1 00:00:10,720 --> 00:00:15,080 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,120 --> 00:00:19,720 Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, it's been 3 00:00:19,880 --> 00:00:22,159 Speaker 1: a long time since we've done like a sort of 4 00:00:22,200 --> 00:00:24,080 Speaker 1: like I don't know if it's been too long, it's been. 5 00:00:24,120 --> 00:00:25,520 Speaker 1: It feels like it's been a while since we've done 6 00:00:25,520 --> 00:00:29,319 Speaker 1: like a pure sort of macro episode. We've obviously, we 7 00:00:29,320 --> 00:00:31,360 Speaker 1: obviously do a lot of micro that's been one of 8 00:00:31,360 --> 00:00:34,760 Speaker 1: the fun things about but I think it's a it's 9 00:00:34,800 --> 00:00:37,800 Speaker 1: time to switch back to the macro. I was gonna 10 00:00:37,840 --> 00:00:41,600 Speaker 1: say we've been distracted by the micro in attempting to 11 00:00:41,920 --> 00:00:45,879 Speaker 1: put together a better picture of the macro in all fairness, 12 00:00:45,960 --> 00:00:48,560 Speaker 1: but yes, you're right, it's been a while since we 13 00:00:48,640 --> 00:00:53,480 Speaker 1: talked about the general outlook for the economy and for markets, 14 00:00:54,160 --> 00:00:58,400 Speaker 1: and of course we are looking ahead to two and 15 00:00:58,480 --> 00:01:01,120 Speaker 1: there are a lot of things going on and a 16 00:01:01,120 --> 00:01:04,600 Speaker 1: lot of things that people are concerned about. So obviously 17 00:01:04,640 --> 00:01:09,360 Speaker 1: we have inflation worries, and then we have a slowdown 18 00:01:09,440 --> 00:01:11,959 Speaker 1: in China as well, and then we have of course 19 00:01:12,720 --> 00:01:15,039 Speaker 1: the fed's reaction function, and there's still a lot of 20 00:01:15,080 --> 00:01:18,160 Speaker 1: questions over what exactly it's going to prioritize going into 21 00:01:18,240 --> 00:01:21,560 Speaker 1: next year. Yeah, exactly right. And you know, I think 22 00:01:21,560 --> 00:01:24,720 Speaker 1: the other thing about this environment and this court kind 23 00:01:24,720 --> 00:01:28,479 Speaker 1: of applied, it's like nobody has any familiarity with this 24 00:01:28,560 --> 00:01:32,160 Speaker 1: type of economic environment. I mean, it's pretty new. So, yes, 25 00:01:32,520 --> 00:01:37,520 Speaker 1: we've seen periods of elevated inflation before, for sure, but 26 00:01:37,920 --> 00:01:40,720 Speaker 1: by and large, this is not like the nine sixties 27 00:01:40,800 --> 00:01:44,760 Speaker 1: or sies. It's different conditions. Employment is growing extremely fast, 28 00:01:44,959 --> 00:01:47,400 Speaker 1: we had a pandemic, were still in a pandemic, and 29 00:01:47,440 --> 00:01:51,480 Speaker 1: so that is totally new. The policy responses that we've 30 00:01:51,520 --> 00:01:53,960 Speaker 1: seen are new. So I think kind of what makes 31 00:01:54,000 --> 00:01:56,760 Speaker 1: this interesting is just like, yeah, everyone could like sort 32 00:01:56,800 --> 00:01:59,960 Speaker 1: of reach for analogies, but there's no real experts who 33 00:02:00,080 --> 00:02:02,240 Speaker 1: could say, you know, this is the playbook or anything. 34 00:02:02,280 --> 00:02:06,920 Speaker 1: It's everyone is on some level doing a non charted territory. Yeah, 35 00:02:07,000 --> 00:02:10,560 Speaker 1: it's a very unusual business cycle. And we've talked about 36 00:02:10,600 --> 00:02:14,320 Speaker 1: this before, but we basically squeezed in like an accelerated 37 00:02:14,360 --> 00:02:17,200 Speaker 1: business cycle right after the pandemic. We have a very short, 38 00:02:17,360 --> 00:02:22,520 Speaker 1: sharp recession, and then the recovery started almost immediately, largely 39 00:02:22,560 --> 00:02:26,160 Speaker 1: thanks to the stimulus efforts from various governments. But of 40 00:02:26,200 --> 00:02:29,520 Speaker 1: course the question is what does the cycle look like? 41 00:02:29,720 --> 00:02:33,160 Speaker 1: Does it behave like other cycles. I've already seen lots 42 00:02:33,200 --> 00:02:36,400 Speaker 1: of people talking about how we're late cycle. All the 43 00:02:36,480 --> 00:02:39,280 Speaker 1: signs point to a late cycle, and it's like, well, 44 00:02:39,760 --> 00:02:42,480 Speaker 1: it's been what two years since this started, Like that 45 00:02:42,520 --> 00:02:46,040 Speaker 1: would be a pretty fast cycle. Yeah. And then I 46 00:02:46,040 --> 00:02:48,639 Speaker 1: guess the other sort of like medium ish to long 47 00:02:48,760 --> 00:02:52,639 Speaker 1: term question is does something change meaning flee And I'm 48 00:02:52,680 --> 00:02:56,640 Speaker 1: thinking about, say an inflation And you know, obviously prior 49 00:02:56,680 --> 00:02:59,639 Speaker 1: to this we had you know, great moderation or disinflation 50 00:02:59,800 --> 00:03:03,320 Speaker 1: or FED could never hit two percent. Now we have, uh, 51 00:03:03,360 --> 00:03:07,320 Speaker 1: you know, over six percent inflation. But is this mean revert? 52 00:03:07,440 --> 00:03:09,200 Speaker 1: Does it just go back to the old way or 53 00:03:09,480 --> 00:03:12,520 Speaker 1: do we enter into some sort of new regime where 54 00:03:12,560 --> 00:03:17,040 Speaker 1: inflation is persistently above and there's much more inflation volatility. 55 00:03:17,320 --> 00:03:20,160 Speaker 1: Sort of These are all like kind of difficult questions 56 00:03:20,200 --> 00:03:21,920 Speaker 1: to know right now, but the big ones that people 57 00:03:21,960 --> 00:03:25,720 Speaker 1: will be asking over the next year and beyond. Yes, indeed, 58 00:03:26,040 --> 00:03:29,000 Speaker 1: so I'm very excited to have is our guest today, 59 00:03:29,440 --> 00:03:32,040 Speaker 1: perfect guest for a macro conversation. He's been on odd 60 00:03:32,040 --> 00:03:35,200 Speaker 1: lots before, at least a couple of times, and in 61 00:03:35,320 --> 00:03:38,400 Speaker 1: terms of sort of macro thinkers. I think one of 62 00:03:38,440 --> 00:03:41,520 Speaker 1: the clearest and most useful guests that we speak to, 63 00:03:42,120 --> 00:03:44,920 Speaker 1: UH please to welcome back on the show. John Turk. 64 00:03:45,280 --> 00:03:48,280 Speaker 1: He's the author of the Chief Convexity blog and the 65 00:03:48,320 --> 00:03:51,800 Speaker 1: founder of j ST Advisors. I think maybe this is 66 00:03:51,800 --> 00:03:55,240 Speaker 1: his third time on the show, but someone who always 67 00:03:55,320 --> 00:03:58,600 Speaker 1: get a lot of insight reading his stuff and having 68 00:03:58,680 --> 00:04:01,000 Speaker 1: him on the show. John, thank you for coming back 69 00:04:01,000 --> 00:04:03,320 Speaker 1: on Other loves. Hey, guys, thank you so much for 70 00:04:03,320 --> 00:04:06,560 Speaker 1: having me. We're going to talk about two. But what 71 00:04:06,840 --> 00:04:11,280 Speaker 1: for you was the sort of big surprise of one? Like, 72 00:04:11,320 --> 00:04:13,400 Speaker 1: what was your what was your lesson? What was your 73 00:04:13,440 --> 00:04:16,640 Speaker 1: takeaway from what we saw this? You know, I think 74 00:04:16,680 --> 00:04:18,680 Speaker 1: that one of the things that you know, really kind 75 00:04:18,720 --> 00:04:21,600 Speaker 1: of changed. And this is pretty obvious, you know, ex 76 00:04:21,640 --> 00:04:25,919 Speaker 1: post is kind of the stickiness we've seen in inflation 77 00:04:25,960 --> 00:04:28,840 Speaker 1: this year. You know, going back to before the year, 78 00:04:28,880 --> 00:04:32,400 Speaker 1: there was kind of this obvious forward looking effect that 79 00:04:32,440 --> 00:04:35,720 Speaker 1: inflation would be higher given the supply bottle next and 80 00:04:35,800 --> 00:04:40,040 Speaker 1: also given the base effects from the pandemic, negative oil prices, etcetera. 81 00:04:40,480 --> 00:04:44,200 Speaker 1: The kind of seeing the stickiness and broadening out of inflation, 82 00:04:45,160 --> 00:04:48,240 Speaker 1: and we really haven't seen that in you know, almost 83 00:04:48,279 --> 00:04:51,159 Speaker 1: twenty years. I mean, there's this famous joke for the 84 00:04:51,279 --> 00:04:53,719 Speaker 1: US that really the only thing that goes up in 85 00:04:53,839 --> 00:04:57,200 Speaker 1: price is education and healthcare, and that's that's not been 86 00:04:57,279 --> 00:04:59,520 Speaker 1: the case this year. And I think especially as this 87 00:04:59,640 --> 00:05:02,400 Speaker 1: relates to FED policy, is we kind of entered this 88 00:05:02,480 --> 00:05:05,200 Speaker 1: year with this thinking of like, okay, was the FED 89 00:05:05,279 --> 00:05:08,680 Speaker 1: reaction function, especially that had it changed post Jackson hole 90 00:05:09,680 --> 00:05:12,760 Speaker 1: and they introduced this idea of flexible average inflation targeting, 91 00:05:13,200 --> 00:05:15,440 Speaker 1: is would it be would that be the best position 92 00:05:15,520 --> 00:05:19,000 Speaker 1: to look through and for the FED to basically avoid 93 00:05:19,000 --> 00:05:23,080 Speaker 1: ECB moment where they were you know, kind of hawkishly 94 00:05:23,120 --> 00:05:27,280 Speaker 1: reacting to spot inflation that was not telling a demand story. 