WEBVTT - Surveillance: Hawkish Fed Sparks Recession Fears 0:00:05.120 --> 0:00:09.200 Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane, along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.799 Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.320 and of course on the Bloomberg terminal. Right now, I 0:00:29.360 --> 0:00:31.200 am so pleased to say we can head over to 0:00:31.240 --> 0:00:33.680 the New York Fed Bloombergs Kathleen Hayes there with one 0:00:33.680 --> 0:00:35.920 of the leadership members of the Federal Reserve of New 0:00:36.000 --> 0:00:41.479 York FED, President John Williams, to answer some of those questions. Kathleen, Lisa, 0:00:41.520 --> 0:00:45.360 thank you, President Williams, thank you for joining us this 0:00:45.400 --> 0:00:47.559 morning on Blombrig Television. So happy to have you here. 0:00:47.600 --> 0:00:50.600 We are in the New York Fed Museum in a 0:00:50.680 --> 0:00:53.200 year when the Fed has been making a lot of history. 0:00:54.560 --> 0:00:57.840 So let's start with the meeting this week and what 0:00:58.240 --> 0:01:00.960 came out of it. Because we got the you know, 0:01:00.960 --> 0:01:03.160 the move up in the to the restrictive rate that 0:01:03.240 --> 0:01:05.840 was even more restrictive than people thought, and inflation has 0:01:05.880 --> 0:01:08.360 stayed high. It's hard to get down, probably harder than 0:01:08.400 --> 0:01:11.200 you thought it would just a few months ago with 0:01:11.280 --> 0:01:13.800 these dots, with this position, Now, do you think you 0:01:13.880 --> 0:01:15.960 finally caught up to where you need to be? Well, 0:01:16.000 --> 0:01:17.840 I think we're well on our way there. And I 0:01:17.920 --> 0:01:20.639 think when you look at the kind of the central 0:01:20.680 --> 0:01:23.720 tendency of the dots, Uh, my colleagues expect the Fed 0:01:23.800 --> 0:01:25.600 funds rate to get to say five to five and 0:01:25.600 --> 0:01:28.320 a half percent next year. I think that's a that 0:01:28.400 --> 0:01:32.600 gets us into that hopefully sufficiently restrictive stance of policy 0:01:32.640 --> 0:01:34.720 that we'll bring inflation back to two percent. So I 0:01:34.720 --> 0:01:39.040 am getting increasingly confident that we're getting closer to that point. 0:01:39.440 --> 0:01:42.039 But obviously we have to watch the data. The inflation 0:01:42.080 --> 0:01:44.280 and other data have surprised this and we need to 0:01:44.319 --> 0:01:46.000 be on the lookout for that. But I do feel 0:01:46.040 --> 0:01:49.200 we're getting to a better place now. Just about two 0:01:49.200 --> 0:01:53.040 weeks ago, you said that the dead funds rate has 0:01:53.080 --> 0:01:56.520 to get above the inflation rate to bring down inflation. 0:01:57.520 --> 0:01:59.800 How far above inflation does it have to get? Well, 0:01:59.840 --> 0:02:02.840 that that's the question, right, And why we talk about 0:02:02.880 --> 0:02:05.680 this is in terms of sufficiently restrictive to bring inflation 0:02:05.680 --> 0:02:08.040 back to two percent. So to me, it's really about 0:02:08.040 --> 0:02:11.080 getting in high enough and of course keeping it high 0:02:11.120 --> 0:02:14.120 for a while, for enough time to really see clear 0:02:14.160 --> 0:02:17.680 science inflation is moving back down on on the way 0:02:17.720 --> 0:02:19.600 to two percent. You know. My view is you have 0:02:19.639 --> 0:02:21.560 to think about real interest rates. As you said, if 0:02:21.560 --> 0:02:24.320 you look at again the median dots, if you will, 0:02:24.360 --> 0:02:27.200 in the in the economic projections we just put out, 0:02:27.320 --> 0:02:29.560 you see the real Fed funds right, say, the Fed 0:02:29.600 --> 0:02:32.359 funds right minus the core pc inflation around one and 0:02:32.400 --> 0:02:35.960 a half percent. I think that's a reasonable view restrictive. Again, 0:02:36.000 --> 0:02:38.760 whether it's sufficiently restrictive, we'll have to watch the data 0:02:38.800 --> 0:02:41.400 and see. But I think that's to me basically where 0:02:41.720 --> 0:02:46.280 where I'm thinking right now, there's many top economist, former 0:02:46.320 --> 0:02:50.320 Fed officials even who are saying, you're look, it's looking 0:02:50.320 --> 0:02:52.120 more and more like you are going to have to 0:02:52.160 --> 0:02:55.240 go higher even than where you are now, maybe something 0:02:55.280 --> 0:02:59.560 like six maybe something heading towards seven percent. Uh, can 0:02:59.600 --> 0:03:03.000 you see the happening and what what circumstances, what would 0:03:03.000 --> 0:03:04.760 be happening for that? Do you have to go ahead 0:03:04.800 --> 0:03:07.160 like that? Well, that's definitely not my baseline, is I 0:03:07.240 --> 0:03:09.480 just indicated. I don't think we'll need to get real 0:03:09.680 --> 0:03:12.160 interest rates that high, But of course things could happen 0:03:12.200 --> 0:03:15.240 differently than than we expect and would have to especially 0:03:15.320 --> 0:03:18.760 around inflation, but also how how strong is the economy 0:03:18.800 --> 0:03:21.240 even with higher interest rates? Does he do we still 0:03:21.280 --> 0:03:24.720 have these imbalances between supply and demand right now, I 0:03:24.720 --> 0:03:28.160 mean PC inflation is six percent or less twelve months, 0:03:28.240 --> 0:03:31.080 and we have clear science and demand exceeds supply in 0:03:31.080 --> 0:03:33.400 our economy and our labor markets. So to me, the 0:03:33.480 --> 0:03:35.400 question of how high we have to get to is 0:03:35.400 --> 0:03:37.400 really get to pend on what we see in inflation 0:03:37.640 --> 0:03:40.360 and the supply demand in balance, and in my base cases, 0:03:40.400 --> 0:03:42.240 we don't have to get that high. I think we 0:03:42.360 --> 0:03:46.080 have some favorable developments underway, things that we've been talking 0:03:46.120 --> 0:03:49.480 about for a long time. Supply chains definitely are getting 0:03:49.520 --> 0:03:51.840 better around the world. We're seeing that in a lot 0:03:51.880 --> 0:03:54.000 of different data. And we're also seeing, you know, some 0:03:54.040 --> 0:03:56.520 of the goods prices and import prices come down, a 0:03:56.600 --> 0:04:00.120 reversal of some of those of pandemic era thing that 0:04:00.200 --> 0:04:02.320 pushed up inflation. So we've got a few factors. I 0:04:02.320 --> 0:04:04.920 think you're gonna bring inflation down to three to three 0:04:04.920 --> 0:04:07.040 and a half percent next year, um. But then the 0:04:07.080 --> 0:04:08.440 real issue is how do we get it all the 0:04:08.440 --> 0:04:11.640 way too, of course is but right there though, is 0:04:11.680 --> 0:04:16.400 the message from Wednesday that and and this ties in 0:04:16.440 --> 0:04:18.600 with you maybe if you we might have to go higher. 0:04:19.080 --> 0:04:21.920 Is the message that if it's not coming down as 0:04:22.000 --> 0:04:25.000 we expect, then we are clearly open to going higher. 0:04:25.000 --> 0:04:27.320 Taking the next step, well, we're gonna have to do 0:04:27.360 --> 0:04:30.919 what's necessary against sufficiently restrictive to bring inflation down to 0:04:30.920 --> 0:04:33.200 two percent, and it could be higher than what we've 0:04:33.240 --> 0:04:35.960 written down. And we have had to increase our interest 0:04:36.080 --> 0:04:38.840 rate projections as the data come in. The inflation has 0:04:38.839 --> 0:04:41.400 been stubbornly highest, you know, many people have said, and 0:04:41.440 --> 0:04:45.840 we've seen the economy remain very resilient to higher interest rates. Remember, 0:04:45.839 --> 0:04:49.200 the unemployment rate is three point seven. Some signs are 0:04:49.600 --> 0:04:52.560 slowing demand for labor, but still a very very strong 0:04:53.200 --> 0:04:56.279 uh imbalance between supply and demand right now. You know, 0:04:56.960 --> 0:05:00.120 there were two surprisingly good CPI reports going in to 0:05:00.200 --> 0:05:02.160 this meeting, and so a lot of people thought, well, 0:05:02.200 --> 0:05:04.159 that good news for the Fed. You know, maybe they're 0:05:04.160 --> 0:05:07.560 not going to be quite as aggressive. Um. But at 0:05:07.560 --> 0:05:11.880 the same time, what happened inflation forecast boom goes up. 0:05:13.240 --> 0:05:17.040 How did this happen? What's guiding your view on inflation. Again, 0:05:17.720 --> 0:05:21.080 two good surprises on CPI and yet the the PC 0:05:21.160 --> 0:05:23.960 core core and PC overall still can expected a rise 0:05:24.360 --> 0:05:27.919 right and again relative to say or earlier projections in September. 