WEBVTT - Surveillance: Growth Acceleration with Dutta 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brawmowitz Jay Lee. We bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.840 dot Com, and of course on the Bloomberg terminal. Now 0:00:29.960 --> 0:00:32.040 you've looked at the same economics, I tea thoughts what 0:00:32.040 --> 0:00:34.479 you're saying on the blame bag. Well, I mean, one 0:00:34.479 --> 0:00:37.199 of the reasons why inventories fell in October, for at 0:00:37.200 --> 0:00:40.520 the retail level, is because we had a absolute blowout 0:00:40.600 --> 0:00:43.800 in retail sales. So think about what the inventory to 0:00:43.840 --> 0:00:46.199 sales ratio is looking like in the retail sector. I'm 0:00:46.240 --> 0:00:48.960 guessing lower. So I guess you know. One of the 0:00:48.960 --> 0:00:52.239 ways that a recession works is through some element of surprise. 0:00:52.520 --> 0:00:55.400 Companies think that things will be okay. Then something bad happens. 0:00:55.400 --> 0:00:58.040 They have to clear out inventories and they're hiring and 0:00:58.440 --> 0:01:01.160 adjust their capex plans and so forth. But what if 0:01:01.280 --> 0:01:03.880 the what if the process works in reverse? What if 0:01:03.880 --> 0:01:07.520 company We've been talking about recession what since June of 0:01:07.600 --> 0:01:11.600 this year and companies have been adjusting to some extent. 0:01:11.640 --> 0:01:14.800 I mean, inventories have been being paired back, capex has 0:01:14.840 --> 0:01:20.080 been slaming somewhat um and what if they're surprised the 0:01:20.120 --> 0:01:22.640 other way? Now, what if growth is accelerating and the 0:01:22.680 --> 0:01:25.120 recession they anticipated didn't happen. So let's get a teeth 0:01:25.160 --> 0:01:27.399 into twenty three. What we're really discussing here is what 0:01:27.520 --> 0:01:29.440 is wrong about a consensus. Deutsche Bank came out a 0:01:29.440 --> 0:01:31.120 little bit earlier this morning. I'll share this quote with 0:01:31.120 --> 0:01:33.080 everyone who might have missed it a little bit earlier. 0:01:33.200 --> 0:01:35.600 It's worth remembering that exactly a year ago, markets were 0:01:35.640 --> 0:01:38.559 pricing a fat funds rate of zero point six eight percent. 0:01:38.560 --> 0:01:41.000 By the end of twenty two, economists had CPI at 0:01:41.000 --> 0:01:43.960 two point six percent. Given the huge forecasting miss over 0:01:44.000 --> 0:01:46.720 the last twelve months, it's remarkable how settled the consensus 0:01:46.880 --> 0:01:51.040 is around a terminal rate of five percent. Their question, 0:01:51.160 --> 0:01:53.920 I think, is your question? Should we be questioning five 0:01:54.680 --> 0:01:57.520 a whole lot more? Yeah? I think there is reskewed 0:01:57.560 --> 0:01:59.560 to the upside. I mean, when Chair Powell tells you 0:01:59.640 --> 0:02:03.240 that doesn't know what the path for rates will be, 0:02:03.320 --> 0:02:04.960 he just knows that it will be enough. I think 0:02:04.960 --> 0:02:06.480 you have to take that as a signal that they're 0:02:06.480 --> 0:02:09.000 willing to do more rather than less. And if real 0:02:09.040 --> 0:02:11.799 economic growth is accelerating, which I believe it is at 0:02:11.800 --> 0:02:17.000 the moment, then that puts pressure on resource capacity and 0:02:17.600 --> 0:02:19.880 that in turn puts upward pressure on prices. So a 0:02:19.960 --> 0:02:22.840 lot of the things that people are talking about, um, 0:02:22.880 --> 0:02:25.720 you know, with respect to some of these bull whip effects, Um, 0:02:25.760 --> 0:02:29.560 you know, in household durable goods that could prove transitory. 