WEBVTT - The Reopening U-Turn 0:00:13.760 --> 0:00:17.480 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.600 --> 0:00:20.520 I'm Mike Creaging, a senior editor at Bloomberg, and this 0:00:20.600 --> 0:00:22.920 week on the show, Well, this was supposed to be 0:00:22.960 --> 0:00:26.400 the summer that kicks off a so called new Roaring twenties, 0:00:26.440 --> 0:00:29.760 as vaccinations allowed us to take off our masks and 0:00:29.880 --> 0:00:32.519 go out and see the outside world again. But if 0:00:32.520 --> 0:00:35.919 you're looking just at the financial markets, well it sort 0:00:35.920 --> 0:00:38.440 of looks like somebody didn't get the memo. Long end 0:00:38.440 --> 0:00:41.080 treasury yields and the type of stocks that benefit from 0:00:41.080 --> 0:00:43.880 a return to normalcy have both made you turns after 0:00:44.040 --> 0:00:46.920 rising strongly earlier in the year. So what exactly is 0:00:46.960 --> 0:00:49.440 going on? We'll get into it with the director of 0:00:49.479 --> 0:00:52.599 investment research at one of the world's biggest hedge fund companies. 0:00:53.159 --> 0:00:55.760 But first, Charlie Pellett tell us who this week's mystery 0:00:55.800 --> 0:01:01.200 co host is. This week's mystery co host is John Author's. 0:01:01.640 --> 0:01:05.400 John is a senior editor and columnist for Bloomberg Opinion. 0:01:05.720 --> 0:01:08.400 He is a big time Red Sox fan who has 0:01:08.520 --> 0:01:12.560 the strangest Boston accent that Reagan has ever heard. Sources 0:01:12.600 --> 0:01:14.840 say John broke into song in the middle of the 0:01:14.840 --> 0:01:18.840 newsroom when England scored first in the euro Cup finals, 0:01:19.440 --> 0:01:22.000 but he was singing the blues by the end of 0:01:22.040 --> 0:01:24.720 the shootout. Uh, John, that was a bit of a 0:01:24.760 --> 0:01:27.520 cheap shot by Charlie there. I think you mean at 0:01:27.560 --> 0:01:32.880 sory rather than blues. It was I was, I was 0:01:33.000 --> 0:01:35.320 seeing all kinds of things when we beat Germany. In 0:01:35.360 --> 0:01:37.839 the news room, I was, I was, I was elsewhere 0:01:37.880 --> 0:01:43.280 for the for the Grand Final. We we Italy were 0:01:43.280 --> 0:01:45.280 the best team on the on the day in the tournament. 0:01:45.400 --> 0:01:49.320 It's much easier to much easier to take guts crushing 0:01:49.320 --> 0:01:51.800 losses like that if if you feel that you weren't 0:01:51.880 --> 0:01:54.560 quite the better team, right, all right, I gotta say 0:01:54.600 --> 0:01:59.280 my wife had this sudden interest in this tournament and 0:01:59.440 --> 0:02:02.360 the English side specifically. I think it had something to 0:02:02.400 --> 0:02:05.240 do with the average level of handsomeness of that team though, 0:02:05.360 --> 0:02:08.359 so I was kind of inclined to take the Italian side. 0:02:08.360 --> 0:02:09.920 I'm a Jersey guy too, so I was kind of 0:02:09.919 --> 0:02:13.920 inclined to take the Italian side just just because of that. Okay, 0:02:15.520 --> 0:02:18.200 I can forgive you. It's like, but John, let's bring 0:02:18.280 --> 0:02:20.720 in our guest, who I think is an old friend 0:02:20.760 --> 0:02:23.560 of yours, and she's one of these people who has 0:02:23.600 --> 0:02:25.800 just an amazing resume. I wish I could read you 0:02:25.840 --> 0:02:27.520 just the highlights, but I think that would be all 0:02:27.520 --> 0:02:29.440 the time we had on the show. But I encourage 0:02:29.480 --> 0:02:32.160 you to google her and check out her history. I 0:02:32.160 --> 0:02:33.920 think you know where. I think the two of you 0:02:33.960 --> 0:02:36.600 have switched jobs, possibly since you last spoke, so we'll 0:02:36.600 --> 0:02:38.560 have to we'll have to catch up on that, but 0:02:38.639 --> 0:02:41.440 I will I will pull one thing from her resume, John, 0:02:41.440 --> 0:02:43.880 and that is she has a few degrees, but their 0:02:43.919 --> 0:02:46.640 first degree is as a journalism major. So I I 0:02:46.720 --> 0:02:49.760 was encouraging for for those of us with ink stains 0:02:49.800 --> 0:02:53.360 on our pants. Still, I'm happy to