WEBVTT - Surveillance: Time to Act on Inflation, Says Rogoff 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownowitz Jaily, we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.680 and of course on the Bloomberg Tournament right now. This 0:00:29.760 --> 0:00:32.080 is a great joy. He's one of the original guests 0:00:32.080 --> 0:00:35.440 to give us support on economics, finance, investment, and all 0:00:35.479 --> 0:00:40.200 of international relations. Kenneth Rogoff of Harvard University that joins 0:00:40.280 --> 0:00:42.120 us here and of course with his public service to 0:00:42.200 --> 0:00:45.800 the International Monetary Fund, a good tour of duty there 0:00:45.880 --> 0:00:49.479 a number of years ago. Ken Rogoff, I want to 0:00:49.520 --> 0:00:52.440 play right now for you and for our radio and 0:00:52.520 --> 0:00:56.880 television audience the comments of Adam Posing at the Peterson 0:00:56.960 --> 0:01:02.120 Institute on a need to lift inflation. Let's listen. One 0:01:02.160 --> 0:01:04.720 of the problems that we didn't foresee when we put 0:01:04.760 --> 0:01:08.399 in place inflation targets was we assumed it's in the 0:01:08.440 --> 0:01:11.240 books that we wrote. We assumed that you would be 0:01:11.280 --> 0:01:15.160 able to reset the target as economic knowledge and circumstances changed. 0:01:15.720 --> 0:01:18.720 We've never seen targets get raised for inflation targets. We 0:01:18.760 --> 0:01:23.000 should be opportunistically reflating. We should be saying, okay, inflation 0:01:23.080 --> 0:01:25.760 is now above three percent, let's re anchor it there. 0:01:26.680 --> 0:01:29.639 Ken rogoff Off your important book, one of my books 0:01:29.640 --> 0:01:32.360 of the year, The Curse of Cash? Should we fear 0:01:32.840 --> 0:01:37.160 the curse of inflation? Well, you know, it's not a 0:01:37.240 --> 0:01:42.119 crazy idea. I think that's a second best idea by far. 0:01:42.280 --> 0:01:45.920 The most elegant long term solution is cash is marginalized, 0:01:46.520 --> 0:01:49.520 is to move to effective negative interest right policy. But 0:01:49.520 --> 0:01:52.320 it's not crazy. But I mean the timing would be 0:01:52.360 --> 0:01:56.120 a little bit awkward. Right now, this isn't a gradual 0:01:56.320 --> 0:02:01.240 rise of inflation three They've lost control of the game here, 0:02:01.800 --> 0:02:04.080 and I think they kind of need to demonstrate that 0:02:04.160 --> 0:02:08.040 could if it's still high in three or three years 0:02:08.120 --> 0:02:10.799 or four years, it might be. I mean, I think 0:02:10.800 --> 0:02:13.640 this conversation will come up. Although I have to tell you, Tom, 0:02:13.680 --> 0:02:17.440 if lal Brainerd had been appointed FED chair, she was 0:02:17.639 --> 0:02:20.760 pretty sympathetic to this idea. I have a feeling to 0:02:20.800 --> 0:02:24.119 your own Powell might listen to it, but won't be 0:02:24.320 --> 0:02:31.440 who lost control of the game. Well, I mean, you know, 0:02:31.639 --> 0:02:36.959 the positive spin on policies simply that uh, they were 0:02:37.040 --> 0:02:40.840 buying insurance. Things turned out much better than we thought, 0:02:40.960 --> 0:02:45.840 the vaccines, the recovery, and so there's inflation, and it's 0:02:45.880 --> 0:02:48.239 sort of good news because it could have gone a 0:02:48.280 --> 0:02:51.359 lot worse. We could have had deflation. But I think 0:02:51.400 --> 0:02:54.800 that story is getting harder to tell, you know, really, 0:02:54.840 --> 0:02:56.919 starting six months ago, I think he was getting kind 0:02:56.960 --> 0:03:00.840 of clear that wasn't where we were. And the stimulus, 0:03:00.919 --> 0:03:04.880 particularly the March stimulus that Congress and the Biden administration 0:03:04.919 --> 0:03:08.400 put in place, was too much, too late, and the 0:03:08.480 --> 0:03:12.000 FED really pushed back. But then again, we wouldn't be 0:03:12.040 --> 0:03:15.440 talking about Chair Jerome Powell now, we'd be talking about 0:03:15.480 --> 0:03:19.320 Chair Lyle Brainer. I think with that hanging over his 0:03:19.440 --> 0:03:23.720 hattie really couldn't come Chet's