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Speaker 1: Let's get to our guest, Jeff Schultz, is with US

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Speaker 1: director and investment strategists at Clearbridge Investments. So, Jeff, it

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Speaker 1: appears as simple as this that as go treasury, so

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Speaker 1: goes the SNP five. This jump in the two year

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Speaker 1: yield here seems to indicate the terminal rate is moving

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Speaker 1: a lot higher. Do you fight this or do you

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Speaker 1: just succumb? Well, first off, thank you for for having

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Speaker 1: me on the program, And unfortunately you're right, um equities

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Speaker 1: are beholden to the treasury market, and you know, we'lling

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Speaker 1: not whether or not we're hitting peak hawkishness, and I

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Speaker 1: think we're getting close. Right now, the markets are pricing

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Speaker 1: at a terminal rate of around five per cent um.

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Speaker 1: I think that's probably gonna do it, especially considering that

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Speaker 1: this will easily be the second fastest start to a

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Speaker 1: tightening cycle since nineteen um only when Volker had to

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Speaker 1: break the back of inflation. Have you seen more tightening comes. So,

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Speaker 1: although you did see some upward pressure today, and I

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Speaker 1: think that's a direct result of some really strong economic

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Speaker 1: data over the last couple of weeks, whether it's payrolls

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Speaker 1: from September, the CPI reading from last week, or industrial production.

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Speaker 1: I think we're probably getting into that ballpark where you

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Speaker 1: went to the tenure treasury roll over from here, which

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Speaker 1: could be a tail wind exacuities near term, Jeff. With

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Speaker 1: peak whocushness, do we get peaked dollar? I think the

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Speaker 1: dollar is going to remain buoyant UM though the dollar

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Speaker 1: has continued to strengthen all year UM, and I think

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Speaker 1: it's clearly going to be a headwind to not only

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Speaker 1: this earning season, but next earning season. I think, given

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Speaker 1: the fact that the dollar is a counter trend currency,

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Speaker 1: it tends to be a risk off trade UM in

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Speaker 1: the slowing of the global economy and in the appearance

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Speaker 1: that zero COVID tolerance policies is still going to be

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Speaker 1: with China in the next year or so. UM. I

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Speaker 1: continue to see that the dollar is buoyant, even though

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Speaker 1: I do think that most of the games have already occurred. Jeff.

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Speaker 1: Is there such a thing as a landing? Well, there is,

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Speaker 1: but I think that path to a soft landing is

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Speaker 1: getting more and more narrow with each FED rate hike.

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Speaker 1: UM in FOMC meeting that we get past UM now

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Speaker 1: and looking at the last thirteen FED initial tightening cycles,

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Speaker 1: since nineteen fifty five. Three of them have ended in

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Speaker 1: a soft landing. That was nineteen sixty six four in

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Speaker 1: nineteen and in looking at those three instances, you had

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Speaker 1: a dubbish FED pivot, which was responsible for prolonging those expansions.

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Speaker 1: But I think nineteen sixty six is most like today

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Speaker 1: in the sense that when the FED pivoted three years later,

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Speaker 1: core inflation almost doubled, going from three point three percent

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Speaker 1: up to six point two percent, while in eight four

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Speaker 1: and ninety five you actually saw inflation move down. And

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Speaker 1: the key reason is that you have a tight labor

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Speaker 1: market in nineteen sixty six with the unemployment rate similar

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Speaker 1: to today at three point eight per cent. So so

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Speaker 1: to cut to the chase, you're saying the FED learned

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Speaker 1: from these experiences won't make the same mistake again as

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Speaker 1: it did in sixty six. And I think you made

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Speaker 1: an interesting point say that because the jolts are so strong,

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Speaker 1: you know, we have all these job openings that can't

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Speaker 1: be filled, that you can take a lot of the

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Speaker 1: slack out there and you don't actually have to fire

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Speaker 1: a lot of people, and you can still take some

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Speaker 1: of the juice out of the labor market. Expound on that. Yeah,

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Speaker 1: I would call it the immaculate flackening, if you will.