hear that. But anyway, 0:02:53.480 --> 0:02:58.800 her name is Rebecca Patterson and she's with Bridgewater Associates. Rebecca, 0:02:58.880 --> 0:03:00.919 thank you so much for joining the show. Oh it's 0:03:00.960 --> 0:03:04.320 great to be here. Oh great, And Rebecca, I wanted 0:03:04.320 --> 0:03:07.080 to sort of get a download of everything you're up 0:03:07.120 --> 0:03:09.239 to it Bridgewater these days. I guess you've been there, 0:03:09.360 --> 0:03:11.920 what about eighteen months or so, twenty months something like that. 0:03:11.960 --> 0:03:14.720 But I really wanted to just first start with kind 0:03:14.720 --> 0:03:18.040 of what we've seen in the markets, uh this week 0:03:18.160 --> 0:03:20.600 and really over the last few months, and just kind 0:03:20.600 --> 0:03:22.920 of get your take on the state of play. Like 0:03:22.960 --> 0:03:25.720 I said that the yields have have come back down, 0:03:26.360 --> 0:03:29.960 there was sort of real cyclical reopening. Uh, favorite stocks 0:03:29.960 --> 0:03:32.600 in the stock market have made a U turn as well, 0:03:33.360 --> 0:03:36.000 And I suppose part of it is just, you know, 0:03:36.600 --> 0:03:38.760 the reopening seems to be progressing in sort of a 0:03:38.760 --> 0:03:41.760 two step forward, one step back type of thing. You know, 0:03:41.800 --> 0:03:47.160 we're seeing Masqus again in Los Angeles, this delta variant 0:03:47.240 --> 0:03:49.920 is is really causing a lot of questions. Well, what's 0:03:50.320 --> 0:03:54.160 curiously your thirty thousand foot take, your macro take on 0:03:54.160 --> 0:03:58.440 on what the market signals are right now? Given especially 0:03:58.560 --> 0:04:00.720 earlier this week, we saw that big a scoff move 0:04:00.800 --> 0:04:03.440 that I guess you could kind of attribute possibly to 0:04:03.520 --> 0:04:06.920 just this typical sloppy summer trading, But it's really been 0:04:07.000 --> 0:04:09.840 going on for months now, this kind of reversal of 0:04:10.000 --> 0:04:14.480 the reflation and reopening themes. What do you see going on? Sure, So, 0:04:14.600 --> 0:04:16.919 at the risk of being cute, I'm going to start 0:04:16.920 --> 0:04:20.200 with alliteration um and I would if I had to 0:04:20.240 --> 0:04:23.840 boil down what caused this sort of view turn, if 0:04:23.839 --> 0:04:26.960 you will, that started around April. I would say it's 0:04:27.040 --> 0:04:32.840 policy pandemic positions and really on the policy and pandemic. 0:04:33.000 --> 0:04:35.880 It's going from what felt in the first quarter as 0:04:36.440 --> 0:04:40.479 a really confident, certain outlook among the market, right among 0:04:40.560 --> 0:04:45.200 market participants that okay, after the Georgia race, we had 0:04:45.839 --> 0:04:50.280 all all green lights for big fiscal stimulus. So we 0:04:50.279 --> 0:04:52.600 we got one point nine trillion passed, and then there 0:04:52.600 --> 0:04:55.119 were prospects for another package to be passed, and people 0:04:55.160 --> 0:04:57.599 were fairly confident that was going forward. So that was 0:04:57.640 --> 0:05:00.880 the fiscal monetary The FED told you we got this 0:05:00.920 --> 0:05:04.280 new inflation target regime where we're gonna let we're gonna 0:05:04.360 --> 0:05:07.720 lag the economy, We're gonna let inflation go above two 0:05:07.920 --> 0:05:11.520 and so people thought easy policy great. And then and 0:05:11.560 --> 0:05:15.240 then positioning followed you. You thought, great, I want to 0:05:15.240 --> 0:05:17.839 be short bonds, I want to be long cyclical assets. 