:50.480 --> 0:10:52.640 at Europe. You're making this call out of London, look 0:10:52.679 --> 0:10:55.080 across the channel to Europe for us. What's the Europe 0:10:55.120 --> 0:10:58.800 call now for you? Yeah? I mean I think I 0:10:58.800 --> 0:11:00.680 think Europe actually leads to all right, I mean you 0:11:00.760 --> 0:11:03.480 do look at who's recovering from this sort of virus 0:11:03.520 --> 0:11:06.480 third way best, who has the highest p M eyes um, 0:11:06.520 --> 0:11:09.160 you know, growth outlook in the world. It's Europe. Who's 0:11:09.200 --> 0:11:12.719 best prepared to benefit from that with you know, the 0:11:12.800 --> 0:11:16.679 most typical indices and the cheapest valuations. It's Europe. And 0:11:16.720 --> 0:11:19.719 who has the policymakers that are basically going to sit 0:11:19.800 --> 0:11:22.439 on their hands for an extended period of time and 0:11:22.559 --> 0:11:24.760 let growth run. I think the CB may tap the 0:11:24.800 --> 0:11:27.000 brakes a little bit today, but you know, I think 0:11:27.040 --> 0:11:29.599 they're gonna be one of the last central banks to 0:11:29.080 --> 0:11:32.319 UH to actually increase interest rates, and physical policy is 0:11:32.320 --> 0:11:34.719 going to remain pretty loose. So acually think the next 0:11:34.720 --> 0:11:38.040 couple of years. Um, you know, European GDP is could 0:11:38.080 --> 0:11:41.440 be on par or even outpace that in in the US. 0:11:41.559 --> 0:11:43.240 And you know, we've just come off an earning season 0:11:43.280 --> 0:11:46.079 in Europe with a hundred and forty percent earnings growth. Um. 0:11:46.120 --> 0:11:47.680 You know that tells you. I think the earnings lie 0:11:47.720 --> 0:11:50.200 Bridge which which you're seeing today, that is quite a 0:11:50.200 --> 0:11:52.560 cool on GDP in Europe. Ben greater catch up, Sir, 0:11:52.640 --> 0:12:02.880 Ben labor Uta global markets strategist Cevita superman of Bank America, 0:12:03.120 --> 0:12:05.439 the head of US equity and quantitative strategy, and she 0:12:05.600 --> 0:12:08.280 joined us right now. Savita, I'm interested in the process. 0:12:08.320 --> 0:12:12.319 It goes from thy fifty. Some people might call that capitulation. 0:12:12.679 --> 0:12:14.400 I'm not sure I'm in that camp. Just walk me 0:12:14.400 --> 0:12:17.400 through your approach to this market, to your forecast with 0:12:17.440 --> 0:12:22.280 other people throwing out numbers like five K for next year. Sure, yeah, 0:12:22.360 --> 0:12:26.000 the process is, it's it's a it's a discipline process. 0:12:26.040 --> 0:12:29.080 So we have a you know, five five signals that 0:12:29.120 --> 0:12:32.160 we look at, which range from things like sentiment to 0:12:32.520 --> 0:12:37.200 fair value valuations, earnings revisions. Here's what's happened over the 0:12:37.280 --> 0:12:40.000 last month a few months. Earnings have come in much 0:12:40.040 --> 0:12:43.880 better than expected, and the market has basically doubled off 0:12:43.920 --> 0:12:47.439 of the COVID loads. So essentially a lot of what 0:12:47.960 --> 0:12:50.240 we've done in terms of thinking about our target from 0:12:50.280 --> 0:12:53.520 here is how much good news is priced into the market. 0:12:53.760 --> 0:12:56.240 How much more can the market rise from these levels 0:12:56.679 --> 0:12:58.800 or as their downside risk in the months to come. 0:12:59.280 --> 0:13:02.480 And I think you know, part of what we're looking 0:13:02.520 --> 0:13:06.080 at is the idea that the market is essentially the 0:13:06.200 --> 0:13:08.880 valuations of the market right now, we're leaving very little 0:13:08.920 --> 0:13:13.160 margin for air. Meanwhile, earnings have come in strong, but 0:13:13.200 --> 0:13:16.680 we're starting to see some harbingers of risk, and you 0:13:16.679 --> 0:13:19.880 know everybody's talking about supply chain risk and inflation. We're 0:13:19.920 --> 0:13:23.240 actually starting to see that come in the numbers. So 0:13:23.600 --> 0:13:26.640 