stuff till your seminal graduate 0:03:23.840 --> 0:03:26.880 work with Maurice Hobsfeld. With what Stan Fisher road in 0:03:28.560 --> 0:03:32.000 and the system that Jerome Powell's in right now, does 0:03:32.040 --> 0:03:36.720 he need to fear instabilities or jump conditions as central 0:03:36.760 --> 0:03:40.840 banker of the world. Well, I think we're talking about 0:03:40.840 --> 0:03:45.280 inflation that tends to move gradually. Now. I know it 0:03:45.320 --> 0:03:48.960 hasn't felt very gradually in perspective, but when you look 0:03:49.000 --> 0:03:52.040 at you know, the great hyper inflations in Latin America 0:03:52.120 --> 0:03:55.920 in the eighties and nineties and the new Soviet republics. 0:03:56.280 --> 0:03:58.560 I mean, it actually takes a while to take off. 0:03:58.640 --> 0:04:02.880 It doesn't happen overnight. Um, but uh, you know you 0:04:02.920 --> 0:04:05.120 need to react at some time. Now we're talking about 0:04:05.120 --> 0:04:08.960 a crisis. If we're talking about another banking crisis, corporate 0:04:08.960 --> 0:04:13.280 debt crisis, that can come much more suddenly. I think 0:04:13.320 --> 0:04:17.680 emerging markets and development economies are just an accident waiting 0:04:17.680 --> 0:04:20.160 to happen now. And if we're talking about the FED 0:04:20.240 --> 0:04:24.440 being behind the curve, the International Monetary Fund is perhaps 0:04:24.520 --> 0:04:27.360 even more so. But I you know, I think right now, 0:04:27.400 --> 0:04:30.360 if we're talking about inflation, there is time to act. 0:04:30.960 --> 0:04:34.240 It doesn't mean that the longer you wait it doesn't 0:04:34.279 --> 0:04:37.720 get longer and more unpleasant to unwind it. I wanna 0:04:38.040 --> 0:04:40.680 double down on this whole idea of an accident waiting 0:04:40.680 --> 0:04:43.600 to happen can in the developing world? How much does 0:04:43.640 --> 0:04:46.400 that really hinge on the idea of a FED that 0:04:46.480 --> 0:04:48.880 most people think will be able to have controlled rate hikes, 0:04:48.920 --> 0:04:51.800 but some people worry have gotten a little bit out 0:04:51.839 --> 0:04:53.560 of control and are going to have to hike much 0:04:53.600 --> 0:04:59.080 more quickly. Well, it's certainly very sensitive for the hiking 0:04:59.120 --> 0:05:05.520 more quickly scenario. Uh, there every many many countries that 0:05:05.640 --> 0:05:09.200 sort of have access right now suddenly wouldn't That would 0:05:09.200 --> 0:05:11.680 really be catastrophic. And I'm not talking about a four 0:05:11.800 --> 0:05:14.240 percent high. Just if they had to hike by a 0:05:14.279 --> 0:05:17.760 full percent next year, I think that would trigger problems. 0:05:17.800 --> 0:05:19.960 But they're already a lot of problems. And what we 0:05:20.000 --> 0:05:25.200 call the frontier emerging markets. Uh, you know countries obviously 0:05:25.320 --> 0:05:29.000 Argentina eleven on have defaulted, but you could look at 0:05:29.000 --> 0:05:33.640 countries like each of Pakistan gonna really or you know, 0:05:33.720 --> 0:05:36.360 have very high debt, not a lot of market access, 0:05:36.720 --> 0:05:40.800 double digit inflation in some cases. Uh, you know, very 0:05:40.800 --> 0:05:43.840 different picture there, and there's not a lot they can 0:05:43.880 --> 0:05:46.640 do if there's a rapid FED high. And again I 0:05:46.680 --> 0:05:49.120 think the I m F has been behind the curve 0:05:49.200 --> 0:05:53.719 on this sort of not putting any conditionality, which made 0:05:53.720 --> 0:05:57.320 a lot of sense early on when it was a catastrophe, 0:05:57.760 --> 0:06:00.440 but as time has gone on, they haven't filed back. 0:06:00.480 --> 0:06:03.680 It's very similar to the FED going back to the FED. 0:06:03.800 --> 0:06:06.760 It can There was an implication in your comments earlier 0:06:06.839 --> 0:06:09.599 about how FED share J. Powell had he been more 0:06:09.680 --> 0:06:12.400 honest in his assessment six months ago about how he 0:06:12.400 --> 0:06:16.400 saw the economic picture he would not get renominated. What 0:06:16.440 --> 0:06:19.080 does that say in terms of how political the Federal 0:06:19.080 --> 0:06:22.080 Reserve is right now and how much market participants can 0:06:22.080 --> 0:06:26.239 trust the messaging that they're they're putting out there. Well, 0:06:26.279 --> 0:06:29.279 you know, there's always pressure on the Fed up to 0:06:29.320 --> 0:06:32.479 the reappointment of the chair, So that's not something new. 0:06:32.520 --> 0:06:36.200 Donald Trump was, you know, pressuring Janet Yellen in that period. 