WEBVTT - Surveillance: Fed Messaging With Porcelli 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 brown Witz Jaily. 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, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:30.080 dot Com, and of course on the Bloomberg Terminal. Just 0:00:30.200 --> 0:00:32.720 got the right guests right now, with the right questions, 0:00:32.760 --> 0:00:34.960 we could really spend a good amount of time on 0:00:35.040 --> 0:00:39.360 wage dynamics and labor dynamics in America with Thomas Porcelli, 0:00:39.560 --> 0:00:42.599 RBC Capital Markets Chief US Economists, and he joins us 0:00:42.920 --> 0:00:45.840 on radio and television this morning. Tom Porcelli, I'm gonna 0:00:45.880 --> 0:00:50.040 cut to the chase of the asymmetry of any labor report, 0:00:50.560 --> 0:00:54.160 and it's one part about well people maybe not getting 0:00:54.240 --> 0:00:57.520 job growth as much or losing jobs faster. There's two 0:00:57.640 --> 0:01:01.760 dynamics always in a labor re porn. Is this economy 0:01:01.880 --> 0:01:07.480 about the inability to form jobs? No? I think yes, 0:01:07.800 --> 0:01:09.600 there's a that is a challenge. I think we know 0:01:09.720 --> 0:01:12.200 that we can see that in the job openings data. 0:01:12.280 --> 0:01:15.920 I mean, you know, we have a staggering amount of 0:01:16.000 --> 0:01:18.760 job openings. Um you know, sort of roughly equal to 0:01:19.040 --> 0:01:22.120 the number of of unemployed, and we just can't find 0:01:22.120 --> 0:01:24.200 those matches. So yeah, I do. I think that there's 0:01:24.240 --> 0:01:28.080 some element of of truth to that. Look, I know, 0:01:28.160 --> 0:01:30.720 people are you know, my my inbox is already filling 0:01:30.760 --> 0:01:33.560 up with Hey, you know, what does this mean for 0:01:33.600 --> 0:01:36.920 the recovery and etcetera. It's one it's it's it's one 0:01:36.920 --> 0:01:39.399 report that missed the mark. Um, you know, and it's 0:01:39.400 --> 0:01:42.160 a report that hasn't done a really good job of 0:01:42.160 --> 0:01:45.080 telling us what it's going to happen with private NFP, 0:01:45.240 --> 0:01:46.960 which we'll get on Friday. I mean, yeah, it did 0:01:47.040 --> 0:01:49.600 a great job last month. Um, you know, the numbers 0:01:49.600 --> 0:01:51.880 were nearly on top of one another. But you know, 0:01:51.920 --> 0:01:55.160 other than that, the misses have been staggering, right. I 0:01:55.200 --> 0:01:57.760 mean it's missed by between four and five undred thousands. 0:01:57.760 --> 0:02:01.200 So I wouldn't take much much away from this report 0:02:01.320 --> 0:02:03.200 is related to this coming Friday. I mean, we're still 0:02:03.240 --> 0:02:06.080 looking for seven hundred thousand private jobs. That feels like 0:02:06.120 --> 0:02:09.960 a pretty good estimate. In fact, if anything, there's a 0:02:10.000 --> 0:02:13.640 really favorable seasonal factor in in play for this coming month, 0:02:13.720 --> 0:02:16.160 So I think we feel comfortable about this. I think 0:02:16.200 --> 0:02:18.600 part of the challenge though, is you know, fed govinor 0:02:18.639 --> 0:02:20.960 Waller put put I think really put a sort of 0:02:21.360 --> 0:02:24.120 a bulls eye on on this report, you know, in 0:02:24.160 --> 0:02:26.480 his speech the other day. Um, So I think, you know, 0:02:26.520 --> 0:02:30.280 maybe expectations are going to be very elevated with with 0:02:30.320 --> 0:02:32.799 regard to this report, but I think it'll probably want 0:02:33.000 --> 0:02:36.720 coming out and at a minimum meeting expectations. And Tom Purcella. 