0:02:30.320 --> 0:02:32.600 So um, you know, I hate to use that word, 0:02:32.639 --> 0:02:34.320 but that that's sort that's sort of where I come 0:02:34.360 --> 0:02:36.760 down on this. I mean, ultimately, Um, you know, people 0:02:36.760 --> 0:02:39.239 look at what's going on with with with car prices 0:02:39.320 --> 0:02:42.960 and prices for household durables. Uh, they're coming down, Okay, 0:02:43.000 --> 0:02:45.079 rents are coming down, But if aggregant incomes are still 0:02:45.080 --> 0:02:47.359 growing at a healthy paste, all that's doing is freeing 0:02:47.440 --> 0:02:50.600 up people to go spend money somewhere else. And you know, 0:02:50.639 --> 0:02:53.200 if savings doesn't really go up, then that's going to 0:02:53.320 --> 0:02:55.120 drive up the prices for the goods and services that 0:02:55.160 --> 0:02:57.040 they start to spend their money on. If you're bullish 0:02:57.080 --> 0:02:59.760 on the economy, does that mean you're bullish for risk? 0:02:59.800 --> 0:03:02.920 Ass it's for next year? No, I don't think so. 0:03:03.520 --> 0:03:06.120 I think that we're probably in for a period of 0:03:06.480 --> 0:03:09.720 below trend returns in the equity markets. So part that 0:03:09.840 --> 0:03:11.440 out to this idea that we're going to see better 0:03:11.480 --> 0:03:14.720 than expected growth in yours in your estimation, that you're 0:03:14.720 --> 0:03:19.079 seeing ongoing resilience, that that's bad news. Well, I'm I 0:03:19.120 --> 0:03:20.920 don't want to fight the FED, right, I mean, you 0:03:20.960 --> 0:03:23.640 know it's it's it's it's it's it's um It's very 0:03:23.680 --> 0:03:25.440 amusing though some of so many of the people that 0:03:25.560 --> 0:03:27.920 you know following the financial crisis, Oh, the FED is 0:03:27.960 --> 0:03:30.639 just driving off stocks and you know it's the balance. Well, 0:03:30.720 --> 0:03:32.360 like now, if you don't want to fight the FED, 0:03:33.160 --> 0:03:37.400 that means you should be cautious on stocks. I looked 0:03:37.440 --> 0:03:40.120 Neil at the math here on the second look GDP, 0:03:40.240 --> 0:03:42.840 and let's call it, and this is completely amateur, folks. 0:03:43.360 --> 0:03:46.200 We had a real GDP two point nine price index 0:03:46.200 --> 0:03:48.080 of four point whatever percent and we come out to 0:03:48.160 --> 0:03:51.720 some form of nominal spirit of seven point two percent. 0:03:52.160 --> 0:03:54.200 We finally got a risk free rate where you know, 0:03:54.240 --> 0:03:58.520 money actually is not free anymore. Do we adapt? How 0:03:58.560 --> 0:04:01.080 do we adjust to going back to what we knew 0:04:01.320 --> 0:04:06.760 decades low, decades ago? With a substantial nominal GDP money 0:04:06.760 --> 0:04:09.800 now actually costs something, and I don't send any gloom 0:04:09.840 --> 0:04:15.560 from you will be fine, right Well, I I don't know. 0:04:15.680 --> 0:04:17.920 I mean I think that, I mean, I think my 0:04:18.000 --> 0:04:20.080 view is that if you're thinking about the next two 0:04:20.279 --> 0:04:24.160 three years, UM, we will probably have a we need 0:04:24.200 --> 0:04:26.200 a period I think of below trend growth to ring 0:04:26.240 --> 0:04:28.520 the inflation out of the system. Right so, even though 0:04:28.520 --> 0:04:31.400 we may be accende real g d P yeah, most 0:04:31.440 --> 0:04:34.400 likely faroly over JP Moor and John is like even 0:04:34.560 --> 0:04:36.400 lower than that as a run rate, I'm not gonna 0:04:36.400 --> 0:04:39.400 see at a point four twenty three. But the question 0:04:39.480 --> 0:04:43.400 is the question is I mean, forecasting out twelve eighteen 0:04:43.400 --> 0:04:46.320 months is difficult. What I have more confidence in is 0:04:46.360 --> 0:04:49.719 what's happening right now. And right now, you know, even 0:04:49.760 --> 0:04:52.120 if you believe that we see some below trend growth 0:04:52.160 --> 0:04:54.000 for a longer period of time, right now things are 0:04:54.000 --> 0:04:57.039 looking a little bit better. And so I think that's 0:04:57.040 --> 0:04:59.760 really the tension. When they started talking about non convertible 0:04:59.839 --> 0:05:01.680 that what do you hear when you see that in 0:05:01.680 --> 0:05:04.520 a statement? Because we had a story of two parts 0:05:04.600 --> 0:05:06.920 around the last fat decision. You have a statement, Then 0:05:06.920 --> 0:05:08.600 you had the news conference can you walk us through 0:05:08.600 --> 0:05:10.800 how you interpreted the statement in that line which many 0:05:10.839 --> 0:05:12.880 