0:06:36.640 --> 0:06:40.680 I think she resisted more. The fat has become very politicized. 0:06:40.760 --> 0:06:43.280 It's a reflection of our society. It's a reflection of 0:06:43.320 --> 0:06:45.200 what they live in, what they have to put up with. 0:06:45.800 --> 0:06:47.880 And I think Jerome Powell is going to do his 0:06:48.120 --> 0:06:51.680 best to steer away from this. But but it's hard. 0:06:51.720 --> 0:06:54.680 Biden has a lot of appointments. There's all kinds of 0:06:54.720 --> 0:06:58.640 indirect pressures they can put on. I certainly we've seen 0:06:58.640 --> 0:07:02.000 a period where a lot of endemics have said we 0:07:02.000 --> 0:07:06.240 should have fiscal dominance followers, or policy shouldn't do that much, 0:07:06.360 --> 0:07:10.120 fiscal policy should take over. That's been actually almost a 0:07:10.240 --> 0:07:13.480 central theme and a lot of research we've seen it's nuts. 0:07:13.760 --> 0:07:16.280 I mean, fiscal policy is very political it should look 0:07:16.280 --> 0:07:20.680 at long term growth, distribution of income, trying to manage cycles. 0:07:20.680 --> 0:07:22.840 Look what happened in March. I mean, it's a perfect 0:07:22.880 --> 0:07:27.600 example of fiscal policy coming in too late, too much, 0:07:27.800 --> 0:07:30.880 wrong timing, and who knows, we may end up tightening 0:07:30.960 --> 0:07:32.800 now more than we need. You kind, I want to 0:07:32.800 --> 0:07:35.360 get to something that you know better than most Tom 0:07:35.360 --> 0:07:37.640 and I get some hate mails sometimes and hate mala 0:07:37.680 --> 0:07:39.240 had in the last twenty four hours is why don't 0:07:39.240 --> 0:07:42.320 you use the H word hyperinflation? Why you're scaned of it? 0:07:42.320 --> 0:07:44.400 While you're using that? I was just thinking, professor, if 0:07:44.440 --> 0:07:48.360 you could distinguish between problematic inflation the mid single digits, 0:07:48.360 --> 0:07:51.320 the high single digits, and the H word, and what 0:07:51.440 --> 0:07:54.000 happens when we cross that line and lose faith in 0:07:54.040 --> 0:07:58.280 the underlying, underlying means of exchange. Can can you walk 0:07:58.360 --> 0:08:01.360 us through that that dividing line, so you know, we 0:08:01.520 --> 0:08:05.600 put having a hyper inflation that's something like two thousand 0:08:05.720 --> 0:08:10.080 percent per year inflation, not even a hundred percent the 0:08:10.160 --> 0:08:12.840 United States. I think, Pete, if you look at annual 0:08:12.840 --> 0:08:16.880 inflation around thirteen percent back in the nineteen seventies the 0:08:17.000 --> 0:08:21.360 UK and Japan went over, that is not hyper inflation. 0:08:21.880 --> 0:08:26.560 Venezuel has had hyper inflation. Uh you know Zimbabwe and 0:08:26.640 --> 0:08:31.360 two thou two millions of percent inflation. Hyperinflation is a 0:08:31.520 --> 0:08:34.520 hyperbolic word. But on the other hand, let me tell you, 0:08:34.720 --> 0:08:37.480 if we got to thirteen percent inflation for a year, 0:08:37.760 --> 0:08:40.360 it would feel like hyper inflation in the United States 0:08:40.400 --> 0:08:43.840 because we have very complex financial markets, they're not built 0:08:43.880 --> 0:08:47.800 for this. You know. I think we could well see 0:08:48.000 --> 0:08:51.439 inflation stay up at three and a half four percent 0:08:51.800 --> 0:08:53.880 in a couple of years. I mean, I don't know 0:08:53.960 --> 0:08:57.320 that it's the modal outcome, but it's quite possible because 0:08:57.360 --> 0:08:59.760 I think as they try to start raising interest rights, 0:08:59.760 --> 0:09:04.679 they're o'clock, Tom, that is high corporate debt, public