WEBVTT - Surveillance: Inflation with Rouse (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Farrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.759 To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.840 and of course on the Bloomberg terminal. It's a tumultuous 0:00:30.920 --> 0:00:32.880 time to say to Lisa, and what we're gonna do, folks, 0:00:32.880 --> 0:00:35.919 is bring you the best minds we can on Global 0:00:35.920 --> 0:00:39.280 Wall Street and of course also in the nation's capitol 0:00:39.440 --> 0:00:42.320 right now. One of those minds is Cecilia Rouse. She 0:00:42.479 --> 0:00:45.720 is chair of the White House Council of Economic Advisors 0:00:45.760 --> 0:00:49.880 and survived at ten at Harvard University. A few years ago. 0:00:50.159 --> 0:00:53.520 Did you have the Feldstein version of the Manque version? 0:00:54.480 --> 0:00:57.959 I actually had a Cay I'm dating myself auto X sign. Oh, 0:00:58.000 --> 0:01:02.000 there you go. She's dating yourself and she is well 0:01:02.040 --> 0:01:04.720 preserved because she's on her pellet. And that's a side story. 0:01:05.240 --> 0:01:09.360 Dr Rouse. Otto Eckstein would say, don't look at the headline. Data. 0:01:09.720 --> 0:01:13.319 Parse the data. You and the president have to parse 0:01:13.760 --> 0:01:17.840 the character of the nation's inflation. What part of it 0:01:18.000 --> 0:01:22.720 is the focus of the President this morning. Well, look, 0:01:22.760 --> 0:01:26.480 the President is focused on the whole of it because 0:01:26.520 --> 0:01:31.679 he understands that the cost of food and gas and 0:01:31.760 --> 0:01:35.959 the price of everyday items for the American family, and 0:01:36.080 --> 0:01:37.920 so he comes from a family where that would be 0:01:37.959 --> 0:01:40.040 meaningful if you had to pay more for a tank 0:01:40.080 --> 0:01:42.520 of gas. Uh, And so he's focused on the all 0:01:42.560 --> 0:01:44.840 of it. He's today he's going to lay out his 0:01:44.840 --> 0:01:48.040 plan for addressing priding price increases. Of course, as his 0:01:48.120 --> 0:01:50.640 economic advisor, I am focused on the part that is 0:01:50.680 --> 0:01:53.440 about core inflation, which is not focused on gas and food, 0:01:53.840 --> 0:01:56.480 and that tells us more about what the Federal Reserve 0:01:56.560 --> 0:01:59.000 can control as it it tries to address inflation, and 0:01:59.040 --> 0:02:01.400 also the parts that more enduring and that by be 0:02:01.600 --> 0:02:04.960 more challenging to address. So you know, the President is 0:02:04.960 --> 0:02:07.440 focused on the whole of it because that is the 0:02:07.520 --> 0:02:11.360 reality for American families. The whole of it is. Politicians, 0:02:11.400 --> 0:02:14.079 away from your remit have to come up with a plan. 0:02:14.639 --> 0:02:18.840 We prove that whip inflation now, buttons don't work. What's 0:02:18.919 --> 0:02:23.079 the plan? So from day one, this president has been 0:02:23.080 --> 0:02:26.959 focused on generating and economy where there is sustainable growth 0:02:27.000 --> 0:02:29.639 that works for all Americans. So he's as he likes 0:02:29.680 --> 0:02:31.600 to say, he wants to build it from the bottom up, 0:02:31.600 --> 0:02:34.440 in the middle out. So that was what underlied the 0:02:34.480 --> 0:02:36.840 American Rescue Plan. It was important to get shots into 0:02:36.919 --> 0:02:39.560 arms and for households and businesses to have the resources 0:02:39.680 --> 0:02:43.079 to get through the pandemic. So now he's focused on inflation, 0:02:43.240 --> 0:02:45.639 so he understands that he needs that we need to 0:02:45.639 --> 0:02:48.679 address gas prices. Much of the gas price increases of 0:02:48.760 --> 0:02:51.600 late have become because of the war of Russia's war 0:02:51.600 --> 0:02:54.880 against Ukraine. The President, in trying to ease those prices, 0:02:54.960 --> 0:02:58.760 has released historic levels from our strategic petroleum reserve in 0:02:58.960 --> 0:03:02.000 concert without our countries, so that on net to date 0:03:02.480 --> 0:03:05.160 there have been about four hundred two