95 00:05:27,320 --> 00:05:30,080 Speaker 1: But now I think, you know, what's becoming clearer is 96 00:05:30,120 --> 00:05:32,120 Speaker 1: that while there are supply bott elects and there are 97 00:05:32,560 --> 00:05:36,320 Speaker 1: kind of supply fragilities that have weighed on spot inflation, 98 00:05:36,360 --> 00:05:39,560 Speaker 1: there's clear that there's also excess to mend and that 99 00:05:39,600 --> 00:05:42,400 Speaker 1: the FED has kind of had to had you know, 100 00:05:42,480 --> 00:05:46,040 Speaker 1: this broader shift that's really started, you know, since June 101 00:05:46,240 --> 00:05:49,400 Speaker 1: poem C, but it's kind of really been enhanced post 102 00:05:49,760 --> 00:05:53,840 Speaker 1: Powell reappointment that you know, fate may still be the 103 00:05:53,839 --> 00:05:56,960 Speaker 1: policy playbook, but it kind of has to adjust to 104 00:05:57,360 --> 00:06:01,080 Speaker 1: the force that fiscal policy was at the lower bound 105 00:06:01,120 --> 00:06:03,360 Speaker 1: and you know, kind of change the nature of where 106 00:06:03,440 --> 00:06:07,680 Speaker 1: nominal GDP is now and probably for the next twelve months. 107 00:06:08,360 --> 00:06:10,800 Speaker 1: So how much of a role do you think demand 108 00:06:11,040 --> 00:06:14,000 Speaker 1: actually played in the price pressures that we're seeing now? 109 00:06:14,040 --> 00:06:17,400 Speaker 1: And I realized it's sort of tough to disaggregate supply 110 00:06:17,560 --> 00:06:20,359 Speaker 1: versus demand in all of this. But maybe give us 111 00:06:20,400 --> 00:06:22,400 Speaker 1: a little bit more color on on how you're thinking 112 00:06:22,440 --> 00:06:25,960 Speaker 1: of it. Yeah, you know, I think that what's looking 113 00:06:26,000 --> 00:06:30,000 Speaker 1: at specially retail sales on things like two years stacks 114 00:06:30,480 --> 00:06:34,880 Speaker 1: and seeing that, like how above trend nominal consumption is. 115 00:06:35,200 --> 00:06:40,520 Speaker 1: I think it's I think it's amplified the supply fragility. 116 00:06:40,560 --> 00:06:43,040 Speaker 1: So it's kind of created a perfect storm for prices. 117 00:06:43,440 --> 00:06:45,839 Speaker 1: And you know, I don't think that it's only a 118 00:06:46,040 --> 00:06:48,960 Speaker 1: demand issue, but you know, it's clear that you know, 119 00:06:49,000 --> 00:06:53,960 Speaker 1: we had a recession where household income in aggregate went up, 120 00:06:54,520 --> 00:06:57,800 Speaker 1: which is obviously most peculiar. You know, the thing that's 121 00:06:57,800 --> 00:07:01,320 Speaker 1: worth thinking about going into next year, especially as inflation 122 00:07:01,400 --> 00:07:03,720 Speaker 1: will peak in Q one, it will come down in 123 00:07:03,839 --> 00:07:05,680 Speaker 1: Q two. The question is, you know, what is the 124 00:07:05,760 --> 00:07:08,120 Speaker 1: run rate. You know, what is the handoff that the 125 00:07:08,160 --> 00:07:10,600 Speaker 1: economy is dealing with. Well, you know, looking back at 126 00:07:11,440 --> 00:07:14,080 Speaker 1: the beginning of one, you know, you can argue the 127 00:07:14,080 --> 00:07:16,560 Speaker 1: transfer payments and things of that nature made a big 128 00:07:16,600 --> 00:07:19,440 Speaker 1: difference in wage replacement or even for some you know, 129 00:07:19,480 --> 00:07:23,640 Speaker 1: income quartels, you know, wage enhancement effectively. But you know, 130 00:07:23,760 --> 00:07:28,120 Speaker 1: now looking into the economy into especially at the lower 131 00:07:28,240 --> 00:07:31,000 Speaker 1: end of the income distribution, you know, wage growth is 132 00:07:31,160 --> 00:07:34,720 Speaker 1: pretty robust, so you know, there is kind of this 133 00:07:35,040 --> 00:07:37,400 Speaker 1: there's not this just big drop off because we're a 134 00:07:37,520 --> 00:07:39,760 Speaker 1: year out from when there was a lot of retail sales. 135 00:07:40,200 --> 00:07:42,520 Speaker 1: You know, wage growth is broadening out in the economy 136 00:07:42,880 --> 00:07:44,800 Speaker 1: and as really strong as we kind of had this 137 00:07:44,920 --> 00:07:48,120 Speaker 1: reset of wages through the Amazon Walmart effect at the 138 00:07:48,120 --> 00:07:51,200 Speaker 1: lower end, that it's hard to have this you know, 139 00:07:51,640 --> 00:07:55,360 Speaker 1: big deceleration in demand that will you know, broaden outer 140 00:07:55,560 --> 00:07:58,400 Speaker 1: help inflation come back to the said supercent target in 141 00:07:58,440 --> 00:08:00,920 Speaker 1: an environment where wage growth is really strong. And I 142 00:08:00,920 --> 00:08:04,240 Speaker 1: think that's also kind of the point miss about this year, right, 143 00:08:04,360 --> 00:08:08,720 Speaker 1: is there are the supply side fragilities, especially in that 144 00:08:08,960 --> 00:08:12,600 Speaker 1: you know we're enhanced through in Southeast Asia through Delta 145 00:08:12,680 --> 00:08:16,400 Speaker 1: when we had Malaysian shutdowns and that affective semiconductor fobs 146 00:08:16,400 --> 00:08:20,200 Speaker 1: and etcetera. But you know, income growth pretty much at 147 00:08:20,240 --> 00:08:23,040 Speaker 1: least especially on the wage side across the Western world, 148 00:08:23,080 --> 00:08:25,840 Speaker 1: has been really strong this year, and there's no real 149 00:08:25,920 --> 00:08:28,960 Speaker 1: signs that, you know, this labor tightness is going to 150 00:08:28,960 --> 00:08:31,920 Speaker 1: give away. We may get more labor surprised, participation rates 151 00:08:31,960 --> 00:08:35,560 Speaker 1: may go higher, but labor is pretty tight right now, 152 00:08:35,640 --> 00:08:38,600 Speaker 1: so wage growth should continue. And I think that kind 153 00:08:38,640 --> 00:08:41,679 Speaker 1: of you know, makes that handoff in terms of like, 154 00:08:41,720 --> 00:08:44,040 Speaker 1: you know, things coming back from mean reverting to normal 155 00:08:44,080 --> 00:08:47,640 Speaker 1: next year kind of tricky. I think this is a 156 00:08:47,679 --> 00:08:50,280 Speaker 1: really interesting point. I'm glad you brought this up. Like 157 00:08:50,320 --> 00:08:53,280 Speaker 1: this idea, it's like, okay, sure, the transfer payments are 158 00:08:53,280 --> 00:08:55,559 Speaker 1: gonna come down, there's going to be at least some 159 00:08:56,080 --> 00:08:59,840 Speaker 1: relative fiscal tightening or the fiscal impulse won't be what 160 00:08:59,880 --> 00:09:02,760 Speaker 1: it is. But there is also this thing you know 161 00:09:02,840 --> 00:09:06,880 Speaker 1: called like endogenous way uh indogenous demand growth or they're 162 00:09:06,920 --> 00:09:10,160 Speaker 1: not everything is just about transfers, and in an environment 163 00:09:10,200 --> 00:09:12,120 Speaker 1: at which there's a lot of momentum, particularly at the 164 00:09:12,160 --> 00:09:15,640 Speaker 1: low end, that has to be a plus. One question 165 00:09:15,720 --> 00:09:19,280 Speaker 1: though on this idea of like demand, because in addition 166 00:09:19,400 --> 00:09:22,440 Speaker 1: to a high level of income growth and a high 167 00:09:22,520 --> 00:09:27,040 Speaker 1: level of aggregate demand, we've also seen this shift that 168 00:09:27,080 --> 00:09:29,120 Speaker 1: a lot of people are talking about, including many of 169 00:09:29,120 --> 00:09:33,640 Speaker 1: our past guests, of goods consumption for services consumption that 170 00:09:33,760 --> 00:09:37,200 Speaker 1: hasn't normalized. Some of us said that more than the 171 00:09:37,240 --> 00:09:41,480 Speaker 1: actual demand itself, is what's contributing to sort of persistent 172 00:09:41,480 --> 00:09:46,800 Speaker 1: bottlenecks or maybe persistent inflation. If that normalizes, if like, okay, 173 00:09:46,840 --> 00:09:48,640 Speaker 1: we get you know, it seems like, you know, I 174 00:09:48,679 --> 00:09:50,960 Speaker 1: don't know what's gonna happen with the virus. But if 175 00:09:51,000 --> 00:09:54,960 Speaker 1: that normalizes, can we get some further downward pressure on 176 00:09:55,080 --> 00:10:00,600 Speaker 1: inflation even with demand remaining quite robust? You know? I 177 00:10:00,640 --> 00:10:03,320 Speaker 1: think you probably will, you know. And I think that 178 00:10:03,720 --> 00:10:06,240 Speaker 1: the broader point that I want to make is that, 179 00:10:06,320 --> 00:10:08,960 Speaker 1: you know, inflation will come down. The question now is 180 00:10:09,000 --> 00:10:11,640 Speaker 1: what is the run rate and getting that run rate 181 00:10:11,679 --> 00:10:16,240 Speaker 1: back to two you know, it's seemingly getting a little harder, 182 00:10:16,360 --> 00:10:19,040 Speaker 1: especially for next year. And I think within this good 183 00:10:19,160 --> 00:10:23,680 Speaker 1: services you know, composition, is