Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownowitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Tournament right now. This
Speaker 1: is a great joy. He's one of the original guests
Speaker 1: to give us support on economics, finance, investment, and all
Speaker 1: of international relations. Kenneth Rogoff of Harvard University that joins
Speaker 1: us here and of course with his public service to
Speaker 1: the International Monetary Fund, a good tour of duty there
Speaker 1: a number of years ago. Ken Rogoff, I want to
Speaker 1: play right now for you and for our radio and
Speaker 1: television audience the comments of Adam Posing at the Peterson
Speaker 1: Institute on a need to lift inflation. Let's listen. One
Speaker 1: of the problems that we didn't foresee when we put
Speaker 1: in place inflation targets was we assumed it's in the
Speaker 1: books that we wrote. We assumed that you would be
Speaker 1: able to reset the target as economic knowledge and circumstances changed.
Speaker 1: We've never seen targets get raised for inflation targets. We
Speaker 1: should be opportunistically reflating. We should be saying, okay, inflation
Speaker 1: is now above three percent, let's re anchor it there.
Speaker 1: Ken rogoff Off your important book, one of my books
Speaker 1: of the year, The Curse of Cash? Should we fear
Speaker 1: the curse of inflation? Well, you know, it's not a
Speaker 1: crazy idea. I think that's a second best idea by far.
Speaker 1: The most elegant long term solution is cash is marginalized,
Speaker 1: is to move to effective negative interest right policy. But
Speaker 1: it's not crazy. But I mean the timing would be
Speaker 1: a little bit awkward. Right now, this isn't a gradual
Speaker 1: rise of inflation three They've lost control of the game here,
Speaker 1: and I think they kind of need to demonstrate that
Speaker 1: could if it's still high in three or three years
Speaker 1: or four years, it might be. I mean, I think
Speaker 1: this conversation will come up. Although I have to tell you, Tom,
Speaker 1: if lal Brainerd had been appointed FED chair, she was
Speaker 1: pretty sympathetic to this idea. I have a feeling to
Speaker 1: your own Powell might listen to it, but won't be
Speaker 1: who lost control of the game. Well, I mean, you know,
Speaker 1: the positive spin on policies simply that uh, they were
Speaker 1: buying insurance. Things turned out much better than we thought,
Speaker 1: the vaccines, the recovery, and so there's inflation, and it's
Speaker 1: sort of good news because it could have gone a
Speaker 1: lot worse. We could have had deflation. But I think
Speaker 1: that story is getting harder to tell, you know, really,
Speaker 1: starting six months ago, I think he was getting kind
Speaker 1: of clear that wasn't where we were. And the stimulus,
Speaker 1: particularly the March stimulus that Congress and the Biden administration
Speaker 1: put in place, was too much, too late, and the
Speaker 1: FED really pushed back. But then again, we wouldn't be
Speaker 1: talking about Chair Jerome Powell now, we'd be talking about
Speaker 1: Chair Lyle Brainer. I think with that hanging over his
Speaker 1: hattie really couldn't come Chet's stuff till your seminal graduate
Speaker 1: work with Maurice Hobsfeld. With what Stan Fisher road in
Speaker 1: and the system that Jerome Powell's in right now, does
Speaker 1: he need to fear instabilities or jump conditions as central
Speaker 1: banker of the world. Well, I think we're talking about
Speaker 1: inflation that tends to move gradually. Now. I know it
Speaker 1: hasn't felt very gradually in perspective, but when you look
Speaker 1: at you know, the great hyper inflations in Latin America
Speaker 1: in the eighties and nineties and the new Soviet republics.
Speaker 1: I mean, it actually takes a while to take off.
Speaker 1: It doesn't happen overnight. Um, but uh, you know you
Speaker 1: need to react at some time. Now we're talking about
Speaker 1: a crisis. If we're talking about another banking crisis, corporate
Speaker 1: debt crisis, that can come much more suddenly. I think
Speaker 1: emerging markets and development economies are just an accident waiting
Speaker 1: to happen now. And if we're talking about the FED
Speaker 1: being behind the curve, the International Monetary Fund is perhaps
Speaker 1: even more so. But I you know, I think right now,
Speaker 1: if we're talking about inflation, there is time to act.
Speaker 1: It doesn't mean that the longer you wait it doesn't
Speaker 1: get longer and more unpleasant to unwind it. I wanna
Speaker 1: double down on this whole idea of an accident waiting
Speaker 1: to happen can in the developing world? How much does
Speaker 1: that really hinge on the idea of a FED that
Speaker 1: most people think will be able to have controlled rate hikes,
Speaker 1: but some people worry have gotten a little bit out
Speaker 1: of control and are going to have to hike much
Speaker 1: more quickly. Well, it's certainly very sensitive for the hiking
Speaker 1: more quickly scenario. Uh, there every many many countries that
Speaker 1: sort of have access right now suddenly wouldn't That would
Speaker 1: really be catastrophic. And I'm not talking about a four
Speaker 1: percent high. Just if they had to hike by a
Speaker 1: full percent next year, I think that would trigger problems.
Speaker 1: But they're already a lot of problems. And what we
Speaker 1: call the frontier emerging markets. Uh, you know countries obviously
Speaker 1: Argentina eleven on have defaulted, but you could look at
Speaker 1: countries like each of Pakistan gonna really or you know,
Speaker 1: have very high debt, not a lot of market access,
Speaker 1: double digit inflation in some cases. Uh, you know, very
Speaker 1: different picture there, and there's not a lot they can
Speaker 1: do if there's a rapid FED high. And again I
Speaker 1: think the I m F has been behind the curve
Speaker 1: on this sort of not putting any conditionality, which made
Speaker 1: a lot of sense early on when it was a catastrophe,
Speaker 1: but as time has gone on, they haven't filed back.
Speaker 1: It's very similar to the FED going back to the FED.