0:05:28.160 --> 0:05:29.919 The you know, I think that you really have to 0:05:29.920 --> 0:05:32.279 think about what's happening in the inflation data. So we 0:05:32.320 --> 0:05:34.920 are seeing good news. I like good news on inflation reports. 0:05:35.000 --> 0:05:36.960 A lot of that's in the goods areas and some 0:05:37.000 --> 0:05:39.880 of the areas we've been long expecting those inflation rates 0:05:39.920 --> 0:05:43.039 to come down, so that wasn't so, you know, that's 0:05:43.040 --> 0:05:44.919 something that we've been expecting to see as part of 0:05:44.920 --> 0:05:49.120 the baseline forecast. Where inflation is still high is in 0:05:49.160 --> 0:05:52.440 these core services areas, the areas that you know are 0:05:52.440 --> 0:05:55.240 probably going to be more persistent and really reflect the 0:05:55.279 --> 0:05:58.240 imbalance between supplying demand in the labor market in our 0:05:58.279 --> 0:06:01.120 overall economy. So sure, we're are seeing some good signs 0:06:01.120 --> 0:06:04.040 on goods and some other categories. I'm also seeing some 0:06:04.080 --> 0:06:06.320 good signs in the in the rents for new leases 0:06:06.360 --> 0:06:08.960 of apartments and houses, So you know that inflation should 0:06:09.000 --> 0:06:12.520 eventually start coming down later in the latter part next year. 0:06:12.680 --> 0:06:15.719 But again in these other core services that inflation rate 0:06:15.800 --> 0:06:18.159 is still high, and that really gets to how strong 0:06:18.200 --> 0:06:20.760 the labor market is. So sure, some good news, but 0:06:20.839 --> 0:06:24.400 the underlying issue of core core services inflation is still 0:06:24.560 --> 0:06:27.360 very much there. Well, you know your your forecast for 0:06:27.440 --> 0:06:30.960 unemployment next year is a big jump, right, you see 0:06:31.000 --> 0:06:34.800 it much much weaker, up to almost full percentage point 0:06:34.839 --> 0:06:37.080 from what you're looking at September to four point six percent. 0:06:37.680 --> 0:06:40.560 You're looking for GDP to be much weaker than you 0:06:40.600 --> 0:06:44.159 thought three months ago, down to zero point five percent um. 0:06:44.680 --> 0:06:48.480 So is this the kind of forecast that is consistent 0:06:48.640 --> 0:06:52.680 with UH a soft landing. Is it a consistent with 0:06:52.800 --> 0:06:55.320 something maybe not quite that good? Well, I think it is. 0:06:55.520 --> 0:06:58.320 It's an economy that's continue to grow. As you pointed out, 0:06:58.320 --> 0:07:01.320 the median dot is a half her percent growth for 0:07:01.320 --> 0:07:04.640 this year and for next year. So as economy that's growing, UH, 0:07:04.680 --> 0:07:08.200 it's an economy where the unemployment rate is is rising somewhat. 0:07:08.279 --> 0:07:10.400 As you mentioned, the meeting will be at four point 0:07:10.440 --> 0:07:12.960 six percent of the end of next year. So I 0:07:13.000 --> 0:07:15.000 don't see this as a recession. We're clearly not a 0:07:15.040 --> 0:07:17.640 recession right now based on the data. It is an 0:07:17.640 --> 0:07:20.520 economy that is growing only modestly, and I think it's 0:07:20.520 --> 0:07:24.000 an economy that's really seen. Uh, the imbalance eats between 0:07:24.040 --> 0:07:28.400 supplying demand diminishing inflation coming down. Is the retail sales. 