that there is goods pressure 184 00:10:23,760 --> 00:10:25,960 Speaker 1: that is going to come down as you know, the 185 00:10:25,960 --> 00:10:29,560 Speaker 1: economy does hand off back to more service oriented, Especially 186 00:10:29,600 --> 00:10:32,640 Speaker 1: the US economy has always been but there's also this 187 00:10:32,760 --> 00:10:34,960 Speaker 1: element that goods are not going to go back to 188 00:10:35,720 --> 00:10:38,200 Speaker 1: where they were in the tents, where you saw many 189 00:10:38,280 --> 00:10:41,679 Speaker 1: years of goods prices actually printing deflation and goods prices 190 00:10:41,679 --> 00:10:45,160 Speaker 1: were falling year year to year. And you know, given 191 00:10:45,679 --> 00:10:49,719 Speaker 1: this level of nominal demand being a little more sticky, 192 00:10:50,040 --> 00:10:52,680 Speaker 1: I think it's hard to kind of see that even 193 00:10:52,720 --> 00:10:55,400 Speaker 1: as you know, we get into next year and it's like, well, 194 00:10:55,440 --> 00:10:58,120 Speaker 1: everyone bought a washing machine or everybody bought a car. 195 00:10:58,600 --> 00:11:00,559 Speaker 1: I think, you know, that argument does hold weight. The 196 00:11:00,640 --> 00:11:03,360 Speaker 1: question is doesn't get you all the way down and 197 00:11:03,400 --> 00:11:05,240 Speaker 1: doesn't get you all the way down in some senses 198 00:11:05,280 --> 00:11:08,600 Speaker 1: to print start printing negative prints and durable goods, and 199 00:11:08,679 --> 00:11:10,720 Speaker 1: that I think is just it's just a harder back 200 00:11:10,840 --> 00:11:14,719 Speaker 1: to have given the level of demand that we're continuing 201 00:11:14,760 --> 00:11:16,920 Speaker 1: to see. And I think, you know, that's that's kind 202 00:11:16,920 --> 00:11:20,720 Speaker 1: of like the broader macro point of this to me is, 203 00:11:21,320 --> 00:11:23,559 Speaker 1: you know, and especially I think this is especially relevant 204 00:11:23,640 --> 00:11:26,480 Speaker 1: with the tenure at one forty and the market like 205 00:11:26,640 --> 00:11:29,560 Speaker 1: very skeptical of forward looking growth. Is we're in the 206 00:11:29,559 --> 00:11:34,160 Speaker 1: midst of this public sector to private sector handoff and 207 00:11:34,200 --> 00:11:37,440 Speaker 1: everyone kind of doubting it. So you know, I think 208 00:11:37,480 --> 00:11:41,079 Speaker 1: that that that story is actually more alive than the 209 00:11:41,200 --> 00:11:44,040 Speaker 1: market is given credit for it. Just real quickly though, 210 00:11:44,080 --> 00:11:45,880 Speaker 1: do what does it need to come all the way down? 211 00:11:46,040 --> 00:11:48,640 Speaker 1: Like what are the stakes of getting back down to 212 00:11:50,480 --> 00:11:54,480 Speaker 1: versus maybe still being over the fence target? Yeah? Yeah, 213 00:11:54,600 --> 00:11:57,160 Speaker 1: so you know, I think like the question for me 214 00:11:57,320 --> 00:12:00,960 Speaker 1: next year on inflation run rate is it below three 215 00:12:01,000 --> 00:12:03,720 Speaker 1: or much above three? Because I think that you know, 216 00:12:03,760 --> 00:12:06,200 Speaker 1: if we if we start getting to you know, if 217 00:12:06,240 --> 00:12:09,720 Speaker 1: you do like simple math and you start going through, okay, 218 00:12:09,760 --> 00:12:11,760 Speaker 1: what is Q two inflation going to start looking like? 219 00:12:12,040 --> 00:12:15,040 Speaker 1: And let's say we assume that month over month prints 220 00:12:15,120 --> 00:12:17,440 Speaker 1: go back to point ones and point two and point 221 00:12:17,520 --> 00:12:21,080 Speaker 1: twos are actually pretty high relative to the last ten years. 222 00:12:21,160 --> 00:12:23,160 Speaker 1: We've become kind of immune to that as we've seen 223 00:12:23,200 --> 00:12:25,880 Speaker 1: point sevens and point nine. But if you start getting 224 00:12:25,920 --> 00:12:28,520 Speaker 1: point to month over month, Prince, you're still going to 225 00:12:28,640 --> 00:12:32,280 Speaker 1: get back to an inflation number around two and a 226 00:12:32,280 --> 00:12:35,360 Speaker 1: half by the end of the summer next year. And 227 00:12:35,400 --> 00:12:39,240 Speaker 1: I think that number, while it's still high relative to 228 00:12:39,280 --> 00:12:42,079 Speaker 1: the FENS target and in terms of their moderate overshooting, 229 00:12:42,120 --> 00:12:44,960 Speaker 1: I think that would be a nudge high. I do 230 00:12:45,120 --> 00:12:48,080 Speaker 1: think that that gives the Fed enough room to say 231 00:12:48,080 --> 00:12:52,800 Speaker 1: that listen, inflation is high, we're hiking, but there's marginal 232 00:12:52,920 --> 00:12:55,840 Speaker 1: risk of us hiking too much that we're going to 233 00:12:56,520 --> 00:12:59,280 Speaker 1: crush this thing, which I think really is the risk now, right. 234 00:12:59,360 --> 00:13:02,600 Speaker 1: The risk now is that inflation comes down in Q two, 235 00:13:02,640 --> 00:13:04,640 Speaker 1: but it comes down to four percent, it comes down 236 00:13:04,720 --> 00:13:08,400 Speaker 1: to three and a half four percent, and in that world, 237 00:13:08,800 --> 00:13:12,800 Speaker 1: does the FEDS say that is not tolerable to us? 238 00:13:12,840 --> 00:13:16,800 Speaker 1: That could meaning belief meaningfully affect inflation expectations and we 239 00:13:16,880 --> 00:13:19,400 Speaker 1: have to act more aggressively than we have, you know, 240 00:13:19,440 --> 00:13:21,600 Speaker 1: in the last few cycles. And I think that's kind 241 00:13:21,600 --> 00:13:23,840 Speaker 1: of what the market is weighing now, right, is there's 242 00:13:23,880 --> 00:13:26,240 Speaker 1: this residual risk premium that the FED is going to 243 00:13:26,360 --> 00:13:29,560 Speaker 1: have to almost hit the kabbash or kind of smash 244 00:13:29,679 --> 00:13:32,800 Speaker 1: this thing, because you know, spot inflation is going to 245 00:13:32,840 --> 00:13:35,560 Speaker 1: start leading to a d anchoring of inflation expectations or 246 00:13:35,600 --> 00:13:38,560 Speaker 1: at a level that they don't see as tolerable. So 247 00:13:38,600 --> 00:13:41,080 Speaker 1: I think that's really the big question of next year, 248 00:13:41,280 --> 00:13:44,240 Speaker 1: and we'll probably find out, you know, late Q two, 249 00:13:44,440 --> 00:13:46,079 Speaker 1: which is why for me, June f O m C 250 00:13:46,320 --> 00:14:04,840 Speaker 1: is the one that is circled. So I wanted to 251 00:14:04,880 --> 00:14:09,400 Speaker 1: go back to what you said about the tenure yield 252 00:14:09,720 --> 00:14:14,040 Speaker 1: so currently sitting at one point four or five percent 253 00:14:14,240 --> 00:14:17,160 Speaker 1: or they're about And one of the big mysteries of 254 00:14:17,440 --> 00:14:21,920 Speaker 1: this entire year has been why bond yields are so low, 255 00:14:22,320 --> 00:14:26,400 Speaker 1: even in the face of the FED ostensibly beginning to 256 00:14:26,440 --> 00:14:30,640 Speaker 1: taper it's balance sheet and maybe getting more worried about inflation. 257 00:14:30,800 --> 00:14:33,640 Speaker 1: And I've seen all sorts of explanations for it. One 258 00:14:33,680 --> 00:14:36,640 Speaker 1: of our guests, Joseph Wayne, was talking about the idea 259 00:14:36,760 --> 00:14:40,160 Speaker 1: that banks are just buying lots more treasuries than they 260 00:14:40,280 --> 00:14:43,160 Speaker 1: used to and that kind of puts a floor or 261 00:14:43,240 --> 00:14:45,720 Speaker 1: maybe I should say a ceiling on yields because you 262 00:14:45,800 --> 00:14:49,280 Speaker 1: always have that huge chunk of demand they're waiting in 263 00:14:49,280 --> 00:14:52,800 Speaker 1: the wings. And I've also seen other people talk about it. 264 00:14:52,960 --> 00:14:55,720 Speaker 1: It's sort of what you were saying, this idea of 265 00:14:55,760 --> 00:15:00,760 Speaker 1: investors not really buying the public to private hand off, 266 00:15:01,000 --> 00:15:03,880 Speaker 1: thinking that the FED is inducing some sort of policy 267 00:15:04,040 --> 00:15:07,080 Speaker 1: error and it's going to have to backtrack at some point. 