0:02:36.800 --> 0:02:39.440 A single sense this morning for me was Paul Donovan, 0:02:39.639 --> 0:02:43.680 always brilliant over at UBS and Paul Donovan said, Wait, 0:02:43.760 --> 0:02:48.359 are we counting jobs correctly in the modern economy? Are 0:02:48.360 --> 0:02:51.919 we counting digital jobs, TikTok jobs and all the rest 0:02:51.919 --> 0:02:54.760 of it? Do you actually believe the data? Now? Are 0:02:54.760 --> 0:02:59.280 we in some new paradigm? Yeah, I think that it's 0:02:59.320 --> 0:03:01.760 a I think it's a thing for all of us 0:03:01.800 --> 0:03:04.280 to sort of really dig into. I don't think there's 0:03:04.280 --> 0:03:06.880 any question about that. Um. But I think the problem 0:03:06.960 --> 0:03:09.560 is this, Um, you know, if if we are in 0:03:09.600 --> 0:03:12.560 the midst of a shifting paradigm, uh, you know, the 0:03:12.840 --> 0:03:15.320 reality is people are going to be very slow to 0:03:15.600 --> 0:03:17.959 sort of wake up to the reality of the new paradigm, 0:03:17.960 --> 0:03:20.079 which means that you're left with having to deal with 0:03:20.440 --> 0:03:21.880 you know, sort of all of the data that we 0:03:21.919 --> 0:03:24.600 have been using prior, um, you know, as it relates 0:03:24.680 --> 0:03:27.520 to FED policy. You know, I would love for them 0:03:27.560 --> 0:03:29.760 to sort of drill in and and sort of understand, 0:03:29.840 --> 0:03:32.280 you know, different labor dynamics beyond us, you know, the 0:03:32.280 --> 0:03:35.120 payroll report and what some alternative data are telling us. 0:03:35.480 --> 0:03:37.400 But that's not something that's gonna happen on the fly, 0:03:37.520 --> 0:03:40.040 particularly not right now. So for the FED as relates 0:03:40.120 --> 0:03:42.480 to the sort of the fate of policy, it's going 0:03:42.520 --> 0:03:45.400 to be entirely about what happens with these payroll reports. Um, 0:03:45.800 --> 0:03:48.680 you know, even if you know sort of behind the scenes, uh, 0:03:48.720 --> 0:03:51.560 there are actually uh you know, the the labor backdrop 0:03:51.600 --> 0:03:55.040 is showing more strength. That's not gonna equate for for 0:03:55.080 --> 0:03:57.800 this FED with regard to what their decision to taper 0:03:58.080 --> 0:04:00.720 or the decision of hyprates now the gate they FED 0:04:00.800 --> 0:04:03.880 speak Vice Chair Clarida A. Tenniston, what kind of a 0:04:03.880 --> 0:04:07.600 provice she you're looking for? Yeah, I look, you know, 0:04:07.680 --> 0:04:11.040 we we we like uh Clarida a lot in terms 0:04:11.040 --> 0:04:13.640 of you know, sort of being a guide post for 0:04:14.120 --> 0:04:16.680 what the conversation that's happening with within the FED. I mean, 0:04:16.720 --> 0:04:18.440 I think again, I think while I really gave us 0:04:18.920 --> 0:04:21.760 a good sense for that the other day. Um. And 0:04:21.760 --> 0:04:25.039 and in fairness, you know, to be totally fair to 0:04:25.080 --> 0:04:26.679 all of these FED officials, I mean they all speak 0:04:26.680 --> 0:04:28.479 with such regularity now, I think we get a really 0:04:28.480 --> 0:04:31.960 good sense for what's happening behind the scenes as relates 0:04:32.000 --> 0:04:35.880 to these conversations. So you know, Clarida has has done 0:04:35.920 --> 0:04:38.560 I think the dutiful thing um in his time as 0:04:38.680 --> 0:04:40.960 vice chair, which is to say, you know, more or 0:04:41.000 --> 0:04:45.920 less representing what the chair um uh is saying and thinking. UM. 0:04:46.040 --> 0:04:48.760 So you know, does he break new ground here today? Frankly, 0:04:48.800 --> 0:04:50.520 I would love for him to break new ground. I 0:04:50.520 --> 0:04:53.600 would love for him to be more aligned with what 0:04:53.640 --> 0:04:56.200 Whilla was saying earlier in the week, because I think 0:04:56.240 --> 0:04:58.440 that is I think directionally, I think that is where 0:04:58.440 --> 0:05:00.200 we're going. I think Pale is probably gonna be the 0:05:00.200 --> 0:05:02.440 one that's late to the party on that. And in fairness, 0:05:02.440 --> 0:05:03.720 and I've said this to you all before, I think 0:05:03.760 --> 0:05:05.520 he probably has to be a little bit late to 0:05:05.520 --> 0:05:07.320 to to the party. I don't I don't think anyone 0:05:07.360 --> 0:05:10.359 wants him, you know, basing what is going to happen 0:05:10.440 --> 0:05:14.320 on policy, on what his forecast is I think that 0:05:14.320 --> 0:05:15.800 they want him to sort of, you know, just hit 0:05:15.839 --> 0:05:17.960 it down the middle, um, as as much as he 0:05:18.040 --> 0:05:20.200 can every time. But again, as I think it relates 0:05:20.200 --> 0:05:23.479 to sort of the changing and the weaving dynamics of 0:05:23.520 --> 0:05:27.080 the economy. UM, I think that the other officials, including Clarida, 0:05:27.360 --> 0:05:30.279 think that they're usually better at giving us a sort 0:05:30.279 --> 0:05:32.960 of a sense for what they're thinking about these changing 0:05:32.960 --> 0:05:35.679 and weaving dynamics. So I'm looking forward to his speech. 