every month we track this guidance ratio, look at the 0:13:26.720 --> 0:13:30.120 number of companies that are guiding above versus below consensus 0:13:30.360 --> 0:13:34.200 earnings revisions or a consensus earnings estimates. Over the last 0:13:34.440 --> 0:13:37.559 let's call it four weeks, we've seen that guidance ratio 0:13:37.679 --> 0:13:42.520 moved from record highs to a big southward move. We're 0:13:42.520 --> 0:13:45.400 starting to see companies worn on profits and it's showing 0:13:45.440 --> 0:13:48.679 up in a broader way across the SMP five hundred. So, 0:13:48.760 --> 0:13:50.640 first of all, earnings are at risk from just a 0:13:50.760 --> 0:13:57.360 cyclical pressure of input costs, wages, supply chain dislocation, et cetera. 0:13:58.040 --> 0:14:00.240 Second of all, when you look at the second their 0:14:00.280 --> 0:14:04.480 pressures on margins. We've had this great period of time 0:14:04.559 --> 0:14:07.640 for the SMP five hundred of globalization. The past twenty 0:14:07.720 --> 0:14:11.240 thirty years have been about US companies getting more global, 0:14:11.760 --> 0:14:16.040 you know, kind of arbitragey taxes, labor class, etcetera. Now 0:14:16.120 --> 0:14:19.280 look what's happening. We're at peak globalization. We're starting to 0:14:19.280 --> 0:14:22.440 see companies on shore. And what that's gonna do is 0:14:22.480 --> 0:14:26.680 again potentially installed or reverse this kind of long term 0:14:26.840 --> 0:14:30.520 great theme that we've had for big multinationals. In to me, 0:14:30.680 --> 0:14:32.880 I want to pin you down in this partition. For me, 0:14:33.000 --> 0:14:36.920 the earnings dynamic, the nugget that we call earnings growth, 0:14:36.960 --> 0:14:40.480 a dollar amount of earnings of SMP index versus the 0:14:40.520 --> 0:14:44.840 partial differentials of price to earnings. Which of those dynamics 0:14:44.840 --> 0:14:49.520 are you focusing on with such a narrow call. Well, 0:14:49.560 --> 0:14:52.440 you know, I think it's more the pe that's that's 0:14:52.520 --> 0:14:55.000 making us think, Okay, there's not a lot of upside 0:14:55.000 --> 0:14:57.080 from here. And I'll tell you one thing, Tom, So 0:14:57.160 --> 0:15:00.920 we have a evaluation frame or cuts not very predictive 0:15:00.960 --> 0:15:03.560 over the near term, but it's kind of all that 0:15:03.600 --> 0:15:06.360 matters over the long term. The are squared on this 0:15:06.560 --> 0:15:11.320 framework is eight in terms of you know, this is critical. 0:15:11.360 --> 0:15:14.040 I don't mean to interrupt this, folks, is math. It's important. 0:15:14.560 --> 0:15:19.080 Is your are squared valid given the dominance of those 0:15:19.200 --> 0:15:24.520 giga tech companies. Well, I'll tell you this much. It 0:15:24.560 --> 0:15:27.360 worked during the tech ball and this is an important point. 0:15:27.400 --> 0:15:30.000 I'm glad you brought up the giga tech tech companies 0:15:30.040 --> 0:15:34.240 because the last time this S framework was as negative 0:15:34.280 --> 0:15:38.720 as it is today was in another period where we 0:15:38.720 --> 0:15:42.840 were all kind of calling out the primacy of technology. 0:15:43.040 --> 0:15:45.920 And I think that today the bubble is potentially even 0:15:46.000 --> 0:15:49.560 more dangerous because it's not about you know, growth stocks 0:15:49.640 --> 0:15:54.520 which were tech ultimately grew into its multiples. It's about bonds, 0:15:54.600 --> 0:15:57.160 bonds and interest rates remaining as low as they are 0:15:57.320 --> 0:16:01.000 for perpetuity. I mean, this is what's scares me, Tom, 0:16:01.160 --> 0:16:05.720 is that the SMP five hundred has essentially turned into 0:16:06.120 --> 0:16:09.960 a thirty six year zero coupon bond. If you look 0:16:10.000 --> 0:16:14.080 at the duration of the market today, it's basically longer 0:16:14.160 --> 0:16:17.480 duration than it's ever been. So what that means is 0:16:17.480 --> 0:16:20.920 that any move higher in the