Speaker 1: It can There was an implication in your comments earlier
Speaker 1: about how FED share J. Powell had he been more
Speaker 1: honest in his assessment six months ago about how he
Speaker 1: saw the economic picture he would not get renominated. What
Speaker 1: does that say in terms of how political the Federal
Speaker 1: Reserve is right now and how much market participants can
Speaker 1: trust the messaging that they're they're putting out there. Well,
Speaker 1: you know, there's always pressure on the Fed up to
Speaker 1: the reappointment of the chair, So that's not something new.
Speaker 1: Donald Trump was, you know, pressuring Janet Yellen in that period.
Speaker 1: I think she resisted more. The fat has become very politicized.
Speaker 1: It's a reflection of our society. It's a reflection of
Speaker 1: what they live in, what they have to put up with.
Speaker 1: And I think Jerome Powell is going to do his
Speaker 1: best to steer away from this. But but it's hard.
Speaker 1: Biden has a lot of appointments. There's all kinds of
Speaker 1: indirect pressures they can put on. I certainly we've seen
Speaker 1: a period where a lot of endemics have said we
Speaker 1: should have fiscal dominance followers, or policy shouldn't do that much,
Speaker 1: fiscal policy should take over. That's been actually almost a
Speaker 1: central theme and a lot of research we've seen it's nuts.
Speaker 1: I mean, fiscal policy is very political it should look
Speaker 1: at long term growth, distribution of income, trying to manage cycles.
Speaker 1: Look what happened in March. I mean, it's a perfect
Speaker 1: example of fiscal policy coming in too late, too much,
Speaker 1: wrong timing, and who knows, we may end up tightening
Speaker 1: now more than we need. You kind, I want to
Speaker 1: get to something that you know better than most Tom
Speaker 1: and I get some hate mails sometimes and hate mala
Speaker 1: had in the last twenty four hours is why don't
Speaker 1: you use the H word hyperinflation? Why you're scaned of it?
Speaker 1: While you're using that? I was just thinking, professor, if
Speaker 1: you could distinguish between problematic inflation the mid single digits,
Speaker 1: the high single digits, and the H word, and what
Speaker 1: happens when we cross that line and lose faith in
Speaker 1: the underlying, underlying means of exchange. Can can you walk
Speaker 1: us through that that dividing line, so you know, we
Speaker 1: put having a hyper inflation that's something like two thousand
Speaker 1: percent per year inflation, not even a hundred percent the
Speaker 1: United States. I think, Pete, if you look at annual
Speaker 1: inflation around thirteen percent back in the nineteen seventies the
Speaker 1: UK and Japan went over, that is not hyper inflation.
Speaker 1: Venezuel has had hyper inflation. Uh you know Zimbabwe and
Speaker 1: two thou two millions of percent inflation. Hyperinflation is a
Speaker 1: hyperbolic word. But on the other hand, let me tell you,
Speaker 1: if we got to thirteen percent inflation for a year,
Speaker 1: it would feel like hyper inflation in the United States
Speaker 1: because we have very complex financial markets, they're not built
Speaker 1: for this. You know. I think we could well see
Speaker 1: inflation stay up at three and a half four percent
Speaker 1: in a couple of years. I mean, I don't know
Speaker 1: that it's the modal outcome, but it's quite possible because
Speaker 1: I think as they try to start raising interest rights,
Speaker 1: they're o'clock, Tom, that is high corporate debt, public that
Speaker 1: the stock market, housing prices, you name it. Yeah, that
Speaker 1: wasn't the case in the early nineteen eighties. I worked
Speaker 1: at the Fellow Reserve under He was very grave, but
Speaker 1: he wasn't going up against that professor. This is a
Speaker 1: massive change, and some you and I've talked about it.
Speaker 1: It might not be higher inflation. We now we near
Speaker 1: those conditions, but somethink double triple to two we used
Speaker 1: to Tom, that's a massive change. I have this conversation
Speaker 1: with a bit late on the open with Premier Bub
Speaker 1: Michael and Jean Bavan. Great lineup, gun into the open.
Speaker 1: I really want to know, John, I really want to
Speaker 1: know where Priam Misers is. If, in the words of
Speaker 1: the professors, in a couple of years time, we're still
Speaker 1: up there, how does that change things for this market?
Speaker 1: Very much? We continue with Kenneth Rogoff and welcome all
Speaker 1: of you on radio and television. Will do equities here
Speaker 1: in a moment on this FAT day, Dr Rogoff, As
Speaker 1: you mentioned Paul Boker, I want to go back to
Speaker 1: the courage of nineteen seventy nine. The Doom and Gloom
Speaker 1: crew wants vulcar courage right now. I don't hear that
Speaker 1: from you that that is needed right now. What is
Speaker 1: the prescription not only for two thousand twenty two for
Speaker 1: the FED, but what kind of courage is necessary here
Speaker 1: for our monetary economists are leaders on this theory? Well,
Speaker 1: you know, we're in this pandemic where there's tremendous uncertainty.
Speaker 1: I think in nineteen seventy nine it was really pretty
Speaker 1: clear what would happen. There was an amazingly broad consensus
Speaker 1: that the FAT needed to do something and the politicians
Speaker 1: but pushed back against it. And I'm not Churchimmy Carter
Speaker 1: knew what he was getting into what he appointed Paul Boker,
Speaker 1: but Paul worker to the job in Greenspan, followed up, etcetera. Today,
Speaker 1: I mean, there's obviously a lot of lingering on certainty.
Speaker 1: I mentioned at the beginning that everybody was offs terrible,
Speaker 1: they're they're idiots. Well, I mean, that's it's Monday morning quarterbacking.