that 0:09:05.000 --> 0:09:08.440 the stock market, housing prices, you name it. Yeah, that 0:09:08.600 --> 0:09:11.720 wasn't the case in the early nineteen eighties. I worked 0:09:11.720 --> 0:09:14.440 at the Fellow Reserve under He was very grave, but 0:09:14.480 --> 0:09:17.400 he wasn't going up against that professor. This is a 0:09:17.400 --> 0:09:19.880 massive change, and some you and I've talked about it. 0:09:19.880 --> 0:09:21.640 It might not be higher inflation. We now we near 0:09:21.720 --> 0:09:26.400 those conditions, but somethink double triple to two we used 0:09:26.400 --> 0:09:28.959 to Tom, that's a massive change. I have this conversation 0:09:29.000 --> 0:09:30.720 with a bit late on the open with Premier Bub 0:09:30.840 --> 0:09:33.319 Michael and Jean Bavan. Great lineup, gun into the open. 0:09:33.600 --> 0:09:35.199 I really want to know, John, I really want to 0:09:35.240 --> 0:09:38.520 know where Priam Misers is. If, in the words of 0:09:38.600 --> 0:09:40.760 the professors, in a couple of years time, we're still 0:09:40.840 --> 0:09:42.840 up there, how does that change things for this market? 0:09:43.000 --> 0:09:45.560 Very much? We continue with Kenneth Rogoff and welcome all 0:09:45.559 --> 0:09:47.760 of you on radio and television. Will do equities here 0:09:47.760 --> 0:09:51.120 in a moment on this FAT day, Dr Rogoff, As 0:09:51.160 --> 0:09:53.600 you mentioned Paul Boker, I want to go back to 0:09:53.640 --> 0:09:57.319 the courage of nineteen seventy nine. The Doom and Gloom 0:09:57.440 --> 0:10:02.199 crew wants vulcar courage right now. I don't hear that 0:10:02.360 --> 0:10:05.880 from you that that is needed right now. What is 0:10:05.920 --> 0:10:08.679 the prescription not only for two thousand twenty two for 0:10:08.760 --> 0:10:12.439 the FED, but what kind of courage is necessary here 0:10:12.840 --> 0:10:19.000 for our monetary economists are leaders on this theory? Well, 0:10:19.040 --> 0:10:23.480 you know, we're in this pandemic where there's tremendous uncertainty. 0:10:23.520 --> 0:10:26.760 I think in nineteen seventy nine it was really pretty 0:10:26.800 --> 0:10:30.480 clear what would happen. There was an amazingly broad consensus 0:10:30.920 --> 0:10:34.240 that the FAT needed to do something and the politicians 0:10:34.280 --> 0:10:37.440 but pushed back against it. And I'm not Churchimmy Carter 0:10:37.559 --> 0:10:39.960 knew what he was getting into what he appointed Paul Boker, 0:10:40.080 --> 0:10:44.400 but Paul worker to the job in Greenspan, followed up, etcetera. Today, 0:10:44.520 --> 0:10:47.120 I mean, there's obviously a lot of lingering on certainty. 0:10:47.160 --> 0:10:50.560 I mentioned at the beginning that everybody was offs terrible, 0:10:50.760 --> 0:10:55.359 they're they're idiots. Well, I mean, that's it's Monday morning quarterbacking. 0:10:55.920 --> 0:10:58.720 I didn't know when the when the pandemic broke out 0:10:58.760 --> 0:11:01.720 that we'd have the vaccine as quickly. We didn't know 0:11:01.840 --> 0:11:05.120 how much we'd adapt. I mean, there were predictions about it, 0:11:05.120 --> 0:11:08.240 but the modal prediction was for much worse. I think 0:11:08.280 --> 0:11:11.439 the mistakes have come, you know, more recently, where he's 0:11:11.480 --> 0:11:13.840 going to have to be courageous. He's going to raise 0:11:14.160 --> 0:11:17.480 right next year. It seem pretty likely to me. Where 0:11:17.480 --> 0:11:20.360 he has to get courageous is you know things are 0:11:20.360 --> 0:11:22.839 going to start seeming a little shaky, there's gonna be 0:11:22.920 --> 0:11:26.920 pushed back, and we had inflation still be up, and 0:11:27.440 --> 0:11:30.320 you know what if he needs to take rates by 0:11:30.559 --> 0:11:35.400 two years from now to uh that that could be 0:11:35.640 --> 0:11:37.600 you know, it's easy to write on paper. But that 0:11:37.640 --> 0:11:41.400 could be very, very difficult to steer politically, Ken Rogoff LUSA, 0:11:41.400 --> 0:11:43.920 and I would like to shift the conversation to this 0:11:44.120 --> 0:11:46.760 mystery of two thousand twenty one, which is the