WEBVTT - Surveillance: Weakening Growth With LaVorgna 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 --> 0:00:30.000 dot com, and of course, on the Bloomberg terminal. Joseph 0:00:30.080 --> 0:00:32.960 Labornia joins US within taxas C. I'd be their chief 0:00:32.960 --> 0:00:35.760 economists for the America's in this public service at the 0:00:35.760 --> 0:00:38.839 White House recently, Joe Lavorgnia, I want to talk to 0:00:38.880 --> 0:00:41.680 you about the mystery of this August. The mystery in 0:00:41.720 --> 0:00:44.599 the Q four is is, well, how opake is your 0:00:44.720 --> 0:00:50.280 Q four right now? It's somewhat opake. The look the 0:00:50.280 --> 0:00:52.720 economy has done very well in the past four quarters. 0:00:52.760 --> 0:00:56.200 GDP growth has been over twelve. But I've been of 0:00:56.240 --> 0:00:58.520 the view that the economy was at peat growth around 0:00:58.600 --> 0:01:01.440 Q two and things are going moderate. But even so, Tom, 0:01:01.480 --> 0:01:03.840 I it's hard to see growth still not being really 0:01:03.960 --> 0:01:06.800 robust in the fourth quarter. I'm more worried about growth 0:01:06.800 --> 0:01:10.480 in two and that's what the US bond market and 0:01:10.480 --> 0:01:13.640 global bond markets are sensing that growth is going to weaken. 0:01:13.760 --> 0:01:18.160 Quite sharply with his bull flattening and inflation will be transitory. 0:01:18.200 --> 0:01:19.920 That's what the markets are telling us. That's what the 0:01:19.920 --> 0:01:22.360 markets are telling us. And is it a weakening back 0:01:22.440 --> 0:01:26.600 to potential GDP or let's say three percent? Me what's 0:01:26.640 --> 0:01:32.039 the level of weakening the scale you would presume this 0:01:32.120 --> 0:01:34.600 year growth WHI thought coming in we have growth seven 0:01:34.600 --> 0:01:37.040 maybe even eight percent. But next year I'm thinking growth 0:01:37.080 --> 0:01:39.960 is only two percent, maybe even less, which isn't far 0:01:40.040 --> 0:01:43.440 from the administration's longer term forecast. And that reflects the 0:01:43.440 --> 0:01:46.880 fact that we're borrowing from the future because we've had 0:01:46.880 --> 0:01:49.720 people that have been unable to spend until recently because 0:01:49.720 --> 0:01:52.720 of the pandemic, they've been locked up. They brought spending forward. 0:01:52.760 --> 0:01:55.560 We see that in goods purchases, which are about four 0:01:55.600 --> 0:01:58.720 to five points above their long term GDP trend, and 0:01:58.760 --> 0:02:01.880 it's been predominantly con sumption led consumption. In the last 0:02:02.160 --> 0:02:05.000 fourteen quarters. If you look at fourteen months rather tom 0:02:05.040 --> 0:02:07.760 from when the savings right went from thirty percent now 0:02:07.800 --> 0:02:12.000 down to nine, we've had annualiance consumption gains of real 0:02:12.520 --> 0:02:15.600 that's amazing. It's mostly in goods, So we're borrowing from 0:02:15.600 --> 0:02:17.880 the future. And that's why growth next year will slow 0:02:17.880 --> 0:02:20.280 and slow quite sharply. John. Let's take your view of 0:02:20.280 --> 0:02:22.040 the world and I'll ask you buys the question, how 0:02:22.040 --> 0:02:24.160 do you think the Federal Reserve operates in the kind 0:02:24.160 --> 0:02:28.639 of environment that you've just described. They don't do anything, Jonathan. 0:02:28.680 --> 0:02:30.920 They stay on hold, They continue to pump liquidity in 0:02:30.919 --> 0:02:33.400 the system. They don't tape or they don't tighten. What 0:02:33.400 --> 0:02:37.680 we've seen continually since those March late March early April 0:02:37.720 --> 0:02:40.720 highs and tenure yields is the market pricing the terminal 0:02:40.800 --> 0:02:43.120 rates significantly lower. That five year five year oh I 0:02:43.280 --> 0:02:46.040 s we've talked about was around two forty back in 0:02:46.320 --> 0:02:49.160 back in early April, thinking the market would basically or 0:02:49.160 --> 0:02:50.960 the FED rather with tighten rates like they did in 0:02:50.960 --> 0:02:52.960 the last cycle. And just the other day we were 0:02:53.000 --> 0:02:55.760 below one fifty. So the market thinking that Fed does nothing. 