people a tribute today. I think I think the Doves 0:05:12.920 --> 0:05:15.000 made a great trade. I mean, if you're sitting around 0:05:15.000 --> 0:05:19.160 the farm c table and you're layle brainerd you got 0:05:19.240 --> 0:05:21.960 them to codify that into the statement in exchange for 0:05:22.000 --> 0:05:25.120 them to say something about neutral interest rates and you know, 0:05:25.200 --> 0:05:28.400 sound puffing their chest at the press conference. And but 0:05:28.520 --> 0:05:30.800 that's all later. That's like five six months from now. 0:05:30.839 --> 0:05:32.760 Lots of things can change, the data can go their 0:05:32.800 --> 0:05:35.640 way in the Dove's way, So you're trading the certainty 0:05:35.640 --> 0:05:39.080 of stepping down to fifty basis points now in exchange 0:05:39.080 --> 0:05:41.800 for the uncertainty around what neutral rates maybe. And so 0:05:41.880 --> 0:05:44.800 in my in my in my view, even though um, 0:05:44.839 --> 0:05:48.200 you know the that was a down day for markets 0:05:48.200 --> 0:05:50.640 and financial conducis titans, so the hawks looked like they 0:05:50.640 --> 0:05:53.160 may have one, I think actually the Doves played their 0:05:53.160 --> 0:05:56.480 hand pretty well. And and I think that's again that's 0:05:56.480 --> 0:05:58.560 part of the problem that it's it's too soon for 0:05:58.560 --> 0:06:00.720 the Doves to be winning any of these debates. This 0:06:00.760 --> 0:06:02.440 is the reason why there's so many people who still 0:06:02.440 --> 0:06:04.280 believe that the FED is going to not raise rates 0:06:04.279 --> 0:06:06.560 to the point that you're saying that that perhaps five 0:06:06.920 --> 0:06:09.440 will be the ceiling, and that they could even start 0:06:09.480 --> 0:06:12.839 cutting rates next year. What gives you confidence that the 0:06:12.920 --> 0:06:15.600 Doves aren't going to win another trade, that they aren't 0:06:15.600 --> 0:06:18.320 going to make something else? That really complicates the message 0:06:18.320 --> 0:06:20.360 when you say don't fight the Fed. Is I think 0:06:20.360 --> 0:06:22.919 the data the data will make it. I mean to me, 0:06:23.000 --> 0:06:24.839 the data will not make it tenable for them to 0:06:24.880 --> 0:06:27.680 make their case for cuts because the unemployment rate would 0:06:27.720 --> 0:06:30.040 not have gone up enough in order to justify that outcome. 0:06:30.440 --> 0:06:32.840 And you know, look, look at what's already happening. I mean, 0:06:32.880 --> 0:06:35.920 interest rates down. Oh, look what's happening. Purchase applications going 0:06:36.000 --> 0:06:39.440 up for more, mortgage demand is rising, um, the dollars 0:06:39.440 --> 0:06:41.680 going down. Have you looked at the performance of industrial 0:06:41.720 --> 0:06:45.400 stocks lately? Global growth may well be picking up next year. 0:06:45.440 --> 0:06:47.520 What do you think that? What do you think that's 0:06:47.520 --> 0:06:51.440 going to mean for US manufactured exports? So what if 0:06:51.480 --> 0:06:54.680 companies are done with inventory adjustment and so? Do you 0:06:54.800 --> 0:06:58.560 not share the housing gloom that's out there? It's tangible? No, 0:06:58.720 --> 0:07:01.680 I mean, look, the housing market is the one area 0:07:01.720 --> 0:07:03.920 where the FEDS policies has gotten a lot of traction. 0:07:04.839 --> 0:07:10.120 But now, uh, interest rates have come down a little bit, 0:07:10.160 --> 0:07:13.560 and that's unlocking some activity. And up is ultimately up. 0:07:13.560 --> 0:07:15.000 I mean this is one of these arguments, Oh, look 0:07:15.000 --> 0:07:17.000 at new home sales. It's all about cancelations. I mean, 0:07:17.040 --> 0:07:18.720 give me a break. I mean, up is up. The 0:07:18.760 --> 0:07:22.440 fact that the fact that people are signing new home 0:07:22.520 --> 0:07:26.240 sales up. No home, new home sales are booked when 0:07:26.240 --> 0:07:28.560 a contract is signed. Are people not knowing what the 0:07:28.600 --> 0:07:31.240 interest rate is when they signed that contract. The fact 0:07:31.280 --> 0:07:33.360 that they're