cost of capital, the 0:16:20.920 --> 0:16:25.800 get interest rates, credit spreads, equity risk premia, that's basically 0:16:25.800 --> 0:16:29.400 going to be a huge knock on the market relative 0:16:29.520 --> 0:16:33.240 to the sensitivity we've seen in the past. So just 0:16:33.360 --> 0:16:37.040 real equipment here. You did upgrade your forecast, however, you 0:16:37.160 --> 0:16:39.920 moved up from thirty eight hundred. Why does this not 0:16:40.080 --> 0:16:44.160 become the bear case the originally saw? Well, look, I 0:16:44.160 --> 0:16:47.120 mean I think that the market couldntest could move as 0:16:47.160 --> 0:16:49.600 low as thirty eight hundred in the near term. But 0:16:49.680 --> 0:16:51.920 when we look at our frameworks and we think about okay, 0:16:51.920 --> 0:16:54.720 where do we I mean points in time, forecasts are 0:16:54.880 --> 0:16:58.680 fraught with peril. But but I think you know, our 0:16:58.720 --> 0:17:00.680 our view is okay. Earn us have come in a 0:17:00.680 --> 0:17:03.480 little bit better. Companies have been able to navigate a 0:17:03.480 --> 0:17:06.639 lot of the margin pressures were actually at peak margins 0:17:06.720 --> 0:17:10.920 today for for SMP. So it's a pretty remarkable story 0:17:10.960 --> 0:17:14.399 that corporate America has been able to manage um, you know, 0:17:14.440 --> 0:17:17.520 the COVID related risks as well as it has. But 0:17:17.600 --> 0:17:20.639 I think that now we're starting to see some of 0:17:20.680 --> 0:17:23.920 those areas prey and we're sort of waiting to see 0:17:24.160 --> 0:17:26.560 how corporate American deals with it. What would make me 0:17:26.600 --> 0:17:29.000 more embarrassing go back to three hundred is a last 0:17:29.040 --> 0:17:32.960 the implation persistent and dangerous and companies unable to pass 0:17:33.080 --> 0:17:35.679 any of it on through prices um And if we 0:17:35.720 --> 0:17:38.560 saw a more hawkish FED. I think the other thing 0:17:38.600 --> 0:17:40.840 that we pointed out in our note is that earnings 0:17:40.880 --> 0:17:44.200 matter for the market, but post crisis, what matters even 0:17:44.240 --> 0:17:47.520 more is the FED. And I think, you know, it's 0:17:47.560 --> 0:17:49.520 kind of remarkable. We have a chart in our note 0:17:49.560 --> 0:17:53.639 that shows that the FED has basically explained half of 0:17:53.680 --> 0:17:57.159 the market moves outside of earnings UM since the global 0:17:57.160 --> 0:18:00.680 financial crisis. So you've got this market that it's basically 0:18:00.720 --> 0:18:03.800 been fed by stimulus. We're now at a point where 0:18:03.840 --> 0:18:06.359 the FED is talking about tapering. It's hard to imagine 0:18:06.359 --> 0:18:10.960 they're going to accelerate asset purchases. I mean, what gives 0:18:11.280 --> 0:18:14.399 And you know, the evaluations don't reflect any of those risks. 0:18:14.480 --> 0:18:17.800 So basically, yeah, I've only got sixty seconds left on 0:18:17.840 --> 0:18:20.639 the clock, but I don't want to leave you before 0:18:20.680 --> 0:18:23.200 asking what do you want to own right now? Within 0:18:23.240 --> 0:18:26.639 the secondity market away from the index level stuff. There's 0:18:26.760 --> 0:18:29.800 always a full market somewhere, And what you want to 0:18:29.880 --> 0:18:33.800 own is the key scares theme today, which is inflation 0:18:34.080 --> 0:18:37.440 protected yield. So let's say the Fed keeps where it's 0:18:37.480 --> 0:18:41.120 low forever, but inflation is starting to bubble up. Don't 0:18:41.160 --> 0:18:43.800 buy bonds, bonds to offer you a fixed coupon that's 0:18:43.880 --> 0:18:48.320 not going to keep up with inflation. By energy dividend yielders, 0:18:48.359 --> 0:18:51.920 by financials dividend unders by companies that are tethered to 0:18:52.359 --> 0:18:56.639 positively tethered to inflation and can pay a growing yield. 