0:05:17.880 --> 0:05:20.679 Let's go. By the time we got to late March 0:05:20.720 --> 0:05:24.040 early April, positions have gotten pretty extended. And we know 0:05:24.160 --> 0:05:27.200 that now based on all the data we've been able 0:05:27.200 --> 0:05:30.920 to see you. Starting around April, I think we got 0:05:30.960 --> 0:05:36.000 more question marks around the policy. So fiscal policy less 0:05:36.000 --> 0:05:39.280 certain about how big the packet next package could be. 0:05:39.320 --> 0:05:42.360 In the timing, it's not clear we're going to get 0:05:42.360 --> 0:05:46.040 a bipartisan infrastructure package through soon. It's not as clear 0:05:46.080 --> 0:05:47.720 if we'll get a big one done before the end 0:05:47.720 --> 0:05:51.000 of the year, so more uncertainty there. Obviously, the June 0:05:51.040 --> 0:05:54.479 FED meeting a little less certainty around the FEDS path 0:05:54.600 --> 0:05:57.400 how quickly they might start tapering quantity of easy and 0:05:57.400 --> 0:05:59.960 how quickly they might start reacting to inflation. And then 0:06:00.000 --> 0:06:03.080 on the pandemic, of course, we're seeing the delta variant 0:06:03.320 --> 0:06:07.760 causing some new lockdowns in places like Australia, you know, horrible, 0:06:07.800 --> 0:06:11.320 horrible infection rates in places like Indonesia, and then just 0:06:11.440 --> 0:06:14.599 question marks. I think it's not surprising that after last 0:06:14.680 --> 0:06:17.839 year it was so sudden unexpected, had such a huge 0:06:18.000 --> 0:06:22.000 economic and human impact that when you see anything that 0:06:22.000 --> 0:06:25.440 that feels the same, it's going to cause people to say, Okay, 0:06:25.480 --> 0:06:28.440 maybe I was pricing in too much Roaring twenties, Maybe 0:06:28.440 --> 0:06:31.240 I want to dial back some of that risk. And 0:06:31.279 --> 0:06:34.400 so I think that's it's the positioning that left things 0:06:34.520 --> 0:06:38.160 vulnerable to less certainty around those other piece, if you will, 0:06:38.279 --> 0:06:42.840 the policy and pandemic repe Obviously, you know, uh, everyone 0:06:42.880 --> 0:06:46.160 expected some hot CPI readings, maybe not as hot as 0:06:46.200 --> 0:06:51.839 what we've actually gotten. Um does that transition into uh 0:06:52.000 --> 0:06:55.200 maybe transitory being a little longer than people were expected. 0:06:55.720 --> 0:06:58.719 But also I to throw even one more p in there, 0:06:58.839 --> 0:07:02.520 and the party politics, Uh, in the US, it's a 0:07:02.600 --> 0:07:05.080 it's a very convenient talking point. And I know, you 0:07:05.120 --> 0:07:07.200 know among play company like this, we shouldn't talk to 0:07:07.200 --> 0:07:09.800 religion or politics. But but but just in general terms, 0:07:09.800 --> 0:07:12.720 it's a very convenient talking point with midterms coming up 0:07:13.560 --> 0:07:17.360 against what what you mentioned, the that fiscal stimulus that 0:07:17.360 --> 0:07:21.440 played such a huge role last year. Is inflation a 0:07:21.600 --> 0:07:27.960 sellable uh notion for politicians to vote no on on 0:07:28.120 --> 0:07:31.920 basically everything that Biden wants to do with infrastructure and 0:07:31.920 --> 0:07:34.360 and anything else you know, looking forward, if this delta 0:07:34.400 --> 0:07:38.440 strain gets even worse and we're talking about maybe extending 0:07:38.480 --> 0:07:44.480 those unemployment benefits, maybe you know all the other things. Um, well, 0:07:44.520 --> 0:07:47.360 inflation work as a as a selling point among the 0:07:47.400 --> 0:07:51.400 electorate and among policy to to sort of prevent another 0:07:51.480 --> 0:07:56.000 leg of fiscal stimulus. Well, you made to two points 0:07:56.000 --> 0:07:58.760 there that I think are probably useful for us to 0:07:58.800 --> 0:08:02.160 impact quickly. One is if delta gets worse, and one 0:08:02.200 --> 0:08:06.000 if inflation is bad and and I it is possible 0:08:06.040 --> 0:08:09.440 you have both right, if if the pandemic gets worse 0:08:09.480 --> 0:08:13.880 and exacerbates supply chain issues. You could have inflation actually 0:08:13.880 --> 0:08:16.080 getting worse, even if growth cools a little bit, which 0:08:16.080 --> 0:08:18.520 would be really, really not a good outcome. We hope 0:08:18.560 --> 0:08:22.920 that one doesn't happen. Um. The thing about Delta just quickly, 0:08:23.120 --> 0:08:26.920 and this is a very US centric view because the 0:08:26.960 --> 0:08:31.240 country has a high, relatively high vaccination rate, and the 0:08:31.280 --> 0:08:34.800 politicians and the public have basically said we're not locking 0:08:34.840 --> 0:08:38.079 down