signing the contract knowing what the rates are 0:07:33.440 --> 0:07:35.520 is a sign of confidence in and of itself. If 0:07:35.520 --> 0:07:37.560 you look at the last Conference Sports survey, they're the 0:07:37.600 --> 0:07:40.600 last couple of conference sports surveys. People see rates to 0:07:40.640 --> 0:07:43.320 be somewhat lower in the year ahead, and what happens, 0:07:43.400 --> 0:07:47.600 buying conditions for homes go up. So I think if, if, if, 0:07:47.640 --> 0:07:49.920 if the Fed pauses rates come in, I mean, yeah, 0:07:50.040 --> 0:07:51.920 residential investment is not going to be as much of 0:07:51.920 --> 0:07:54.520 a drag in Q two of next year as it 0:07:54.600 --> 0:07:58.120 is at this very moment. We haven't mentioned. It comes 0:07:58.120 --> 0:08:01.800 on a proba, he says, long, Sterling, I'm bullish Sterling 0:08:01.800 --> 0:08:05.440 and Rishio and now back up to one twenty got 0:08:05.440 --> 0:08:13.920 any more exactly? No? Ever? Nice? Do you have a 0:08:13.960 --> 0:08:16.000 sweater to go with your tie? For those you? So 0:08:16.080 --> 0:08:18.000 we're looking for the Christmas so we play this up? 0:08:18.000 --> 0:08:19.880 Can we sit in because I'm getting people rank and 0:08:20.320 --> 0:08:23.760 look like pap a grain with laser and sang it's 0:08:23.920 --> 0:08:29.760 not ranked. But these are dear with with sets around him. Yeah, nice, 0:08:29.800 --> 0:08:32.800 big ears, it's like that. Now he says that right here, 0:08:32.840 --> 0:08:34.480 do you have a sweater to go with this? Can 0:08:34.480 --> 0:08:36.800 we get you on before Christmas? With this? Sure, I'll 0:08:36.840 --> 0:08:38.720 be happy to put on my Mr Rodgers look for you. 0:08:38.880 --> 0:08:41.440 Very good. We can do Christmas sweaters? Are we doing that? Please? 0:08:41.480 --> 0:08:43.320 Do you know I think that you should with like 0:08:43.320 --> 0:08:45.880 a little bow tie around them? That I think really 0:08:46.120 --> 0:08:49.960 of course, little like pump pumps and little very joyful 0:08:50.080 --> 0:08:58.640 guy around, very joyful man. Iron Jersey owns the high 0:08:58.920 --> 0:09:01.480 I didn't know that doesn't sweater territory. I thought you 0:09:01.760 --> 0:09:04.600 did football scoffs. He's good, same thing. It's a scarf sweater. 0:09:04.679 --> 0:09:19.240 Carboy joined this now. Senior investment strategistic Edward Giants might 0:09:19.240 --> 0:09:21.320 not have to say. Reading through your work, you sound 0:09:21.400 --> 0:09:25.720 a little bit more constructive. It's what does that constructive 0:09:25.840 --> 0:09:29.280 you come from? Yeah, thanks, Sean. Look, you know, I 0:09:29.320 --> 0:09:32.800 think we have a journey to get to that constructive view. 0:09:32.800 --> 0:09:35.560 But it's certainly the FED is still on this path 0:09:35.679 --> 0:09:38.160 to raise rates. They've made it clear they are not done, 0:09:38.520 --> 0:09:40.880 and in fact we're probably heading towards that five percent 0:09:40.960 --> 0:09:45.040 level early. And of course the focus is shifting somewhat 0:09:45.080 --> 0:09:50.199 in markets from this inflationary ongoing upward pressure to perhaps 0:09:50.200 --> 0:09:53.640 some stabilization, but then of course a shift towards what 0:09:53.679 --> 0:09:57.200 happens to the economic growth picture, which we think does soften, 0:09:57.320 --> 0:10:00.599 especially in that first half of UM, but perhaps a 0:10:00.720 --> 0:10:03.079 silver lining. And that more constructive view comes from the 0:10:03.120 --> 0:10:06.440 fact that we are perhaps set up then the stages 0:10:06.520 --> 0:10:10.280 then set for potential recovery from a market perspective, and 0:10:10.360 --> 0:10:12.839 keep in mind, the market cycle and economic cycle are 0:10:12.920 --> 0:10:17.480 two different animals, and in fact, markets can you know, 0:10:17.640 --> 0:10:20.360 head towards a low, make a low, but then rebound 0:10:20.480 --> 0:10:23.880 even as we are in perhaps a downturn or recession. 