0:05:35.720 --> 0:05:38.560 But it again, UM, I have to say, like, my 0:05:38.560 --> 0:05:41.400 my new favorite FED official is Governor Waller. Just to 0:05:41.440 --> 0:05:44.160 move things along, I'm not surprised, Tom. Some people might 0:05:44.160 --> 0:05:46.479 say that Chairman Pounds merely reflecting what the vice chair 0:05:46.960 --> 0:05:49.479 is thinking. But we'll leave that for another day. Let's 0:05:49.480 --> 0:05:51.640 talk about the sacencing you're looking for. We've had two 0:05:51.640 --> 0:05:54.440 outlacker calls on this program in the last couple of days. 0:05:54.480 --> 0:05:56.719 We've had one who thinks we can get a June 0:05:56.800 --> 0:05:59.800 right hike June of next year, and another from the ticks. 0:05:59.880 --> 0:06:01.800 Is you said no rate heights through the whole of 0:06:01.839 --> 0:06:05.080 this presidential administration, Tom, what are you looking for the 0:06:05.120 --> 0:06:08.599 kind of sequencing your base case at the moment. Yeah, 0:06:08.640 --> 0:06:13.280 So our our base cases that they tee up tapering. Uh, 0:06:13.320 --> 0:06:16.800 perhaps as early as the November meeting. Again, I would 0:06:16.800 --> 0:06:18.640 love for September to be right, I don't think I 0:06:18.680 --> 0:06:20.920 think that's way too early. So we think that it 0:06:20.960 --> 0:06:23.680 could happen as early as November. But again I have 0:06:23.720 --> 0:06:26.680 to be frank, where's November December. That's a that's a 0:06:26.720 --> 0:06:29.960 distinction without a difference in my humble opinion. Um. But again, 0:06:30.520 --> 0:06:33.360 so it's November December they teed up. They start either 0:06:33.600 --> 0:06:37.200 in sort of December or in January. Uh, and then 0:06:37.240 --> 0:06:39.560 they tied up by the middle of the year, and 0:06:39.600 --> 0:06:41.960 then shortly thereafter they're raising rate. So we have one 0:06:42.000 --> 0:06:44.920 hight built in for next year. But again, Jonathan, I 0:06:44.920 --> 0:06:47.120 think you're asking the right question. I mean, let's let's 0:06:47.160 --> 0:06:48.720 let's all be clear on this. I think it's a 0:06:48.760 --> 0:06:52.040 really important point. If you think about this, this new 0:06:52.080 --> 0:06:55.440 flexible average inflation targeting framework, you can easily make the 0:06:55.480 --> 0:06:58.880 case that maybe fate has the f a I T 0:06:59.160 --> 0:07:02.599 has been has been achieved already, and and and Loretta 0:07:02.640 --> 0:07:06.160 Mester has has effectively said that idea. We agree with 0:07:06.160 --> 0:07:08.920 her on that, and then think about next year, think 0:07:08.960 --> 0:07:12.080 about the FETs forecast for the unemployment rate next year's 0:07:12.200 --> 0:07:14.960 three point eight percent. Um. I know people think that 0:07:15.000 --> 0:07:18.640 I'm like this big, you know, economic bull out there. Um, okay, 0:07:18.680 --> 0:07:21.520 but the bull is then aligned with the FED because 0:07:21.600 --> 0:07:23.680 that's pretty much my forecast, I mean, at three point 0:07:23.720 --> 0:07:25.800 five percent on the unemployment rate by the end of 0:07:25.880 --> 0:07:28.680 next year. Yet, are you gonna tell me that three 0:07:28.680 --> 0:07:31.000 and a half percent, which is three point percent using 0:07:31.040 --> 0:07:33.320 FENS number, which is below their long ERWN estimate of 0:07:33.360 --> 0:07:38.880 funds and fate having been achieved, equates to no hikes 0:07:39.240 --> 0:07:43.800 in twenty two. I mean that that that is inconsistent. Um, 0:07:44.000 --> 0:07:46.560 And so I think people are looking for catalyst to 0:07:46.600 --> 0:07:48.200 get the market to move. I'll give you a catalyst 0:07:48.240 --> 0:07:50.240 that I think could be very interesting. Um. I don't 0:07:50.240 --> 0:07:52.160 think it's econ data. I don't think I think even 0:07:52.200 --> 0:07:53.880 if Perils blows it that, I don't think that's what's 0:07:53.880 --> 0:07:56.040 gonna do it. I think the September Peril I think 0:07:56.040 --> 0:07:58.840 the September FMC meeting I think could be very interesting. 