hundred forty million 0:03:05.160 --> 0:03:09.160 barrels released worldwide. In addition, he's urging gas and oil 0:03:09.200 --> 0:03:13.280 companies to increase their production domestically by using existing leases 0:03:13.600 --> 0:03:16.079 and increase their drillings so that we can get more 0:03:16.120 --> 0:03:18.920 oil on the market. But he also was focused on 0:03:18.960 --> 0:03:22.480 reducing long term costs for families. That is through for example, 0:03:23.040 --> 0:03:26.919 reducing prescription costs by getting allowing Medicare to negotiate prices, 0:03:27.200 --> 0:03:30.160 by addressing childcare costs, by addressing the cost of housing. 0:03:30.560 --> 0:03:35.280 These are policies that we know will help increase our 0:03:35.480 --> 0:03:38.920 economic growth, ensure that it's more broadly shared, and in 0:03:38.960 --> 0:03:41.560 the process reduced the cost for families. But he wants 0:03:41.600 --> 0:03:45.640 to do so in a deficit reducing way his budget. 0:03:45.680 --> 0:03:47.800 You know, last year he reduced the deficit by three 0:03:47.880 --> 0:03:51.200 hundred billion dollars, on track to do reduce it by 0:03:51.240 --> 0:03:54.040 one point five trillion this year um and he does 0:03:54.080 --> 0:03:58.600 so by increasing taxes on our very wealthiest corporation cecilia. 0:03:59.000 --> 0:04:02.520 With retrospect, with hindsight being our guide, was it a 0:04:02.560 --> 0:04:08.160 mistake in March to issue four checks to every American 0:04:08.200 --> 0:04:12.480 who qualified? It is so hard to go back and 0:04:12.520 --> 0:04:16.600 do retrospective because it's hard to imagine the counter factual. 0:04:16.920 --> 0:04:19.599 Mark Xandy, who has tried to do so and looking 0:04:19.640 --> 0:04:23.599 at all of the pandemic policies, has has estimated that 0:04:23.720 --> 0:04:26.320 had we not acted, this goes back to cares as well, 0:04:26.400 --> 0:04:29.080 because that was important as well, But including the American 0:04:29.080 --> 0:04:31.680 Rescue Plan, we may well have faced a double depercession. 0:04:32.880 --> 0:04:36.000 We would be facing elevated unemployment today and we would 0:04:36.040 --> 0:04:38.320 not have had the economic growth that we had last year, 0:04:38.360 --> 0:04:40.240 which is going to put us on a path for 0:04:40.320 --> 0:04:43.840 more sustainable growth going forward. So the American Rescue Plan 0:04:43.920 --> 0:04:46.400 was an insurance policy. We did not know how long 0:04:46.400 --> 0:04:49.719 this pandemic was going to remain a challenge. We needed 0:04:49.720 --> 0:04:52.040 to get shots into arms so we could regain our lives. 0:04:52.320 --> 0:04:56.680 So worldwide, advanced economies are dealing with inflation because that 0:04:56.960 --> 0:05:00.240 is the consequence of helping families and businesses get through 0:05:00.279 --> 0:05:03.800 the pandemic when we were facing supply chains which couldn't 0:05:03.880 --> 0:05:07.560 quite handle that sustained demand. So, Cecilia, how much does 0:05:07.600 --> 0:05:09.920 inflation have to come down before the end of the 0:05:10.040 --> 0:05:12.960 year for this growth that we're seeing to be sustained 0:05:13.000 --> 0:05:15.920 for that not to really curtail some of the momentum 0:05:15.960 --> 0:05:19.479 that we're seeing in households. So what's important is that 0:05:19.520 --> 0:05:23.000 we maintain our economic activity UH, and we don't want 0:05:23.120 --> 0:05:28.080 the inflation to become spiraling out of control and for individuals, 0:05:28.400 --> 0:05:31.200 households have become underwater. So what we need the Federal 0:05:31.240 --> 0:05:35.680 Reserve mandate is price stability and full employment. You gave 0:05:35.760 --> 0:05:39.840 it your header. J Powell, the chair Powell UH emphasizing 0:05:39.839 --> 0:05:42.479 how the Federal Reserve is on it, and that is 0:05:42.520 --> 0:05:44.600 what they are focused on as well. The President would 0:05:44.680 --> 0:05:47.880 urge Congress to confirm his his nominees so that the 0:05:47.880 --> 0:05:50.880 Federal Reserve Board has all hands on deck to fulfill 0:05:50.920 --> 