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Speaker 1: Um job openings in the latest releasement from eleven million

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Speaker 1: found a ten million massive movement a one month period.

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Speaker 1: But at ten million, that's still two and a half

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Speaker 1: million more than what we saw prior to COVID. So

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Speaker 1: you have this insatiable thirst for labor demand, and there

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Speaker 1: certainly is the possibility for job openings to continue to

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Speaker 1: move down, and that could create some lower pressure on

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Speaker 1: wage gains, and it may make the FED a little

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Speaker 1: bit more comfortable with inflation moving back down to target. Now,

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Speaker 1: the one thing I'll mention is job openings have never

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Speaker 1: moved down in a material way without the unemployment rate rising.

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Speaker 1: But this has been such a unique cycle that this

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Speaker 1: could be another first that will look be looking back

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Speaker 1: to when we think about this time frame, Jeff, you

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Speaker 1: look at economic history and it does say that the

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Speaker 1: recessions do act as a kind of a clear out

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Speaker 1: of zombie companies and uh the like, if you will.

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Speaker 1: In two thousand and eight, we really did manage to

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Speaker 1: perhaps avoid a really really deep recession because of the

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Speaker 1: action of the central banks around the world and also

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Speaker 1: China too, and during the pandemic likewise, is it is it?

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Speaker 1: I mean, it's a horrible thing to say, because it

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Speaker 1: is people's lives that is the US in need of

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Speaker 1: a recession. I think we are you know, obviously very

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Speaker 1: very tight labor market, whether you're looking at you know,

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Speaker 1: obviously wage growth, where you're looking at the job creation,

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Speaker 1: which the latest release is still one and a half

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Speaker 1: times the average job creation that we saw last decade.

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Speaker 1: Um initial job has claims are a relatively low, so

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Speaker 1: you have a very tight labor market. And again, in

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Speaker 1: order for the FED to achieve its goal of price

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Speaker 1: stability and not repeat the sins of the nineteen sixty

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Speaker 1: six soft pivot, you need to have a recession. And

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Speaker 1: that has includes businesses going under obviously a lot of

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Speaker 1: cheap capital flowing over the last couple of years, and

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Speaker 1: in a higher unemployment rate, uh, in joblessness situation. So yeah,

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Speaker 1: after a very strong two years of you know, cheap

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Speaker 1: money and a lot of stimulus, I think the economy

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Speaker 1: does need to cool and a recession is the necessary

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Speaker 1: equal for that. So in the meantime, while we try

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Speaker 1: to get there, or what we've seen happen this year,

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Speaker 1: year to date, Tesla is down almost fifty so they're

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Speaker 1: selling the dream and buying what insurance companies. Yeah, obviously

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Speaker 1: UM markets are down quite a bit here recently, in

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Speaker 1: particular in the areas that did the best coming off

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Speaker 1: of the rebound in the bottom of Tesla being one

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Speaker 1: of those primary beneficiaries. But I think obviously as we

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Speaker 1: get deeper into this recessionary sell off and we don't

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Speaker 1: put a durable bottom in UM, I think a lot

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Speaker 1: of companies are going to be smart and hoard capital

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Speaker 1: UM They're going to My question was sort of a

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Speaker 1: sneaky way of just saying what what what should you

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Speaker 1: buy here? Yeah, I think that we're not through the

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Speaker 1: sell off. I think earnings expectations just started to come down.

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Speaker 1: Over the last three recessions. Earnings have come down by

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Speaker 1: on average, we're about two percent of the way there.

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Speaker 1: So I like health care, utilities and staples and more

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Speaker 1: defensive areas of the marketplace. Jeff Passion having you on

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Speaker 1: the program, thank you so much. That's a deficial director

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Speaker 1: and investment strategist at a clear Bridge Investment