0:07:59.160 --> 0:08:01.240 As I think everyone you shase there's seven FEDE officials 0:08:01.280 --> 0:08:03.560 looking for a hiking twenty two, it only takes two 0:08:03.600 --> 0:08:05.680 more officials moving off to zero lower bound to get 0:08:05.680 --> 0:08:07.840 that medium to move. I wouldn't be the least bit 0:08:07.880 --> 0:08:10.120 surprised if something like that happens. In fact, I would 0:08:10.160 --> 0:08:13.000 say that that's the area that's right for continued movement 0:08:13.760 --> 0:08:16.440 within the within the step in general. That's such a 0:08:16.440 --> 0:08:18.800 good point, such a good final point, Tompo Selli of 0:08:18.880 --> 0:08:28.360 OURBC Tom great catch ups as always. Tobias Lefkovitch joins 0:08:28.440 --> 0:08:30.680 US now from City, the chief US equity strategist, and 0:08:30.760 --> 0:08:33.720 Tobias is looking for four thousand year end on the 0:08:33.800 --> 0:08:36.640 SMP five hundred all time highs. Did a close yesterday 0:08:36.880 --> 0:08:38.959 to Bias. Walk me through the work that you and 0:08:39.000 --> 0:08:41.040 a team Robert Buckland over in Europe is doing with 0:08:41.080 --> 0:08:43.240 his team over at City and why you're just a 0:08:43.280 --> 0:08:47.440 little bit more cautious on US equities together. Sure, so 0:08:47.720 --> 0:08:49.520 let's start with the you know, the discussion you guys 0:08:49.520 --> 0:08:52.160 are having before about the modern market. Monules have had 0:08:52.320 --> 0:08:56.880 enormous impact on how you think about cyclicles versus growth 0:08:57.160 --> 0:09:00.280 versus you know, defenses versus growth versus value. And this 0:09:00.360 --> 0:09:02.640 has been what's really changed in the past three months 0:09:02.880 --> 0:09:05.120 as you've seen the bond you'll do it now again. 0:09:05.160 --> 0:09:08.199 There's been a lot of discussion around what the impact is, 0:09:08.280 --> 0:09:11.439 source and etcetera of the FED has been but keep 0:09:11.480 --> 0:09:14.599 in mind central banks globally have been keeping sup frustrates 0:09:14.600 --> 0:09:17.400 since really two thousand and eight, and what that suggests 0:09:17.480 --> 0:09:21.080 that they don't have confidence in kind of long term, sustainable, 0:09:21.160 --> 0:09:24.640 durable growth. So as a result, risk premiums are higher, 0:09:24.720 --> 0:09:27.000 which something people don't talk about when they talk about 0:09:27.000 --> 0:09:30.640 negative fields for example, UM. And it is important evaluation 0:09:30.760 --> 0:09:32.960 markets in an environment today, and I think it's like 0:09:32.960 --> 0:09:35.839 a really critical thing to understand. In two thousand eight, 0:09:35.880 --> 0:09:40.679 in our last recession, was comprised of in terms of 0:09:40.679 --> 0:09:44.600 market cap, weight was comprised of deep cyclical industrial materials, energy, 0:09:45.040 --> 0:09:48.920 and was secular growth including I T including media entertainment, 0:09:49.320 --> 0:09:51.800 UM including digital retailing if you don't think of it 0:09:51.800 --> 0:09:54.240 that way, and healthcare, which is growing as simply because 0:09:54.280 --> 0:09:58.240 of demographics today that numbers like fifty five versus fifteen 0:09:58.960 --> 0:10:00.880 in favor of growth. So the US is a heavy 0:10:00.960 --> 0:10:03.320 growth market. And if you believe bond yields are going 0:10:03.320 --> 0:10:05.560 to edge higher, then growth socks are going to take 0:10:05.600 --> 0:10:08.160 a little bit on the chin. And that's why you'd 0:10:08.200 --> 0:10:10.440 probably want to be in more value orging terriers, which 0:10:10.480 --> 0:10:14.319 is what Robbed Bupplin, our global chief clistrategist, was suggesting 0:10:14.720 --> 0:10:17.360 with his note. One last point to Bosmi, who is 0:10:17.360 --> 0:10:20.320 our great strategist, looking at that two percent number, really 0:10:20.360 --> 0:10:24.440 pointed out very significantly that because tax collections really stepped 0:10:24.480 --> 0:10:27.679 up meaningfully in June. Remember we distorted the timeframe for 0:10:27.679 --> 0:10:30.720 collecting it. Instead of April fifteen, who was June sixteenth. 