0:05:53.200 their dual mandate. So that is what's going to be 0:05:53.279 --> 0:05:56.719 most important to date. We see that inflation expectations are anchored, 0:05:56.960 --> 0:06:00.800 so we're optimistic that the Federal Reserve can do what job. Meanwhile, 0:06:00.800 --> 0:06:03.600 the President is also focused on doing what he can 0:06:03.680 --> 0:06:07.120 to ease the pain at the pump and to ensure 0:06:07.160 --> 0:06:09.920 that families that can pay a reasonable price for gas. 0:06:10.360 --> 0:06:13.520 He's focused on food prices, UH, and he's focused on 0:06:13.640 --> 0:06:16.400 addressing those costs that we know that families face every 0:06:16.480 --> 0:06:18.680 day and that are so important for them. It's the 0:06:18.720 --> 0:06:21.480 City Arrest. Thank you the champ of the White House 0:06:21.480 --> 0:06:29.839 Council of Economic Advices. Right now we do go global 0:06:29.880 --> 0:06:33.040 and it's wonderful to have with us again from City Group, 0:06:33.600 --> 0:06:36.760 Nathan Sheets. He's global chief Economist at City and former 0:06:36.839 --> 0:06:41.159 Undersecretary of the Treasury for International Affairs with public service 0:06:41.640 --> 0:06:45.279 at the Federal Reserve System as well. Nathan Sheets, wonderful 0:06:45.320 --> 0:06:46.640 to have you with us. I want to go to 0:06:46.800 --> 0:06:50.120 Stanley Fisher, who you are a nodding acquaintance with m 0:06:50.200 --> 0:06:54.240 I t a few years ago, which is suddenly the 0:06:54.360 --> 0:06:58.480 US central bankhead is central banker to the world. How 0:06:58.560 --> 0:07:02.760 close is Jerome po Well to being central banker to 0:07:03.240 --> 0:07:08.919 the world. You know, that's certainly true during times of stress, 0:07:09.120 --> 0:07:13.240 where when global markets are under duress and under pressure, 0:07:13.280 --> 0:07:17.240 they need dollars, and on several occasions over the last 0:07:17.240 --> 0:07:22.280 fifteen years, the FAT has stepped up and provided that liquidity. 0:07:22.480 --> 0:07:25.480 But similarly, I would say it in episode like the 0:07:25.520 --> 0:07:29.600 one we're in now, where central banks are struggling with 0:07:29.680 --> 0:07:34.760 this truly extraordinary set of shocks and an inflation environment 0:07:35.280 --> 0:07:37.920 unlike anything that we've seen in decades, that the FED 0:07:38.040 --> 0:07:40.760 is very much setting the tone. And as the FED 0:07:40.880 --> 0:07:44.760 shifted more hawkish, that opened the way for a lot 0:07:44.800 --> 0:07:47.400 of other central banks to be more hawkish as well. 0:07:47.640 --> 0:07:50.680 What are the stresses? For example, I take sing dollar 0:07:51.240 --> 0:07:53.960 back to two thousand six, and the answer is we 0:07:54.040 --> 0:07:57.480 have a week Singapore dollar, which is usually a crown 0:07:57.600 --> 0:08:02.760 jewel of tiger economies. Tell us what those those those 0:08:02.800 --> 0:08:07.760 economies do after the easy decision to defend by raising rates, 0:08:10.680 --> 0:08:15.680 the the FEDS moving, and as the FED moves and 0:08:15.760 --> 0:08:19.080 the US economy is under pressure but still looks better 0:08:19.080 --> 0:08:21.880 than a lot of h the rest of the world. 0:08:22.480 --> 0:08:26.120 You're seeing the dollar strengthening, and there's been a debate 0:08:26.200 --> 0:08:30.040 about how much traction the FEDS getting in financial conditions, 0:08:30.080 --> 0:08:32.880 but make no mistake, it's getting traction on the dollar, 0:08:33.520 --> 0:08:37.760 and Tom, as you suggest, that has echoes throughout the 0:08:37.800 --> 0:08:41.600 rest of the world, and uh the US stronger currency, 0:08:41.600 --> 0:08:46.160 it's helpful frosting fighting inflation, but the weaker currencies that 0:08:46.160 --> 0:08:49.320 are on the other side of that are inflationary in 0:08:49.320 --> 0:08:52.440 those countries and making the challenges for those central banks 0:08:53.160 --> 0:08:58.160 even more acute and in adgestion for many emerging market economies, 0:08:58.520 --> 0:09:01.760 it creates tensions in their national balance sheets giving their 0:09:01.760 --> 0:09:05.040 exposures to dollars. So it does create, as you suggest, 0:09:05.400 --> 0:09:09.120 some exquisite dilemmas for these central banks and may force 0:09:09.200 --> 0:09:11.760 them into further rate hikes at times when they don't 0:09:11.800 --> 0:09:14.040 want to hike rates. Here in the United States, in 0:09:14.040 --> 0:09:16.560 about twenty four hours, as John was mentioning, we are 0:09:16.559 --> 0:09:18.720 going to get that CPI print expected to come in 0:09:19.040 --> 0:09:22.719 at eight point one percent by economist surveyed by Bloomberg, 0:09:22.800 --> 0:09:25.800 down from eight point five percent in the prior read. 0:09:25.960 --> 0:09:28.679 How important is it to look at the components of 0:09:28.720 --> 0:09:32.160 what's driving this inflation. What's your projection for how we 0:09:32.200 --> 0:09:37.360 can understand the granularity of this report. I think that 0:09:38.000 --> 0:09:41.400 looking under the hood is going to be critical. We're 0:09:41.440 --> 0:09:45.800 expecting a zero point four percent month to month read 0:09:46.600 --> 0:09:51.160 for core, somewhat lower for headline, but when I look 0:09:51.320 --> 0:09:55.840 at underlying components, I just have a hard time being 0:09:55.960 --> 0:09:59.439 too optimistic about the inflation outlook. I think in this 0:09:59.640 --> 0:10:04.640 environ with high commodity prices, supply chaining pressures, potential further 0:10:04.760 --> 0:10:08.439 disruptions as a result of what's happened in China to 0:10:08.640 --> 0:10:12.320 supply chains, that it's not a positive environment for for 0:10:12.400 --> 0:10:17.120 goods prices, there's a lot of inertia in shelter and 0:10:17.280 --> 0:10:21.640 ownery equivalent rents. That's not looking like a very positive picture. 0:10:22.040 --> 0:10:25.240 And then finally, for services, we've got a red hot 0:10:25.320 --> 0:10:28.760 labor market and wages may not have risen quite as 0:10:28.840 --> 0:10:31.679 much as headline CPI, but it looks to me like 0:10:31.880 --> 0:10:35.520 pressures on services prices will likely be pretty durable as well. 0:10:35.960 --> 0:10:38.800 So I think those components right now are just not 0:10:39.120 --> 0:10:43.400 very encouraging and tell a tale of longer lived inflation. 0:10:43.880 --> 0:10:45.840 So do you think, Nathan, that we've seen the peak. 0:10:47.840 --> 0:10:53.000 You know, maybe in some arithmetic sense, yes, uh, you know, 0:10:53.280 --> 0:10:58.800 is this the peak for twelvemonth headline inflation or even 0:10:58.840 --> 0:11:04.480 twelvemonth core inflation? Possibly? Is it? Is? It likely to 0:11:04.480 --> 0:11:07.319 be on a bit of a downward trajectory, but a 0:11:07.440 --> 0:11:11.599 very gradual downward trajectory, and one that even at the 0:11:11.679 --> 0:11:14.319 end of this year, our expectation is the measures of 0:11:14.360 --> 0:11:18.439 core prices, be they PC or cp I, are still 0:11:18.440 --> 0:11:23.120 likely to have four handles well above federal reserve targets. 0:11:23.120 --> 0:11:26.719 So maybe it is peak, but it's really more, as 0:11:26.800 --> 0:11:30.160 my colleagues have said, really more of a plateau. Nathan, 0:11:30.480 --> 0:11:33.240 how much control does the FED really have over this 0:11:33.360 --> 0:11:36.480 inflationary impulse? If so much of it is coming in 0:11:36.559 --> 0:11:39.800 addition to the housing in addition to the labor market, 0:11:40.040 --> 0:11:42.040 to what we're seeing in China, to what we're seeing 0:11:42.080 --> 0:11:44.720 with the oil markets, how much control can the federally have? 0:11:46.559 --> 0:11:50.640 This is this is the critical question now, Paul Paul 0:11:50.720 --> 0:11:54.920 Volker that taught us in the nineteen eighties that if 0:11:54.920 --> 0:11:58.480 the BED is aggressive enough, it can move that demand 0:11:58.520 --> 0:12:04.720 curve sufficiently to UH to tame inflation. But that is 0:12:04.720 --> 0:12:08.720 a very painful process, and I think Ultimately to get 0:12:08.760 --> 0:12:12.200 out of this without a recession, the fat is going 0:12:12.240 --> 0:12:15.800 to need some help