268 00:15:07,280 --> 00:15:10,760 Speaker 1: So how are you thinking about the bond market at 269 00:15:10,760 --> 00:15:14,760 Speaker 1: the moment and what the tenure is actually telling us? Yeah, 270 00:15:14,880 --> 00:15:18,080 Speaker 1: you know, I think it's especially one of the more 271 00:15:18,080 --> 00:15:21,840 Speaker 1: prevalent questions right now, as we're gonna end the year 272 00:15:22,040 --> 00:15:25,520 Speaker 1: probably with you know, between the eleven and twelve present 273 00:15:25,640 --> 00:15:29,080 Speaker 1: nominal GDP growth, and you know that all the tenure 274 00:15:29,160 --> 00:15:32,840 Speaker 1: does is rally, and we're entering pro FED hiking cycle 275 00:15:33,000 --> 00:15:36,200 Speaker 1: and it's still rallies. And I actually think it does 276 00:15:36,960 --> 00:15:40,560 Speaker 1: make more sense than it would appear on the face, 277 00:15:40,600 --> 00:15:43,840 Speaker 1: you know. I think looking at things like five year 278 00:15:43,880 --> 00:15:46,200 Speaker 1: five year o I s, which the FED and you know, 279 00:15:46,240 --> 00:15:48,880 Speaker 1: market participants kind of look at as as an estimate 280 00:15:48,960 --> 00:15:51,160 Speaker 1: of you know, where the FED will get to in 281 00:15:51,280 --> 00:15:54,200 Speaker 1: terms of the hiking cycle or destination, which equates to 282 00:15:54,320 --> 00:15:57,040 Speaker 1: around the tenure was treasury yield. I think there is 283 00:15:57,120 --> 00:15:59,880 Speaker 1: this element, and we're just talking about this of this 284 00:16:00,160 --> 00:16:04,480 Speaker 1: residual risk premium that inflation got too high and the 285 00:16:04,520 --> 00:16:07,800 Speaker 1: FED is going to have to react asymmetrically to it 286 00:16:07,920 --> 00:16:10,640 Speaker 1: next year. And that is why I think we've kind 287 00:16:10,680 --> 00:16:13,280 Speaker 1: of had not only this this front loading of the 288 00:16:13,360 --> 00:16:17,760 Speaker 1: hiking cycle, but also this relentless flattening as the market 289 00:16:17,760 --> 00:16:21,200 Speaker 1: has had to weigh the probability that if the FED 290 00:16:21,320 --> 00:16:24,720 Speaker 1: has to go let's say faster than quarterly next year, 291 00:16:25,080 --> 00:16:27,120 Speaker 1: or has to go at a pace that's more than 292 00:16:27,680 --> 00:16:31,280 Speaker 1: basis points of meeting, then the chances of the FED 293 00:16:31,720 --> 00:16:34,600 Speaker 1: overdoing it go up. And we also know that we're 294 00:16:34,600 --> 00:16:36,880 Speaker 1: still in a very low our star world. So if 295 00:16:36,880 --> 00:16:39,320 Speaker 1: the chances to FED overdo it, the chances that the 296 00:16:39,520 --> 00:16:42,760 Speaker 1: forward looking bond market is like okay, that raises the 297 00:16:42,760 --> 00:16:44,920 Speaker 1: odds that we're actually going to end up back at zero. 298 00:16:45,400 --> 00:16:48,360 Speaker 1: So you're in this interesting paradox where the bond market 299 00:16:48,400 --> 00:16:52,000 Speaker 1: is weighing hikes but also weighing what kind of hikes 300 00:16:52,080 --> 00:16:55,280 Speaker 1: we get, and the fatter that residual risk premium is 301 00:16:55,400 --> 00:16:59,280 Speaker 1: that the hikes we get are destructive or too much 302 00:16:59,320 --> 00:17:03,000 Speaker 1: given the level spot inflation or the worry about inflation expectations, 303 00:17:03,040 --> 00:17:06,360 Speaker 1: that actually paradoxically raises the chances that the FED will 304 00:17:06,400 --> 00:17:08,760 Speaker 1: be back at zero. Because we're in this low R 305 00:17:08,840 --> 00:17:10,760 Speaker 1: star world and the assumption is that the Fed over 306 00:17:10,800 --> 00:17:12,520 Speaker 1: does it, that means the next move is to cut, 307 00:17:12,760 --> 00:17:14,679 Speaker 1: and if they cut, that means they go to zero. 308 00:17:15,560 --> 00:17:18,080 Speaker 1: I think that's kind of the calculation that the bond 309 00:17:18,080 --> 00:17:20,640 Speaker 1: market is making right now, and which is why I think, 310 00:17:20,680 --> 00:17:22,960 Speaker 1: you know, we're in this interesting time where you know, 311 00:17:23,080 --> 00:17:26,280 Speaker 1: people like me have this you know, pretty positive view 312 00:17:26,320 --> 00:17:29,040 Speaker 1: about nominal GDP growth next year, and then we look 313 00:17:29,080 --> 00:17:31,800 Speaker 1: at the tenures like, well, that's not confirming it. And 314 00:17:31,840 --> 00:17:34,040 Speaker 1: I think the reason that's not the trade yet is 315 00:17:34,080 --> 00:17:36,680 Speaker 1: the market kind of has to get through this this 316 00:17:36,840 --> 00:17:40,080 Speaker 1: period of what is the peak of inflation and what 317 00:17:40,240 --> 00:17:42,399 Speaker 1: is the inflation run rate? And those are both questions 318 00:17:42,400 --> 00:17:44,159 Speaker 1: we don't have the answer to yet, and I think 319 00:17:44,240 --> 00:17:46,800 Speaker 1: until we do, the market is not going to feel 320 00:17:46,800 --> 00:17:52,000 Speaker 1: comfortable taking these quote unquote destination trades higher, especially neal. 321 00:17:52,840 --> 00:17:57,680 Speaker 1: Is the possibility of a highly aggressive hiking cycle. Something 322 00:17:57,760 --> 00:17:59,640 Speaker 1: which we haven't seen in a long time. Is death 323 00:17:59,680 --> 00:18:01,760 Speaker 1: showing up in risky assets anywhere? Is the showing up 324 00:18:01,800 --> 00:18:04,679 Speaker 1: at the stock market? You know? I think that you know, 325 00:18:04,720 --> 00:18:08,600 Speaker 1: we have had a little bit of multiple compression this year, 326 00:18:08,640 --> 00:18:11,560 Speaker 1: I mean, especially looking at you know what forward earnings 327 00:18:11,560 --> 00:18:13,800 Speaker 1: are projected to do. I think there has been some. 328 00:18:14,240 --> 00:18:17,080 Speaker 1: But you know, a question I get a lot is well, 329 00:18:17,160 --> 00:18:20,840 Speaker 1: the bond market is flattening a lot, so shouldn't stocks care? 330 00:18:21,320 --> 00:18:24,200 Speaker 1: And you can make an argument that five thirties may 331 00:18:24,280 --> 00:18:27,200 Speaker 1: actually be inverted that you know, this time next year. 332 00:18:27,240 --> 00:18:30,600 Speaker 1: And while that's always at least in two tens, that's 333 00:18:30,600 --> 00:18:34,199 Speaker 1: always traditionally a harbingeer of recession. And you know, I 334 00:18:34,240 --> 00:18:37,560 Speaker 1: think that actually that there should be this this d 335 00:18:37,760 --> 00:18:40,879 Speaker 1: link between kind of the slope of the yield curve 336 00:18:41,600 --> 00:18:45,000 Speaker 1: and kind of equity market risk premium. When I think that, 337 00:18:45,119 --> 00:18:48,920 Speaker 1: you know, from a distribution perspective, the bond market has 338 00:18:48,960 --> 00:18:51,040 Speaker 1: to weigh the risk, especially in things like five or 339 00:18:51,040 --> 00:18:54,200 Speaker 1: five year or ten year US treasury yields, is the 340 00:18:54,200 --> 00:18:56,760 Speaker 1: bond market has to weigh the risk of you know, 341 00:18:57,200 --> 00:19:01,560 Speaker 1: kind of the whole trajectory of a policy where it's like, okay, well, 342 00:19:01,560 --> 00:19:03,879 Speaker 1: what's the percent chance they go too much with the 343 00:19:03,920 --> 00:19:06,439 Speaker 1: percent chance that in three or four years they have 344 00:19:06,560 --> 00:19:09,119 Speaker 1: to take it back, and thinking about that kind of 345 00:19:09,359 --> 00:19:13,719 Speaker 1: the whole scope visa VI the equity market, which is like, well, 346 00:19:14,320 --> 00:19:17,000 Speaker 1: next year, earnings growth is still going to be really good. 347 00:19:17,080 --> 00:19:21,040 Speaker 1: Even if the FED goes four times three earnings they 348 00:19:21,080 --> 00:19:23,400 Speaker 1: may have to come down a little. And I think 349 00:19:23,440 --> 00:19:26,600 Speaker 1: that's what we've seen in forward pees coming down actually 350 00:19:26,680 --> 00:19:28,920 Speaker 1: or at least not really moving all year, even though 351 00:19:29,040 --> 00:19:31,600 Speaker 1: earnings growth and earnings estimates they need to be picked up, 352 00:19:31,880 --> 00:19:34,199 Speaker 1: because I think there is that element, but the equity 353 00:19:34,200 --> 00:19:36,160 Speaker 1: market is not going to be like, oh, in four 354 00:19:36,240 --> 00:19:38,080 Speaker 1: or five years, the FED, you know, may have to 355 00:19:38,119 --> 00:19:40,160 Speaker 1: go back to zero. You know, I think in terms 356 00:19:40,200 --> 00:19:44,320 Speaker 1: of time prisons, they're really operating on different ones. And 357 00:19:44,359 --> 00:19:47,960 Speaker 1: the bond market is you know, leaning into its symmetry, 358 00:19:47,960 --> 00:19:50,159 Speaker 1: and the equity market is leaning into its own. And 359 00:19:50,200 --> 00:19:53,199 Speaker 1: I don't think necessarily, you know, they have to be 360 00:19:53,280 --> 00:19:54,960 Speaker 1: saying the same thing. In fact, I think it would 361 00:19:54,960 --> 00:19:58,040 Speaker 1: be odd of the work just on the idea of 362 00:19:58,040 --> 00:20:00,680 Speaker 1: whether or not a great hiking so I goal would 363 00:20:00,720 --> 00:20:03,159 Speaker 1: be bad for risk assets or what impact it would have. 364 00:20:03,320 --> 00:20:06,639 Speaker 1: Can you talk a little bit about emerging markets, because 365 00:20:06,680 --> 00:20:09,119 Speaker 1: of course, you know, if the FED is raising rates, 366 00:20:09,359 --> 00:20:12,360 Speaker 1: then theoretically the dollars should go up. That's bad for 367 00:20:12,560 --> 00:20:15,840 Speaker 1: people that have a lot of dollar denominated debt or 368 00:20:15,880 --> 00:20:19,640 Speaker 1: you know, historically it has been bad for many developing economies. 