0:10:30.920 --> 0:10:34.200 The treasury was flush with cash going into July and 0:10:34.280 --> 0:10:37.600 only issued billion dollars worth of bonds eighty billion loans 0:10:37.640 --> 0:10:39.600 just picked up by the Fed. So you left fourteen 0:10:39.600 --> 0:10:41.720 billion of new issues for the rest of the world. 0:10:42.160 --> 0:10:44.720 That's going to have impact on that one yield, and 0:10:45.640 --> 0:10:47.760 it's another one of those distortions that are sitting in 0:10:47.800 --> 0:10:51.640 market on a nominal tenure yield. You guys are looking 0:10:51.679 --> 0:10:54.440 for that move back towards two. So Tobias for an 0:10:54.440 --> 0:10:59.200 international story, you understand from Robert Buckland Japan UK deep value, 0:10:59.200 --> 0:11:02.040 I've got all that from a US perspective to bus 0:11:02.040 --> 0:11:04.160 can you just want me through the sector preference right 0:11:04.200 --> 0:11:07.440 now for you and the team. So we're a little 0:11:07.440 --> 0:11:09.440 bit mixed on that. We We do like capital goods, 0:11:09.480 --> 0:11:12.520 We do like consumer discretionary, but very specifically within retailing 0:11:12.559 --> 0:11:15.600 consumer services. We're not chasing consumer durables in the power, 0:11:15.600 --> 0:11:18.560 We're not chasing autos. I think those are probably not 0:11:18.720 --> 0:11:21.959 interesting to us. And then and then we like financials. 0:11:21.960 --> 0:11:25.520 We like banks, we like insurance, more neutral underspie financials 0:11:25.520 --> 0:11:29.880 today UM, and those are excuse me, those are more 0:11:30.000 --> 0:11:34.600 value cyclical oriented groups. So from that perspective, UM, we 0:11:34.679 --> 0:11:37.160 are there. We're not totally out of growth. We're not 0:11:37.240 --> 0:11:40.240 saying run like hell because tach hardware equipment. We're still 0:11:40.240 --> 0:11:42.320 in overweight on UM. We do have a down grade 0:11:42.320 --> 0:11:44.199 watch there, but we're still in overweight because we think 0:11:44.200 --> 0:11:47.120 it's part of the capital spending cycle. These glide pests 0:11:47.200 --> 0:11:50.760 to bias to the city group outcome. Can they be 0:11:50.880 --> 0:11:56.200 affected with stability or do you see significant volatility where 0:11:56.200 --> 0:12:00.559 along the path we enjoy VIX thirty or even worser? 0:12:02.679 --> 0:12:07.839 Is that a word worser? UM, let's see UM, but 0:12:08.120 --> 0:12:10.440 let's let's kind of go through this process. I'm not 0:12:10.480 --> 0:12:12.240 actually worried if the VIX is at thirty, and I'm 0:12:12.280 --> 0:12:14.520 not actually worried of the vixes of fifteen. Where I 0:12:14.559 --> 0:12:16.960 get very worried is between twenty and thirty, because that 0:12:17.000 --> 0:12:19.359 tends to be the problem area for the market historically. 0:12:19.760 --> 0:12:21.960 Um you have about if the vix was at fifteen 0:12:22.040 --> 0:12:24.360 or thirty five, you both in both instances, you have 0:12:24.360 --> 0:12:26.280 about an eighty eight percent probability that the markets will 0:12:26.320 --> 0:12:28.840 be higher twelve months later. So it's not those edges, 0:12:28.880 --> 0:12:32.440 it's it's crossing over in that range that you need 0:12:32.440 --> 0:12:33.760 to be a little bit more worried. And I do 0:12:33.840 --> 0:12:35.880 think you have some potential for volatility. There are four 0:12:35.920 --> 0:12:39.760 catalysts that are disconcerting, if you like, for us that 0:12:40.760 --> 0:12:45.040 possibly could all coalesce around September. Tapering, inflation being a 0:12:45.080 --> 0:12:48.000 little bit more persistent, Profit margin pressures because costs go 0:12:48.120 --> 0:12:51.560 up because the supply change challenges for example, and you 0:12:51.640 --> 0:12:54.040 can't is easily make it up on pricing. And then 0:12:54.120 --> 0:12:57.679 lastly is something nobody's talking about, which is taxation. We're 0:12:57.679 --> 0:12:59.800 going to see corporate taxes going up and it's going 0:12:59.840 --> 0:13:03.520 to pack estimates for the street, and that has been 0:13:03.559 --> 0:13:05.880 the real driver for the market has been really strong earnings. 0:13:06.080 --> 0:13:09.080 Problem is the guidance isn't that good anymore. Revision transferred 0:13:09.240 --> 0:13:11.400 historic peaks and it is unlikely to be you know, 0:13:11.440 --> 0:13:14.640 continuing to rise at this pace, and that will worry 0:13:14.679 --> 0:13:18.080 some people, especially when centiment is so bullish. Haarp panicy 0:13:18.160 --> 0:13:20.240 for he's been in for it for a while. Um. 0:13:20.480 --> 0:13:23.000 The complacency out there when we talk to investors, you know, 0:13:23.040 --> 0:13:25.600 on a qualitative basis, is very palpable. There's a lot 0:13:25.679 --> 0:13:27.920 of potential headwinds, and yet it doesn't seem to be 0:13:27.920 --> 0:13:30.360 coming together in some sort of big swoon as a 0:13:30.400 --> 0:13:32.040 lot of fun managers would like to see so they 0:13:32.040 --> 0:13:33.880 can go ahead and buy that dip. And I do 0:13:34.000 --> 0:13:36.640 wonder whether this just means we've brought forward so many 0:13:36.679 --> 0:13:38.640 of the returns and that going forward over the next 0:13:38.640 --> 0:13:41.800 five to ten years, returns on the headline SMP five 0:13:41.880 --> 0:13:45.000 hundred are going to be pretty muted. What's your expectation there? 0:13:46.040 --> 0:13:47.880 It's a really good questionally. So one of these we've 0:13:47.920 --> 0:13:49.880 been showing people is that if you look at the 0:13:49.920 --> 0:13:53.920 household sectors, equity exposure as a percent of their financial 0:13:53.920 --> 0:13:57.320 assets is around or so right now. That's a fifty 0:13:57.400 --> 0:13:59.560 year high. And if you go back in time and 0:13:59.559 --> 0:14:02.920 you look at heavy exposure, you've actually done exactly what 0:14:03.000 --> 0:14:05.080 you just suggested is brought forward a lot of the return. 0:14:05.559 --> 0:14:07.880 If you look at that today, it's talking about kind 0:14:07.880 --> 0:14:11.280 of a zero percent return compounded annually over the next 0:14:11.320 --> 0:14:13.600 ten years. And that shouldn't shock people when they hear that, 0:14:13.800 --> 0:14:15.720 because remember when you hit your highs and two thousand, 0:14:15.760 --> 0:14:18.360 you didn't get back to that level until two thousand seven. 0:14:19.000 --> 0:14:22.320 So we do have periods, and I'm relatively certain about 0:14:22.360 --> 0:14:24.440 this that over the next ten years we will have 0:14:24.440 --> 0:14:28.360 a recession. And when that happens, earnings often dropped and 0:14:28.400 --> 0:14:31.160 so to market. So to say, over the next ten 0:14:31.200 --> 0:14:33.720 years you might not get any returning equities on the s. 0:14:34.760 --> 0:14:38.520 Isn't that crazy even though it sounds crazy, um, but 0:14:38.680 --> 0:14:40.640 it means that you probably have to be much more 0:14:40.640 --> 0:14:43.800 of an active investor than passive. Vehicles may become less 0:14:43.840 --> 0:14:46.680 interesting to investors over the next decade. We had a 0:14:46.680 --> 0:14:49.240 recession over the last decade. It lasted a couple of weeks. 