Speaker 1: I didn't know when the when the pandemic broke out
Speaker 1: that we'd have the vaccine as quickly. We didn't know
Speaker 1: how much we'd adapt. I mean, there were predictions about it,
Speaker 1: but the modal prediction was for much worse. I think
Speaker 1: the mistakes have come, you know, more recently, where he's
Speaker 1: going to have to be courageous. He's going to raise
Speaker 1: right next year. It seem pretty likely to me. Where
Speaker 1: he has to get courageous is you know things are
Speaker 1: going to start seeming a little shaky, there's gonna be
Speaker 1: pushed back, and we had inflation still be up, and
Speaker 1: you know what if he needs to take rates by
Speaker 1: two years from now to uh that that could be
Speaker 1: you know, it's easy to write on paper. But that
Speaker 1: could be very, very difficult to steer politically, Ken Rogoff LUSA,
Speaker 1: and I would like to shift the conversation to this
Speaker 1: mystery of two thousand twenty one, which is the ascent
Speaker 1: of bitcoin. You were out front on this with the
Speaker 1: Curse of Cash, looking at cashless societies, the criminality of
Speaker 1: the system. We looked at negative interest rates as well.
Speaker 1: Your thoughts on the endure ability of bitcoin and crypto
Speaker 1: and I take this off of Alan Hour's work at
Speaker 1: the Bank of International Settlements fold bitcoin into your seminal work,
Speaker 1: the Curse of Cash. Well, I talked about it extensively
Speaker 1: the last part of my books all about central bank
Speaker 1: digital currency and UH cryptocurrencies. I think the thing I
Speaker 1: would say I got wrong was the pace at which
Speaker 1: regulation would react. Regulation does need to react, I think,
Speaker 1: much more dramatically than it has I suspect eventually, UH
Speaker 1: pseudonymous cryptocurrencies are basically going to have to go band
Speaker 1: in the advanced economies. And that was sort of a
Speaker 1: prediction of my book, as it was just too easy
Speaker 1: to avoid taxes, too easy induced. I mentioned before the program,
Speaker 1: I'm doing a lot of research on these issues now,
Speaker 1: but boy, you know, the dynamics of regulation, you know,
Speaker 1: bitcoin e t f A, allowing the big investment houses
Speaker 1: to set up you know, funds and current retention funds
Speaker 1: to invest. An analogy I like to make is a
Speaker 1: little bit like what if he found a diamond. Et
Speaker 1: f was a really good idea, Okay, I want to
Speaker 1: invest in, and then what if I tell you it's
Speaker 1: blood diamonds that you're investing in. I mean, if you
Speaker 1: look at the actual uses of pseudonymous cryptocurrencies, I don't
Speaker 1: think it's something we can tolerate. But I got it
Speaker 1: wrong five years ago at the pace at which this
Speaker 1: would happen and drag out for a long time, and
Speaker 1: therefore they can have a lot of value because I mean,
Speaker 1: oil and gas have a lot of value even though
Speaker 1: we think we won't be using them in four or
Speaker 1: fifty years. Lisa, this is incredibly important. I thought you
Speaker 1: just heard, Lisa, was James Diamond falling off his chair
Speaker 1: down on Park Avenue. To deal with this, I mean, Lisa,
Speaker 1: this is incredibly important. How the regulation, how Gensler hasn't
Speaker 1: stepped in well, and he has been pretty vocal about
Speaker 1: the need to do so. In trying to be a
Speaker 1: little bit more aggressive going forward, But there has been
Speaker 1: a feeling of by the government to not want to
Speaker 1: stifle innovation at a time when the technological advancements of
Speaker 1: the United States have really driven a lot of the growth.
Speaker 1: Professor Rogolf, there is a theory out there that when
Speaker 1: you pull the tide back at a certain point, there
Speaker 1: is a lot of malfeasance. There are a lot of
Speaker 1: very frothy spots that would get knocked out, and that
Speaker 1: the Fed cannot allow that to happen because that would
Speaker 1: torpedo and economy that it has very few tools left
Speaker 1: to accurately prop up. Do you agree that the Federal
Speaker 1: Reserve in the modern incarnation is going to be vastly
Speaker 1: more involved in activists just by virtue of the potential
Speaker 1: consequences If they're not, so you're going beyond cryptos I
Speaker 1: am yeah. I mean, well, I think it. I don't
Speaker 1: know if it makes them more activists or less. I mean,
Speaker 1: I think in the immediate future, the next few years,
Speaker 1: the difficulty for the FAT is that they might need
Speaker 1: to raise interest rates cyclically quite a bit. And and and frankly,
Speaker 1: I think the three basis point drop in real interest
Speaker 1: rates that's happened since two thousand and seven. Looking at
Speaker 1: the ten year UM, I think part of that trend,
Speaker 1: maybe a third of it or sixth of it as trend,
Speaker 1: but some of it's not, and they're likely to have
Speaker 1: to retrace some of that. And at these market levels,
Speaker 1: you know, you can just go down the asset list
Speaker 1: of everything. It's going to be very painful. And that's
Speaker 1: why I suspect that despite the tough talk that we're
Speaker 1: going to get now, when things start pushing back, they're
Speaker 1: going to find it harder to scale back than they think.
Speaker 1: I'm not saying, you know again, I'm glad we're getting
Speaker 1: out of this. I'm glad the economy is recovering, but
Speaker 1: it's they're in a very difficult spot. Thank you so
Speaker 1: much for an extended conversation with Harvard University, and of
Speaker 1: course the Cursive cash wonderful, as well as other work
Speaker 1: as well. Ye let us start strong with David Constance.
Speaker 1: She few us strategists at Goldman Sex. He's been a
Speaker 1: huge advantage to us in describing a bullmarket that he
Speaker 1: needs to be invested in the big fear right now.
Speaker 1: David is a silliness over Breath five stocks going up,
Speaker 1: everything else terrible in the fear of a draw down.
Speaker 1: Tie the two together. Well, the subject of a drawing down,
Speaker 1: of course, will bring happiness to at least that you
Speaker 1: hear about that. But the idea of a narrowing breath
Speaker 1: market is I think an important characteristic of the last
Speaker 1: six months. So there's been a relatively few stocks that
Speaker 1: have driven the market to these pretty much record levels,
Speaker 1: and the history would suggest that over the next three
Speaker 1: or six months you'll get a larger than average, a
Speaker 1: deeper than average draw down, say, for example, instead of
Speaker 1: a four percent draw down over time, over a couple
Speaker 1: of months period, may likely get an eight percent draw down.