0:07:28.760 --> 0:07:32.520 We're weak across the board pretty much. Uh. Is this 0:07:32.560 --> 0:07:35.520 a canary in the cold mine for where the economy 0:07:35.560 --> 0:07:36.920 is heading and a part of the colom you want 0:07:36.920 --> 0:07:39.600 to get filed demand down? Is this maybe an early 0:07:39.640 --> 0:07:41.560 sign that you're succeeding. But we have to look at 0:07:41.600 --> 0:07:43.679 all the data on that. And obviously where we're seeing 0:07:43.680 --> 0:07:45.880 the science of the economy slowing is in the housing 0:07:45.920 --> 0:07:49.520 sector and now in manufacturing. Consumer spanning has been kind 0:07:49.520 --> 0:07:51.960 of jumping around a bit months and months and months 0:07:52.040 --> 0:07:54.200 quarter to quarter. It's actually been more up until this 0:07:54.360 --> 0:07:57.200 latest data, more resilient perhaps, and I was expecting. So 0:07:57.240 --> 0:07:58.800 we just have to, you know, go through all that 0:07:58.880 --> 0:08:01.720 data and really the kind of the underlying strength in 0:08:01.760 --> 0:08:04.600 the economy. That data doesn't change my basic view that 0:08:04.600 --> 0:08:06.560 we're going to have an economy growing modestly over the 0:08:06.600 --> 0:08:10.560 next year. You know, you're talking about the services ex 0:08:10.640 --> 0:08:13.400 housing right course, services X housing is that it seems 0:08:13.400 --> 0:08:15.720 like it's the key indicator. Now we have to see 0:08:15.760 --> 0:08:19.040 that coming down for the pad to be convinced that 0:08:19.040 --> 0:08:21.520 inflation is moving in the right direction. Well, I think 0:08:21.560 --> 0:08:24.559 that is it is most closely related in many ways 0:08:24.760 --> 0:08:28.080 to the state of the labor market into domestic price pressures. 0:08:28.400 --> 0:08:30.520 Some of these other categories, which of course are part 0:08:30.520 --> 0:08:32.520 of the inflation index. We don't ignore any of them, 0:08:32.600 --> 0:08:35.160 but they really are about the special factors our prices 0:08:35.200 --> 0:08:39.000 that skyrocketed, transportation costs and things like that. And then 0:08:39.320 --> 0:08:41.240 I think the housing market, we're always seeing some good 0:08:41.280 --> 0:08:43.560 indicators eventually of that coming down. So this is the 0:08:43.600 --> 0:08:46.920 area that that's not coming down, and we definitely needed 0:08:46.960 --> 0:08:48.560 to see it coming down to get to that two 0:08:48.559 --> 0:08:52.600 percent inflation goal. So a lot of focus on labor 0:08:52.880 --> 0:08:55.600 and wages in that part of it, right, That's that's 0:08:55.600 --> 0:08:59.280 what's important. That's what Pow pointed out this week. So, uh, 0:08:59.720 --> 0:09:03.240 do you think that there are signs of a wage 0:09:03.240 --> 0:09:06.040 price spiral right now? Is that one of your concerns again? 0:09:06.040 --> 0:09:08.560 And when you look at cp C guys coming down, 0:09:08.679 --> 0:09:10.920 that's good news, but boy oh boy, that the trend 0:09:10.960 --> 0:09:13.880 is still too much up for us. So I don't 0:09:13.920 --> 0:09:16.200 see any signs of a wage price spiral of the 0:09:16.240 --> 0:09:18.839 kind that we saw in the seventies. A couple data 0:09:18.840 --> 0:09:22.200 points at point to one is UH inflation expectations have 0:09:22.280 --> 0:09:25.200 been coming down. They've been really well anchored for longer 0:09:25.280 --> 0:09:27.800 run expectations. But we've also seen in New York Fed 0:09:27.840 --> 0:09:31.120 survey and in the Michigan survey shorter term inflation expectations 0:09:31.120 --> 0:09:32.760 coming down. So I think that we're not seeing that 0:09:32.840 --> 0:09:36.360 kind of dynamic kicking of people expecting higher inflation demanding 0:09:36.520 --> 0:09:39.439 higher wage increases because of that. The other is, you know, 0:09:39.520 --> 0:09:42.319 I really see wages is kind of the barometer, one 0:09:42.320 --> 0:09:44.600 of the barometers of the strength of the labor market 0:09:44.600 --> 0:09:47.120 about demand and supply. I think wage growth has been 0:09:47.200 --> 0:09:50.240 very high because labor demand has been really strong relative 0:09:50.320 --> 0:09:54.079 available available supply. Is labor demand and supply get better 0:09:54.200 --> 0:09:56.520 and better balance, I think, you know, the wage gains 0:09:56.520 --> 0:10:00.040 will be more inconsistent with will be more consisting and 0:10:00.120 --> 0:10:01.960 with longer term trans and or two percent. What do 0:10:02.000 --> 0:10:06.240 you make of the the Southwest Airlines contract? It was 0:10:06.280 --> 0:10:09.800 just