0:14:49.400 --> 0:14:52.400 It's unbelievable of us going to catch up sets of 0:14:52.520 --> 0:14:59.440 us Leftovich City chief US sequity strategist right now our 0:14:59.600 --> 0:15:01.800 Jersey where this is Bloomberg Intelligence of the bun where 0:15:01.800 --> 0:15:03.640 I could Eira, we really wanted to do a one 0:15:03.680 --> 0:15:07.240 hour interview where you will compress it right down. What 0:15:07.440 --> 0:15:13.280 matters to you in this new low yield environment. Well, well, really, realistically, 0:15:13.280 --> 0:15:16.440 the only thing that matters is the outlook for COVID 0:15:16.560 --> 0:15:18.440 and the effect that it's going to have on the economy. 0:15:18.480 --> 0:15:21.280 And I think that that's really what's been driving the 0:15:21.360 --> 0:15:24.120 market for the last couple of months, the delta variant, 0:15:24.200 --> 0:15:27.520 how pervasive it's been in other parts of the world, 0:15:27.560 --> 0:15:30.960 and then now it's feeding into uh, the US psyche 0:15:31.040 --> 0:15:34.040 a little bit here um fears about lockdowns and and 0:15:34.120 --> 0:15:36.720 that's really what's going on with the with the bond 0:15:36.760 --> 0:15:39.240 market right now. You know, I'm sympathetic to that Morgan 0:15:39.320 --> 0:15:42.120 Stanley call that you mentioned about yields being hired by 0:15:42.200 --> 0:15:44.920 year end, and I do hope that that's going to 0:15:44.960 --> 0:15:48.680 be the case. But this is all about fear right now, 0:15:48.760 --> 0:15:51.800 and the bond market is benefiting from flight to quality. 0:15:51.920 --> 0:15:53.600 That was a city group called John Why don't you 0:15:53.680 --> 0:15:56.560 pick it up and frame it around that the magnitude 0:15:56.560 --> 0:15:59.000 of that city group called Stanley looking for move back 0:15:59.040 --> 0:16:01.200 towards six days? Are you looking for a move back 0:16:01.200 --> 0:16:04.160 to two? I do want to the degree to which 0:16:04.160 --> 0:16:06.360 there is some asymmetric risk around where real yields are 0:16:06.520 --> 0:16:09.680 right now negative one twent one this morning, Gyra. Do 0:16:09.720 --> 0:16:11.360 you speak to anyone that thinks they can go much 0:16:11.400 --> 0:16:14.600 lower than this? Yeah, so so everyone that I talked 0:16:14.560 --> 0:16:16.520 to him on the institutional side doesn't like it. But 0:16:16.560 --> 0:16:19.200 I think that there's two big factors that continue to 0:16:19.960 --> 0:16:22.960 push real yields lower and lower. One of those is 0:16:23.000 --> 0:16:25.840 you look at flows into tipsy tfs and mutual funds, 0:16:25.880 --> 0:16:28.600 and they're just insatiable. There's a lot of people who 0:16:28.600 --> 0:16:31.640 want inflation protection. They're worried that inflation is going to 0:16:31.720 --> 0:16:34.640 be higher, maybe there's going to be more supply chain disruptions, 0:16:34.880 --> 0:16:36.920 and you're going to see CPI prints that are a 0:16:36.960 --> 0:16:39.600 bit higher than what we've had in the recent paths, 0:16:39.680 --> 0:16:42.440 or at least that they will persist longer even if 0:16:42.440 --> 0:16:44.680 they don't go much higher from here um. And the 0:16:44.720 --> 0:16:47.520 second is the Federal Reserve still is buying a lot 0:16:47.560 --> 0:16:50.920 of the tips market. Remember they're there. They only own 0:16:51.000 --> 0:16:54.520 seven percent of the tips market in February. Now they 0:16:54.560 --> 0:17:00.119 own almost so you know, they they've significantly increased their ownership. 0:17:00.120 --> 0:17:02.440 So liquidity in that market wasn't like it was a 0:17:02.520 --> 0:17:05.200 nominal treasuries in the first place. And then you add 0:17:05.240 --> 0:17:08.720 to that these flows into from retail investors into e 0:17:08.800 --> 0:17:11.239 t f s and and UH and mutual funds, and 0:17:11.280 --> 0:17:14.080 suddenly you have a recipe for lower and lower real yields. 