Speaker 1: That's what history would suggest. Once there's such a significant
Speaker 1: narrowing of breath in the market. However, if you think
Speaker 1: about where you end the not just a year, but
Speaker 1: over that period of time, equity prices likely to be higher.
Speaker 1: Why is that the case? All of the focus today
Speaker 1: and your conversations before have been about the announcement of
Speaker 1: the FED today and the dot plot and the tapering.
Speaker 1: All those are important, but the fundamental issue and equities
Speaker 1: has been this year you've had a huge spike in commodities,
Speaker 1: You've had supply chain disruption, You've had difficulty in companies
Speaker 1: finding and keeping employees, and you've had the variants the
Speaker 1: delta and an omicron. All these issues. Yet profit margins
Speaker 1: in the United States across every sector or at record
Speaker 1: high levels. Managements have been very nimble in basically dealing
Speaker 1: with these these issues. And so we look at the
Speaker 1: two earnings up around eight percent. Largely economy is still
Speaker 1: growing at a decelerating pace, margins increasing slightly. That is
Speaker 1: the story for two. You have a flat valuation, in
Speaker 1: my opinion, that's how you get to five are up
Speaker 1: roughly maybe eleven percent, told to return when you add
Speaker 1: and dividend yields. So, David, just to be clear, I'm
Speaker 1: not rooting for a down draft here, but I do
Speaker 1: think a lot of people have been talking about how
Speaker 1: things look perilously valued. Your argument is they are not
Speaker 1: because you're going to get the ongoing margin, a sort
Speaker 1: of incremental growth in terms of how much they're expanding.
Speaker 1: What's the down case scenario, just because I want to
Speaker 1: be in brand here, you know, what's the sense that
Speaker 1: we're going to get some kind of rate hike or
Speaker 1: savings accounts that get depleted and the consumers say, no, Moss,
Speaker 1: We're not going to accept and give you money and
Speaker 1: not only pay you enough for more inflation, but then more.
Speaker 1: The least of the disconnect and the discussion with most
Speaker 1: portfolio managers relates to the situation that fast growing companies
Speaker 1: that are fast profit forecast fast fast group profit growth
Speaker 1: and high margin companies trade at race basically the same
Speaker 1: valuation as fast growing but negative margins losing money or
Speaker 1: very thin profit margins. Those two uh groups of stocks
Speaker 1: is anomalous that they would be trading it roughly the
Speaker 1: same valuation. To give you a number, roughly sort of
Speaker 1: nine times enterprise value of sales. What are we talking about.
Speaker 1: We're talking about companies with a forecast to say, revenue
Speaker 1: growth both sides, but some are having margins, others basically
Speaker 1: companies losing money. And the issue is as rates go higher,
Speaker 1: and to be clear, that is the forecast of golden sects,
Speaker 1: a tenure treasury yields will climb towards around two p
Speaker 1: at the end of next year. In that environment, it
Speaker 1: is exceedingly unlikely that you get the same valuation for
Speaker 1: these two groups of stocks, and the idea the market
Speaker 1: is unforgiving if companies which have high revenue growth and
Speaker 1: all the valuation is dependent on that revenue growth, as
Speaker 1: compared with companies where there's rapid revenue growth but there's
Speaker 1: also high profit margins to work with. That's the central
Speaker 1: tension in most conversations with fund managers because so many
Speaker 1: of the money losing, loss making growth stocks are very
Speaker 1: much in the meme aspector of the uh sor the
Speaker 1: glamour stocks in the market that everyone has has been
Speaker 1: so benefited from in the profit over the last couple
Speaker 1: of years in terms of performance, David, the obsession now,
Speaker 1: as you know, is to look forward twelve months. Can
Speaker 1: we just reflect on the last twelve months briefly? I
Speaker 1: remember about twelve months ago looking at your original forecast
Speaker 1: for the SMP five hundred, which was forty three hundred,
Speaker 1: and when that first came out, I think the SMP
Speaker 1: was in and around thirty five hundred, and we looked
Speaker 1: at your forecast, looked at JP Morgan's which was a
Speaker 1: little bit higher, and everybody sat there and said, come on,
Speaker 1: this is ridiculous. We're really going to have a year
Speaker 1: that big. We broke through forty seven hundred before we
Speaker 1: got to the end of the year, David, I wanted
Speaker 1: them to stand from your standpoint when we play this
Speaker 1: game each and every year at this time of year,
Speaker 1: when you look back twelve months, what's been the biggest
Speaker 1: lesson for you in the team as you speak to clients.
Speaker 1: So the biggest lesson, and you're right, at this time
Speaker 1: last year, our forecast for the SMP five hundred at
Speaker 1: the end of and we lifted that in August. The
Speaker 1: biggest surprise has been the resilient In my opinion, the
Speaker 1: biggest surprise has been the resilience of corporate margins. Uh
Speaker 1: and that's been a key driver of why you've had
Speaker 1: earnings and has really been an earnings led market. I
Speaker 1: think that's really the most important development. It has not
Speaker 1: been a valuation expansion story. It's been a earnings led market.
Speaker 1: And I looked into Jonathan and that is the same
Speaker 1: outlook that we're anticipating, which is earnings climbing around eight percent.
Speaker 1: The other aspect that was surprising to me is all
Speaker 1: year long, and when you've been invited me on as
Speaker 1: a guest most of this year, we've been looking and
Speaker 1: handicapping the probability of a higher corporate tax rate. We
Speaker 1: were assuming most of this year there would be some
Speaker 1: legislation pass some reconciliation led inislation passed this year and
Speaker 1: affecting and head wind to profit growth next year. But
Speaker 1: now it looks as though whatever legislation may or may
Speaker 1: not be passed, and I do expect some legislation be passed,
Speaker 1: but that tax headwind tax hike will not affect company
Speaker 1: profits until three So basically that extra earnings in yours
Speaker 1: in yours to the investor. That's the other so profit
Speaker 1: margins and the lack of an increase in tax legislation
Speaker 1: I think have been a too surprises to me. David.