0:10:24.160 --> 0:10:26.600 And so I think that's where the constructive view comes from. 0:10:26.679 --> 0:10:29.360 And of course the hope and the leading indicators of 0:10:29.400 --> 0:10:32.920 inflation that are showing that stability ahead in the next 0:10:33.120 --> 0:10:36.520 year would you explain surveillance one oh one that the 0:10:36.559 --> 0:10:40.480 world doesn't end if we get a five percent terminal rate. 0:10:40.679 --> 0:10:44.520 We've been there before. Why are we so angst ridden 0:10:44.520 --> 0:10:48.079 this time? Yeah, a great point. And in fact, if 0:10:48.120 --> 0:10:50.000 you look at you know, a thirty year history, a 0:10:50.040 --> 0:10:52.640 five percent FRED funds rate is not out of the norm, 0:10:52.679 --> 0:10:54.800 and a treasury yeld certainly at three and a half 0:10:54.840 --> 0:10:56.600 to four percent, is not out of the norm. What 0:10:56.720 --> 0:10:59.560 we will say is unique this time around versus the 0:10:59.640 --> 0:11:03.760 last ten years, perhaps the period after the Great Financial Crisis, 0:11:04.160 --> 0:11:07.080 that's when the FED was perhaps closer to the zero bound, 0:11:07.280 --> 0:11:10.760 treasury yields closer to two percent. That whole period was 0:11:10.880 --> 0:11:14.199 really marked by a growth out performance, growth versus value. 0:11:14.640 --> 0:11:17.720 This period ahead is unique in the fact that we 0:11:17.800 --> 0:11:20.000 probably won't head back to zero bound. You know, the 0:11:20.000 --> 0:11:22.920 FED can go from about a five percent rate over time, 0:11:23.000 --> 0:11:25.240 perhaps back to a more neutral rate two and a 0:11:25.280 --> 0:11:29.240 half percent range, let's say, um, but yields treasure yields 0:11:29.240 --> 0:11:31.600 in that environment may also remain in that two to 0:11:31.720 --> 0:11:34.680 three three and a half percent range. And so what's different, 0:11:34.679 --> 0:11:36.440 I think, is that you do have an alternative to 0:11:36.520 --> 0:11:40.320 equities and play probably a better mix between bonds and 0:11:40.480 --> 0:11:44.040 stocks in your portfolio, but also that environment where growth 0:11:44.080 --> 0:11:47.600 outperformed for perhaps close to a decade UM, it maybe 0:11:47.679 --> 0:11:50.240 look a little different in the next decade ahead, and 0:11:50.280 --> 0:11:52.720 that because yields are higher, we could get a better 0:11:52.760 --> 0:11:55.280 balance between growth and value as well. What if Evan 0:11:55.320 --> 0:11:57.880 Brown of Ubs is right and we avoid a recession 0:11:57.920 --> 0:12:00.560 next year and that ends up being really negative in 0:12:00.679 --> 0:12:04.960 terms of creating higher rates for longer that bleeds into 0:12:05.080 --> 0:12:08.240 an over indebted society, which a lot of people say 0:12:08.480 --> 0:12:12.600 is the case. How's that factor into your outlook? Yeah, 0:12:12.600 --> 0:12:15.640 you know, it's interesting. We don't necessarily think the path 0:12:15.720 --> 0:12:18.840 to a soft landing is completely closed either, but we 0:12:18.880 --> 0:12:20.440 do think it's getting narrow, and a lot of the 0:12:20.480 --> 0:12:23.120 leading indicators that we watch, including the curve but also 0:12:23.240 --> 0:12:24.719 things like the p M I S and I S 0:12:24.880 --> 0:12:28.960 M indicators are pointing towards, if not recession, at least 0:12:28.960 --> 0:12:31.760 a softening below trend. So, um, we do think that 0:12:31.920 --> 0:12:34.480 is in the cards. But if we do avoid that 0:12:34.520 --> 0:12:37.560 recessionary path and hit the soft landing, um, we do 0:12:37.640 --> 0:12:41.480 think actually markets will respond favorably to that to some extent. 