ascent 0:11:46.920 --> 0:11:50.040 of bitcoin. You were out front on this with the 0:11:50.080 --> 0:11:54.679 Curse of Cash, looking at cashless societies, the criminality of 0:11:54.760 --> 0:11:57.760 the system. We looked at negative interest rates as well. 0:11:58.360 --> 0:12:02.680 Your thoughts on the endure ability of bitcoin and crypto 0:12:02.800 --> 0:12:05.439 and I take this off of Alan Hour's work at 0:12:05.440 --> 0:12:11.319 the Bank of International Settlements fold bitcoin into your seminal work, 0:12:11.520 --> 0:12:16.000 the Curse of Cash. Well, I talked about it extensively 0:12:16.160 --> 0:12:18.680 the last part of my books all about central bank 0:12:18.720 --> 0:12:23.240 digital currency and UH cryptocurrencies. I think the thing I 0:12:23.280 --> 0:12:26.200 would say I got wrong was the pace at which 0:12:26.280 --> 0:12:31.120 regulation would react. Regulation does need to react, I think, 0:12:31.400 --> 0:12:37.520 much more dramatically than it has I suspect eventually, UH 0:12:37.840 --> 0:12:41.800 pseudonymous cryptocurrencies are basically going to have to go band 0:12:41.880 --> 0:12:44.640 in the advanced economies. And that was sort of a 0:12:44.640 --> 0:12:47.000 prediction of my book, as it was just too easy 0:12:47.040 --> 0:12:50.760 to avoid taxes, too easy induced. I mentioned before the program, 0:12:50.760 --> 0:12:53.120 I'm doing a lot of research on these issues now, 0:12:53.720 --> 0:12:57.200 but boy, you know, the dynamics of regulation, you know, 0:12:57.720 --> 0:13:02.800 bitcoin e t f A, allowing the big investment houses 0:13:03.000 --> 0:13:08.200 to set up you know, funds and current retention funds 0:13:08.240 --> 0:13:11.480 to invest. An analogy I like to make is a 0:13:11.559 --> 0:13:14.040 little bit like what if he found a diamond. Et 0:13:14.240 --> 0:13:16.840 f was a really good idea, Okay, I want to 0:13:16.880 --> 0:13:18.600 invest in, and then what if I tell you it's 0:13:18.679 --> 0:13:21.720 blood diamonds that you're investing in. I mean, if you 0:13:21.760 --> 0:13:25.520 look at the actual uses of pseudonymous cryptocurrencies, I don't 0:13:25.520 --> 0:13:28.480 think it's something we can tolerate. But I got it 0:13:28.480 --> 0:13:30.679 wrong five years ago at the pace at which this 0:13:30.760 --> 0:13:33.440 would happen and drag out for a long time, and 0:13:33.480 --> 0:13:36.280 therefore they can have a lot of value because I mean, 0:13:36.320 --> 0:13:38.400 oil and gas have a lot of value even though 0:13:38.440 --> 0:13:40.640 we think we won't be using them in four or 0:13:40.679 --> 0:13:43.920 fifty years. Lisa, this is incredibly important. I thought you 0:13:44.040 --> 0:13:46.880 just heard, Lisa, was James Diamond falling off his chair 0:13:46.960 --> 0:13:50.480 down on Park Avenue. To deal with this, I mean, Lisa, 0:13:50.559 --> 0:13:54.480 this is incredibly important. How the regulation, how Gensler hasn't 0:13:54.480 --> 0:13:57.000 stepped in well, and he has been pretty vocal about 0:13:57.040 --> 0:13:58.719 the need to do so. In trying to be a 0:13:58.720 --> 0:14:01.520 little bit more aggressive going forward, But there has been 0:14:01.520 --> 0:14:04.160 a feeling of by the government to not want to 0:14:04.200 --> 0:14:07.920 stifle innovation at a time when the technological advancements of 0:14:07.960 --> 0:14:10.199 the United States have really driven a lot of the growth. 0:14:10.240 --> 0:14:13.600 Professor Rogolf, there is a theory out there that when 0:14:13.640 --> 0:14:16.560 you pull the tide back at a certain point, there 0:14:16.760 --> 0:14:18.840 is a lot of malfeasance. There are a lot of 0:14:18.960 --> 0:14:21.400 very frothy spots that would get knocked out, and that 0:14:21.440 --> 0:14:24.200 the Fed cannot allow that to happen because that would 0:14:24.240 --> 0:14:27.680 torpedo and economy that it has very few tools left 0:14:27.880 --> 0:14:30.560 to accurately prop up. Do you agree that the Federal 0:14:30.600 --> 0:14:33.520 Reserve in the modern incarnation is going to be vastly 0:14:33.640 --> 0:14:37.040 more involved in activists just by virtue