0:02:56.280 --> 0:02:58.120 My guess is we don't get it tightening until after 0:02:58.160 --> 0:03:00.880 the next presidential election. John. And then this goes right 0:03:00.919 --> 0:03:03.160 to the heart of what you mentioned before, which is 0:03:03.160 --> 0:03:07.600 a gentleman from St. Louis disagrees, just flat out disagrees 0:03:07.639 --> 0:03:10.040 with Joe. LaVar asked us the form ahead of research 0:03:10.120 --> 0:03:14.120 I'm menching for the Saint Louis FED as well on 0:03:14.120 --> 0:03:16.880 the other side of that. Try. I imagine you don't mind, 0:03:16.880 --> 0:03:20.080 not at all. You said, no tidening, no tapering. You 0:03:20.080 --> 0:03:23.960 don't think we get a taper here, Joe, that's not 0:03:24.120 --> 0:03:26.919 until we know what the contours of of a budget 0:03:26.919 --> 0:03:29.880 deal look like, because the federal treat a lack of 0:03:29.919 --> 0:03:32.720 a deal as being contractionary. And even though we're in 0:03:32.760 --> 0:03:36.080 the midst of of debating what happens on the infrastructure side, 0:03:36.080 --> 0:03:39.160 the bigger part of the packages is family welfare bill, 0:03:39.200 --> 0:03:40.960 and we're not gonna know what that looks like if 0:03:40.960 --> 0:03:43.240 we get it, and it will likely be to reconciliation 0:03:43.320 --> 0:03:47.360 until maybe mid October early November. So no, I think 0:03:47.360 --> 0:03:49.320 the Fed's gonna sit and wait and see how things evolve. 0:03:49.360 --> 0:03:51.200 And it's gonna be really hard, Jonathan, for the FED 0:03:51.320 --> 0:03:54.520 to taper in a slower growth environment, and especially if 0:03:54.920 --> 0:03:57.120 over the next few months and the job growth slows, 0:03:57.120 --> 0:04:00.280 which I expected. Fascinating at least this one't be lost 0:04:00.320 --> 0:04:03.320 on you. No tapering the other code there, no right 0:04:03.400 --> 0:04:08.280 hike until after the next election. Yes, that's why. One 0:04:08.280 --> 0:04:10.000 of the things you know that sounds aggressive but if 0:04:10.000 --> 0:04:12.119 you look at the last two cycles, the average time 0:04:12.160 --> 0:04:14.440 from the last rate cut to the first rate hike 0:04:14.480 --> 0:04:16.520 with seven years, So this isn't really that unusual if 0:04:16.520 --> 0:04:18.559 you look at the last couple of cycles. So, Joe, 0:04:18.839 --> 0:04:21.479 why are some people wrong who are saying that the 0:04:21.520 --> 0:04:25.000 balance of risks is too much higher inflation, especially with 0:04:25.040 --> 0:04:28.000 the FEDS so devish and so willing to wait. What 0:04:28.200 --> 0:04:32.280 is wrong with that call? Because it seems like you disagree. Yeah, Well, 0:04:32.320 --> 0:04:34.720 the thing is, we've never had a basically a global 0:04:34.760 --> 0:04:37.160 lockdown of the economy where we've gotten these bottlenecks, and 0:04:37.200 --> 0:04:40.080 of course demand has been much stronger than people expect 0:04:40.080 --> 0:04:42.960 that the government has provided a tremendous amount of assistance, 0:04:43.000 --> 0:04:45.520 So it's easy to see why prices are rising if 0:04:45.520 --> 0:04:48.120 there's a concern on inflation, and if I'm wrong on inflation, 0:04:48.520 --> 0:04:51.280 it's because perhaps we we just spend too much, is 0:04:51.320 --> 0:04:54.080 a sort of the Larry Summer's argument, and maybe evidence 0:04:54.120 --> 0:04:56.240 of that is seen in what the CBO next year 0:04:56.320 --> 0:04:58.800 was saying. The output gap looks like there's forecasting an 0:04:58.800 --> 0:05:01.719 output gap of all two and forty basis points, meaning 0:05:01.720 --> 0:05:04.800 the economy is two points above its long term potential 0:05:05.200 --> 0:05:07.839 that's the highest in seventy one. So it is possible 0:05:08.160 --> 0:05:11.359 if we get more fiscal stimulus, you could build this 0:05:11.440 --> 0:05:14.119 inflation dynamic in the system. But I think most people 0:05:14.200 --> 0:05:17.520 just aren't fully appreciative of the unique situation where and 0:05:17.720 --> 0:05:19.480 the fact that much of the liquidity we've had to 0:05:19.560 --> 0:05:22.479 this point has gone into assets, both equities and of 0:05:22.520 --> 0:05:25.400 course real estate. Jo I had to use the word transitory. 