again. Um. And that has its own cost. But 0:08:38.400 --> 0:08:41.600 it means that even if the DELTA infections get worse 0:08:41.640 --> 0:08:43.679 in the US, I think the bar is much higher 0:08:43.720 --> 0:08:46.679 before we lock down again, which means that the economic 0:08:46.720 --> 0:08:50.240 consequences are very different. You know, the economic shock occurred 0:08:50.280 --> 0:08:53.440 last year because all business activity largely stopped because of 0:08:53.440 --> 0:08:56.679 the lockdowns. We're not seeing that happen again. And so 0:08:56.720 --> 0:08:59.479 when I look at the markets and how they've behaved recently, 0:09:00.040 --> 0:09:02.440 if you think a large part of the equity sell off, 0:09:02.440 --> 0:09:05.000 and we definitely saw it in reopening sectors. You know, 0:09:05.040 --> 0:09:07.040 if you if you forget about the SMP and you 0:09:07.120 --> 0:09:09.880 drill down to the types of companies that sold off more, 0:09:10.360 --> 0:09:12.920 you know, you see things like hotels and leisure and 0:09:13.000 --> 0:09:16.600 airlines down thirty or fifty from from their high over 0:09:16.600 --> 0:09:19.079 the last few months. So that's a pretty big that's 0:09:19.120 --> 0:09:22.560 a very big move. UM. But I think those growth 0:09:22.600 --> 0:09:26.400 worries purely based on delta, for the United States at least, 0:09:26.440 --> 0:09:29.640 are overdone because it is to me the bar is 0:09:29.679 --> 0:09:33.160 so incredibly high that the US has broad lockdowns again. 0:09:33.240 --> 0:09:35.640 I think what you're seeing now are countries taking different 0:09:35.640 --> 0:09:38.640 paths and how they deal with it. Australia locking down, 0:09:39.360 --> 0:09:43.280 the UK opening up Freedom Day this week right, And 0:09:43.400 --> 0:09:45.280 in the US it feels like it's going to be 0:09:45.400 --> 0:09:48.559 very localized. The l A is having more mask mandates, 0:09:48.720 --> 0:09:51.400 other parts of the country are saying what you know, 0:09:51.440 --> 0:09:54.440 what vaccine and what pandemic? So UM. I do think 0:09:54.480 --> 0:09:57.840 it's important not to extrapolate what happened last year and 0:09:57.880 --> 0:09:59.960 think it just repeats this year. I think the word 0:10:00.200 --> 0:10:02.400 isn't delta. The worry would be if we have a 0:10:02.480 --> 0:10:07.559 mutation which is always possible, that evades the vaccine, right, 0:10:07.679 --> 0:10:10.960 that that we're not protected against. That's when you could 0:10:11.000 --> 0:10:13.720 be looking at new lockdowns. Because we're basically back at 0:10:13.720 --> 0:10:16.600 square one. UM. And I'm not an expert. I don't 0:10:16.600 --> 0:10:21.480 know what the probability is that that happens. But to inflation, absolutely, 0:10:21.559 --> 0:10:25.079 that could be a political point. I as a journalist, um, 0:10:25.120 --> 0:10:27.280 I did spend a few years in d C. Covering 0:10:27.320 --> 0:10:30.280 Capitol Hill in the White House, which was great fun 0:10:30.480 --> 0:10:34.960 to see firsthand how the sausage has made. And you know, 0:10:35.080 --> 0:10:38.680 anything that affects your voters is going to be something 0:10:38.720 --> 0:10:41.520 that becomes a campaign talking point. And if your rents 0:10:41.559 --> 0:10:44.560 are going up, if you can't afford to buy a car, 0:10:45.480 --> 0:10:48.120 if your food prices are going up, your gasoline prices 0:10:48.160 --> 0:10:51.959 are going up, well yeah, blame the other party. Um So, 0:10:52.160 --> 0:10:55.640 I I do think inflation could be something that becomes 0:10:55.679 --> 0:10:58.200 more of a political hot button, and that will put 0:10:58.200 --> 0:11:01.880 the FED in a really interesting position. Obviously, the Fed 0:11:01.960 --> 0:11:04.280 is independent, They're not going to react to politics, but 0:11:04.360 --> 0:11:08.679 you could envision uh situation over the coming months if 0:11:08.720 --> 0:11:11.960 inflation does stay higher a little longer than maybe the 0:11:11.960 --> 0:11:15.319 consensus believes, And the consensus today believes that inflation is 0:11:15.320 --> 0:11:17.960 going to be back to pre pandemic levels within a year, 0:11:18.200 --> 0:11:21.000 which is interesting to me and I think probably overdone. 