369 00:20:19,680 --> 00:20:24,240 Speaker 1: So how do you see that unfolding? And I gotta say, 370 00:20:24,320 --> 00:20:27,840 Speaker 1: like the dollar index already has been pretty strong going 371 00:20:27,920 --> 00:20:31,399 Speaker 1: into the end of this year. Yeah, you know, I 372 00:20:31,440 --> 00:20:33,760 Speaker 1: think it's a it's a really interesting one. And I 373 00:20:33,800 --> 00:20:37,480 Speaker 1: think that for e M. The question for the FED 374 00:20:37,560 --> 00:20:41,040 Speaker 1: next year is not if they're hiking, but what they're 375 00:20:41,160 --> 00:20:45,520 Speaker 1: hiking at relative to market pricing, and I think, you know, 376 00:20:45,600 --> 00:20:47,840 Speaker 1: e M has had this tricky few months and you 377 00:20:47,840 --> 00:20:52,080 Speaker 1: could really argue since the summer, partly because we've had 378 00:20:52,119 --> 00:20:58,360 Speaker 1: to continuously add hikes, especially into the implied and it's 379 00:20:58,440 --> 00:21:01,640 Speaker 1: kind of always still those added hikes have come with 380 00:21:01,680 --> 00:21:05,960 Speaker 1: the the asymmetry that the next pricing is towards a 381 00:21:06,040 --> 00:21:08,960 Speaker 1: hike and not towards less. Right, we've kind of entered 382 00:21:09,119 --> 00:21:12,400 Speaker 1: since June fom C market pricing for next year went 383 00:21:12,440 --> 00:21:15,520 Speaker 1: from zero to one with the asymmetry of a B too. 384 00:21:15,560 --> 00:21:19,040 Speaker 1: It went from two to three with almost the asymmetry 385 00:21:19,040 --> 00:21:20,679 Speaker 1: of being four. And I think that's kind of what 386 00:21:20,760 --> 00:21:23,560 Speaker 1: the dollar has leaned into, right, The dollar has leaned 387 00:21:23,600 --> 00:21:26,680 Speaker 1: into Okay, they're hiking, and it's more likely that they 388 00:21:27,040 --> 00:21:29,960 Speaker 1: hike more than less. And now I think we're entering 389 00:21:30,000 --> 00:21:32,320 Speaker 1: this like kind of interesting period. I think is especially 390 00:21:32,320 --> 00:21:37,040 Speaker 1: relevant for emerging markets where I'm not convinced the next 391 00:21:37,280 --> 00:21:41,720 Speaker 1: hype is actually dollar positive, where the the ray change 392 00:21:41,760 --> 00:21:44,040 Speaker 1: from zero to one, one to two, two to three 393 00:21:44,040 --> 00:21:47,040 Speaker 1: have all been dollar positive, and we've seen this pretty 394 00:21:47,080 --> 00:21:50,480 Speaker 1: significant dollar rally, especially since Q three. But I think 395 00:21:50,520 --> 00:21:52,879 Speaker 1: what's interesting now is if you get to if the 396 00:21:52,920 --> 00:21:55,720 Speaker 1: market goes from three to four. There are a few 397 00:21:56,280 --> 00:22:01,000 Speaker 1: interesting externalities. One I think that lessens the odds that 398 00:22:01,200 --> 00:22:03,840 Speaker 1: the FED is operating by themselves, and this I think 399 00:22:03,920 --> 00:22:06,440 Speaker 1: especially matters for emerging markets because it kind of goes 400 00:22:06,440 --> 00:22:09,879 Speaker 1: through the dollar channel. Is if the fourth hike in 401 00:22:09,920 --> 00:22:13,440 Speaker 1: the market price for the FED happens, I think that 402 00:22:13,600 --> 00:22:16,399 Speaker 1: raises the chances that the e c B, the r 403 00:22:16,480 --> 00:22:18,800 Speaker 1: b A, the ricks Bank, central banks that have been, 404 00:22:19,280 --> 00:22:23,960 Speaker 1: you know, kind of more into this not necessarily transitory message, 405 00:22:24,000 --> 00:22:26,000 Speaker 1: but next year is too soon, even if they've given 406 00:22:26,080 --> 00:22:30,720 Speaker 1: up on transitory, I think that hike makes it much 407 00:22:30,760 --> 00:22:35,040 Speaker 1: more likely that central banks like the ECB go hold 408 00:22:35,080 --> 00:22:37,960 Speaker 1: on a second. Maybe two should be live in terms 409 00:22:37,960 --> 00:22:40,240 Speaker 1: of rate hikes. The other thing that I think is 410 00:22:40,280 --> 00:22:43,800 Speaker 1: really interesting is if we went to four, that means 411 00:22:44,320 --> 00:22:46,399 Speaker 1: to go to quarterly paces, the FED would have to 412 00:22:46,440 --> 00:22:48,920 Speaker 1: go in March, but also that they would be hiking 413 00:22:48,920 --> 00:22:52,240 Speaker 1: in the same meeting that they're basically ending HUEY. And 414 00:22:52,280 --> 00:22:55,800 Speaker 1: now there's no necessary preconditioned to the FED having to 415 00:22:55,800 --> 00:22:58,600 Speaker 1: have a gap between the end of KUEI and rate hikes. 416 00:22:58,640 --> 00:23:00,960 Speaker 1: We only know that the FED can heke while they're 417 00:23:00,960 --> 00:23:03,600 Speaker 1: buying bonds, but I think in terms of a message 418 00:23:03,680 --> 00:23:06,960 Speaker 1: or signal of intent, that would be a pretty big 419 00:23:06,960 --> 00:23:09,520 Speaker 1: one where the FED would say there's no gap in 420 00:23:09,560 --> 00:23:12,040 Speaker 1: between the end of keewee and raid hikes, and that 421 00:23:12,080 --> 00:23:16,520 Speaker 1: would also, I think make it much more likely that 422 00:23:16,680 --> 00:23:19,800 Speaker 1: central banks like BCB, like the r B A kind 423 00:23:19,800 --> 00:23:24,120 Speaker 1: of have their moment of yet we're also live this year. 424 00:23:24,880 --> 00:23:27,159 Speaker 1: And then that kind of speaks to something that I 425 00:23:27,160 --> 00:23:31,040 Speaker 1: think is very different this cycle than last, which is 426 00:23:31,440 --> 00:23:36,440 Speaker 1: in this period was very FED dominant, very US growth dominant, 427 00:23:36,680 --> 00:23:39,359 Speaker 1: but kind of looking into next year, you could be 428 00:23:39,400 --> 00:23:43,600 Speaker 1: in this much more coordinated policy growth dynamic, which I 429 00:23:43,640 --> 00:23:46,240 Speaker 1: don't think will have the same dollar spill over. Now. 430 00:23:46,600 --> 00:23:51,520 Speaker 1: If we went to four next year, then the chances 431 00:23:51,680 --> 00:23:55,240 Speaker 1: of five I think actually become this maybe the same 432 00:23:55,359 --> 00:23:58,440 Speaker 1: or even less than the chances of three, because five 433 00:23:58,480 --> 00:24:01,119 Speaker 1: would be the FED saying, okay, we're off, We're not 434 00:24:01,200 --> 00:24:03,840 Speaker 1: on a quarterly pace. Something really bad happened and we 435 00:24:03,880 --> 00:24:06,359 Speaker 1: have to we have to address it right away. So 436 00:24:06,400 --> 00:24:08,320 Speaker 1: I think in terms of the dollar, I don't know 437 00:24:08,480 --> 00:24:12,439 Speaker 1: that it's obvious cell but I do think there are 438 00:24:12,440 --> 00:24:16,640 Speaker 1: elements that are actually you know, topping, and I think 439 00:24:16,680 --> 00:24:19,360 Speaker 1: from an e M perspective, you know, going into next year, 440 00:24:19,359 --> 00:24:21,959 Speaker 1: I think the setup is fairly binary, as it usually 441 00:24:22,000 --> 00:24:25,119 Speaker 1: is in the m UM, where you know, you could 442 00:24:25,200 --> 00:24:28,960 Speaker 1: have a bed that's kind of priced for what it's 443 00:24:28,960 --> 00:24:31,400 Speaker 1: going to do. Right, it's for the first time we're 444 00:24:31,400 --> 00:24:35,159 Speaker 1: not kind of incrementally adding hikes into the implies for 445 00:24:35,240 --> 00:24:38,000 Speaker 1: next year at the same time that terms of trade 446 00:24:38,000 --> 00:24:41,160 Speaker 1: and e M are off the charts. On the other hand, 447 00:24:41,200 --> 00:24:43,720 Speaker 1: you could have an EM where the Fed says, oh, 448 00:24:43,760 --> 00:24:45,560 Speaker 1: by the way, we really have to stop this thing 449 00:24:45,600 --> 00:24:48,880 Speaker 1: because inflation is too high, and that's at the same 450 00:24:48,920 --> 00:24:51,720 Speaker 1: time that you have political development such as Brazilian elections 451 00:24:51,720 --> 00:24:55,359 Speaker 1: in October, etcetera, and you have a further mess. But 452 00:24:55,480 --> 00:24:58,920 Speaker 1: I do think EM is going into next year actually 453 00:24:58,960 --> 00:25:02,320 Speaker 1: with some bet are buffers. Then people I think give 454 00:25:02,359 --> 00:25:06,359 Speaker 1: it credit for given that because US demand is so strong, 455 00:25:06,520 --> 00:25:09,840 Speaker 1: because the Chinese currency has been so strong this year, 456 00:25:10,200 --> 00:25:12,720 Speaker 1: terms of trade are really strong, and current accounts have 457 00:25:12,880 --> 00:25:15,280 Speaker 1: kind of sayed sticky to the surplus side. I mean, 458 00:25:15,560 --> 00:25:17,439 Speaker 1: we've had this year, We've had South Africa have a 459 00:25:17,440 --> 00:25:20,080 Speaker 1: current account circus, which is kind of unheard of. And 460 00:25:20,119 --> 00:25:22,800 Speaker 1: it's not to say that that will last. It won't 461 00:25:23,280 --> 00:25:25,159 Speaker 1: but the question