signed. They're going to get increase in wages over 0:10:10.160 --> 0:10:13.720 the next when is it five years? Four years? Excuse me? Uh? 0:10:13.840 --> 0:10:16.680 Is that a concern? Well, you know, we're seeing a 0:10:16.720 --> 0:10:19.520 lot of adjustment and wages for around the country. I'm 0:10:19.559 --> 0:10:21.959 not going to point to any specific one. I mean again, 0:10:22.040 --> 0:10:24.600 wage increases right now, given to where inflation has been, 0:10:24.640 --> 0:10:27.080 given where the labor market is are, are still quite 0:10:27.160 --> 0:10:30.040 high um, and so we're watching those indicators. To me, 0:10:30.240 --> 0:10:32.640 it's really what tracking how the economy does over the 0:10:32.640 --> 0:10:36.480 next year labor demands, supplying wages, not focus on financial conditions. 0:10:36.679 --> 0:10:39.439 Chairpile noting that the markets and the feder seemed be 0:10:39.520 --> 0:10:42.200 working at cross purposes all the time lately. Are you 0:10:42.240 --> 0:10:45.440 concerned about this push pull between the FED and where 0:10:45.520 --> 0:10:47.959 it's trying to lead and h where the markets want 0:10:48.000 --> 0:10:50.040 to go? Well, I, you know, I think we need 0:10:50.080 --> 0:10:52.000 to be and we are being clear on what we're 0:10:52.040 --> 0:10:54.719 trying to, what we're going to achieve, uh, and how 0:10:54.720 --> 0:10:56.440 we're going to achieve it. I think that you know, 0:10:56.640 --> 0:10:59.280 the economic projections and the dot plot we put out 0:10:59.440 --> 0:11:02.160 provided a nice roadmap of how we're seeing the economy 0:11:02.160 --> 0:11:04.680 and Monte policy over the next couple of years. UH. 0:11:04.720 --> 0:11:07.080 And obviously financial conditions depend on a lot of other 0:11:07.120 --> 0:11:09.679 things than just Monterey policy. So I always look at 0:11:09.679 --> 0:11:13.400 a broad set of Monte Poulse sorry financial conditions understand 0:11:13.440 --> 0:11:16.199 how that feeds into our outlook right now. I know 0:11:16.280 --> 0:11:18.720 that you know a lot of some market participants clearly 0:11:18.720 --> 0:11:21.560 are more optimistic about inflation coming down. I look at 0:11:21.760 --> 0:11:24.600 the real interest rates implied by that. I think pretty 0:11:24.679 --> 0:11:27.080 much everyone understands that real interest rates need to get 0:11:27.200 --> 0:11:29.280 restrictive and stay there. Is that an issue for the 0:11:29.280 --> 0:11:32.480 Fed though, when you're trying to um you're trying to 0:11:32.679 --> 0:11:35.760 move policy in a certain direction, right, you want to 0:11:35.840 --> 0:11:38.800 tighten and if the market's rally and then findtional financial 0:11:38.800 --> 0:11:42.520 conditions softened for whatever interpretation the markets are taking, is 0:11:42.520 --> 0:11:44.839 that an issue. Does that make the job harder? Doesn't 0:11:44.880 --> 0:11:47.040 make the job hard harder. But it's just another one 0:11:47.080 --> 0:11:49.120 of those factors like that. You know, what's happening in 0:11:49.160 --> 0:11:51.400 the global economy, a lot of things that have to 0:11:51.440 --> 0:11:53.840 feed into our view of where the economy is going 0:11:54.200 --> 0:11:56.560 and then what we need to do. Clearly, to the 0:11:56.559 --> 0:11:59.079 extent that you know, financial conditions have tightened quite a bit, 0:11:59.320 --> 0:12:02.839 consisting the past year, consistent with our moving to towards 0:12:02.880 --> 0:12:05.600 the restrictives or to a restrictive stance of policy. That's 0:12:05.600 --> 0:12:08.360 an important part of the transmission of Monterey policy of 0:12:08.360 --> 0:12:10.200 the economy. In keeping with that, I want to ask 0:12:10.200 --> 0:12:12.600 you one last question, because there's this We're hearing this 0:12:12.640 --> 0:12:14.800 a lot, that the FED let inflation get out of 0:12:14.800 --> 0:12:18.319 control for whatever reason, and that this may have eroded 0:12:18.320 --> 0:12:20.360 the credibility that fed with the market. So how do 0:12:20.360 --> 0:12:23.520 you respond to that. Well, we're absolutely committed to getting 