0:05:25.440 --> 0:05:27.840 But let's talk transitory and at what point you start 0:05:27.880 --> 0:05:30.880 to look past some of the near term influences on 0:05:30.920 --> 0:05:34.279 the economy. I'm talking about supply chain disruptions. The gentleman 0:05:34.480 --> 0:05:37.400 from St. Louis, as Tom said, was highlighting this is 0:05:37.480 --> 0:05:40.880 one feature that forces monetary policy makers to be more nimble. 0:05:41.200 --> 0:05:43.839 How do you factor in some of these disruptions that 0:05:43.920 --> 0:05:48.520 seem overly persistent and persisting longer than many people had expected. Yeah, 0:05:48.520 --> 0:05:50.480 I would just say I would just give it time. 0:05:50.520 --> 0:05:52.560 I mean the thing as we saw with lumber, for example, 0:05:52.600 --> 0:05:55.120 which was the poster child for bottlenecks, where prices have 0:05:55.200 --> 0:05:58.760 basically collapsed as the mills were able to reopen. And 0:05:58.760 --> 0:06:00.320 I've argued we're going to see that more on the 0:06:00.360 --> 0:06:03.120 semiconductor side and other parts of the economy. It just 0:06:03.240 --> 0:06:06.719 needs to take time. The expectation side, if it's important, 0:06:06.760 --> 0:06:08.080 and we look at and when we look at the 0:06:08.080 --> 0:06:11.159 tips curve, that tips curve is actually inverted. So it's 0:06:11.160 --> 0:06:13.400 not saying the markets are always right. There's just no 0:06:13.480 --> 0:06:17.640 evidence that anybody believes this is permanent. And because expectations 0:06:17.680 --> 0:06:21.080 oftentimes can be self feeding and self sustaining. Uh, those 0:06:21.120 --> 0:06:24.960 expectations are very likely to keep inflation low and then 0:06:25.040 --> 0:06:28.640 as supply comes on, you'll start to see those prices moderate. Joe, 0:06:28.720 --> 0:06:32.520 None of this is in the economic textbooks, Advass. This 0:06:32.600 --> 0:06:37.080 is all absolutely original that we're dealing with right now. 0:06:37.279 --> 0:06:40.200 How do you interpret the real yield? Are you looking 0:06:40.279 --> 0:06:44.320 at the nominal rate? Are you taking out the inflation expectation? 0:06:44.400 --> 0:06:49.880 Which of those two dynamics will adjust the real yield? Well, this, 0:06:50.240 --> 0:06:52.400 I would say, just focus on the real yield. The 0:06:52.440 --> 0:06:56.400 real yield has been falling as inflation expectations have edged 0:06:56.480 --> 0:06:59.000 up of it, and that sort of evidence tom right there. 0:06:59.080 --> 0:07:02.000 The market does not believe that you're gonna have very 0:07:02.080 --> 0:07:04.640 very strong growth going forward. It's the I hate to 0:07:04.640 --> 0:07:07.960 say these words, but it's the secular stagnation thesis. That's 0:07:07.960 --> 0:07:09.880 really what the market saying, and you see it more 0:07:09.920 --> 0:07:11.840 broadly just in the slope of the curve, as you 0:07:11.920 --> 0:07:14.880 highlighted both in the US and Germany and elsewhere, you've 0:07:14.920 --> 0:07:17.120 got a bull flattening of the yield curve. So that's 0:07:17.120 --> 0:07:19.680 really not an inflation story. It's a growth story. And 0:07:19.720 --> 0:07:21.920 of course equities benefit from the fact that there aren't 0:07:21.920 --> 0:07:24.720 any alternatives, and it's a tremendous amount of liquidity in 0:07:24.760 --> 0:07:28.840 the market. Jo fantastic to catch up some really interesting things. 0:07:29.720 --> 0:07:31.560 Really gets ahead from you said that takes a c 0:07:31.720 --> 0:07:40.880 I being chief economists for the Americans joining us now 0:07:40.920 --> 0:07:43.160 on the Dow Jones Industrial average of Michael Holland with 0:07:43.240 --> 0:07:46.040 Holland and Company and their chairman, knowing that the standard 0:07:46.080 --> 0:07:50.200 force is more indicative of what's going on Michael Holland. 