0:11:21.760 --> 0:11:25.840 Um But if inflation is high and the unemployment rate 0:11:25.880 --> 0:11:29.200 isn't back to the Fed's target, and they're getting political pressure. 0:11:29.600 --> 0:11:31.600 I think you're going to see a tremendous amount of 0:11:31.600 --> 0:11:34.640 focus on the FED, and including on whether or not 0:11:35.280 --> 0:11:38.080 President Buying keeps your own Powell the seat going into 0:11:38.200 --> 0:11:53.120 next year. One point i'd like to to make um 0:11:53.160 --> 0:11:57.120 on the pandemic. I certainly agree with you the chances 0:11:57.160 --> 0:12:02.040 of another lookdown the scale of what happened last spring 0:12:02.120 --> 0:12:06.800 requires effectively a new virus, which i'd like you don't 0:12:06.800 --> 0:12:09.240 know enough about to to know whether it will happen. 0:12:10.400 --> 0:12:13.520 The chances are above zero, and neither of us already 0:12:13.559 --> 0:12:16.000 qualified to say anything much more than that. What I 0:12:16.080 --> 0:12:19.840 do think, however, both from being a British person who 0:12:19.880 --> 0:12:22.520 still can't go home unless I'm prepared to get very 0:12:22.520 --> 0:12:25.920 expensive PC artists and spend ten days in quarantine even 0:12:25.960 --> 0:12:30.720 though I'm fully vaccinated and and Britain is free, there 0:12:30.800 --> 0:12:36.239 are actually um subtler gradations than we than we expected. 0:12:36.320 --> 0:12:39.560 And as somebody who's generally been arguing that inflation is 0:12:39.600 --> 0:12:43.240 more of a risk than people think, this is I 0:12:43.320 --> 0:12:46.680 have to admit an argument that inflation may be less 0:12:46.679 --> 0:12:49.280 of a risk than people think, which is that we're 0:12:49.320 --> 0:12:51.640 not going to lock down. And some people might have 0:12:51.679 --> 0:12:55.120 ideological reasons for not for for thinking they really can 0:12:55.240 --> 0:12:59.839 behave as normal. But it's going to be around. It's 0:13:00.160 --> 0:13:02.200 to remind us of its presence. We're about to watch 0:13:02.240 --> 0:13:05.240 the Olympics played in front of empty stadiums. I couldn't 0:13:05.240 --> 0:13:07.920 go to my Red Sox Yankees game last last week 0:13:07.960 --> 0:13:12.600 because the Yankees all had covid um. It will, it 0:13:12.640 --> 0:13:16.040 will drag on having some kind of an effect on 0:13:16.040 --> 0:13:18.480 our lives, and it won't mean a sudden stop. But 0:13:18.559 --> 0:13:23.040 it also won't mean all the roaring twenties ideas that 0:13:23.040 --> 0:13:24.760 we're all going to go out and spend all this 0:13:24.840 --> 0:13:28.760 money burning a hole in our pockets. That that argument, also, 0:13:28.840 --> 0:13:31.680 it seems to me, is looking weaker now as we 0:13:31.800 --> 0:13:37.120 understand where the pandemic is going. So perhaps we shouldn't 0:13:37.120 --> 0:13:42.520 be thinking so binarily about this. Is that a concern 0:13:42.559 --> 0:13:46.520 of yours, whether whether we really are going to spend 0:13:46.520 --> 0:13:49.760 all the money happily in the way that people have 0:13:49.760 --> 0:13:54.320 have been predicting. The riscue articulated definitely resonates with me 0:13:54.600 --> 0:13:58.120 that and I think again it will depend quite a 0:13:58.120 --> 0:14:01.000 bit country by country. We should see a lot of differentiation. 0:14:01.120 --> 0:14:04.240 If if you're a country like Thailand, and you depend 0:14:04.360 --> 0:14:08.800 so heavily on tourism. Um. You know, there are very 0:14:08.840 --> 0:14:11.920 few people who have the ability and willingness to spend 0:14:11.920 --> 0:14:14.640 who are going to Thailand right now, um, And so 0:14:14.960 --> 0:14:18.120 you are going to see some countries hurt and hurt 0:14:18.160 --> 0:14:22.320 even more with delta just creating fear and uncertainty. The 0:14:22.440 --> 0:14:26.320 United States I think is in unique is too strong 0:14:26.360 --> 0:14:29.480 a word, but in a differentiated