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Speaker 1: Let's got the James Abatte, managing director and chief investment

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Speaker 1: officer at Center Asset Management. So we mentioned that the

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Speaker 1: Jolts survey was pretty frisky, James, but the prices paid

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Speaker 1: component in the I s M was was way down.

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Speaker 1: So I guess the main takeaway is the same. It's

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Speaker 1: a solid economy. And a question could be, then is

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Speaker 1: there enough momentum in inflation coming down to to cheer

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Speaker 1: the bulls or is it is it time for the

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Speaker 1: bearers to to continue to reign supreme. You know, it's

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Speaker 1: a little too early to tell. I mean, as you

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Speaker 1: point out, you know, the I s M Index, which

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Speaker 1: is to the stock market as important as the Department

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Speaker 1: of Labor's monthly payroll number is to the bond market.

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Speaker 1: It's literally the most important top down indicator. So the

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Speaker 1: manufacturing index came in at fifty point zero two, which

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Speaker 1: means we're literally catering on recession, but the directional momentum

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Speaker 1: is still down, and you know, from that perspective, I think,

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Speaker 1: you know, we have to egency. But as you said,

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Speaker 1: the saving grace and that was that the inflation index

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Speaker 1: was below fifty, giving some indication, but that tends to

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Speaker 1: be more geared towards producer prices rather than consumer prices.

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Speaker 1: And unfortunately, what we've seen lately is a sharp increase

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Speaker 1: in services inflation, and I think a lot of it

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Speaker 1: has to do with significant decline in productivity that was

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Speaker 1: witnessed James the ultimately we were not getting huge wage increases.

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Speaker 1: You know, that's is a fact from the data that

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Speaker 1: we've been looking at. And that would also then mean

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Speaker 1: that perhaps what inflation is doing at the moment is

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Speaker 1: perhaps I want to use those words transitory. It's not

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Speaker 1: as not as actually deeply as embedded, and it has

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Speaker 1: not as much momentum as people are looking at with

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Speaker 1: the policy response that we have, oh well, with the

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Speaker 1: fact that productivity falling so rapidly. Let's not forget that

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Speaker 1: the latest reading was minus four. That's the lowest number

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Speaker 1: we've seen in seventy years. Um. So from perspective, when

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Speaker 1: you think about what the FED has to do, you know,

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Speaker 1: there's never been an environment really when the FED is

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Speaker 1: raised interest rates. We've brought on a recession where productivity

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Speaker 1: didn't go up. Companies have taken the steps to right

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Speaker 1: size their operations. You know, we're in a very sticky

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Speaker 1: place here, and I think actually stagflation is the more

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Speaker 1: likely outcome here. The bears have had the wind in

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Speaker 1: their sales this year and probably feeling pretty smug. But

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Speaker 1: since June the SMP is actually a little bit higher.

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Speaker 1: UM So I suppose the question is what is this

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Speaker 1: transition to next? Yeah, that's that's that's the million dollar question, right.

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Speaker 1: So bear markets have three stages. There's usually that sharp

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Speaker 1: down effect, which was the d rating that we experienced

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Speaker 1: in the first half of the year. You get a

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Speaker 1: reflective rebound, which we enjoyed over the summer months. But

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Speaker 1: then if you have a bear market, you have a

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Speaker 1: drawn out fundamental down. Yea. So it seems like we're

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Speaker 1: we'll have to continue in a moment James almost treading

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Speaker 1: a lot at the moment, James Abatte from Center Asset Management,

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Speaker 1: up against the clock, James, you know we've been talking

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Speaker 1: about the day to that jold state that we're talking

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Speaker 1: about some of the other Um. I suppose fasts affecting

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Speaker 1: what's going on in the economy, but tepically, how do

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Speaker 1: you see things panning out? Because we left on a

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Speaker 1: note where you use the s word stagflation, The reason

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Speaker 1: why I use stagflation is that I think one of

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Speaker 1: the things that is a problem right now with most

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Speaker 1: analysts is that they suffer from recency bias, meaning that

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Speaker 1: they're still looking at the two thousand eight two thousand

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Speaker 1: nine global real estate and financial crisis rather than dot

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Speaker 1: com bus is a you know, a good analog. I

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Speaker 1: think what people have to remember is that the important

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Speaker 1: distinguishing characteristic of that O eight oh nine period that's

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Speaker 1: overlooked by most in the financial and analysts and media

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Speaker 1: world is that the misallocation of capital back then leading

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Speaker 1: to that crisis was not confined just to real estate

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Speaker 1: and excessive balance sheet leverage at the financial sector, but

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Speaker 1: also who included the energy and resources industries that underwent,

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Speaker 1: you know, an excessive period of investment to feed the