0:12:41.559 --> 0:12:43.720 You know, I think the jobs picture will be in 0:12:43.800 --> 0:12:47.160 decent condition will have a consumer and healthy shape, and 0:12:47.200 --> 0:12:50.160 in fact, you could get through this period. We think 0:12:50.160 --> 0:12:54.360 the inflationary pressures were largely supply side driven, UM, and 0:12:54.400 --> 0:12:56.840 the demand picture will soften it. So we think inflation 0:12:56.880 --> 0:12:58.559 could come in as well, and so we don't think 0:12:58.559 --> 0:13:03.160 it's necessarily this dire scenario to avoid a recession here 0:13:03.160 --> 0:13:05.880 in the US. But keep in mind recessionary cycles are 0:13:06.400 --> 0:13:09.040 part of the business cycle, and so we do think 0:13:09.080 --> 0:13:11.959 at some point the excesses that have have accumulated over 0:13:12.000 --> 0:13:14.520 the past you know, two or three years UM, that 0:13:14.600 --> 0:13:17.319 will you know, play itself out in some to some extent, 0:13:17.400 --> 0:13:20.120 and perhaps we will won't see a broader recession, but 0:13:20.160 --> 0:13:22.400 we could see what we're calling that rolling recession in 0:13:22.440 --> 0:13:25.040 certain sectors, and perhaps are starting to see that in 0:13:25.080 --> 0:13:27.199 the tech sector, which was probably where a lot of 0:13:27.200 --> 0:13:30.400 the excess has happened during that pandemic period. UM. But 0:13:30.440 --> 0:13:33.520 I think your broader point, you know, with debt increasing 0:13:33.559 --> 0:13:36.680 and yields moving higher and perhaps staying higher, UM, we 0:13:36.720 --> 0:13:38.880 will see a little bit of a clearing impact on 0:13:38.920 --> 0:13:41.280 the credit side as well. But probably a good thing 0:13:41.360 --> 0:13:43.800 for investors who are looking for value. Someone I just 0:13:43.840 --> 0:13:45.680 want to squeeze this in twenty seconds. Can you be 0:13:45.960 --> 0:13:48.079 super specific why you think the leadership is going to 0:13:48.160 --> 0:13:52.320 come from. Yeah, we think heading into the year, we 0:13:52.360 --> 0:13:55.640 could still see this defensive value play have a little 0:13:55.640 --> 0:13:58.160 bit of legs because we are in entering a period 0:13:58.160 --> 0:14:01.440 of potential downward tim in the economy. But as we 0:14:01.480 --> 0:14:04.000 re emerge from that, we think the recovery playbook is 0:14:04.000 --> 0:14:07.160 back in play areas. You know, parts of quality growth 0:14:07.280 --> 0:14:10.280 will probably take some leadership, but cyclicals and maybe even 0:14:10.320 --> 0:14:13.200 that small cap sector um will return as well. So 0:14:13.360 --> 0:14:16.880 think about more balance in your portfolio heading into Thank you, 0:14:18.000 --> 0:14:28.640 omistic constructive. That was the constructive. I'm not doing crystal ball. 0:14:28.680 --> 0:14:30.960 I'm looking at the present, which is what Realie is doing. 0:14:31.000 --> 0:14:34.320 She's global chief investment strategist of black Rock. Helped us 0:14:34.320 --> 0:14:36.600 out in London when we were there, uh a number 0:14:36.600 --> 0:14:38.200 of weeks ago, and we're thrilled you join us in 0:14:38.240 --> 0:14:40.760 New York this morning. I'm gonna cut to the chase. 0:14:40.920 --> 0:14:43.640 What's changed here not the crystal ball that John mentions, 0:14:44.000 --> 0:14:46.200 but what changed is that we have a risk free rate, 0:14:46.240 --> 0:14:48.920 we have cash as values. We're getting on our iPhones, 0:14:48.960 --> 0:14:51.520 YouTube can make three point two percent. You know it's 0:14:51.560 --> 0:14:54.320 like from another time and place. Now that the risk 0:14:54.480 --> 0:14:58.760 free rate is back, we have almost a real money environment. 0:14:59.040 --> 0:15:02.280 What does that mean for as an allocation? Well, as 0:15:02.360 --> 0:15:06.000 we enter this new region, in fact, well already in 0:15:06.040 --> 0:15:09.680 this new region where it departs from the Great moderation 0:15:10.000 --> 0:15:13.800 and now we're in a word shaped by supply, in 0:15:13.880 --> 0:15:17.960 our view, it needs to require the rethink of us 0:15:17.960 --> 0:15:20.400 a location. You talked about free rate. In fact, we 0:15:20.440 --> 0:15:24.360 think that the new region requires a new playbook altogether. 0:15:24.520 --> 0:15:27.280 So we talked about forecast for next year, and we 0:15:27.320 --> 0:15:30.320 believe that even as we enter a recession, which is 0:15:30.400 --> 0:15:34.760 our expectation for next year, inflation could surprise on the upside. 