from the outside world. We're gonna 0:12:15.800 --> 0:12:19.840 need to see these supply chains improving, commodity prices come down, 0:12:20.000 --> 0:12:22.680 and they's in the common feature of city group economics, 0:12:22.679 --> 0:12:26.360 from Villin Powders through Catherine Van to you is respect 0:12:26.400 --> 0:12:29.839 for the data. Do you take comfort in I m 0:12:30.000 --> 0:12:33.280 F or w t O global g d P guesses 0:12:33.360 --> 0:12:39.520 now or is it an impossible task? The reality here 0:12:39.920 --> 0:12:45.280 is that we as economists have this uh tendency to 0:12:45.880 --> 0:12:50.200 UH to forecast immaculate landings. But why do we do this? 0:12:50.320 --> 0:12:53.360 Why do we forecast the soft landing where inflation kind 0:12:53.360 --> 0:12:57.439 of eases down, grows slow some, and we avoid recession. 0:12:57.840 --> 0:13:00.640 The reality is that the other outcome are just so 0:13:00.800 --> 0:13:03.520 messy it's hard to figure out what they look like 0:13:03.679 --> 0:13:07.600 on paper. So we write down these these these soft 0:13:07.720 --> 0:13:10.839 landing scenarios, and there is a plausible path to a 0:13:10.960 --> 0:13:14.760 soft landing with some lock. But they're right now. The 0:13:14.800 --> 0:13:20.800 inflation risk, section risk, even the stagflation risk, is quite appreciable. 0:13:20.800 --> 0:13:24.720 And and those kinds of forecasts don't don't help me 0:13:24.760 --> 0:13:27.319 sleep a whole lot better at Nathan are we at 0:13:27.360 --> 0:13:31.240 any point where we turn to a nominal analysis from 0:13:31.280 --> 0:13:35.080 a real analysis, are things so out of whack we'd 0:13:35.120 --> 0:13:42.800 literally go back pre Arthur Burns As as inflation surges, 0:13:43.360 --> 0:13:46.120 you have to start thinking about the nominals as well 0:13:46.160 --> 0:13:48.800 as the reels. Now, to be clear, I think at 0:13:48.800 --> 0:13:51.440 the end of the day, how does the FED attraction? 0:13:52.120 --> 0:13:55.760 And the FED has to get traction ironically by thinking 0:13:55.840 --> 0:13:59.439 about the reels. And I think ultimately the question that 0:13:59.520 --> 0:14:02.520 the FED it's got a struggle with is how much 0:14:02.520 --> 0:14:06.440 are they gonna have to push interest rates positive in 0:14:06.720 --> 0:14:10.880 real terms to get traction on this thing? And in 0:14:10.960 --> 0:14:14.319 their SCP from a couple of months ago, they said, 0:14:14.360 --> 0:14:18.160 well just a little bit positive. That's not clear to me. 0:14:18.480 --> 0:14:20.360 That's not clear to me at all that we may 0:14:20.400 --> 0:14:23.800 need a substantially positive real rate. So it's the world's 0:14:23.840 --> 0:14:26.360 thinking more nominal. It's gonna be critical for the FED 0:14:26.440 --> 0:14:29.280 to think more real. Nan also gonna get you hope 0:14:29.280 --> 0:14:30.880 for you a Boddy as other wise Nathan shakes. That 0:14:31.360 --> 0:14:39.040 sits eight. Lisa shllet is with Morgan Stanley Wealth Management. 0:14:39.120 --> 0:14:43.120 She hinges everything and having a plan and then heaven 0:14:43.200 --> 0:14:46.760 forbid staying with the plan in times of stress? What's 0:14:46.760 --> 0:14:49.120 the plan, Lisa? And how do you have the courage 0:14:49.160 --> 0:14:53.400 to stay with it? Right now? So? Look, I actually 0:14:53.520 --> 0:14:57.160 think as radical as the last you know, week has 0:14:57.160 --> 0:15:00.000 been in volatile as the last week has been, there 0:15:00.040 --> 0:15:02.400 is an element of it that is somewhat predictable. And 0:15:02.440 --> 0:15:05.160 what I mean by that is that the market has 0:15:05.200 --> 0:15:08.720 finally gotten to the point where it's digested, Uh, the 0:15:08.880 --> 0:15:11.040 level and degree to which the FED is going to 0:15:11.080 --> 0:15:16.360 be hawkish, But they didn't hadn't yet really really, um, 0:15:16.400 --> 0:15:19.200 you know, fast forwarded that to what are the probabilities 0:15:19.200 --> 0:15:22.680 that the FED can really execute a soft landing? And 0:15:22.760 --> 0:15:25.960 so we know from history. You know that in the 0:15:26.000 --> 0:15:30.560 post World War two period, the FED has tightened roughly 0:15:30.640 --> 0:15:35.320 fourteen times. Eleven of those episodes have resulted in a recession, 0:15:35.800 --> 0:15:39.600 and only three times have we pulled off a soft landing. Uh. 0:15:39.640 --> 0:15:43.160 And we are operating this is a FED at JEROMEE. 