is, you know, the same thing with 462 00:25:25,320 --> 00:25:27,640 Speaker 1: US inflation is kind of what does it come back 463 00:25:27,680 --> 00:25:31,879 Speaker 1: to for e M. The interesting thing for next year is, 464 00:25:32,160 --> 00:25:34,520 Speaker 1: you know, all these guys have pretty much have hyped 465 00:25:34,560 --> 00:25:38,320 Speaker 1: a lot in terms of trade, are really strong. If 466 00:25:38,320 --> 00:25:41,040 Speaker 1: the FED is not doesn't have to say, oh, you know, 467 00:25:41,200 --> 00:25:43,360 Speaker 1: inflation got to how we have to do something drastic, 468 00:25:43,920 --> 00:25:47,320 Speaker 1: then this setup is actually pretty strong, especially as you 469 00:25:47,320 --> 00:25:50,320 Speaker 1: know Chinese growth starts to you know, bottom around here. 470 00:25:51,240 --> 00:25:55,080 Speaker 1: That was that was very interesting and useful framework. I 471 00:25:55,119 --> 00:25:56,879 Speaker 1: want to can you just say a little bit more 472 00:25:56,920 --> 00:25:59,720 Speaker 1: about China? I mean, Tracy has been obviously covering it 473 00:25:59,720 --> 00:26:02,240 Speaker 1: a lot, the slowdown in China, and yet we have 474 00:26:02,359 --> 00:26:05,159 Speaker 1: seen the Chinese u N even during a period of 475 00:26:05,160 --> 00:26:08,960 Speaker 1: dollar strength. I think the un has been even stronger. 476 00:26:09,600 --> 00:26:12,680 Speaker 1: What is the dynamic there you expect a re acceleration, 477 00:26:12,800 --> 00:26:16,520 Speaker 1: what explains that und strength? And how are you thinking 478 00:26:16,560 --> 00:26:21,120 Speaker 1: about China and its contribution to growth and uh sort 479 00:26:21,160 --> 00:26:25,359 Speaker 1: of demand in Yeah, you know, I think China has 480 00:26:25,400 --> 00:26:29,880 Speaker 1: been probably outside of the FED and inflation, I think 481 00:26:29,920 --> 00:26:33,159 Speaker 1: one of the more interesting drivers this year where you know, 482 00:26:33,200 --> 00:26:37,320 Speaker 1: we've clearly had this policy goal or crackdown on both 483 00:26:37,359 --> 00:26:40,879 Speaker 1: the tech and property sectors that you know, obviously made 484 00:26:41,440 --> 00:26:45,360 Speaker 1: Chinese assets underperform. But at the same time we've had 485 00:26:45,359 --> 00:26:48,679 Speaker 1: this massive out performance of the Chinese currency. And this 486 00:26:48,760 --> 00:26:51,399 Speaker 1: is also this performance has happened in the context of 487 00:26:51,560 --> 00:26:55,960 Speaker 1: Chinese growth, you know, kind of decelerating faster than it 488 00:26:56,080 --> 00:26:58,720 Speaker 1: has pretty much anywhere in the West. And I think, 489 00:26:58,760 --> 00:27:01,840 Speaker 1: you know something that I I've definitely you know, talked 490 00:27:01,840 --> 00:27:05,040 Speaker 1: about with Tracy is this China has had this interesting 491 00:27:05,160 --> 00:27:08,680 Speaker 1: policy posture this year where they came into this year 492 00:27:09,720 --> 00:27:12,439 Speaker 1: with two things. One, they wanted to get the credit 493 00:27:12,440 --> 00:27:16,200 Speaker 1: impulse lowered because they thought, okay, you know, we did 494 00:27:16,200 --> 00:27:19,679 Speaker 1: a lot in we got demand back, global economy strong. 495 00:27:20,000 --> 00:27:23,800 Speaker 1: They have politically become more sensitive to no kind of 496 00:27:23,800 --> 00:27:25,920 Speaker 1: new credit in the economy, especially as it relates to 497 00:27:25,960 --> 00:27:28,960 Speaker 1: the property sector, etcetera. So I think that there's been 498 00:27:28,960 --> 00:27:34,040 Speaker 1: this this impetus to bring being credit lowered and then 499 00:27:34,080 --> 00:27:39,440 Speaker 1: that traditionally ways on domestic growth, which it did this time. 500 00:27:39,840 --> 00:27:42,600 Speaker 1: I think the difference that happened this time and why 501 00:27:42,760 --> 00:27:45,840 Speaker 1: China wasn't this you know, kind of disaster for the 502 00:27:45,880 --> 00:27:48,240 Speaker 1: global economy, as it really did have a pretty big 503 00:27:48,240 --> 00:27:51,800 Speaker 1: deceleration and it's credit impulse is that China was able 504 00:27:51,920 --> 00:27:57,119 Speaker 1: to not fully but replace a lot of domestic demand 505 00:27:57,160 --> 00:28:00,520 Speaker 1: that they usually got through marginal credit increased via the 506 00:28:00,560 --> 00:28:03,359 Speaker 1: current account. And this is something that didn't happen the 507 00:28:03,440 --> 00:28:07,199 Speaker 1: last two times that China has had these pretty stark 508 00:28:07,359 --> 00:28:10,840 Speaker 1: credit decelerations that we saw post eleven which ended up 509 00:28:10,840 --> 00:28:13,719 Speaker 1: in you know, kind of a commodity bus, and we 510 00:28:13,760 --> 00:28:21,000 Speaker 1: didn't see you know, which followed China. Stimulus is China 511 00:28:21,119 --> 00:28:26,560 Speaker 1: because of how strong US and European demand was, specially US. 512 00:28:26,920 --> 00:28:29,800 Speaker 1: China was running a current account surplus three percent this year, 513 00:28:30,600 --> 00:28:34,199 Speaker 1: and this is in contrast to it basically drawing its 514 00:28:34,240 --> 00:28:38,880 Speaker 1: current account to zero in and I think that China 515 00:28:39,000 --> 00:28:42,840 Speaker 1: was basically made the calculation that they could import the 516 00:28:42,880 --> 00:28:45,640 Speaker 1: demand that they were off setting by being tied on credit. 517 00:28:46,080 --> 00:28:49,000 Speaker 1: It seemingly was a bet that worked. I mean, it's 518 00:28:49,000 --> 00:28:50,840 Speaker 1: hard to say that, you know, China has had this 519 00:28:50,960 --> 00:28:54,560 Speaker 1: robust growth theory it didn't, especially in a relative sense. 520 00:28:54,880 --> 00:28:58,680 Speaker 1: But China was not this massive drag on global growth 521 00:28:58,760 --> 00:29:03,160 Speaker 1: this year, even though have you know, much weaker credit impulse. 522 00:29:03,360 --> 00:29:06,600 Speaker 1: I think partly because it was able to import that 523 00:29:06,840 --> 00:29:09,400 Speaker 1: you know, lost demand, and I think that's what kind 524 00:29:09,400 --> 00:29:12,000 Speaker 1: of you know, they kind of set this up as 525 00:29:12,160 --> 00:29:14,920 Speaker 1: China wanted two things from this year. One is, they 526 00:29:14,960 --> 00:29:17,560 Speaker 1: wanted to offset some of the inflationary pressure that the 527 00:29:17,600 --> 00:29:20,160 Speaker 1: rest of the world was feeling. One way to do 528 00:29:20,200 --> 00:29:22,840 Speaker 1: that is to have a stronger currency. And then the 529 00:29:22,880 --> 00:29:26,200 Speaker 1: other thing is that they wanted to have this tightening 530 00:29:26,600 --> 00:29:29,080 Speaker 1: either on the credit side, and won't really speak to 531 00:29:29,120 --> 00:29:31,520 Speaker 1: the tech side as not an expert on it, is 532 00:29:31,800 --> 00:29:37,160 Speaker 1: they wanted to really tighten credit post big credit acceleration 533 00:29:37,200 --> 00:29:40,640 Speaker 1: they had then, especially as the property sector is extremely 534 00:29:40,680 --> 00:29:45,280 Speaker 1: vulnerable right now, they wanted to replace that demand through 535 00:29:45,360 --> 00:29:48,800 Speaker 1: the West, which is not too dissimilar to what the 536 00:29:48,840 --> 00:29:53,320 Speaker 1: West effectively did post GFC. Right the post GFC, the 537 00:29:53,400 --> 00:29:58,000 Speaker 1: West basically lad not purposefully and probably not as purposefully 538 00:29:58,000 --> 00:30:00,680 Speaker 1: as China did this time. Is the s went into 539 00:30:00,680 --> 00:30:04,320 Speaker 1: austerity and China stimulated, and kind of the way out 540 00:30:04,520 --> 00:30:07,760 Speaker 1: was that, you know, Chinese demand carried the way, and 541 00:30:08,040 --> 00:30:12,280 Speaker 1: this time it's China made the i think calculation that 542 00:30:12,400 --> 00:30:14,160 Speaker 1: they were going to let the West leave, they were 543 00:30:14,160 --> 00:30:17,600 Speaker 1: going to import that excess demand and that would let them, 544 00:30:17,600 --> 00:30:20,800 Speaker 1: you know, achieve some policy tightening that they wanted to 545 00:30:20,800 --> 00:30:24,840 Speaker 1: do anyway without a big marginal cost of growth. This 546 00:30:25,120 --> 00:30:27,840 Speaker 1: leads very well into the next question I wanted to 547 00:30:27,880 --> 00:30:32,720 Speaker 1: ask you, which is about the policy response going into two, 548 00:30:32,840 --> 00:30:35,160 Speaker 1: because I think there is I mean, there is this 549 00:30:35,320 --> 00:30:39,080 Speaker 1: history that when things go awry in the global economy, 550 00:30:39,200 --> 00:30:43,400 Speaker 1: China will start easing and effectively save everyone. And that 551 00:30:43,640 --> 00:30:46,400 Speaker 1: might not be the case this time around, given what 552 00:30:46,440 --> 00:30:49,240 Speaker 1: you just laid out. But on the other hand, we 553 00:30:49,320 --> 00:30:53,680 Speaker 1: are seeing China start to push back a little bit 554 00:30:53,720 --> 00:30:57,520 Speaker 1: against the u N and also show some signs of easing. 