Speaker 1: Your distinction, as you say, just shut up and own him,
Speaker 1: own a high growth, own high margin, own high profits stocks.
Speaker 1: And there's x number of those as well. Are they
Speaker 1: under owned or over owned right now? Well, it depends
Speaker 1: if you want to talk about the hedge fund community
Speaker 1: or the mutual fund community, so Tom, and that makes
Speaker 1: a difference distinction which which clients we're looking at. So
Speaker 1: if you look at the hedge fund community, the leverage community,
Speaker 1: by basically owning the leading stocks in the market. That's
Speaker 1: been persistent for twenty years. We look at this every
Speaker 1: ninety days and been looking at this since two thousand
Speaker 1: and one, and that's been pretty much in the last
Speaker 1: you know, four or five years, the same stocks, the
Speaker 1: leading stocks in the market, largest companies in the market
Speaker 1: have been dominating their performance and and and their portfolios. Uh.
Speaker 1: And that's pretty much in and similar to the whole index,
Speaker 1: if you will, If you're looking and so they're overweight
Speaker 1: those stocks, and then you look into the mutual fund
Speaker 1: area and they're significantly underweight. And here we're looking at
Speaker 1: large cap core managers, value managers taking a different benchmark,
Speaker 1: and growth managers. But in terms of your core mutual
Speaker 1: fund managers, they're actually underweight those larger stocks, part because
Speaker 1: they're such a significant waiting in the market. Five stocks
Speaker 1: in the market. John this is incredibly important, this insight
Speaker 1: from Mr Costan in the comparison contrast to what we
Speaker 1: saw with the nifty fifty zillion years ago. Just gonna
Speaker 1: some new Tom, I want to break and then we'll
Speaker 1: return back to David cost in the Prime Minister Boris
Speaker 1: Johnson holding a news conference from Downing Street at five
Speaker 1: pm local times, so midday Eastern time, Tom to talk
Speaker 1: about omicron the reporting out of the UK right now,
Speaker 1: not expecting to get new measures, expecting an update on
Speaker 1: the booster program. So one for the diary a little
Speaker 1: bit later. David, I want to come back to you
Speaker 1: on multiples. We talked a lot about earnings has been
Speaker 1: the big surprise if this year you're talking about earning
Speaker 1: has been the big surprise for next year to potentially
Speaker 1: let's just sit on multiples for a moment. It's been
Speaker 1: some confusion around why multiples are so elevated, and want
Speaker 1: to understand what it is from your perspective. Is it
Speaker 1: that early recovery where earnings starts to deliver upside surprise,
Speaker 1: beat and raise, beat and raise, that's where Deutsche Banks
Speaker 1: sit on the idea. Or is it the fact that
Speaker 1: rates are low and if it's rates, what does that
Speaker 1: mean for the FED and what that means for multiples
Speaker 1: going forward? Can you give me your view on that
Speaker 1: right now, David. So, we think about evaluation and an
Speaker 1: absolute metric. If you look at enterprise VEDA, sales, enterprise VADA,
Speaker 1: even the price earnings multiple, any of those metrics, the
Speaker 1: equity valuations are extremely high. I would say the rationale
Speaker 1: for the market being reasonably attractive does depend on the
Speaker 1: extremely low interest rate environment that we have, whether that's
Speaker 1: corporate bond yields, tips UH inflation, you know, protected securities,
Speaker 1: or even nominal treasure yields, and all those interest rate
Speaker 1: related metrics, equities look reasonably attractive. So, Jonathan, an important
Speaker 1: construct to think about is that in history, it shows
Speaker 1: six months before a FED hike six months after a
Speaker 1: FED hike that one year period. Basically you have multiples
Speaker 1: flat in every one of the tightening regimes that you've
Speaker 1: seen over time. That's been the experience, and so that
Speaker 1: happens to match up pretty closely with calendar year twenty two. Coincidentally,
Speaker 1: you're starting now, it's about six months before the expected
Speaker 1: first hike and six months afterward, of course, put you
Speaker 1: at the end of two. That's not the forecast for
Speaker 1: a stable multiple. That's on upon which we make debate
Speaker 1: the forecast. But as a result, that's consistent with history.