0:12:23.559 --> 0:12:26.199 inflation back to our two percent goal, UH, and we're 0:12:26.240 --> 0:12:28.640 acting in that way. I think we're communicating in that way. 0:12:28.679 --> 0:12:30.839 So I don't think we've lost the credibility, of course 0:12:31.120 --> 0:12:33.559 at all. I do think that, you know, we are 0:12:33.640 --> 0:12:37.080 completely united in our focus on getting inflation back to 0:12:37.120 --> 0:12:41.559 two percent. We've taken extraordinarily strong UH policy actions over 0:12:41.600 --> 0:12:43.760 the past year, and as we've shown, we're going to 0:12:43.800 --> 0:12:46.400 continue to take the actions are needed to get inflation 0:12:46.440 --> 0:12:49.640 back to two percent. Price stability is absolutely essential for 0:12:49.640 --> 0:12:51.600 a strong economy in the long run. We need to 0:12:51.600 --> 0:12:55.320 get that done and we will. All Right, Well, here 0:12:55.360 --> 0:12:58.520 it comes President John Williams. Thank you so much for 0:12:58.600 --> 0:13:02.000 joining us today. Thank you, Okay, Lisa, back to you. 0:13:02.320 --> 0:13:05.160 Great Where Kathleen Hayes with John Williams of the New 0:13:05.240 --> 0:13:18.839 York Federal Reserve. Ye're joining us now. Embody Rodman Co 0:13:18.920 --> 0:13:22.240 Chief investment strategist that John Hancock Investment Management. Embody fantastic 0:13:22.320 --> 0:13:24.120 to catch up with you, always is. I just want 0:13:24.160 --> 0:13:25.400 to pick up on a theme that I know you're 0:13:25.440 --> 0:13:29.040 dridding down on the equity bond performance this week. Emily, 0:13:29.280 --> 0:13:31.440 you've picked up on it as well. What's it telling you? 0:13:32.679 --> 0:13:36.960 It's actually pretty refreshing to see the diversification is working again. 0:13:37.440 --> 0:13:39.800 You have stocks down on the week, bonds up on 0:13:39.840 --> 0:13:41.840 the week, and that's the type of reaction that makes 0:13:41.840 --> 0:13:44.720 sense to us. Markets have almost been in this state 0:13:44.760 --> 0:13:48.120 of being comfortably numb, given the fact that central banks 0:13:48.120 --> 0:13:51.120 are implementing the most tightening that we've seen in the generation. 0:13:51.160 --> 0:13:54.599 The economic data are suggesting that the global recession is 0:13:54.679 --> 0:13:58.160 likely into three. The yield curve is wildly inverted to 0:13:58.160 --> 0:14:00.560 the tune of seventy eight basis points, and earnings are 0:14:00.600 --> 0:14:03.400 starting to come off. Those are all things to us 0:14:03.440 --> 0:14:07.160 suggested a recession is likely, and we've seen cyclical areas 0:14:07.160 --> 0:14:10.840 of the market showing leadership. We've seen European equities having 0:14:10.840 --> 0:14:13.680 their best quarter. They're they're one of their best quarters 0:14:13.720 --> 0:14:16.839 in years, and a lot of that cross asset performance 0:14:16.880 --> 0:14:20.520 to us just hadn't been driving with the macroeconomic backdrops. 0:14:20.520 --> 0:14:22.480 And we're starting to feel a little bit better that 0:14:22.640 --> 0:14:26.080 things are working as they should. But Emily, this goes 0:14:26.120 --> 0:14:28.400 against this idea that perhaps we have to have a 0:14:28.440 --> 0:14:31.040 different playbook this time around. And this is what we've 0:14:31.080 --> 0:14:33.400 been talking about for a number of weeks now that 0:14:33.440 --> 0:14:37.040 we're not necessarily going back to the pre pandemic investment 0:14:37.040 --> 0:14:41.320 thesis where if something goes wrong, central banks lower rates 0:14:41.400 --> 0:14:44.400 and that fuels a risk rally. So does it make 0:14:44.480 --> 0:14:47.760 sense to you that the relationship between stocks and bonds 0:14:47.880 --> 0:14:51.800 is reverting back to something that has been traditionally at 0:14:51.800 --> 0:14:56.120 a time when nothing about this moment is traditional. Yeah, 0:14:56.200 --> 0:14:59.080 I mean we think that the playbook is really you know, 0:14:59.120 --> 0:15:01.760 you can't be that are still rely on history here, 0:15:01.800 --> 0:15:04.200 and we do think that given the fact that the 0:15:04.240 --> 0:15:08.280 economy is likely to contract next year, central banks ultimately 0:15:08.320 --> 0:15:11.040 will be cutting in the back half of next year, 0:15:11.080 --> 0:15:13.000 so we want to be positioned for that. We want 0:15:13.000 --> 0:15:15.360 to lean into bonds here. We like the idea that 0:15:15.440 --> 0:15:17.840 bonds are working in a portfolio. And you know, Matt 0:15:17.920 --> 0:15:20.080 MSK and I have been talking a lot about the 0:15:20.120 --> 0:15:23.880 fact that income is very attractive and very competitive versus 0:15:23.880 --> 0:15:26.120 other parts of the market. So we do think that 0:15:26.120 --> 0:15:29.280 that playbook comes through again into next year, but it's 0:15:29.280 --> 0:15:32.640 gonna take some time. The FED has been incredibly just 0:15:32.840 --> 0:15:35.720 dogmatic in their approach to fighting inflation. We've heard it 0:15:35.800 --> 0:15:38.160 time and time again, but we know that the FED 0:15:38.240 --> 0:15:43.960 is looking at lagging economic data, employment inflation, especially services inflation. 0:15:44.280 --> 0:15:46.200 Many of your guests have talked about the fact that 0:15:46.240 --> 0:15:49.080 it's very, very sticky, and it's probably going to be 0:15:49.120 --> 0:15:52.840 too late for the FED to really sort of reverse 0:15:52.920 --> 0:15:56.200 course quickly into next year. They're going to cause this 0:15:56.280 --> 0:15:58.400 economic slowdown and then they're going to have to cut 0:15:58.960 --> 0:16:01.240 so soft the supermaan and this is something that John 0:16:01.360 --> 0:16:04.240 has been talking about really pointed out that there still 0:16:04.280 --> 0:16:06.960 is this feeling that if that is the playbook, then 0:16:07.000 --> 0:16:09.120 go into big tech, and that's what so many people 0:16:09.120 --> 0:16:11.080 are doing. And she pushes back against that and says 0:16:11.120 --> 0:16:14.720 that doesn't necessarily seem like the prudent play Where do 0:16:14.760 --> 0:16:17.480 you feel on the leadership on which are the stocks 0:16:17.720 --> 0:16:21.480 that can continue to drive upward some of the equity 0:16:21.520 --> 0:16:24.240 performance at a time. If we're reverting back to a 0:16:24.240 --> 0:16:28.120 playbook that's familiar, Yeah, I would agree the playbook from 0:16:28.160 --> 0:16:31.600 a cross asset perspective within equities might be a little 0:16:31.600 --> 0:16:34.240 bit different this time. It was always that, you know, 0:16:34.320 --> 0:16:37.000 we look to growth stocks. We wanted companies that were 0:16:37.000 --> 0:16:40.280 able to you know, produce that organic growth in a 0:16:40.360 --> 0:16:43.360 slowing backdrop. And now we're not really seeing that. A 0:16:43.440 --> 0:16:46.840 lot of the growth in technology stocks was pulled forward 0:16:46.920 --> 0:16:48.920 during the height of the pandemic. Think about all this 0:16:48.960 --> 0:16:52.200 stuff that we bought, whether it was online shopping or 0:16:52.240 --> 0:16:55.040 you know, conferencing tools or laptops for the kids. A 0:16:55.040 --> 0:16:57.480 lot of that growth in demand was pulled forward. And 0:16:57.520 --> 0:17:00.080 so we're seeing this period in which the batta on 0:17:00.240 --> 0:17:03.080 is being handed over to the old economy. You know, 0:17:03.160 --> 0:17:05.320 we look at the value side of the house, which 0:17:05.359 --> 0:17:07.560 is showing some resilience here. So we want to be 0:17:07.640 --> 0:17:10.680 thoughtful about where we're going in growth. Where we're going 0:17:10.760 --> 0:17:14.160 in value areas like healthcare one of our favorite sectors, 0:17:14.280 --> 0:17:17.760 very high quality, great balance sheets, cash on their balance sheets, 0:17:17.880 --> 0:17:20.840 organic growth drivers. But we also like your kind of 0:17:20.920 --> 0:17:24.240 classic S and P five hundred tech companies, ones with 0:17:24.280 --> 0:17:26.720 a lot of cash. We don't want to own companies 0:17:26.760 --> 0:17:29.240 that need to tap the capital markets in order to grow. 0:17:29.280 --> 0:17:34.159 We don't want to own unprofitable technology companies In this environment. 