0:17:14.119 --> 0:17:16.600 So you know, I think that there's a big risk 0:17:16.640 --> 0:17:19.040 to really yields where if really yields do back up 0:17:19.080 --> 0:17:21.439 fifty seventy basis points, there's going to be a lot 0:17:21.480 --> 0:17:25.000 of negatives on people's statements and maybe they'll rethink those investments, 0:17:25.160 --> 0:17:27.840 which could push real yields even higher. But we're not 0:17:27.880 --> 0:17:30.760 there yet because, like I mentioned, fear is still gripping 0:17:30.760 --> 0:17:33.000 these marks worried about the opposite. I think this is 0:17:33.000 --> 0:17:35.760 so important, together with the fact that the Federal Reserve 0:17:35.800 --> 0:17:38.479 ohone is almost a third of this market now, people 0:17:38.520 --> 0:17:42.560 buying tips with conviction or as insurance, because if you 0:17:42.600 --> 0:17:46.240 don't own insurance for inflation in the year ahead, haven't 0:17:46.240 --> 0:17:49.159 you got a degree of career risk? Isn't that in 0:17:49.160 --> 0:17:52.000 the mix of thing now for pms? I think here's 0:17:52.040 --> 0:17:54.040 part of part of the issue is that you there's 0:17:54.119 --> 0:17:56.320 other ways to take inflation risk. That the problem I 0:17:56.359 --> 0:17:59.400 have with owning tips outright, and most of these mutual 0:17:59.440 --> 0:18:02.560 funds take a lot of interest rate exposure and a 0:18:02.560 --> 0:18:05.960 lot of interest rate risk where let's say that inflation 0:18:06.000 --> 0:18:08.119 does go up to five or six percent and stays 0:18:08.119 --> 0:18:11.400 there persistently, you're not likely to see, really ye'll stay 0:18:11.440 --> 0:18:14.400 where they are. Those are likely to rise up from 0:18:14.480 --> 0:18:18.080 negative and twenty basis points to maybe negative fifty or zero, 0:18:18.480 --> 0:18:21.280 and if that happens, you wind up actually losing three 0:18:21.359 --> 0:18:23.919 or four percent on a mark to market basis. So 0:18:23.960 --> 0:18:25.760 it really depends on who you are. Like tips are 0:18:25.760 --> 0:18:28.480 a great investment and a great inflation hedge if you 0:18:28.520 --> 0:18:30.879 hold the individual bonds and you hold them to maturity. 0:18:31.200 --> 0:18:35.480 But owning mutual funds and other other rappers like that 0:18:35.840 --> 0:18:38.600 mean that you're you're always taking interest rate risk that 0:18:38.760 --> 0:18:41.840 maybe you don't really want to be taking. Um. So, 0:18:41.840 --> 0:18:43.520 so I really worry that there's a lot of people 0:18:43.520 --> 0:18:47.800 buying these products that don't really understand the underlying risks 0:18:47.840 --> 0:18:50.199 that that are inherent in that market. I or, just 0:18:50.240 --> 0:18:53.119 to put a bowl of this idea of ownership of 0:18:53.119 --> 0:18:55.720 the TIPS market by the Federal Reserve, has a TIPS 0:18:55.760 --> 0:18:59.240 market ever been more divorced from giving a true indication 0:18:59.400 --> 0:19:03.320 of inflation expectation that it is right now? Well, that's 0:19:03.320 --> 0:19:06.399 a good question, because you know, at two point three percent, 0:19:06.480 --> 0:19:09.240 which is where ten year tips or pricing inflation at 0:19:09.240 --> 0:19:12.439 the moment, it's not obvious that that that's going to 0:19:12.480 --> 0:19:16.880 be wrong. So I think that the inflation component may 0:19:16.960 --> 0:19:20.639 be actually um, suggesting that that the market is going 0:19:20.680 --> 0:19:22.600 to be right and you're gonna have two wish plus 0:19:22.720 --> 0:19:26.119 or minus twenty five basis points of inflation um. The 0:19:26.560 --> 0:19:30.040 The question is, is really yields being so low keeping 0:19:30.080 --> 0:19:32.240 nominal yields lower than they should be. You know, you 0:19:32.280 --> 0:19:34.640 look at a lot of our fair value models based 0:19:34.640 --> 0:19:37.439 on where fundamentals are, and we are twenty five to 0:19:37.560 --> 0:19:41.760 forty five basis points too low on on actual yield, 0:19:41.840 --> 0:19:44.400 So closer to one fifty seems to be a more 0:19:44.480 --> 0:19:47.240 fair value. But I think it's these flight to quality 0:19:47.240 --> 0:19:49.440 and some of these technical aspects of the of the 0:19:49.760 --> 0:19:52.399 both the tips market and the nominal market that's keeping 0:19:52.680 --> 0:19:55.160 yields as low as they are now, and those can 0:19:55.160 --> 0:19:57.000 take a long time to go away. So this isn't 0:19:57.000 --> 0:19:58.959 something that necessarily gonna snap back in the next two 0:19:59.040 --> 0:20:01.919