position in that you 0:14:29.520 --> 0:14:32.560 do have the high vaccination rate, You do have a 0:14:32.640 --> 0:14:37.320 savings rate that is still today um, quite a bit 0:14:37.360 --> 0:14:40.160 elevated versus where it was before the pandemic. You have 0:14:40.400 --> 0:14:43.960 net worth that's basically at record highs UM. You have 0:14:44.040 --> 0:14:47.800 balance sheets both of companies and households that are extremely 0:14:47.840 --> 0:14:51.560 healthy uh. And you have one of the tightest labor 0:14:51.600 --> 0:14:54.760 markets we've seen in decades, even with the unemployment rate 0:14:54.800 --> 0:14:58.040 at five point nine percent. And so while I don't 0:14:58.040 --> 0:14:59.760 know if we're going to see a roaring twenties and 0:14:59.800 --> 0:15:02.720 now LGY, I do think the odds, even with the 0:15:02.800 --> 0:15:05.640 delta variant, are pretty good that you will continue to 0:15:05.680 --> 0:15:09.240 see very robust growth in the United States in line 0:15:09.240 --> 0:15:12.840 with and I think the biases above expectations at least 0:15:12.880 --> 0:15:16.440 for the coming quarters. Um. Now, of course that's barring, 0:15:16.840 --> 0:15:20.520 you know, as we said, a new virus variant. I 0:15:20.560 --> 0:15:24.480 hate even talking about it. It's depressing, but it's possible, um. 0:15:24.760 --> 0:15:27.280 And I think you know, we believe our base case 0:15:27.440 --> 0:15:30.040 is that you are going to get another fiscal package 0:15:30.320 --> 0:15:33.120 in the US this year, maybe not till the fourth quarter, 0:15:33.240 --> 0:15:35.120 but we are going to. We we expect we will 0:15:35.160 --> 0:15:38.240 see something get through. And we believe that the FED 0:15:38.560 --> 0:15:41.280 is going to continue lagging the recovery, so to speak, 0:15:41.680 --> 0:15:44.680 they will let right now, it's too noisy. How can 0:15:44.680 --> 0:15:47.800 you read anything into a CPI report month to month? 0:15:48.200 --> 0:15:51.760 So let the noise fade, see what the underlying inflation 0:15:51.880 --> 0:15:54.120 rate is to the degree you can, and then figure 0:15:54.120 --> 0:15:56.720 out where you go. And so even if the FED 0:15:56.800 --> 0:15:59.600 does announce at Jackson Hole or in September their plan 0:15:59.760 --> 0:16:02.680 for tapering, and maybe they start tapering somewhere around your 0:16:02.800 --> 0:16:05.440 end um, they're they're not going to be acting the 0:16:05.480 --> 0:16:09.560 way they were in two thousand seventeen or before. They're 0:16:09.600 --> 0:16:12.600 not going to be preemptively tightening. And I would add 0:16:12.640 --> 0:16:15.440 on the FED briefly that you know, we're talking so 0:16:15.520 --> 0:16:18.120 much about inflation, and that is the big thing. But 0:16:18.200 --> 0:16:21.960 don't forget they also fine tuned their labor market target. Right. 0:16:22.000 --> 0:16:25.960 They're looking at inclusive employment. And if you think inclusively 0:16:26.000 --> 0:16:29.280 about employment, you're thinking about cohorts of people high school 0:16:29.320 --> 0:16:33.200 degree and under, etcetera. That unemployment rate tends to run 0:16:33.240 --> 0:16:37.000 two or three percentage points higher um than the headline 0:16:37.040 --> 0:16:40.200 unemployment rate. And that's another reason if there are any 0:16:40.400 --> 0:16:43.160 uncertainties about growth and the Fed wants to go a 0:16:43.200 --> 0:16:45.600 little slow, that's a reason they could go a little 0:16:45.640 --> 0:17:04.520 slower justifiably. John, I wanted to ask you a question 0:17:04.520 --> 0:17:07.000 about you have written about inflation. You have what you 0:17:07.080 --> 0:17:11.959 call authors indicators. Um, you are sort of leaning, uh 0:17:12.000 --> 0:17:14.600 perhaps on the on the hawkish side on inflation to 0:17:14.960 --> 0:17:17.639 some degree. And I think that's interesting because it is 0:17:17.720 --> 0:17:21.160 seeing it does seem like such a solid consensus, especially 0:17:21.160 --> 0:17:23.480 many of the guests we've had on the show that 0:17:24.080 --> 0:17:29.040 transitory uh you know, he's on