555 00:30:57,640 --> 00:31:02,120 Speaker 1: So it just cut the reserve vironment ratio, it's talked 556 00:31:02,120 --> 00:31:04,960 Speaker 1: a little bit about rolling back some of the property curves. 557 00:31:05,320 --> 00:31:08,480 Speaker 1: How should we be thinking about that policy response going 558 00:31:08,480 --> 00:31:12,240 Speaker 1: into I think this is really one of the more 559 00:31:12,280 --> 00:31:15,400 Speaker 1: important questions. I think I kind of come at it 560 00:31:15,480 --> 00:31:20,160 Speaker 1: with a China is not going to go full easing. 561 00:31:20,360 --> 00:31:22,880 Speaker 1: I either is not going to be well, there's a 562 00:31:22,960 --> 00:31:25,320 Speaker 1: National Party Congress, so we go pedal to the metal, 563 00:31:25,640 --> 00:31:28,880 Speaker 1: you know. I don't really think that will be China's 564 00:31:28,960 --> 00:31:31,640 Speaker 1: policy posture. I think what we are seeing though, is 565 00:31:31,920 --> 00:31:35,400 Speaker 1: and this became extremely evident when we had three separate 566 00:31:35,720 --> 00:31:40,520 Speaker 1: macro economic stabilizer events in China that I think China 567 00:31:40,640 --> 00:31:43,160 Speaker 1: is putting a floor in terms of where they're going 568 00:31:43,160 --> 00:31:45,840 Speaker 1: to let growth go. And I think this became really 569 00:31:45,880 --> 00:31:49,560 Speaker 1: not worthy over the past two weeks when three things happened. One, 570 00:31:49,640 --> 00:31:53,240 Speaker 1: as you noted, China basically said, okay, you want it's 571 00:31:53,240 --> 00:31:55,719 Speaker 1: gone a lot and we're comfortable with a strong huan policy, 572 00:31:55,800 --> 00:31:59,160 Speaker 1: especially as we're in this broader context of dual circulation 573 00:31:59,160 --> 00:32:02,800 Speaker 1: and wanting to increase message demand, but it's gone too strong, 574 00:32:02,920 --> 00:32:06,840 Speaker 1: and they hyped forex reserve ratio from seven to nine percent. 575 00:32:07,280 --> 00:32:10,360 Speaker 1: Then we also saw from the Stitate Council in the 576 00:32:10,360 --> 00:32:14,680 Speaker 1: Peelborough that there is more of a fiscal backstop that 577 00:32:14,720 --> 00:32:17,400 Speaker 1: will probably kick in next year. And then on the 578 00:32:17,440 --> 00:32:20,480 Speaker 1: monetary side, we saw that they're going to cut the 579 00:32:20,520 --> 00:32:23,720 Speaker 1: triple R rate again. And have you know, at least 580 00:32:23,760 --> 00:32:26,400 Speaker 1: in the market been a little more aggressive on the 581 00:32:26,440 --> 00:32:30,400 Speaker 1: liquidity side. So I think we've had these three theory 582 00:32:30,440 --> 00:32:33,680 Speaker 1: independent macro stabilizers that have all kind of happened at 583 00:32:33,680 --> 00:32:36,160 Speaker 1: once that I kind of think give you the message 584 00:32:36,200 --> 00:32:38,840 Speaker 1: that listen, China is not going to go into next 585 00:32:38,920 --> 00:32:42,400 Speaker 1: year and start doing massive fiscal or massive infrastructure or 586 00:32:42,480 --> 00:32:45,640 Speaker 1: massive monetary stimulus through rate cuts. You know, I wouldn't 587 00:32:45,640 --> 00:32:48,280 Speaker 1: even be surprised if you know, the loan prime rate 588 00:32:48,360 --> 00:32:51,320 Speaker 1: or you know, kind of China's now default policy rate 589 00:32:51,520 --> 00:32:55,000 Speaker 1: doesn't actually move down at all. But I think China 590 00:32:55,200 --> 00:32:59,280 Speaker 1: is going through the process of kind of narrowing the 591 00:32:59,320 --> 00:33:03,040 Speaker 1: confidence into both their growth range. And I think we've 592 00:33:03,080 --> 00:33:06,960 Speaker 1: reached the point now where growth has gotten too low 593 00:33:07,040 --> 00:33:09,600 Speaker 1: that they wanted to pretty much pick up. And I 594 00:33:09,640 --> 00:33:12,120 Speaker 1: think what you will see in you know, the next 595 00:33:12,160 --> 00:33:15,360 Speaker 1: two quarters is the credit impulse will pick up, and 596 00:33:15,560 --> 00:33:18,120 Speaker 1: China wants that, but they don't want it, you know, 597 00:33:18,240 --> 00:33:22,080 Speaker 1: necessarily going bananas. So I think that's kind of what's 598 00:33:22,160 --> 00:33:24,840 Speaker 1: different this time is that China is not going to 599 00:33:24,880 --> 00:33:29,600 Speaker 1: be this big marginal impulse to global growth. But I 600 00:33:29,640 --> 00:33:32,880 Speaker 1: think China, especially as we've seen over the last two quarters, 601 00:33:33,240 --> 00:33:35,720 Speaker 1: is the fear of China being this big drag on 602 00:33:35,760 --> 00:33:38,680 Speaker 1: global growth I think we'll receive going into the first 603 00:33:38,720 --> 00:33:57,920 Speaker 1: half next year. Oh no, bring it back a little 604 00:33:57,920 --> 00:34:00,719 Speaker 1: bit to the United States, and you know, one of 605 00:34:00,760 --> 00:34:05,200 Speaker 1: the you know, thinking about this possibility of multiple hikes 606 00:34:05,240 --> 00:34:08,040 Speaker 1: and maybe four and you know, maybe at some point 607 00:34:08,040 --> 00:34:10,200 Speaker 1: of things where to go get a little too wild, 608 00:34:10,440 --> 00:34:13,560 Speaker 1: maybe five. And obviously that's nobody. That doesn't seem like 609 00:34:13,640 --> 00:34:16,279 Speaker 1: that's anyone space case. But I'm thinking about you know, 610 00:34:16,320 --> 00:34:18,919 Speaker 1: of course, at the end, near the end of twenty 611 00:34:19,160 --> 00:34:24,240 Speaker 1: and the FED unveiled its new framework flexible average inflation targeting, 612 00:34:24,840 --> 00:34:28,120 Speaker 1: And in addition to this sort of new framework change, 613 00:34:28,239 --> 00:34:31,640 Speaker 1: we heard share Powell talk about things like inclusive growth 614 00:34:31,800 --> 00:34:35,680 Speaker 1: and a true commitment to sort of maximum employment in 615 00:34:35,719 --> 00:34:38,520 Speaker 1: a way that seemed different. Do you think, you know, 616 00:34:38,560 --> 00:34:41,920 Speaker 1: if you think about how the market and investors are 617 00:34:42,080 --> 00:34:45,840 Speaker 1: anticipating Fed action next year and beyond, would you say 618 00:34:45,840 --> 00:34:49,200 Speaker 1: that it's a reflection of essentially the FED having met 619 00:34:49,239 --> 00:34:52,279 Speaker 1: its goals and the FED having delivered on its commitments. 620 00:34:52,800 --> 00:34:55,960 Speaker 1: Or is there a belief that actually, in the end 621 00:34:56,000 --> 00:34:58,640 Speaker 1: it will be the same old Fed and that for 622 00:34:58,680 --> 00:35:01,640 Speaker 1: all of the talk of a new rainwork and uh 623 00:35:01,920 --> 00:35:04,840 Speaker 1: perhaps a slightly greater weight on the employment side of 624 00:35:04,840 --> 00:35:08,160 Speaker 1: the mandate, that in the end the FED is going 625 00:35:08,200 --> 00:35:11,600 Speaker 1: to sort of be the Fed it's always been. No, 626 00:35:11,680 --> 00:35:13,520 Speaker 1: It's it's a good question, and I think, you know, 627 00:35:13,680 --> 00:35:15,960 Speaker 1: on the surface, I think a lot of people would 628 00:35:15,960 --> 00:35:19,240 Speaker 1: say that it's you know, kind of same old Fed, 629 00:35:19,680 --> 00:35:23,279 Speaker 1: But I I don't think so. And the reason I 630 00:35:23,320 --> 00:35:26,200 Speaker 1: don't think so is you know, I think that part 631 00:35:26,239 --> 00:35:31,000 Speaker 1: of what's made this recalibration FED pricing very uncomfortable is 632 00:35:31,320 --> 00:35:35,520 Speaker 1: we were thinking about in the first half of that 633 00:35:35,719 --> 00:35:37,799 Speaker 1: the first FED rate hike was going to come in, 634 00:35:39,320 --> 00:35:44,160 Speaker 1: and we've basically gone from no hikes until two three 635 00:35:44,280 --> 00:35:47,920 Speaker 1: hikes in two in a very short period of time, right, 636 00:35:48,120 --> 00:35:50,399 Speaker 1: And I think that that has kind of come with 637 00:35:50,680 --> 00:35:54,719 Speaker 1: the broader perception that this is a FED that flinches, 638 00:35:54,880 --> 00:35:57,959 Speaker 1: this is it's you know, the fate is kind of dead, 639 00:35:58,680 --> 00:36:02,040 Speaker 1: and you know, I think going into next year, there 640 00:36:02,160 --> 00:36:06,000 Speaker 1: is a possibility that fate does die, but it's it's 641 00:36:06,040 --> 00:36:09,040 Speaker 1: a possibility the fate dies with in kind of what 642 00:36:09,080 --> 00:36:12,440 Speaker 1: the FED told you in their monetary policy statement, which 643 00:36:12,520 --> 00:36:16,200 Speaker 1: is that the goal of fate is to be reactive, right, 644 00:36:16,280 --> 00:36:19,120 Speaker 1: It's not to be pre emptive. However, there was one 645 00:36:19,239 --> 00:36:21,480 Speaker 1: thing that the FED said they would be pre emptive on, 646 00:36:22,160 --> 00:36:24,440 Speaker 1: even in within the context of faith, and that was 647 00:36:24,520 --> 00:36:28,560 Speaker 1: inflation expectations. And inflation expectations as we've known this year 648 00:36:28,640 --> 00:36:32,600 Speaker 1: is kind of this messy concept. But I think what's 649 00:36:32,640 --> 00:36:34,719 Speaker 1: easier to say, and you could read the Jeremy Read 650 00:36:34,760 --> 00:36:36,839 Speaker 1: paper and different papers have come out on this year. 651 00:36:36,880 --> 00:36:39,319 Speaker 1: That's kind of show how messy it is to kind 652 00:36:39,360 --> 00:36:41,759 Speaker 1: of manage. And we know that CLARAA looks at things 653 00:36:41,800 --> 00:36:45,200 Speaker 1: like c I E. The Fed's common inflation expectations indicator. 