Speaker 1: Where we think about it is rates are going higher,
Speaker 1: risk premium going a bit lower. Why is it a
Speaker 1: bit lower? Consumer confidence remains high, unemployment falling, and wages
Speaker 1: are increasing. Number one and number two the policy uncertainty,
Speaker 1: our referenced earlier about tax hikes. UH, the election for
Speaker 1: next November. So once that's beyond us, you'll be basically
Speaker 1: back to a roughly stable valuation around twenty times, which
Speaker 1: is the valuation now historically high, but still reasonably attractive
Speaker 1: in a low interest rate environment, even with rates rising. David,
Speaker 1: just brilliant. I hate to reduce the whole body of
Speaker 1: work to just an index level. Cool but fantastic on
Speaker 1: the index level through much of the last twelve months, sir,
Speaker 1: to you and the team. Gonna catch up as always,
Speaker 1: enjoyed the holidays, David. Thank you, Sir David Coasting that
Speaker 1: of Goldman Sachs. Dana Peterson now chief econnor US at
Speaker 1: the Conference Board. And what's important is our other guests
Speaker 1: focus on the unique skills of the Conference Board of
Speaker 1: measuring American economic dynamics. Stay in a good morning. This
Speaker 1: is such an important conversation on the ability to sustain
Speaker 1: economic growth. What is the call that you have twelve
Speaker 1: months forward on real g d P. We're thinking that
Speaker 1: we're probably going to expand by around three and a
Speaker 1: half percent next year, and that's not including a build
Speaker 1: back better plan. UH. Certainly if the build back Better
Speaker 1: plan is passed, then we could potentially see growth around
Speaker 1: four percent. So you're talking about China, like nominal GDP,
Speaker 1: we're gonna have who knows the number, six, seven, eight,
Speaker 1: nine percent top line g d P. What does that
Speaker 1: do to the conference boards Corporate America. Well, certainly that
Speaker 1: would be positive if a lot of that's driven by consumption,
Speaker 1: And certainly we're anticipating that hopefully next year that much
Speaker 1: of the services activity will return to pre pandemic levels,
Speaker 1: or at least approach that level. And that's really going
Speaker 1: to be highly dependent upon the evolution of the pandemic,
Speaker 1: whether or not people are vaccinated, whether or not people
Speaker 1: feel comfortable getting out there and going on trips, traveling,
Speaker 1: visiting restaurants, hotels, et cetera. Danta. In about an hour,
Speaker 1: we're going to get those US retail sales for the
Speaker 1: month of November. We expect an increase. How do you
Speaker 1: parse out the increased due to inflation from the increased
Speaker 1: due to consumers with an ever a strong pile of
Speaker 1: cash willing to spend. Sure, I think the easiest thing
Speaker 1: is just kind of take that nominal headline and deflate
Speaker 1: it by the c P I and you'll see essentially
Speaker 1: that uh, much of it's probably going to be related
Speaker 1: to price increases. But still in all our own survey
Speaker 1: suggests that consumers, even though they're a little bit dower
Speaker 1: on the outlook, they're still willing to spend. Certainly, our
Speaker 1: holiday shopping UH survey said that people are willing to
Speaker 1: get out there and spend especially go there, go to malls,
Speaker 1: and do in person shopping. So were anticipating that that's
Speaker 1: going to show up in the retail sales today. Does
Speaker 1: it matter that they're shopping at LVMH perhaps and some
Speaker 1: of the other luxury providers. I'm not going to go
Speaker 1: back into that, and that perhaps they're restricting some of
Speaker 1: their purchases at Target, at Walmart where you're not seeing
Speaker 1: as easy of a pass through in some of the inflation. Well,
Speaker 1: I think it really depends upon the shopper. The person
Speaker 1: who's shopping at you know, Walmart or Target may not
Speaker 1: necessarily be shopping at Louis Vuitton. UM. But certainly, UH,
Speaker 1: consumers do do have pent up savings that they've had,
Speaker 1: certainly because we had big stimulus checks. Also, many more
Speaker 1: people are employed relative to when they were before. But
Speaker 1: certainly we're going to see more caution in terms of
Speaker 1: people looking for discounts, and certainly if we that's not
Speaker 1: delivered at the big box stores, that we're going to
Speaker 1: see weaker spending going forward. Is a general statement, what
Speaker 1: is the strength of the consumer? I have trouble with
Speaker 1: a weak consumer and a nine percent nominal GDP economy. Well,
Speaker 1: the thing is that the consumer really isn't weak. It's
Speaker 1: just that they have soured in their opinion given the
Speaker 1: fact that inflation is high, they're still worried about COVID
Speaker 1: cases arising. We have Amicron in front of us potentially,
Speaker 1: But when we look at incomes, they're still very high.
Speaker 1: Many people are working. Our unemployment rate is at four
Speaker 1: point um. That does not signal a week consumer. It
Speaker 1: just says that maybe they're just a little bit soured
Speaker 1: right now in the environment. So how do you square
Speaker 1: what they say and what they do? And we're talking
Speaker 1: about the University of Michigan Consumer Sentiment survey that's actually
Speaker 1: been deteriorating, a slight rebound last month, but not much.
Speaker 1: At the same time that everyone comes on and says
Speaker 1: the consumer is incredibly strong and willing to spend well,
Speaker 1: consumers may say one thing, but what they do is
Speaker 1: more important than what they do. We can find out
Speaker 1: in the retail sales and the PC data that we
Speaker 1: received later on in the month, and so far consumers
Speaker 1: have been getting out there and they've been spending. We've
Speaker 1: got to leave with this, and cute Danny Pitterson of
Speaker 1: the conference port right now, Alan Ruskin, chief international strategist
Speaker 1: at Deutsche Bank and Allen congratulation on a trenchant note.
Speaker 1: Your note on the terminal rate? What is the terminal
Speaker 1: rate and why should J. Paul focus on it? Well, Tom,
Speaker 1: the terminal rates really seen as the peak rate for
Speaker 1: FED funds in any particular cycle. And it's critical in
Speaker 1: this point because the markets expecting a very low terminal
Speaker 1: rate in the order about one and a half to
Speaker 1: one and three quarter percent. And if you think that
Speaker 1: the FATS peak funds rate is going to be one
Speaker 1: and a half to one in three percent, then there's
Speaker 1: no way that the tenure heeld is going to back
Speaker 1: up particularly sharply. And if the tenure heel doesn't back
Speaker 1: up particularly sharply, then monetary conditions won't tighten very much
Speaker 1: and the equity market will prove pretty resilient as well,
Speaker 1: So all asset markets are tied together with where the
Speaker 1: terminal rate is. Your Matthew Lozerli is a lot on this.
Speaker 1: It's been one of my great themes. Good morning, David
Speaker 1: Stubs over at JP Morgan as well, Ellen Ruskin. Do
Speaker 1: we underestimate the overlay of technology engaging where the terminal
Speaker 1: rate is or should be? Do we know the technological
Speaker 1: path of the next decade that we have to try
Speaker 1: to get to in that terminal rate? I don't think so, Tom,
Speaker 1: So I am really distinguished the terminal rate and the
Speaker 1: long term our star. So you can have a low
Speaker 1: our star that relates to the really technological change, the
Speaker 1: natural rate of growth perhaps being lower for longer. But
Speaker 1: I think in terms of this cycle, you're fighting a
Speaker 1: particularly inflation problem and you can have a very high
Speaker 1: peak or terminal funds rate even with a long term
Speaker 1: long equilibrium our star. So I wouldn't tie those two
Speaker 1: eaches together, and I think it's very important to separate
Speaker 1: them in fact. So Allan, let's just build on that,
Speaker 1: and let's start here, because you've done some tremendous research
Speaker 1: on this. In the last couple of months. I've been
Speaker 1: readly through it all, you talked about how unusually it
Speaker 1: is to have nominal growth as high as it is
Speaker 1: right now, and to have yields and rates where they
Speaker 1: are at the moment too. Just how unusual is that album.