the shorter end of transitory, 0:17:29.080 --> 0:17:32.000 temporary whatever, however many months that is no one seems 0:17:32.000 --> 0:17:35.320 to know. But it's not it's not a real permanent 0:17:35.359 --> 0:17:39.040 shift in pricing. UM. We'll walk us through your indicators, 0:17:39.080 --> 0:17:41.920 what you're seeing kind of briefly, and why you are 0:17:41.960 --> 0:17:45.800 toting a little hawkishly. Okay. You know, first of all, um, 0:17:46.119 --> 0:17:49.640 as Rebecca was saying earlier, I have, thankfully not being 0:17:49.800 --> 0:17:52.120 over well over a hundred years old, I have never 0:17:52.160 --> 0:17:56.360 lived through anything like this either, and so um, you know, 0:17:56.960 --> 0:18:02.280 one starts from a position of humility and ignorance. The 0:18:02.320 --> 0:18:05.160 general idea of the indicators is trying to work out 0:18:05.200 --> 0:18:09.200 what I think the most the most important numbers will 0:18:09.240 --> 0:18:11.439 be to keep an eye on across a range of factors, 0:18:11.480 --> 0:18:14.439 because you can argue about whether inflation is a monetary 0:18:14.480 --> 0:18:18.280 phenomenon or whether it's about the wage spiral or whatever. 0:18:18.359 --> 0:18:21.000 But you know, there are plainly many factors that go 0:18:21.080 --> 0:18:24.000 into causing it, and there are plainly genuine there are 0:18:24.040 --> 0:18:26.399 real forces in either direction. I think some of this 0:18:26.520 --> 0:18:29.960 debate gets a little weak and it's like saying, you know, 0:18:30.119 --> 0:18:33.000 the picture, just through this at this through the ball 0:18:33.160 --> 0:18:35.359 over a hundred miles an hour. Of course he's not 0:18:35.400 --> 0:18:37.880 going to hit it. And the other guy says, well, 0:18:37.880 --> 0:18:41.400 look this guy, it's the most muscle bound sluggly you've 0:18:41.440 --> 0:18:44.440 ever seen. He swung really hard. It's bound to go out. 0:18:44.880 --> 0:18:46.919 Both of those are very stupid things to say. There 0:18:46.960 --> 0:18:51.240 are very strong forces in either direction, and yet any 0:18:51.320 --> 0:18:54.840 number of outcomes is possible depending on the exact angle, 0:18:54.960 --> 0:19:00.000 that margin, everything about the contact that is that is made. 0:19:00.320 --> 0:19:04.080 So there are forces in both directions. What we need 0:19:04.119 --> 0:19:08.080 to see is how they how they counteract. So we 0:19:08.840 --> 0:19:13.000 all the standard measures of inflation, including trimmed mean, including core, 0:19:14.000 --> 0:19:18.760 everything suggests that inflation is higher than it has been 0:19:18.760 --> 0:19:20.680 on the average for the last ten years. You can 0:19:21.400 --> 0:19:28.840 I've seen some remarkable prestig agitation with with the numbers. Ultimately, yes, 0:19:28.880 --> 0:19:32.160 inflation is definitely a bit higher. Whichever way you look 0:19:32.200 --> 0:19:34.359 at it. It may not be terrifying, but it's higher. 0:19:35.119 --> 0:19:37.720 Um the bond market at this point, there is no 0:19:38.160 --> 0:19:40.720 possible doubt that the bond market just doesn't think this 0:19:40.800 --> 0:19:44.040 is a problem in terms of its consensus, in terms 0:19:44.040 --> 0:19:47.320 of the view that finally emerges from the price uh. 0:19:48.200 --> 0:19:51.080 If you look at we've got indicators for the for 0:19:51.400 --> 0:19:55.399 various components. The one that's fascinating, which I think is 0:19:55.640 --> 0:19:57.640 probably going to be critical over the next few months 0:19:57.800 --> 0:20:01.840 shelter um, which which recommentioned earlier in the in the 0:20:02.040 --> 0:20:06.520 in her first comments as well that generally speaking, there 0:20:06.560 --> 0:20:10.240 are all kinds of technical complaints about exactly how how 0:20:10.480 --> 0:20:14.680 shelter is accounted for in the in the CPI calculations. 