0:07:50.200 --> 0:07:52.160 I want to ask you lu U Kaiser question, and 0:07:52.240 --> 0:07:55.040 I say this with great respect to the sweat of 0:07:55.080 --> 0:07:59.040 Wall Street week years and years ago when fear was ascended. 0:07:59.600 --> 0:08:03.720 The way we saw fear in our equity ownership is 0:08:03.760 --> 0:08:08.800 to extrapolate out what successful companies do. How far out 0:08:08.880 --> 0:08:12.760 are you extrapolating right now on the companies you believe 0:08:12.760 --> 0:08:17.720 it are you out six months? Are you out six years? 0:08:17.760 --> 0:08:20.240 More like the years than the months time. But I 0:08:20.280 --> 0:08:23.520 think there are fewer and fewer companies that one can 0:08:24.400 --> 0:08:26.960 zero in on and say I think this is worth 0:08:27.120 --> 0:08:30.760 the risk of losing money because the potential for the 0:08:30.840 --> 0:08:36.160 upside is so significant. There is enough cacophony around about 0:08:36.480 --> 0:08:41.920 the economy, the FED, China, COVID and on that companies 0:08:42.040 --> 0:08:44.880 like Tyson what you were just talking about are indicating 0:08:44.920 --> 0:08:47.640 the world continues to change under our feet. Yet in 0:08:47.679 --> 0:08:51.560 the markets, because of the the tsunami of cash that 0:08:51.679 --> 0:08:55.120 has come over the markets over the best few years, 0:08:55.440 --> 0:08:59.360 we have pricing that we've lost price discovery, we've lost 0:08:59.400 --> 0:09:02.079 a real rate of return to use, free rates of 0:09:02.160 --> 0:09:05.760 return to use for econometric modeling. So the fet is flying, 0:09:05.840 --> 0:09:08.520 it's flying, is the rest of us? Interesting to me? Michael, 0:09:08.520 --> 0:09:11.280 how willing investors seem to be just isolated problem a 0:09:11.320 --> 0:09:13.520 problem emerges, they can put it over there to one 0:09:13.559 --> 0:09:15.240 side and say it won't bother us too much. And 0:09:15.280 --> 0:09:17.680 a great example of this you mentioned China. This is 0:09:17.679 --> 0:09:19.280 what Dan Ives of wet Bush had to say. My 0:09:19.320 --> 0:09:21.520 producer Jamie Ping this across to me in the last 0:09:21.520 --> 0:09:23.760 couple of minutes. This is what Dan I've says. We 0:09:23.840 --> 0:09:26.240 believe these dynamics will yet again bode well for US 0:09:26.280 --> 0:09:29.000 tech stocks, as the favorable backdrop and rotation away from 0:09:29.080 --> 0:09:33.280 Chinese tag into US tech creates an avana set up. So, Mike, 0:09:33.320 --> 0:09:35.240 we used to say a couple of years ago, what 0:09:35.400 --> 0:09:37.439 hurts some would hurt everyone because we're all buying the 0:09:37.480 --> 0:09:40.000 same basket of goods. Now we've got people saying, what 0:09:40.080 --> 0:09:43.280 hurts China will actually benefit US Tech. Let's rotate even 0:09:43.320 --> 0:09:45.240 harder into them. What do you make of that dynamic? 0:09:45.920 --> 0:09:49.560 Either dynamic is reflective of the market that has gone 0:09:49.559 --> 0:09:54.160 a negorably upward, Johnathan over the last several years. And 0:09:54.480 --> 0:09:58.439 I think the looking for the positive outcome is something 0:09:58.520 --> 0:10:00.520 that I'm always prepared to do. And in the case 0:10:00.559 --> 0:10:03.760 of China, I think, uh, it would be a fool 0:10:03.840 --> 0:10:07.000 there and to to ignore what's going on. They're a 0:10:07.000 --> 0:10:11.320 wonderful piece in Bloomberg Intelligence yesterday on the ternal about 0:10:11.880 --> 0:10:15.240 the thing that's different about China today in contrast to 0:10:15.280 --> 0:10:18.160 the last forty years and most of which I spent 0:10:18.280 --> 0:10:21.640 going over there, is that they now remember that their communists. 