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Speaker 1: growing industrialization of China in the mid two thousands. You know,

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Speaker 1: right now we have a misalignment of capital spending cycle

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Speaker 1: with the stock market or consumer business cycle, meaning that

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Speaker 1: my fear is that the wholesale destruction that we may

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Speaker 1: see from the wealth effective cycle will be as intense

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Speaker 1: as it was during the dot com bust, but the

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Speaker 1: inflationary declines that emanated from the excessive tangible capacity that

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Speaker 1: came online proceeding the two thousand two thousand nine recession

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Speaker 1: and the energy and resources industries is not evident today,

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Speaker 1: so it's not going to provide the disinflationary benefits to

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Speaker 1: interest rates. Yeah. So, I mean it feeds into what

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Speaker 1: what is the biggest unintended consequence from this most recent dislocation,

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Speaker 1: you know, from this relocation is that we stay in

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Speaker 1: an environment where pricing become the dominant variable, you know,

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Speaker 1: in the marketplace, and almost we go back to a

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Speaker 1: period of time where in the worst case scenario, if

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Speaker 1: you think about the price to earnings multiple being kind

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Speaker 1: of a inverse relationship of you know, interest rates and risk,

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Speaker 1: you have an environment where interest rates stay high and

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Speaker 1: continue to basically reflect that higher inflation, but also you

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Speaker 1: get people's risk appetites declining, so you get a compounding effect,

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Speaker 1: which means the PE multiple continues to fall in the SMP. Yeah,

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Speaker 1: I mean, we see you're looking more at I suppose

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Speaker 1: at the end of the day, the the e if

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Speaker 1: earning is fool, but you know, what did you make

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Speaker 1: of the earning season thus far? Then you know that's

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Speaker 1: exactly the point and our thesis going into the year

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Speaker 1: was that basically you're can have a broad D rating

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Speaker 1: in stock. So what you wanted to do is find

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Speaker 1: companies that could generate high earnings growth and that's why

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Speaker 1: you've seen energy. Um you know, the EPs growth rate

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Speaker 1: and energy I think was like eighty or some out percent,

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Speaker 1: but that had offset a ten percent decline in the

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Speaker 1: PE multiple even for the energy sector. So when you

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Speaker 1: look at the smp F I've ventured as a whole,

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Speaker 1: you know, if you look at the total return year

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Speaker 1: to date, you know about it as a decline in

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Speaker 1: the PE multiple with just about four percent of it

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Speaker 1: being positive EPs growth. But most of that came from

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Speaker 1: you know, energy, staples and utilities, nowhere else really, So

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Speaker 1: so the problem for the average investor is that even

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Speaker 1: even if they thought, well, okay, if that's the case,

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Speaker 1: then I can go to the bond market and have

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Speaker 1: a mix of corporates and UH and sovereigns. But you're

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Speaker 1: saying that inflation will stay high. So that's going to

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Speaker 1: erode those yields. Yeah, absolutely, because I mean people again

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Speaker 1: with the recency bias, this inverse correlation that exists between

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Speaker 1: stocks and bonds has only been the case, and you

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Speaker 1: know in evidence since two thousand and two, you know,

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Speaker 1: prior to that and for the majority of the past

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Speaker 1: one years, stocks and bonds moved together based upon inflation.

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Speaker 1: So I think when you look at the where we

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Speaker 1: are today, you know, the problem is people look at

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Speaker 1: price momentum and trend following is the deal and end all.

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Speaker 1: But when you look at long term perspectives of history,

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Speaker 1: you know, the big money is usually made when you

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Speaker 1: can anticipate regime changes. And we're in the midst of

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Speaker 1: that regime change that you know started this past year.

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Speaker 1: Uh well, just so what do you do then, I mean,

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Speaker 1: that's the final question, it's the big one. Well, let's

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Speaker 1: just let's let's just look at the stock market. Right.

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Speaker 1: Everybody's talking about how great the tao had a month

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Speaker 1: in October, right, it was the best months since nineteen

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Speaker 1: seventy six. You know, the problem is if you look

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Speaker 1: in nineteen seventy seven, it was a terrible year for

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Speaker 1: the markets and the SMP felt you know, seven out

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Speaker 1: of the first ten months of the year ended with

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Speaker 1: a loss. Um. You know, that's had small caps did

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Speaker 1: very well. So I think doing the underestimate the ability

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Speaker 1: of stock picking, sector rotation and other things, but basically

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Speaker 1: try to limit your market your market risk at least

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Speaker 1: a positive a positive finish up there, James, thank you

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Speaker 1: so much. Always always a pleasure, James about it. The

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Speaker 1: Managing Director, Chief Investment Officite Center Asset Management