0:15:34.760 --> 0:15:36.560 It's going to be lower than what we have seen 0:15:36.640 --> 0:15:38.280 so far this year, but you could surprise on the 0:15:38.360 --> 0:15:40.920 upside because we believe central banks are not going to 0:15:41.040 --> 0:15:43.560 go all the way to fight inflation to bring it 0:15:43.600 --> 0:15:45.760 down to target. And at the same time you talked 0:15:45.760 --> 0:15:50.760 about consensus by nour risk of we're not that constructive 0:15:50.840 --> 0:15:54.160 on risk center. You underway equities, where underway equities, We 0:15:54.320 --> 0:15:56.800 remain under way equities at this juncture. But I think 0:15:56.800 --> 0:16:02.080 what is more important is when we would become more constructive, 0:16:02.120 --> 0:16:05.120 and we expect to be more constructive at some point 0:16:05.280 --> 0:16:08.760 in twenty twenty three, and having the mechanism of gauging 0:16:08.840 --> 0:16:12.160 when to turn positive is important. Sizing the damage of 0:16:12.600 --> 0:16:16.280 the macro scarring as a result of central banks overtightening 0:16:16.320 --> 0:16:19.680 and also understanding to what extent that damage is in 0:16:19.720 --> 0:16:22.040 the price is going to be critical as we think 0:16:22.040 --> 0:16:26.240 about when to turn positive, and also importantly as written positive, 0:16:26.520 --> 0:16:29.320 it's not going to be the prelude of a decades 0:16:29.400 --> 0:16:31.880 long booll market that we have seen in the past. 0:16:32.240 --> 0:16:34.200 We believe that there's going to be a lot more volatile, 0:16:34.320 --> 0:16:37.040 a lot more trophy. And again here size in the damage, 0:16:37.120 --> 0:16:39.040 understanding what's in the price is going to become what's 0:16:39.040 --> 0:16:41.280 shaping your view about that shift in the market, right shame, 0:16:41.880 --> 0:16:45.120 what drives you towards making that conclusion. It's very much 0:16:45.160 --> 0:16:48.000 around our conviction that we're in a word, shaped by 0:16:48.440 --> 0:16:52.680 multiple factors of supply constraint. Yes, of course, energy prices 0:16:52.800 --> 0:16:54.560 coming down a little bit and some of the supply 0:16:54.680 --> 0:16:59.600 bottlenecks is getting alleviated, but looking beyond that, we're still 0:16:59.640 --> 0:17:05.040 face seen three structural catalysts for elevated inflations in the 0:17:05.080 --> 0:17:08.639 long term, so aging demographics. You know, over the last 0:17:08.920 --> 0:17:12.400 fifteen years in the US actually participation rate went from 0:17:12.520 --> 0:17:15.679 sixty eight percent to sixty two percent. There is wholly 0:17:15.760 --> 0:17:20.200 explainable by aging demographics. And also we have geopolitical fragmentation 0:17:20.600 --> 0:17:26.360 that represents further supply constrained restoring French shoring, as well 0:17:26.400 --> 0:17:29.160 as the net zero transition, where we believe that there 0:17:29.160 --> 0:17:32.080 will be a mismatch between demand and supply. Just like 0:17:32.200 --> 0:17:35.000 during the pandemic, there was a mismatch between demand and 0:17:35.040 --> 0:17:38.480 supply and that pushed up inflation. So we see this persisting, 0:17:38.520 --> 0:17:40.879 which is why even as inflation goes down, as we 0:17:40.920 --> 0:17:43.119 look at next year, we believe that it's going to 0:17:43.240 --> 0:17:47.879 settle higher versus the pre pandemic levels. Even that, how 0:17:47.960 --> 0:17:51.760 much conviction can you have going into long duration currently, 0:17:51.840 --> 0:17:55.480 we actually want to push back against this notion that 0:17:55.680 --> 0:17:59.480 as we enter a recession you just automatically hide in 0:17:59.560 --> 0:18:02.159 long do raction bonds, because this recession is going to 0:18:02.160 --> 0:18:05.440 be caused by central banks over tightening. This is previous 0:18:05.440 --> 0:18:08.159 recessions where central banks are expected to come to the 0:18:08.200 --> 0:18:10.960 rescue and cut rate. We actually don't believe that the 0:18:11.119 --> 0:18:14.560 developed markets central banks in particular, the FED is able 0:18:14.600 --> 0:18:18.199 to cut rates next year, Marcus surprising. Ray cuts are 0:18:18.200 --> 0:18:21.560 pretty