of the potential 0:14:37.080 --> 0:14:42.640 consequences If they're not, so you're going beyond cryptos I 0:14:42.680 --> 0:14:47.720 am yeah. I mean, well, I think it. I don't 0:14:47.760 --> 0:14:50.600 know if it makes them more activists or less. I mean, 0:14:50.680 --> 0:14:53.840 I think in the immediate future, the next few years, 0:14:54.200 --> 0:14:57.280 the difficulty for the FAT is that they might need 0:14:57.320 --> 0:15:01.480 to raise interest rates cyclically quite a bit. And and and frankly, 0:15:01.600 --> 0:15:05.040 I think the three basis point drop in real interest 0:15:05.120 --> 0:15:07.840 rates that's happened since two thousand and seven. Looking at 0:15:07.840 --> 0:15:11.760 the ten year UM, I think part of that trend, 0:15:11.880 --> 0:15:14.960 maybe a third of it or sixth of it as trend, 0:15:15.200 --> 0:15:17.640 but some of it's not, and they're likely to have 0:15:17.760 --> 0:15:21.360 to retrace some of that. And at these market levels, 0:15:21.440 --> 0:15:23.800 you know, you can just go down the asset list 0:15:23.920 --> 0:15:27.400 of everything. It's going to be very painful. And that's 0:15:27.400 --> 0:15:30.720 why I suspect that despite the tough talk that we're 0:15:30.720 --> 0:15:35.600 going to get now, when things start pushing back, they're 0:15:35.640 --> 0:15:39.480 going to find it harder to scale back than they think. 0:15:39.760 --> 0:15:42.280 I'm not saying, you know again, I'm glad we're getting 0:15:42.280 --> 0:15:45.400 out of this. I'm glad the economy is recovering, but 0:15:45.480 --> 0:15:48.920 it's they're in a very difficult spot. Thank you so 0:15:49.000 --> 0:15:51.840 much for an extended conversation with Harvard University, and of 0:15:51.880 --> 0:15:55.360 course the Cursive cash wonderful, as well as other work 0:15:55.520 --> 0:16:04.080 as well. Ye let us start strong with David Constance. 0:16:04.080 --> 0:16:06.920 She few us strategists at Goldman Sex. He's been a 0:16:07.000 --> 0:16:10.880 huge advantage to us in describing a bullmarket that he 0:16:10.960 --> 0:16:14.040 needs to be invested in the big fear right now. 0:16:14.160 --> 0:16:17.360 David is a silliness over Breath five stocks going up, 0:16:17.400 --> 0:16:21.240 everything else terrible in the fear of a draw down. 0:16:21.400 --> 0:16:25.440 Tie the two together. Well, the subject of a drawing down, 0:16:25.440 --> 0:16:27.600 of course, will bring happiness to at least that you 0:16:27.680 --> 0:16:32.120 hear about that. But the idea of a narrowing breath 0:16:32.240 --> 0:16:35.400 market is I think an important characteristic of the last 0:16:35.400 --> 0:16:38.720 six months. So there's been a relatively few stocks that 0:16:38.800 --> 0:16:41.960 have driven the market to these pretty much record levels, 0:16:42.480 --> 0:16:46.120 and the history would suggest that over the next three 0:16:46.160 --> 0:16:49.600 or six months you'll get a larger than average, a 0:16:49.720 --> 0:16:52.720 deeper than average draw down, say, for example, instead of 0:16:52.720 --> 0:16:55.760 a four percent draw down over time, over a couple 0:16:55.760 --> 0:16:58.440 of months period, may likely get an eight percent draw down. 0:16:59.120 --> 0:17:03.120 That's what history would suggest. Once there's such a significant 0:17:03.520 --> 0:17:06.240 narrowing of breath in the market. However, if you think 0:17:06.240 --> 0:17:08.560 about where you end the not just a year, but 0:17:08.640 --> 0:17:12.200 over that period of time, equity prices likely to be higher. 0:17:12.440 --> 0:17:14.919 Why is that the case? All of the focus today 0:17:14.960 --> 0:17:18.480 and your conversations before have been about the announcement of 0:17:18.560 --> 0:17:21.080 the FED today and the dot plot and the tapering. 