0:18:56.720 --> 0:18:59.720 I think that's the that's the that's the call right 0:18:59.720 --> 0:19:04.080 now is really focused on income and inflation protections. This 0:19:04.119 --> 0:19:06.200 was great. Can you promise me one thing next time 0:19:06.200 --> 0:19:07.960 you come back. Let's get together with John I thank 0:19:07.960 --> 0:19:10.960 god a credit sweets again and which we can do 0:19:11.080 --> 0:19:13.560 a repeat. Let's still repeat that. Savada is going to 0:19:13.640 --> 0:19:15.720 catch up. We appreciate your time as always, send our 0:19:15.760 --> 0:19:22.040 regards to the team. Savita Subramani of Bank of America. 0:19:23.040 --> 0:19:27.000 We are thrilled to provide clarity here, maybe Hulger Schmiden 0:19:27.080 --> 0:19:30.600 joins us with Barenburg their chief economists. Hulger, I want 0:19:30.600 --> 0:19:33.400 to go to the politics of the moment I'm sure 0:19:33.440 --> 0:19:38.080 be unspoken within the press conference the Hawks, the traditionalists 0:19:38.119 --> 0:19:42.479 at the ECB, which you have beautifully enunciated over your career. 0:19:43.000 --> 0:19:49.639 How does Bundesbank respond to this semantic jumping through hoops 0:19:49.720 --> 0:19:54.960 on debbish practices. Well, the bank won't quite like it. 0:19:55.040 --> 0:19:58.399 But what we probably will learn is that two day's 0:19:58.640 --> 0:20:02.840 statement they press conference, it's only the prelude to the 0:20:02.960 --> 0:20:06.679 really big decision. The Hawks will now probably try to 0:20:06.800 --> 0:20:11.200 sum up all the strength to influence the December decision. 0:20:11.560 --> 0:20:14.560 In December the easy we will probably not be able 0:20:14.600 --> 0:20:19.080 to duck the issue, namely, when does the emergency end? 0:20:19.480 --> 0:20:23.879 When does the paper emergency program has to end? And 0:20:24.040 --> 0:20:27.000 as a result, expect the Hawks to make quite a 0:20:27.000 --> 0:20:31.679 few noises incoming weeks to prepare for probably a decision 0:20:31.680 --> 0:20:34.960 in December that will be hotly contested and may give 0:20:35.080 --> 0:20:38.840 us a better clue about the genuine tapering that will 0:20:38.960 --> 0:20:42.000 come at some time next year, whether it starts in 0:20:42.040 --> 0:20:44.639 April or whether it will take longer. Okay, this is 0:20:44.640 --> 0:20:47.360 really difficult for people to follow because there's two programs 0:20:47.400 --> 0:20:49.520 running in parallel. This PEP on the one side, there's 0:20:49.560 --> 0:20:52.160 a p P on the other. If they ENDPAP, because 0:20:52.200 --> 0:20:54.760 actually say the clue is in the name emergency. If 0:20:54.800 --> 0:20:58.040 that ends, what does it mean for the asset purchase program. 0:20:58.119 --> 0:21:00.640 That's another big open question. It probably really will mean 0:21:00.720 --> 0:21:03.680 that the normal as a purchase program is beamed up, 0:21:03.960 --> 0:21:06.879 and I expect it to be made moderately more flexible 0:21:07.280 --> 0:21:10.320 to react to market conditions, but to not be anywhere 0:21:10.359 --> 0:21:14.679 as flexible as the current emergency program. So the compromise 0:21:14.720 --> 0:21:16.840 will likely be in my view, and it will be 0:21:16.920 --> 0:21:20.800 hotly contested that in December the ECB tells us yes 0:21:21.000 --> 0:21:24.560 the PEB the emergency program will be phased out from 0:21:24.600 --> 0:21:28.919 April onwards. At the same time, the standard program that 0:21:29.080 --> 0:21:32.440 is open ended will be raised a bit and made 0:21:32.520 --> 0:21:35.800 more flexible. So but that's the debate for the next 0:21:35.840 --> 0:21:38.720 few weeks. With the December decision, rather than anything, we 0:21:38.760 --> 0:21:42.040 will probably learn the details about today. Today is probably 0:21:42.080 --> 0:21:44.440 just the day when we may learn, Yes, there is 0:21:44.480 --> 0:21:47.040 a serious debate going on and they have agreed to 0:21:47.119 --> 0:21:50.760 disagree until December. On a broader level, however, the message 0:21:50.960 --> 0:21:52.640