aggressive ray cut cycle. But in the face of 0:18:21.600 --> 0:18:25.160 this persistent inflation and supply constraint that I just talked about, 0:18:25.200 --> 0:18:27.840 we believe that they're gonna high and stay at those 0:18:27.920 --> 0:18:30.720 levels for an extended period of time. This is an 0:18:30.760 --> 0:18:33.960 important day for China. One of your leaders has died, 0:18:34.000 --> 0:18:35.520 and I want to go back. Before you were at 0:18:35.560 --> 0:18:38.680 the University of Cambridge. You did something no one we've 0:18:38.680 --> 0:18:41.480 ever talked to did, which is you did the mathematical 0:18:41.480 --> 0:18:45.800 Olympiad in your China, not once but twice, which is, folks, 0:18:45.840 --> 0:18:50.520 trust me unheard of. How do you perceive the leadership 0:18:50.720 --> 0:18:52.199 change that we say. I don't want to get in 0:18:52.200 --> 0:18:55.600 trouble with black Rock, but the new China or the 0:18:55.680 --> 0:18:58.919 next China, what does it look like to you and 0:18:58.960 --> 0:19:03.399 the stayver gendas. I think one beak takeaway from the 0:19:03.440 --> 0:19:08.440 Party Congress earlier in the quarter is that the focus 0:19:08.560 --> 0:19:14.720 is broadening out from growth to social coherence, common prosperity 0:19:14.760 --> 0:19:18.000 in national security, and what that means over the longer 0:19:18.119 --> 0:19:21.600 term is that we should expect a lower trend growth 0:19:21.760 --> 0:19:25.160 for China and also in terms of the transmission mechanism 0:19:25.200 --> 0:19:28.800 from macro to micro would become less efficient, so all 0:19:28.840 --> 0:19:31.119 of the warrants are higher risk premier as you think 0:19:31.119 --> 0:19:33.879 about incorporating China in a Hope portfolio context, which is 0:19:33.880 --> 0:19:37.359 why technically when neutral China asks even as the country 0:19:37.359 --> 0:19:41.560 opens up, but strategically we're actually underweight China government bonds 0:19:41.600 --> 0:19:45.760 because of the yield attractiveness becoming less This was brilliant. 0:19:45.760 --> 0:19:48.080 I'm going to take the opportunity to to promote some 0:19:48.119 --> 0:19:50.080 of the research for a Black right time, because I 0:19:50.080 --> 0:19:52.000 think a lot of people outside of Wall Street they 0:19:52.000 --> 0:19:56.080 find it differ undower certain research. Not to be clear, 0:19:56.160 --> 0:20:00.000 hits on the Investment Institute weekly No is available online 0:20:00.160 --> 0:20:03.440 on the website for everyone and it's a great rate. 0:20:03.560 --> 0:20:16.960 Always enjoy it. Whitely fantastic from Black. Let's do this, folks. 0:20:17.040 --> 0:20:19.520 Let's go to someone that can piece together You're November 0:20:19.840 --> 0:20:22.800 and try to stagger into two thousand twenty three. They 0:20:22.840 --> 0:20:25.399 do that at Deutsche Bank, led by David focus Landau, 0:20:25.520 --> 0:20:28.919 and he has as his chief international strategist Alan Ruskin, 0:20:29.240 --> 0:20:31.800 who has been such a supporter of the show through 0:20:31.840 --> 0:20:33.840 this crazy year. Ellen, I want to go a little 0:20:33.840 --> 0:20:37.560 bit technical right now. The Bloomberg Financial Conditions Index, which 0:20:37.640 --> 0:20:40.800 I think the great Michael Rosenberg told me, is eleven ratios. 0:20:41.240 --> 0:20:44.960 The fact is, over November it has become more accommodative. 0:20:45.280 --> 0:20:48.400 On a standard deviation basis. We moved from the gloom 0:20:48.400 --> 0:20:52.760 of a negative one standard deviation almost back to negative 0:20:52.800 --> 0:20:57.600 point five zero standard deviation. We are more accommodative. How 0:20:57.640 --> 0:21:01.680 does that change Chairman Powell's each today and the FED 0:21:01.760 --> 0:21:05.720 meeting forward? Tom, I think it's a great question really 0:21:05.760 --> 0:21:08.960 because I think on the one hand, Chairman pal will 0:21:09.040 --> 0:21:12.160 just look to what the FED fund futures are pricing 0:21:12.200 --> 0:21:16.280 in and it's looking for a peek in fat funds, 0:21:16.280 --> 0:21:19.080