0:17:21.359 --> 0:17:24.600 All those are important, but the fundamental issue and equities 0:17:24.680 --> 0:17:28.160 has been this year you've had a huge spike in commodities, 0:17:28.440 --> 0:17:32.320 You've had supply chain disruption, You've had difficulty in companies 0:17:32.520 --> 0:17:35.679 finding and keeping employees, and you've had the variants the 0:17:35.720 --> 0:17:40.600 delta and an omicron. All these issues. Yet profit margins 0:17:40.840 --> 0:17:44.320 in the United States across every sector or at record 0:17:44.560 --> 0:17:48.800 high levels. Managements have been very nimble in basically dealing 0:17:48.840 --> 0:17:50.639 with these these issues. And so we look at the 0:17:51.400 --> 0:17:55.640 two earnings up around eight percent. Largely economy is still 0:17:55.680 --> 0:17:59.800 growing at a decelerating pace, margins increasing slightly. That is 0:17:59.840 --> 0:18:04.119 the story for two. You have a flat valuation, in 0:18:04.160 --> 0:18:07.959 my opinion, that's how you get to five are up 0:18:08.040 --> 0:18:11.840 roughly maybe eleven percent, told to return when you add 0:18:11.840 --> 0:18:14.320 and dividend yields. So, David, just to be clear, I'm 0:18:14.320 --> 0:18:17.080 not rooting for a down draft here, but I do 0:18:17.200 --> 0:18:19.160 think a lot of people have been talking about how 0:18:19.200 --> 0:18:22.560 things look perilously valued. Your argument is they are not 0:18:22.640 --> 0:18:25.920 because you're going to get the ongoing margin, a sort 0:18:25.920 --> 0:18:28.840 of incremental growth in terms of how much they're expanding. 0:18:29.359 --> 0:18:31.840 What's the down case scenario, just because I want to 0:18:31.840 --> 0:18:34.080 be in brand here, you know, what's the sense that 0:18:34.119 --> 0:18:36.560 we're going to get some kind of rate hike or 0:18:36.800 --> 0:18:40.520 savings accounts that get depleted and the consumers say, no, Moss, 0:18:40.560 --> 0:18:42.679 We're not going to accept and give you money and 0:18:42.800 --> 0:18:45.840 not only pay you enough for more inflation, but then more. 0:18:47.160 --> 0:18:50.720 The least of the disconnect and the discussion with most 0:18:50.760 --> 0:18:57.160 portfolio managers relates to the situation that fast growing companies 0:18:57.160 --> 0:19:00.679 that are fast profit forecast fast fast group profit growth 0:19:00.960 --> 0:19:05.160 and high margin companies trade at race basically the same 0:19:05.640 --> 0:19:10.240 valuation as fast growing but negative margins losing money or 0:19:10.520 --> 0:19:15.480 very thin profit margins. Those two uh groups of stocks 0:19:15.920 --> 0:19:18.280 is anomalous that they would be trading it roughly the 0:19:18.320 --> 0:19:21.240 same valuation. To give you a number, roughly sort of 0:19:21.359 --> 0:19:24.359 nine times enterprise value of sales. What are we talking about. 0:19:24.440 --> 0:19:28.160 We're talking about companies with a forecast to say, revenue 0:19:28.160 --> 0:19:33.000 growth both sides, but some are having margins, others basically 0:19:33.000 --> 0:19:36.800 companies losing money. And the issue is as rates go higher, 0:19:37.000 --> 0:19:39.440 and to be clear, that is the forecast of golden sects, 0:19:39.480 --> 0:19:42.520 a tenure treasury yields will climb towards around two p 0:19:42.920 --> 0:19:45.879 at the end of next year. In that environment, it 0:19:46.040 --> 0:19:50.240 is exceedingly unlikely that you get the same valuation for 0:19:50.280 --> 0:19:52.800 these two groups of stocks, and the idea the market 0:19:52.840 --> 0:19:56.920 is unforgiving if companies which have high revenue growth and 0:19:57.000 --> 0:20:00.320 all the valuation is dependent on that revenue growth, as 0:20:00.359 --> 0:20:03.400 compared with companies where there's rapid revenue growth but there's 0:20:03.400 --> 0:20:06.160 also high profit margins to work with. That's the central 0:20:06.200 --> 0:20:09.720 tension in most conversations with fund managers because so many 0:20:09.760 --> 0:20:13.760 of the money losing, loss making growth stocks are very 0:20:13.880 --> 0:20:17.119 much in the meme aspector of the uh sor the 0:20:17.119 --> 0:20:20.320 glamour stocks in the market that everyone has has been 0:20:20.400 --> 0:20:23.160 so benefited from in the profit over the last couple 0:20:23.160 --> 0:20:25.399 of years in terms of performance, David, the obsession now, 0:20:25.400 --> 0:20:27.159 as you know, is to look