0:17:34.200 --> 0:17:37.920 But but some areas, carefully selected areas of the technology 0:17:37.960 --> 0:17:41.320 complex to us still makes sense paired with value. So Emily, 0:17:41.359 --> 0:17:43.320 one thing that you've said is that for the most part, 0:17:43.440 --> 0:17:46.280 equities are not acting like a recession is coming. Can 0:17:46.320 --> 0:17:48.080 I ask you where you would look for that and 0:17:48.160 --> 0:17:50.880 why you think we are further along in the adjustment process, 0:17:50.960 --> 0:17:54.920 perhaps relative to other parts of the equity market. Yeah, 0:17:54.920 --> 0:17:58.000 it is so amazing to see this rerating in stocks 0:17:58.040 --> 0:18:00.520 that began at the beginning of the quarter. We saw, Uh, 0:18:00.600 --> 0:18:04.159 the SMP five hundred started fifteen times forward earnings and 0:18:04.160 --> 0:18:06.680 now we're trading it around seventeen and a half, which 0:18:06.720 --> 0:18:09.640 is means that stocks are now more expensive than their 0:18:09.680 --> 0:18:13.280 twenty year average. So we've seen this big rerating, especially 0:18:13.280 --> 0:18:17.560 in more cyclical economically sensitive areas of the market. Energy 0:18:17.560 --> 0:18:20.520 stocks doing better even with oil prices coming down a bit, 0:18:20.840 --> 0:18:24.199 pretty notable dynamic here. So we would look to find 0:18:24.359 --> 0:18:28.840 areas that are already price for a recession. There aren't many. 0:18:29.480 --> 0:18:31.440 We Matt and I have used the analogy of there's 0:18:31.480 --> 0:18:33.760 an equity store and a bond store for your for 0:18:33.840 --> 0:18:36.720 your Christmas shopping, and you know the equity store, there's 0:18:36.760 --> 0:18:39.919 not very much on sale areas like MidCap value stocks, 0:18:40.000 --> 0:18:43.000 we like they're treating at a steep discount already at 0:18:43.040 --> 0:18:45.119 two thousand and eight two thousand nine levels. But the 0:18:45.200 --> 0:18:48.640 fixed income store, there's where a lot of the opportunity 0:18:48.640 --> 0:18:50.560 where a lot of the bargains are. You look at 0:18:50.640 --> 0:18:54.880 investment grade corporate bonds seeing this big price decline similar 0:18:54.880 --> 0:18:57.199 to a weight oh nine levels, we like that. We 0:18:57.280 --> 0:19:00.119 like the income there, the total return potential. So and 0:19:00.560 --> 0:19:03.159 favoring the bond store over the equity store during this 0:19:03.440 --> 0:19:06.119 holiday shopping. When you were a kid and your parents 0:19:06.119 --> 0:19:08.560 would say, you can't get anything from there, and that's 0:19:08.600 --> 0:19:11.440 where you wanted to shop. It was the toys, they're expensive, 0:19:12.480 --> 0:19:14.120 and then your parents came along and said, you've got 0:19:14.119 --> 0:19:16.000 to get that. You need a new coat. I feel 0:19:16.040 --> 0:19:17.920 like that's what Emny Rolands telling me right now. It's like, 0:19:17.960 --> 0:19:19.880 don't look his stocks, go to the bond store. Who 0:19:19.880 --> 0:19:21.640 wants to shop at the bond store? No one's wanted 0:19:21.680 --> 0:19:23.680 to shop there for ten years. What was the most 0:19:23.680 --> 0:19:26.040 disappointing gift you've ever gotten? When I was a kid, 0:19:26.080 --> 0:19:29.200 I didn't like getting clothes. It's very against clothes. And 0:19:29.200 --> 0:19:31.560 I remember my Nan turning around to me and saying, John, 0:19:31.920 --> 0:19:34.040 in twenty years time, this is all you want. You 0:19:34.200 --> 0:19:36.680 just want nice clothes. You won't want toys. And it's like, yeah, 0:19:36.720 --> 0:19:42.000 but I'm not, you know, but I'm still. This is clothes. 0:19:42.040 --> 0:19:47.359 God bless her. So please, if you're listening, clothes, clothes now, 0:19:47.600 --> 0:19:49.760 love clothes. And although I was thinking the other day, 0:19:49.800 --> 0:19:51.800 you know what, I'd love a toy car for this Christmas, 0:19:51.840 --> 0:19:54.960 just a remote controlled one. I'd love that. I'm thinking about. 0:19:55.240 --> 0:19:58.919 I'm thinking about for the apartment. You're absolutely serious. I'm 0:19:58.960 --> 0:20:01.000