0:10:21.960 --> 0:10:24.520 And when they remember their communists, you end up with 0:10:24.600 --> 0:10:27.560 a situation where you're not doing things as as they've 0:10:27.600 --> 0:10:30.600 been doing for the last which which created Ali Baba, 0:10:30.720 --> 0:10:34.040 which created the opportunity for people make tons of money, 0:10:34.200 --> 0:10:37.600 but now are now becoming political and warrior like. So 0:10:37.720 --> 0:10:40.880 Michael folded into an investment thesis. If price discovery has 0:10:40.920 --> 0:10:45.080 gone away, if we have China that matters more broadly, 0:10:45.600 --> 0:10:49.080 what are you doing right now? Being very careful and 0:10:49.480 --> 0:10:52.880 Lisa and and actually we've we've kidded before about the 0:10:52.920 --> 0:10:56.600 all Weather portfolio. But I think the as you the 0:10:56.679 --> 0:11:00.720 three of you opine daily, they're things that don't make 0:11:00.720 --> 0:11:03.400 a lot of sense, can't be explained in terms of 0:11:03.400 --> 0:11:07.000 where prices are. You have a five percent earnings yield 0:11:06.840 --> 0:11:10.320 the flip of the reciprocal of the price earnings on 0:11:10.360 --> 0:11:12.960 the markets in the US, and less than a two 0:11:13.000 --> 0:11:16.120 percent ten year treasury with inflation looking like it's going 0:11:16.160 --> 0:11:18.880 to be sticky. It's somewhere around four to five to six, 0:11:18.920 --> 0:11:21.160 and or maybe two to three to four. But these 0:11:21.200 --> 0:11:24.120 things don't make sense. So what what what I do 0:11:24.200 --> 0:11:28.920 is try to identify properties that are useful. Tom asked 0:11:28.920 --> 0:11:31.920 the question about weeks and months or Jonathan as well, Um, 0:11:32.720 --> 0:11:36.640 you buy properties. I would say that the companies like 0:11:36.880 --> 0:11:39.040 General Motors, which I've been looking at recently in the 0:11:39.120 --> 0:11:41.560 last several months, I have have a plethora of things 0:11:41.600 --> 0:11:45.400 that could could go right, but evaluation that doesn't reflect 0:11:45.400 --> 0:11:48.439 the overall markets, so the risk, but there are fewer 0:11:48.440 --> 0:11:51.600 of those. They're just it's hard to do. Michael Holan, 0:11:51.720 --> 0:11:55.319 do you do some of the parts analysis on companies 0:11:55.360 --> 0:11:59.520 that have different sections they're not lying tempko vote? Michael, you, 0:11:59.520 --> 0:12:02.120 you and I are the only ones listening for watching 0:12:02.240 --> 0:12:04.560 that no what l t V is. But if they're 0:12:04.559 --> 0:12:07.400 not linked Tempo vote, do you still do some of 0:12:07.400 --> 0:12:10.640 the parts, say on Amazon, Apple or some stock. I 0:12:10.679 --> 0:12:15.559 don't know absolutely. It's it's interesting that you even have 0:12:15.679 --> 0:12:19.120 to ask the question, because that's what value is. If 0:12:19.640 --> 0:12:21.080 the three of us and the four of us, I 0:12:21.080 --> 0:12:23.600 should say, we're looking at something to buy in the 0:12:23.679 --> 0:12:26.559 in the private market, we look at what is it worth? 0:12:26.840 --> 0:12:29.040 What are we willing to pay for it? And and 0:12:29.040 --> 0:12:32.360 in the public market people have gone away from do 0:12:32.480 --> 0:12:36.600 we just which you describe. Jimmy Ling and the LTV 0:12:36.679 --> 0:12:38.800 crowd figured figure that out a long time ago. That 0:12:39.600 --> 0:12:42.560 but prices were so low back then in a lot 0:12:42.559 --> 0:12:45.160 of cases that you could find out that if you 0:12:45.240 --> 0:12:47.559 look at you listening to as genteral motors today, if 0:12:47.559 --> 0:12:51.920 you look at the the uh, the different kinds of 0:12:51.920 --> 0:12:56.560 businesses they're in um in technology, any individual one of 0:12:56.600 --> 0:12:58.679 those a few years from now could be worth a 0:12:58.840 --> 0:13:01.920 gazilla amount of money. But they're trying to do that 0:13:01.960 --> 0:13:05.280 to further the businesses. But but yes, uh, you do 0:13:05.400 --> 0:13:10.280 still have companies like General Morris that afford that opportunity 0:13:10.320 --> 0:13:12.319 to look at maybe they're some of the parts it's 0:13:12.360 --> 0:13:15.280 really worth a lot more than what the market's paying 0:13:15.280 --> 0:13:17.480 for them. But not too many of them anymore. Micro 0:13:17.640 --> 0:13:19.600 legend and it's always great a cant shop. We appreciate 0:13:19.600 --> 0:13:28.000 your time, Michael Holling that Holland and Couch chairman