0:20:14.720 --> 0:20:16.840 But if house prices rise as much as they've done 0:20:17.280 --> 0:20:21.960 of late, it would be very surprising. Indeed, if rents 0:20:22.200 --> 0:20:25.840 didn't start to rise once annual leases show up and 0:20:26.040 --> 0:20:30.920 landlds have the chance to negotiate a higher, higher rent, 0:20:31.080 --> 0:20:33.200 that the odds are very high that you will see 0:20:33.200 --> 0:20:36.840 that number not get into Zimbabwe territory, but you might 0:20:36.880 --> 0:20:39.840 get it getting into three or a bit more, and 0:20:39.880 --> 0:20:43.560 that would be very very intriguing, very interesting if it happened. 0:20:44.000 --> 0:20:48.919 Then we have wage inflation numbers which are broadly banging 0:20:49.080 --> 0:20:51.200 the line of where they've been for much of the 0:20:51.600 --> 0:20:56.160 last decade, with the intriguing exception that the lower skilled, 0:20:56.240 --> 0:20:59.840 lesser educated people are getting a nicer deal than they 0:21:00.560 --> 0:21:04.240 for a while, obviously because of the way the because 0:21:04.320 --> 0:21:07.959 of all the effects on employment we know about from 0:21:08.000 --> 0:21:11.160 the pandemic, there's a lot of noise there. I think 0:21:11.200 --> 0:21:13.080 you need until the end of this year at the 0:21:13.160 --> 0:21:15.280 very earliest to have any clarity as to whether there 0:21:15.280 --> 0:21:18.480 has been what you would logically expect, which is some 0:21:18.600 --> 0:21:20.440 kind of an increase in the strength of the hand 0:21:20.440 --> 0:21:24.040 of labor. Broadly speaking, I think what we need to 0:21:24.040 --> 0:21:31.720 see is whether um, the wage inflation starts to take 0:21:31.840 --> 0:21:35.280 hold in the way that some people fear. And also 0:21:35.320 --> 0:21:40.200 I forgot to measure commodities, whether commodity inflation takes hold 0:21:40.440 --> 0:21:44.640 in the way that some fear. And that's my that's 0:21:44.680 --> 0:21:48.920 my best attempts to try to be calm and logical 0:21:49.440 --> 0:21:53.840 and provide some kind of a manageable way for for 0:21:53.960 --> 0:21:57.840 our clients are viewers, to understand this in a in 0:21:57.840 --> 0:22:02.920 a way that doesn't oversimplify. I'm glad you brought up psychology, John, 0:22:02.960 --> 0:22:05.440 that that gives me the perfect segue to the craziest 0:22:05.480 --> 0:22:08.720 things we've seen in markets this week, Rebecca. But before 0:22:08.720 --> 0:22:10.600 we get to that, Rebecca, there are two There are 0:22:10.640 --> 0:22:13.280 two things on a certain cohort of listeners of the 0:22:13.280 --> 0:22:16.399 show wait very patiently for so we'll get to the 0:22:16.440 --> 0:22:18.840 crazy things. That's obviously one of them. But I think 0:22:18.840 --> 0:22:20.719 a lot of people just want to hear an answer 0:22:20.760 --> 0:22:23.439 to the general question just tell me what to do 0:22:23.520 --> 0:22:26.159 with my money right now. So I'm curious, you know, 0:22:26.680 --> 0:22:33.480 given this sort of paralyzing feeling of uncertainty and noise. Yeah, 0:22:33.760 --> 0:22:36.720 and especially given Bridgewater, you know, the famous um all 0:22:36.800 --> 0:22:39.040 weather strategy. I mean, we've had a lot of debate. 0:22:39.280 --> 0:22:42.159 Another question I'm sick of answering and asking, is is 0:22:42.200 --> 0:22:45.120 sixty forty dead? You know, obviously all weathers a more 0:22:45.160 --> 0:22:50.680 sophisticated but sort of similarly motivated strategy. Just walk us through, 0:22:50.720 --> 0:22:54.560 like what is you know, how should we be positioned 0:22:54.640 --> 0:22:57.200 in this environment? And what is kind of your outlook 0:22:57.240 --> 0:23:00.480 for for the all weather strategy given you know, high 0:23:00.560 --> 0:23:04.680 valuations in both both bond and stock markets. So all 0:23:04.760 --> 0:23:08.000 whether um, I think, I think when you go back 0:23:08.000 --> 0:23:10.920 to why it started and what the goal was, it 0:23:11.480 --> 0:23:15.240 makes it so much more clear. Ray Dahlia, our founder, 0:23:15.800 --> 0:23:19.840 when he got going, he realized his kids might not 0:23:20.160 --> 0:23:23.399 have the same aptitude or interest he did. He wanted 0:23:23.600 --> 0:23:27.560 to have a strategic allocation for his family as kids 0:23:27.600 --> 0:23:30.200