Speaker 1: There's no historical precedent for nominal GDP running. It'say eleven percent,
Speaker 1: Q four and Q four, which is what we probably
Speaker 1: will get with the GDP numbers. And uh, you know
Speaker 1: a five year tracking you know where it is currently,
Speaker 1: or you know, all rates the rate structures sub two
Speaker 1: percent in the treasury treasury market, So there really is
Speaker 1: nothing even close to this, John, which then also begs
Speaker 1: some very important questions because I think a lot of
Speaker 1: people are going to say, well, wait a minute, the
Speaker 1: old curve, which has been such a reliable signal, is
Speaker 1: going to invert shortly, and you know, watch out, guys,
Speaker 1: in eighteen months to two years, you're gonna have a recess.
Speaker 1: I think that yield curve in general is not giving
Speaker 1: a pure signal, or you know, past historical precedent is
Speaker 1: not accurate either. Does it tell you something about how
Speaker 1: much work this FED will need to do? And this
Speaker 1: goes back to the conversation you were having with Tom
Speaker 1: just a moment ago. There is a belief that we
Speaker 1: stop at one seventy five, that the FED funds rate
Speaker 1: will peek out there, and I sense that you're push
Speaker 1: him back against that in just the comments you had
Speaker 1: a couple of minutes ago out and what kind of
Speaker 1: number have you got in mind? You know, I pushed
Speaker 1: back it against it, you know, pretty strongly. So you know,
Speaker 1: you think in terms of a real funds rate, and
Speaker 1: historically a real funds rate peak would be nearer, say
Speaker 1: three percent in the last cycle. And we're always fighting
Speaker 1: the last war, right, We're always thinking in terms of
Speaker 1: the last cycle that's freshest in our memories. Nominal the
Speaker 1: real funds rate went up to about zero UM. So
Speaker 1: even then, if you just took a zero real funds rate,
Speaker 1: you would have, you know, certainly a nominal funds rate
Speaker 1: to say two and a half percent, that would be
Speaker 1: almost a minimum. Now, I think the last cycle you
Speaker 1: didn't have an inflation problem at all. I think co
Speaker 1: inflation from you know, this core PC was just above two,
Speaker 1: so the Fed wasn't fighting inflation. So in this cycle
Speaker 1: you're fighting inflation. So there's even more reason why you
Speaker 1: should actually have a much higher terminal rate. Given that,
Speaker 1: and given the fact that the yield curve has caused
Speaker 1: for a lot of people's concern, should have continued to flatten.
Speaker 1: Do you think that the market is underestimating a discussion
Speaker 1: about balance sheet roll off in the nearer term, as
Speaker 1: that would likely affect the long end of the yield
Speaker 1: curve more quickly. But I think the market's underestimating perhaps
Speaker 1: this sort of general story that relates to taper. They're
Speaker 1: not treating taper as any sort of tightening, and I
Speaker 1: think it is some tightening because if you look at
Speaker 1: the flow of funds and you look at the role
Speaker 1: the Fed has played in financing the public sector deficit,
Speaker 1: it has been absolutely critical. So you know, just as
Speaker 1: that taper gets accelerated and the Feds all diminishes, I
Speaker 1: think you will see term premiers start to pick up.
Speaker 1: But I think the more important story from the bond
Speaker 1: mark is less the term premius side than the risk
Speaker 1: neutral rate. I think the risk neutral rate is the
Speaker 1: thing that's going to have to go up. You know
Speaker 1: substantially that risk neutral rates is you know, essentially the
Speaker 1: expected funds rate. Given the fact that you seem to
Speaker 1: think that the signal coming from the bond market is
Speaker 1: highly messy at best, and that it is not accurate
Speaker 1: in terms of a portrayal of the overall economy. Do
Speaker 1: you think that Jack Avlin over a Crescent Capital came
Speaker 1: on earlier and so the bond market is smart money
Speaker 1: is no longer correct, that the bond market no longer
Speaker 1: can be a signal for equities in the same way
Speaker 1: that it once was. Yeah, I think it is problematic.
Speaker 1: I think what you've had. I think people underestimate this
Speaker 1: is said, and you don't see officials talk about this sufficiently.
Speaker 1: Is this drop of helicopter money GDPs worth of empty
Speaker 1: balances dropped into the system that essentially cut creating bubble
Speaker 1: like conditions in all asset claus is inclusive of the
Speaker 1: bond market. This liquidity is going everywhere. You know, it's
Speaker 1: going into bitcoin, it's going to equities, but it's also
Speaker 1: doing at the bondom market. Some people talk about its
Speaker 1: excess savings, but I preferred to talk about as excess liquidity.
Speaker 1: I want to say the Fed's responsible for some of this.
Speaker 1: This is not just household savings, per say, policymakers are
Speaker 1: actually responsible for this and this was prudent policy in
Speaker 1: March of twenty but it's not prudent policy now, you know.
Speaker 1: In November December, Allen Mr Ara de Juan at one
Speaker 1: point wanted to look south and west across the new
Speaker 1: Turkish reach that has been shattered over the last five
Speaker 1: six eight years and shattered today with new weakness in
Speaker 1: Turkish lera out of fourteen point seven four. You and
Speaker 1: I spent a story evening in Dubai waxing philosophical about
Speaker 1: emerging markets. Is that the great unknown for two thousand
Speaker 1: twenty two is all this Jerome Powell chat and what
Speaker 1: it means for for emerging markets who do not have
Speaker 1: the degrees of freedom that America has. Yeah, I think
Speaker 1: the emerging market story is complicated, you know. I think
Speaker 1: there's a sense that if we get through the early
Speaker 1: stages of fair tightening, and particularly if the Fed does
Speaker 1: what the market expects, then the emerging market complex can
Speaker 1: trade better in the second half of two I think
Speaker 1: in the end it's still going to come around to
Speaker 1: the story about the terminal rate. If if the terminal
Speaker 1: rate is substantially higher than what the markets priced, then
Speaker 1: then you know, em is still gonna have a hard
Speaker 1: time of it. Alan just wonderful as always in good
Speaker 1: to hear from you, sir, And I'm Ruskin at Deutsche Bank.