0:15:43.160 --> 0:15:46.520 Powell admitted this that is operating with an against a 0:15:46.560 --> 0:15:51.080 backdrop where there's an extraordinary degree of difficulty. Not only 0:15:51.160 --> 0:15:56.280 is the macro environment complex, but the geopolitical environment is complex. 0:15:56.520 --> 0:16:00.400 And look, the FED itself is trying to do something 0:16:00.400 --> 0:16:04.480 that they've never done before, which is simultaneously raised rates 0:16:04.600 --> 0:16:07.680 and reduce the size of the balance sheet. So to me, 0:16:08.200 --> 0:16:12.160 yesterday was very much something to be expected that eventually 0:16:12.240 --> 0:16:15.000 we were going to get a growth scare where everyone 0:16:15.080 --> 0:16:18.800 starts worrying about the fact that we might in fact 0:16:18.840 --> 0:16:21.880 have a hard landing. And while we continue to be 0:16:21.920 --> 0:16:26.440 in the camp that says we don't see an imminent recession, 0:16:27.000 --> 0:16:31.080 the reality is is that growth may slow much faster, 0:16:31.880 --> 0:16:35.760 uh than than folks believe. And so it's notable to 0:16:35.760 --> 0:16:39.960 to your and Jonathan's point that finally the bond market 0:16:40.400 --> 0:16:44.560 is getting on the bandwagon, meaning starting to to worry 0:16:44.720 --> 0:16:49.400 less about upward moves and inflation and potentially beginning to 0:16:49.440 --> 0:16:53.680 think about downward moves and inflation, which are you know, 0:16:54.520 --> 0:16:57.240 a reflection of weaker growth, So at least a two 0:16:57.240 --> 0:16:59.200 pound question, just to be clear, it sounds like you 0:16:59.280 --> 0:17:02.040 expect one more down side and equity prices. But to 0:17:02.240 --> 0:17:04.520 the second part, if we have that dance side, that 0:17:04.600 --> 0:17:07.080 set off just the character the nature of the sound 0:17:07.080 --> 0:17:10.840 of change, Uh yeah, I do. I do think that 0:17:10.920 --> 0:17:14.359 it does because I think, um, you know, we start 0:17:14.400 --> 0:17:17.840 to get a lot more defensive. It's why why bonds 0:17:17.840 --> 0:17:20.840 are finally getting a bid here UH. And so I 0:17:20.880 --> 0:17:25.480 think that that defensive trade that unwound, the long duration, 0:17:25.680 --> 0:17:31.200 stable growth stock trade that was really unwinding fiercely last 0:17:31.240 --> 0:17:35.400 week UM starts to get a bid uh And And 0:17:35.440 --> 0:17:37.639 again it's what do I want to own if the 0:17:37.680 --> 0:17:42.480 economy is really genuinely slowing. So you're basically basically saying, Lisa, 0:17:42.640 --> 0:17:45.119 big tech is a bright spot for the next couple 0:17:45.119 --> 0:17:48.320 of months. So I want to be really careful because 0:17:48.400 --> 0:17:51.320 I don't know that I think big tech in in 0:17:51.400 --> 0:17:56.840 all caps is but I think long duration assets actively 0:17:57.000 --> 0:18:01.040 selected are the place to be. So we have begun 0:18:01.080 --> 0:18:04.920 to add duration. We started that about three or four 0:18:04.960 --> 0:18:08.199 weeks ago, albeit it was early and and you know, 0:18:08.240 --> 0:18:11.680 many of our clients who began to add back UH 0:18:11.720 --> 0:18:14.840 into bonds have not had a great three or four weeks. 0:18:15.480 --> 0:18:18.280 But but we do think that that that trade may 0:18:18.320 --> 0:18:22.840 begin to work, and some of the higher quality UH 0:18:23.600 --> 0:18:28.159 growth oriented names are certainly worth looking at today and 0:18:28.359 --> 0:18:31.920 and buying, And that's what we're advising our clients to do, Lisa. 0:18:31.920 --> 0:18:33.879 There have been some people who have talked about the 0:18:34.000 --> 0:18:37.720 unwind of certain nonprofitable tech companies and others as the 0:18:37.720 --> 0:18:39.800 bursting of a bubble. And I take a look at 0:18:39.800 --> 0:18:43.320 Peloton this morning, the shares were down from the peak 0:18:43.680 --> 0:18:47.160 even before going into today the shares getting massacred right 0:18:47.200 --> 0:18:50.880 now in pre market trading after they reported their earnings. 