and 0:13:28.040 --> 0:13:30.680 I have joined us now whilst founder Security is equity strategist, 0:13:30.679 --> 0:13:32.280 So and let's talk about that. What does it mean 0:13:32.280 --> 0:13:35.480 for an equity investor the incoming economic data at the moment, 0:13:37.120 --> 0:13:38.840 I think what it means for us is that it 0:13:38.880 --> 0:13:41.560 can be interpreted sort of how you want to see 0:13:41.600 --> 0:13:43.760 the picture in the eye of the beholder. What I 0:13:43.800 --> 0:13:46.040 mean by that is that sometimes you look at the 0:13:46.080 --> 0:13:49.760 economic data, you can be really concerned it's growth slowing down. 0:13:49.880 --> 0:13:54.360 Is the amplitude of future economic GDP growth slowing down? 0:13:54.440 --> 0:13:57.760 Will that extend the cycle? And in that case is 0:13:57.800 --> 0:14:00.920 that of concern? And why it? Maybe yields are pulling 0:14:00.960 --> 0:14:05.040 back because people have a concern about whether full employment 0:14:05.240 --> 0:14:07.680 can be reached sooner. On the other hand, there are 0:14:07.720 --> 0:14:10.400 a lot of still bright spots in that economic data 0:14:10.640 --> 0:14:13.840 that support this reflation trade. I think it depends which 0:14:13.840 --> 0:14:17.560 camp you're in. And your research note is fascinating and 0:14:17.600 --> 0:14:20.040 its physics where you talk about amplitude, I want to 0:14:20.080 --> 0:14:23.520 take it over to an even larger idea of magnitude 0:14:23.640 --> 0:14:26.400 for the bulls out there in the equity market. What 0:14:26.520 --> 0:14:30.400 are the magnitudes that get you out to the emotion 0:14:30.480 --> 0:14:33.480 of sp X five thousand or the emotion of DALT 0:14:33.520 --> 0:14:38.240 forty thousand. You know, those are big, beautiful round numbers, Tom, 0:14:38.320 --> 0:14:41.360 and people love those shiny numbers. I think to get there, 0:14:41.360 --> 0:14:44.440 what you really need to see maybe two fronts. One 0:14:44.480 --> 0:14:47.280 is that when you have these kind of yields retreating, 0:14:47.800 --> 0:14:50.560 you see this kind of natural effect for a discounting 0:14:50.560 --> 0:14:53.680 model for equity growth, for equity earnings. But on the 0:14:53.720 --> 0:14:56.320 other hand, that comes with this sort of ominous side 0:14:56.320 --> 0:14:59.400 of book growth is slowing down? Is it sustainable? But 0:14:59.520 --> 0:15:02.720 to get that yield, people may be reaching into equities 0:15:02.880 --> 0:15:05.280 on the other hand, to really push equities. And I 0:15:05.280 --> 0:15:09.920 think what's been driving it more recently is expectations and estimates. 0:15:10.160 --> 0:15:13.600 As we've gone through earning season, you've seeing corporates very 0:15:13.680 --> 0:15:17.680 focused on what do these input costs mean from my margins? 0:15:17.760 --> 0:15:20.280 And for the companies that are able to pass along 0:15:20.320 --> 0:15:23.600 that price and those margins can remain fat, then you 0:15:23.720 --> 0:15:26.920 see that they're able to continue seeing some price appreciation. 0:15:27.240 --> 0:15:30.640 I think it's that upward expectation and estimate revisions that 0:15:30.680 --> 0:15:33.280 we're really keeping an eye on to get there and specifically, 0:15:33.280 --> 0:15:34.680 just to dig in a little bit more. Anna, you 0:15:34.760 --> 0:15:37.600 noted in your recent research the earnings estimate revisions continue 0:15:37.600 --> 0:15:41.080 to entire, especially for value sectors. So why is this 0:15:41.160 --> 0:15:44.160 not being reflected in our performance of these particular areas 0:15:44.160 --> 0:15:46.400 where you see growth surge ahead over the past month 0:15:46.480 --> 0:15:50.600 or so, I think growth surgeons recently has been a 0:15:50.600 --> 0:15:53.920 bit of that move in nominal yield. And what's interesting 0:15:54.040 --> 0:15:56.880 is that nominal yield move has been driven by real yields, 0:15:56.880 --> 0:16:00.640 but the inflation expectation baked in at least the tenure 0:16:00.840 --> 0:16:04.400 has remained more rather steady, So you see this growth 0:16:04.480 --> 0:16:07.520 trade has had resurgence and zeals pulled back. The question 0:16:07.600 --> 0:16:11.360 for these value stocks is is this reflation going to 0:16:11.400 --> 0:16:14.440 be a concern? And that uncertainty I think still weighs 0:16:14.440 --> 0:16:16.960 on it, that additional risk premium that you have to 0:16:17.040 --> 0:16:19.760 bag in. But when you look at estimates, you're right, 0:16:20.000 --> 0:16:24.479 these value sectors are really what's pushing the estimate revisions. 