Speaker 1: If you are a fancy John and you go to India,
Speaker 1: you stay at the Oberoi and say you went to India.
Speaker 1: That's in Mumbai, and it's a fancy six star hotel.
Speaker 1: That that's someone John goes to when he goes to India.
Speaker 1: Bacti insiety to something different. She is world claimed on
Speaker 1: going where others don't. And Bacti I'm not going to
Speaker 1: pronounce the names because I'll just kill it, but we
Speaker 1: are thrilled to have you here. Is you were north
Speaker 1: of the Ganges, somewhere south of Kutman. Do what does
Speaker 1: the real India look like in this pandemic? So the
Speaker 1: real India looks like real rural America. You know this fear,
Speaker 1: high rates of unvaccinated individuals, patients coming to the hospital, confused, scared,
Speaker 1: and there's a real fear after what India lived through
Speaker 1: during the second set, that it's all about to start
Speaker 1: again and they're getting ready and getting prepared to be
Speaker 1: able to fight the new bariant. So you got a
Speaker 1: cup of coffee with the leadership at Viser at Maderna,
Speaker 1: you and Dr Adalge will sit down with them and say, look,
Speaker 1: here's the reality of helping the rich and poor of
Speaker 1: the unvaccinated. What is the plan to get the unvaccinated vaccinated? Twofold? Globally,
Speaker 1: the issue still is supply chain and so like improving
Speaker 1: supply chain, providing vaccines without a coastroalth life, ensuring that
Speaker 1: those vaccines that reached that last mile, that lost village
Speaker 1: is really key and that involves partnerships with government um
Speaker 1: locally and in other higher resource settings. The issues are
Speaker 1: really around anti vaccine sentiment and how do we combat
Speaker 1: anti vaccine sentiment. And I don't think any of us
Speaker 1: thought that we'd be having this conversation twenty months into
Speaker 1: the pandemic dr Insatia. So the India is getting prepared
Speaker 1: for the omicron variant to spread akin to what we
Speaker 1: saw in the second wave, which was terrifying by all accounts,
Speaker 1: by the images that we saw and I'm sure by
Speaker 1: the aftermath that you witnessed, what does that look like
Speaker 1: with the omicron variant based on the initial evidence that
Speaker 1: we have so luckily for us, when we're seeing in
Speaker 1: South Africa is while reinfectionist comment hospitalization as comment less
Speaker 1: patients are requiring oxygen. Now, what we saw in this
Speaker 1: consurge in India was that a lot of patients guide
Speaker 1: from critical hypoxy and lack of oxygen access. Oxygen access
Speaker 1: in India has been significantly strengthened, but there are other
Speaker 1: policies in place, so their decrease that they're improving border control,
Speaker 1: um improving same day rapid testing prior to travel, and
Speaker 1: all of these innovations will help you know the spread
Speaker 1: of the virus and going to those rural underserved areas.
Speaker 1: One confusion that a lot of people have, myself included,
Speaker 1: is how much less virulent the omicron variant is. We
Speaker 1: don't have concrete data showing that. But the real issue
Speaker 1: here is when does this move from a virus that
Speaker 1: we need to counter and social distance for and mask
Speaker 1: and vaccinate repeatedly, versus a common cold versus something that
Speaker 1: you're going to get every once in a while. It's
Speaker 1: not going to be fun, but you get over it,
Speaker 1: you live, you move on. So I really try to
Speaker 1: think about what does it mean for a virus to
Speaker 1: be endemic? So scientifically, an endemic virus is one that
Speaker 1: has predictable variations, seasonal variations like the common cold, that
Speaker 1: it's impact on the health system is manageable and variable
Speaker 1: and acceptable to society. And the third is is that
Speaker 1: the number of people inviting another person is one and
Speaker 1: we're not there with COVID. We know that these surgeries
Speaker 1: can have catastrophic consequences on the health system. We're already
Speaker 1: seeing in the United States several hospitals claim they have
Speaker 1: no more e D beds, no more ICU beds, um
Speaker 1: and our resources are outstripped. So I think what my
Speaker 1: concern is by calling this endemic, that there will be
Speaker 1: a complacency that will set it, which I think is
Speaker 1: unnecessary because still deaths that need to be avoided in
Speaker 1: our future based on the trajectory of the pandemic. When
Speaker 1: will we get to that point? After ansanti? You know,
Speaker 1: I think as soon. Um we are now expanding vaccines.
Speaker 1: Vaccine uptake has improved in the United States in the
Speaker 1: recent weeks. We are really expecting the youngest in our
Speaker 1: society TV under five to have access to vaccines very soon.
Speaker 1: And as the virus continues to involve, we do think
Speaker 1: we'll transmissibility will increase. The virulence is unlikely to continue
Speaker 1: to increase. So I'm really saying, like next Christmas we'll
Speaker 1: have we will not be having this conversation. I will
Speaker 1: not be on the show, I hope. Oh no, months
Speaker 1: ago we do back to you. We do scientific research
Speaker 1: here in the needle goes when you're on. So no,
Speaker 1: you'll be was we expect you to be talking about
Speaker 1: the two year yield two years back and say of
Speaker 1: Johns Hopkins, thank you so much. Away. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays
Speaker 1: from seven to ten am Eastern on Bloomberg Radio and
Speaker 1: on Bloomberg Television each day from six to nine am
Speaker 1: for insight from the best in economics, finance, investment, and
Speaker 1: international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm
Speaker 1: Tom keene In. This is Bloomberg