0:18:51.280 --> 0:18:54.560 Is Peloton a one off? Or is this uh something 0:18:54.680 --> 0:18:57.239 that is endemic that has not fully been beaten out 0:18:57.280 --> 0:19:01.200 of the system. Uh? And oh, I think we're starting 0:19:01.240 --> 0:19:05.000 to get there. Uh. And and on the stock side 0:19:05.000 --> 0:19:08.760 of things, I think we we certainly have. What's interesting 0:19:08.880 --> 0:19:12.880 is among the unprofitable tech companies, uh, the stocks may 0:19:12.920 --> 0:19:16.800 actually have led uh. And the credit market probably needs 0:19:16.840 --> 0:19:19.600 to catch up and and really blow some of these 0:19:20.000 --> 0:19:24.760 um you know triples see and junk spreads out even further. Um. 0:19:24.800 --> 0:19:28.440 But but from a stock perspective, you probably are starting 0:19:28.480 --> 0:19:30.840 to get to the point where there's enough blood and 0:19:30.960 --> 0:19:34.560 enough pain in the streets uh that these valuations start 0:19:34.640 --> 0:19:38.719 to look a little bit better. The key issue, however, 0:19:39.560 --> 0:19:43.160 is to recognize that companies are now and investors are 0:19:43.200 --> 0:19:47.119 now looking at you know, cost of capital, and that means, 0:19:47.160 --> 0:19:49.560 you know, to what extent has cost of debt gone 0:19:49.640 --> 0:19:52.280 up and to what extent has cost of equity gone up? 0:19:52.600 --> 0:19:56.919 And both have gone up. Uh in this rising uh 0:19:57.000 --> 0:20:00.560 you know rate environment and the policy pivot. Lisa Shanna 0:20:00.720 --> 0:20:04.399 awesome as a wife from Morgan Stanley Wealth Management. Lisa, 0:20:04.440 --> 0:20:13.600 thank you right now. Cathy joins Jones, chief fixed Income 0:20:13.680 --> 0:20:18.199 Strategists at the Schwab Center for Financial Research. Kathy, A 0:20:18.280 --> 0:20:25.399 given bondy TF is down in price nine annualized big loss. 0:20:26.160 --> 0:20:30.920 I would just the bond market handles price decline and 0:20:31.160 --> 0:20:35.280 a bond bear market differently than the equity market. What 0:20:35.400 --> 0:20:42.920 are you observing from SWAB clients? Is they enjoy price decline? Well, 0:20:42.960 --> 0:20:45.680 I'm not sure they're enjoying price decline and bond funds. 0:20:45.760 --> 0:20:50.199 But what we are saying is UM investors trying to 0:20:50.240 --> 0:20:55.000 take on a little more income by going into longer 0:20:55.080 --> 0:20:58.080 duration bonds. And this has been our call recently to 0:20:58.200 --> 0:21:02.160 start gradually, not at once, but gradually adding some duration 0:21:02.240 --> 0:21:04.800 as as yields go up, because you know, you have 0:21:04.880 --> 0:21:10.200 the opportunity now to get some relatively attractive coupons at 0:21:10.640 --> 0:21:13.520 prices that are often below par. So that means not 0:21:13.640 --> 0:21:17.199 only the opportunity to earn more incommon a portfolio, but 0:21:17.320 --> 0:21:22.199 also potential capital games. Where is the biggest opportunity right now, Kathy, 0:21:22.200 --> 0:21:24.520 when you talk about those coupons, is it in credit 0:21:24.600 --> 0:21:27.080 and the riskier the better, or is it in full 0:21:27.119 --> 0:21:31.639 faith and credit US treasuries. Well, I would cite it 0:21:31.680 --> 0:21:33.880 a little bit more carefully than that. There are two 0:21:33.880 --> 0:21:37.200 areas that we really like. One as municipal bonds. Um 0:21:37.320 --> 0:21:40.600 you can get on a tax equivalent basis for a 0:21:40.760 --> 0:21:44.800 very high income earner uh A north to five percent 0:21:45.200 --> 0:21:49.119 in municipal bomb, high quality municipal bonds. We're okay with 0:21:49.320 --> 0:21:52.720 investment grade, but we want to stay a little more 0:21:52.800 --> 0:21:55.600 careful because we do think we're going into or we 0:21:55.640 --> 0:21:58.840 are in credits part of the credit cycle where we'll 0:21:58.880 --> 0:22:02.240 see some further spread. I think we're not crazy about 0:22:02.280 --> 0:22:05.520 the high yield simply because this is this is the 0:22:05.680 --> 0:22:08.920 part of the cycle where high yield usually does most poorly. 