forward twelve months. Can 0:20:27.200 --> 0:20:29.720 we just reflect on the last twelve months briefly? I 0:20:29.720 --> 0:20:32.560 remember about twelve months ago looking at your original forecast 0:20:32.600 --> 0:20:35.480 for the SMP five hundred, which was forty three hundred, 0:20:35.680 --> 0:20:37.359 and when that first came out, I think the SMP 0:20:37.520 --> 0:20:39.640 was in and around thirty five hundred, and we looked 0:20:39.680 --> 0:20:42.480 at your forecast, looked at JP Morgan's which was a 0:20:42.480 --> 0:20:45.080 little bit higher, and everybody sat there and said, come on, 0:20:45.280 --> 0:20:47.120 this is ridiculous. We're really going to have a year 0:20:47.119 --> 0:20:49.720 that big. We broke through forty seven hundred before we 0:20:49.760 --> 0:20:51.280 got to the end of the year, David, I wanted 0:20:51.280 --> 0:20:53.560 them to stand from your standpoint when we play this 0:20:53.640 --> 0:20:55.920 game each and every year at this time of year, 0:20:55.960 --> 0:20:58.600 when you look back twelve months, what's been the biggest 0:20:58.680 --> 0:21:00.480 lesson for you in the team as you speak to clients. 0:21:01.520 --> 0:21:03.680 So the biggest lesson, and you're right, at this time 0:21:03.760 --> 0:21:06.800 last year, our forecast for the SMP five hundred at 0:21:06.800 --> 0:21:12.359 the end of and we lifted that in August. The 0:21:12.359 --> 0:21:15.639 biggest surprise has been the resilient In my opinion, the 0:21:15.640 --> 0:21:20.080 biggest surprise has been the resilience of corporate margins. Uh 0:21:20.119 --> 0:21:22.120 and that's been a key driver of why you've had 0:21:22.680 --> 0:21:25.000 earnings and has really been an earnings led market. I 0:21:25.000 --> 0:21:28.040 think that's really the most important development. It has not 0:21:28.560 --> 0:21:33.479 been a valuation expansion story. It's been a earnings led market. 0:21:33.520 --> 0:21:36.800 And I looked into Jonathan and that is the same 0:21:37.040 --> 0:21:42.240 outlook that we're anticipating, which is earnings climbing around eight percent. 0:21:42.560 --> 0:21:45.200 The other aspect that was surprising to me is all 0:21:45.280 --> 0:21:47.199 year long, and when you've been invited me on as 0:21:47.240 --> 0:21:49.639 a guest most of this year, we've been looking and 0:21:49.800 --> 0:21:55.320 handicapping the probability of a higher corporate tax rate. We 0:21:55.320 --> 0:21:57.680 were assuming most of this year there would be some 0:21:57.800 --> 0:22:02.040 legislation pass some reconciliation led inislation passed this year and 0:22:02.119 --> 0:22:05.879 affecting and head wind to profit growth next year. But 0:22:05.960 --> 0:22:08.920 now it looks as though whatever legislation may or may 0:22:08.960 --> 0:22:12.000 not be passed, and I do expect some legislation be passed, 0:22:12.160 --> 0:22:15.920 but that tax headwind tax hike will not affect company 0:22:15.960 --> 0:22:21.080 profits until three So basically that extra earnings in yours 0:22:21.080 --> 0:22:24.080 in yours to the investor. That's the other so profit 0:22:24.119 --> 0:22:27.560 margins and the lack of an increase in tax legislation 0:22:27.680 --> 0:22:30.200 I think have been a too surprises to me. David. 0:22:30.280 --> 0:22:33.520 Your distinction, as you say, just shut up and own him, 0:22:33.720 --> 0:22:38.000 own a high growth, own high margin, own high profits stocks. 0:22:38.240 --> 0:22:41.520 And there's x number of those as well. Are they 0:22:41.640 --> 0:22:47.199 under owned or over owned right now? Well, it depends 0:22:47.200 --> 0:22:49.919 if you want to talk about the hedge fund community 0:22:50.040 --> 0:22:52.480 or the mutual fund community, so Tom, and that makes 0:22:52.680 --> 0:22:56.959 a difference distinction which which clients we're looking at. So 0:22:57.080 --> 0:22:59.720 if you look at the hedge fund community, the leverage community, 0:22:59.800 --> 0:23:05.000 by basically owning the leading stocks in the market. That's 0:23:05.000 --> 0:23:08.480 been persistent for twenty years. We look at this every 0:23:08.560 --> 0:23:10.760