0:16:24.520 --> 0:16:27.760 And if that continues, and if that expectations or these 0:16:27.800 --> 0:16:31.840 revisions can continue outpacing what investors want out of it, 0:16:32.040 --> 0:16:35.480 I think you will see that eventual appreciation later down 0:16:35.520 --> 0:16:38.080 the road. And what leads to the downdraft you entertain 0:16:38.160 --> 0:16:40.960 With Chris Harby looking for thirty eight fifty on SMP, 0:16:41.160 --> 0:16:44.240 we've had the forty seven view just about an hour ago. 0:16:44.480 --> 0:16:47.960 What's the thirty eight fifty view. Well, if you remember 0:16:48.040 --> 0:16:50.680 us coming into the year, we talked about low volatility 0:16:50.720 --> 0:16:54.080 and defensive strategies come summer, and look what's happened in 0:16:54.080 --> 0:16:57.680 the recent month. We recommended a tactical pivot into low 0:16:57.760 --> 0:17:01.240 volatility strategy in the style because a pullback in yield 0:17:01.440 --> 0:17:04.400 could cause some of that volatility, and for us right now, 0:17:04.760 --> 0:17:08.080 it's not that necessarily our longer term view on reflation 0:17:08.160 --> 0:17:11.840 has yet changed, but we like to say be careful 0:17:12.080 --> 0:17:15.679 of perception becoming reality. Once the market really starts to 0:17:15.760 --> 0:17:19.760 doubt the potential for reflation, the potential for growth, that 0:17:19.800 --> 0:17:22.120 can kind of spiral out of control. So for us, 0:17:22.359 --> 0:17:25.639 the reason we remain cautious is that we're seeing signs 0:17:25.640 --> 0:17:28.359 of concern and that can really have a sort of 0:17:28.600 --> 0:17:32.200 uh negative and spreading effect amongst investors. So it keeps 0:17:32.240 --> 0:17:34.240 us a little bit more cautious than on our toes 0:17:34.359 --> 0:17:37.200 earlier this year, and we were pointing to retail investors 0:17:37.240 --> 0:17:40.439 is the potential swing trader when it came to certain 0:17:40.440 --> 0:17:43.199 big moves in equity markets. Are they still players or 0:17:43.200 --> 0:17:45.240 have they all gone back to taking vacations and not 0:17:45.320 --> 0:17:48.760 dealing with the robin hood accounts? Well, I think they 0:17:48.760 --> 0:17:51.240 are definitely still a player, and they may be even 0:17:51.320 --> 0:17:55.040 growing as we go several years forward. However, for now, 0:17:55.160 --> 0:17:57.000 I think a lot of the flows you're seeing, and 0:17:57.040 --> 0:17:59.600 that's been dominating more on the fixed income markets has 0:17:59.680 --> 0:18:03.000 been our institutional side has been your bigger fishes or 0:18:03.000 --> 0:18:06.000 whales in the ocean here. But when you look at equities, 0:18:06.280 --> 0:18:08.960 a lot of this sort of risk taking, a risk 0:18:09.320 --> 0:18:13.480 um seeking was pulled back last month given the additional 0:18:13.520 --> 0:18:16.720 concern about potential for full employment to be a bit 0:18:16.800 --> 0:18:19.639 further down the road, and as at risk appetite wanes. 0:18:19.720 --> 0:18:22.320 I think you may see the retail crowdbe a little 0:18:22.400 --> 0:18:24.760 quieter and maybe be a little may sit down a 0:18:24.840 --> 0:18:27.040 little bit in the stands and it gets to catch up. 0:18:27.160 --> 0:18:28.800 Always good to hear from you and I hand there 0:18:28.840 --> 0:18:32.040 of wilst Fargo's equity strategist with Chris Harvey, and that's 0:18:32.040 --> 0:18:40.200 saying this is an important conversation and it may surprise 0:18:40.240 --> 0:18:43.040 you that it's our conversation of the day. We're trying 0:18:43.080 --> 0:18:47.199 to recalibrate equities and economics into the litmus paper of 0:18:47.200 --> 0:18:50.080 the system, which is yield. And John Farrell, you've talked 0:18:50.119 --> 0:18:54.320 about global yields as being as important in their interdependencies 0:18:54.640 --> 0:18:57.440 as the US tenure benchmark. Yeah, let's get some part 0:18:57.440 --> 0:18:59.760 of Gavy on that song. Hanji had a global jet 0:18:59.760 --> 0:19:02.639 and strategy part. Oh, let's talk about ten year year 0:19:02.640 --> 0:19:04.719 old so they shouldn't be down here in the treasury market. 