0:22:09.520 --> 0:22:11.920 People forget that it's not the beginning of the rate 0:22:12.000 --> 0:22:14.760 hike cycle. It's usually the end of the rate high cycle, 0:22:15.200 --> 0:22:18.159 when the economy starting to weekend that you start to 0:22:18.160 --> 0:22:20.480 see those high yield spreads really move that, Kathy, I 0:22:20.520 --> 0:22:22.080 want to focus on that for a minute, because we 0:22:22.080 --> 0:22:25.560 saw a pretty pretty big move in spreads yesterday in 0:22:25.600 --> 0:22:28.120 the high yield sector, which is something new. We really 0:22:28.160 --> 0:22:30.639 hadn't been seeing credit respond in the same kind of 0:22:30.680 --> 0:22:33.600 way that stocks have been responding, and yet suddenly we 0:22:33.680 --> 0:22:36.240 do see some sort of indication here. Is this just 0:22:36.320 --> 0:22:39.760 the beginning of a widening of a protracted selloff and 0:22:39.800 --> 0:22:43.160 credit or is this basically some sort of mini capitulation 0:22:43.280 --> 0:22:48.119 that will be viable for a lot of investors. I 0:22:48.160 --> 0:22:51.040 think it's the former and not the ladder. So I 0:22:51.080 --> 0:22:53.720 think that we have seen, say, triple C is really 0:22:53.840 --> 0:22:58.040 underperformed for quite some well quite a while relative to say, 0:22:58.320 --> 0:23:00.320 you know, the higher end of the high yield market. 0:23:00.760 --> 0:23:03.439 But as we get into higher rates, you're starting to 0:23:03.520 --> 0:23:07.760 see the impact on cash flow for those weaker companies 0:23:07.800 --> 0:23:10.600 with weaker balance sheets, maybe not as great as a 0:23:10.720 --> 0:23:13.480 cash flow. It's one reason we don't like loans as 0:23:13.520 --> 0:23:16.880 well now, simply because we're starting to see the effect 0:23:16.880 --> 0:23:19.800 of the interest rate increases and that's probably going toor 0:23:19.920 --> 0:23:24.240 road the ability to to meet those obligations at the 0:23:24.320 --> 0:23:27.600 lower the weaker credits. So definitely would not be chasing 0:23:27.640 --> 0:23:29.880 how yield at this stage of the game. Kathy, there's 0:23:29.880 --> 0:23:33.679 a religion in the equity market that if you go down, correction, 0:23:33.760 --> 0:23:37.640 bear market, or worse. At some point you grow your 0:23:37.680 --> 0:23:40.359 way back to where you were the market high, and 0:23:40.400 --> 0:23:43.600 there's long spans where this has been a challenge. How 0:23:43.640 --> 0:23:45.800 do you do that in the bond market? If I'm 0:23:45.960 --> 0:23:50.880 x percent down from the summer of two thousand twenty, 0:23:51.000 --> 0:23:55.000 how do I grow myself back with yield if I 0:23:55.080 --> 0:24:02.280 don't have attendant growth underneath it like I have in stocks. Well, 0:24:02.520 --> 0:24:04.880 it depends. If you're holding individual bonds and you hold 0:24:04.920 --> 0:24:07.000 them to par, you're still gonna get. You're still going 0:24:07.080 --> 0:24:10.240 to get your principle and your interest payments barring a 0:24:10.320 --> 0:24:14.040 default all the way along. So you've earned whatever that 0:24:14.200 --> 0:24:17.400 current yield was when you bought the bond. If you're 0:24:17.400 --> 0:24:20.240 in a bond fund, it usually takes longer, but usually 0:24:20.280 --> 0:24:23.160 what will happen in a bond fund is the manager 0:24:23.240 --> 0:24:26.520 is reinvesting for higher income and on a total return 0:24:26.600 --> 0:24:30.760 basis over time, assuming that rates don't go sky high 0:24:30.800 --> 0:24:33.919 from here, which we don't think is likely. Um, you 0:24:33.960 --> 0:24:38.159 know you you're earned your way back with the income component. Kathy, 0:24:38.400 --> 0:24:40.800 thank you for bemist this morning. Kathy Jones that of 0:24:40.840 --> 0:24:45.080