0:19:05.080 --> 0:19:07.840 Then you look to Germany, and yesterday the whole curve 0:19:08.560 --> 0:19:11.880 below zero, beneath zero. Part of how important is that dynamic, 0:19:11.880 --> 0:19:16.760 the European dynamic, that gravitational pull yield to lower. Oh, 0:19:16.760 --> 0:19:19.560 it's absolutely vital, it's it's it's I mean, this is 0:19:19.680 --> 0:19:23.240 an incredible set of circumstances. But you can't get away 0:19:23.240 --> 0:19:26.840 from the fact that the treasure yield is the global bounchmark. 0:19:27.119 --> 0:19:29.399 And as we're sitting here today, we're looking at that 0:19:29.480 --> 0:19:32.800 tenuere heading towards and towards one was sent. And I 0:19:32.800 --> 0:19:35.440 think the big lesson here for Europe is and Europe 0:19:36.160 --> 0:19:41.080 never really recovered from the global financial crisis as measured 0:19:41.080 --> 0:19:44.560 by monetary policy. I mean, it's just still negative. Jewey 0:19:44.840 --> 0:19:47.720 is as aggressive as it's ever been. The only hole 0:19:47.840 --> 0:19:51.639 for Europe is that the US manages to repeat what 0:19:51.760 --> 0:19:56.720 it did post the Great Financial Crisis. Stop buying government bonds, 0:19:57.440 --> 0:20:01.360 raise rates, get back to suns some elements of normality. 0:20:01.440 --> 0:20:03.840 Is what I see in Europe is a loss of 0:20:03.880 --> 0:20:07.320 hope because if the US can't do us, how can 0:20:07.400 --> 0:20:09.800 your do what I haven't done it before? A loss 0:20:09.800 --> 0:20:12.200 of hope? And is that the message from the sixteen 0:20:12.240 --> 0:20:15.400 point five trillion dollars of negative yielding debt, the highest 0:20:15.480 --> 0:20:19.600 volume globally since February. Is this representing a loss of hope? 0:20:22.480 --> 0:20:24.640 You know what, You've got to break this out as 0:20:24.640 --> 0:20:28.520 to whether the market discount is telling us something about 0:20:28.520 --> 0:20:31.640 the future or whether the market is being pushed there 0:20:31.720 --> 0:20:34.920 by an excess demand for fixed income. And I think 0:20:34.920 --> 0:20:36.840 it's a bit of both. In a sense, there is 0:20:36.880 --> 0:20:38.919 a loss of hope because we've got to accept that 0:20:39.000 --> 0:20:42.399 the marketplace, the bond market, is a discount function. But 0:20:42.560 --> 0:20:46.000 at the same time, we know center banks are huge 0:20:46.000 --> 0:20:49.199 buyers of government bonds, persistent virus of government bonds, and 0:20:49.280 --> 0:20:53.960 that's a major catalyst behind this fallen yields. Everybody wants 0:20:54.000 --> 0:20:56.400 to be on the same side as a center bank, 0:20:56.440 --> 0:20:59.320 and as long as central banks are buying bonds, that's 0:20:59.359 --> 0:21:02.040 the side want to be on. Hence we find ourselves 0:21:02.080 --> 0:21:07.879 in this incredible situation, very deviant from where microcircumstances are park. 0:21:08.480 --> 0:21:10.720 You know, we're all talking yield here, but this is 0:21:10.720 --> 0:21:13.480 a time where I flipped a price and the answer 0:21:13.560 --> 0:21:17.280 is there's a massive bid on all this paper. Is 0:21:17.320 --> 0:21:21.359 it similar to two thousand five, in two thousand six, 0:21:21.720 --> 0:21:25.359 or there a different character to the bid, the insatiable 0:21:25.400 --> 0:21:30.560 desire to move price up on fixed income. There's a 0:21:30.600 --> 0:21:33.200 whole series of players out there tomb that are buying 0:21:33.280 --> 0:21:36.840 fixed income. And you know it's not just guys buying bombs, 0:21:36.840 --> 0:21:39.840