654 00:36:45,640 --> 00:36:49,680 Speaker 1: Is that the FED could decide that spot inflation so 655 00:36:49,760 --> 00:36:53,600 Speaker 1: above target for so long has a risk of the 656 00:36:53,640 --> 00:36:56,600 Speaker 1: anchoring that it could require a faster pace, and that 657 00:36:56,640 --> 00:37:01,040 Speaker 1: would actually be consistent with their monetary policy strategy. And 658 00:37:01,080 --> 00:37:02,800 Speaker 1: I think, you know, going into next year, more of 659 00:37:02,840 --> 00:37:05,799 Speaker 1: a base case world, right where the FED kind of 660 00:37:05,840 --> 00:37:09,600 Speaker 1: hikes three times. It ends quie in March at least. 661 00:37:09,600 --> 00:37:11,680 Speaker 1: Looking if you assume the first hike is going to 662 00:37:11,719 --> 00:37:14,239 Speaker 1: be in June, well, what's going to be the case. 663 00:37:14,280 --> 00:37:17,120 Speaker 1: In June? You're probably gonna have a sub four percent unemployment, right, 664 00:37:17,560 --> 00:37:20,879 Speaker 1: You're going to have prime age EPOP that's probably going 665 00:37:20,920 --> 00:37:24,799 Speaker 1: to be back at pre COVID levels. And I think 666 00:37:24,840 --> 00:37:27,960 Speaker 1: there is this implicit bias from the FED, and it 667 00:37:28,040 --> 00:37:31,640 Speaker 1: may not come across in a higher you start or 668 00:37:31,719 --> 00:37:34,400 Speaker 1: higher natural rate of unemployment. Is that the natural rate 669 00:37:34,400 --> 00:37:38,400 Speaker 1: of unemployment probably did rise post COVID, and it may 670 00:37:38,440 --> 00:37:41,080 Speaker 1: have not risen drastically, but I think the FED is 671 00:37:41,080 --> 00:37:42,799 Speaker 1: going to be less comfortable with the idea that you 672 00:37:42,800 --> 00:37:44,920 Speaker 1: can get back to three and a half percent unemployment 673 00:37:45,239 --> 00:37:49,560 Speaker 1: and then have no marginal inflationary cost, especially at this 674 00:37:49,640 --> 00:37:53,000 Speaker 1: point in time when inflation is in the sixtes. So 675 00:37:53,719 --> 00:37:56,480 Speaker 1: you know, I think going into next year, there is 676 00:37:56,520 --> 00:37:58,600 Speaker 1: this idea that it's like kind of all over the 677 00:37:58,600 --> 00:38:02,160 Speaker 1: same old FED. Whatever the data comes in is that is. 678 00:38:02,200 --> 00:38:05,279 Speaker 1: And I do agree that the FED is now less 679 00:38:05,320 --> 00:38:09,560 Speaker 1: preemptive in terms of policy being the dominant variable, not 680 00:38:09,719 --> 00:38:12,440 Speaker 1: the data. The data now is definitely the valiant and variable, 681 00:38:12,719 --> 00:38:15,120 Speaker 1: and that was kind of the FED shift post June. 682 00:38:15,560 --> 00:38:18,120 Speaker 1: But I think you know, looking into June and you 683 00:38:18,200 --> 00:38:21,200 Speaker 1: look at the Fate checklist, you know something that claritists 684 00:38:21,200 --> 00:38:24,000 Speaker 1: gave a speech on in August UM that really called 685 00:38:24,040 --> 00:38:27,759 Speaker 1: people by surprise is well, I'm he said, I'm looking 686 00:38:27,760 --> 00:38:29,399 Speaker 1: at the Faith checklist and I could see it being 687 00:38:29,440 --> 00:38:33,239 Speaker 1: hit by the end of And I think it's reasonable 688 00:38:33,280 --> 00:38:35,439 Speaker 1: to say, since you know, the labor market progress we've 689 00:38:35,440 --> 00:38:38,399 Speaker 1: had since August and the continued price pressure we've had, 690 00:38:38,400 --> 00:38:41,440 Speaker 1: that that has just been moved forward six months, and 691 00:38:41,480 --> 00:38:43,919 Speaker 1: it's I think it's pretty consistent to say that Fate 692 00:38:43,920 --> 00:38:47,160 Speaker 1: will actually be hit in June of next year, and 693 00:38:47,200 --> 00:38:50,799 Speaker 1: the FED won't be you know, kind of same old 694 00:38:50,800 --> 00:38:52,680 Speaker 1: fetting it in terms of, Okay, how do we come 695 00:38:52,760 --> 00:38:55,359 Speaker 1: up with reasons to hype when we're really only scared 696 00:38:55,360 --> 00:38:58,680 Speaker 1: about inflation. I do think inflation is the dominant variable 697 00:38:58,680 --> 00:39:01,520 Speaker 1: and kind of this recalibration policy. But I think it's 698 00:39:01,560 --> 00:39:04,560 Speaker 1: this recalibration of policy also happened in the context of 699 00:39:04,560 --> 00:39:06,920 Speaker 1: a labor market that is healing much faster than it 700 00:39:06,960 --> 00:39:10,120 Speaker 1: has in past cycles. So before we go, John, you know, 701 00:39:10,160 --> 00:39:12,799 Speaker 1: I wanted to get your take obviously, just sort of 702 00:39:13,040 --> 00:39:16,080 Speaker 1: risky assets, and we talked about them a little bit 703 00:39:16,120 --> 00:39:19,319 Speaker 1: before about whether there's any evidence of them pricing in 704 00:39:19,760 --> 00:39:22,960 Speaker 1: an aggressive hiking cycle like maybe the bond market is. 705 00:39:23,280 --> 00:39:26,600 Speaker 1: But by and large, it's been an incredible year. I mean, 706 00:39:26,719 --> 00:39:28,600 Speaker 1: and I think there's sort of two things that stand 707 00:39:28,600 --> 00:39:30,839 Speaker 1: out for me. Is like, one is, you know, at 708 00:39:30,880 --> 00:39:34,239 Speaker 1: least in the US, but also I think elsewhere headline 709 00:39:34,719 --> 00:39:37,960 Speaker 1: stock induscries have just an insanely well smp up something 710 00:39:37,960 --> 00:39:41,120 Speaker 1: it'll you know, something like just like an incredible year. 711 00:39:41,400 --> 00:39:45,240 Speaker 1: On the other hand, we have seen this pretty intense 712 00:39:45,280 --> 00:39:47,560 Speaker 1: sell off in what was really hot earlier in the 713 00:39:47,600 --> 00:39:52,000 Speaker 1: year a lot of the growth the stuff textu meme stuff, etcetera. 714 00:39:52,640 --> 00:39:55,000 Speaker 1: I'm just sort of like curious, like, you know, how 715 00:39:55,080 --> 00:39:56,680 Speaker 1: you're thinking about this. I don't know if you wann't 716 00:39:56,680 --> 00:39:59,040 Speaker 1: like have a call on sort of like the SMP 717 00:39:59,200 --> 00:40:03,239 Speaker 1: or think about that. But within the macro context, how 718 00:40:03,280 --> 00:40:06,000 Speaker 1: does all of this play into the part of the 719 00:40:06,040 --> 00:40:09,399 Speaker 1: market that sort of most people observe most directly, which 720 00:40:09,480 --> 00:40:13,040 Speaker 1: is the stock market. Yeah, you know, I think it's 721 00:40:13,080 --> 00:40:15,799 Speaker 1: it's interesting going into next year. I think that there's 722 00:40:15,880 --> 00:40:18,840 Speaker 1: kind of this like broader narrative that we've been alluding 723 00:40:18,880 --> 00:40:21,560 Speaker 1: to that you know, the economy is not really going 724 00:40:21,600 --> 00:40:25,360 Speaker 1: to be able to deal with this public deprivate sector handoff. 725 00:40:25,440 --> 00:40:27,520 Speaker 1: The FED is going to be a big, you know, 726 00:40:27,560 --> 00:40:30,200 Speaker 1: impediment to the market. And you know, something I do 727 00:40:30,320 --> 00:40:32,600 Speaker 1: think is true is that you know, the quote unquote 728 00:40:32,600 --> 00:40:35,320 Speaker 1: FED foot has been restruck lower. Yeah, you know, and 729 00:40:35,520 --> 00:40:38,360 Speaker 1: and in terms of like distribution of where like multiples 730 00:40:38,400 --> 00:40:41,200 Speaker 1: can go. Given that, I do think it is significant. 731 00:40:41,560 --> 00:40:44,919 Speaker 1: But you know, I think more broadly is I think 732 00:40:44,960 --> 00:40:50,320 Speaker 1: the market is actually readjusting now to the possibility that 733 00:40:50,680 --> 00:40:53,439 Speaker 1: the FED may have to be more drastic next year 734 00:40:53,800 --> 00:40:57,120 Speaker 1: than especially originally intended to, but also in terms of like, 735 00:40:57,320 --> 00:40:59,120 Speaker 1: you know, the last ten to twenty years of what 736 00:40:59,200 --> 00:41:02,080 Speaker 1: it has done, and I think like that's become like 737 00:41:02,320 --> 00:41:06,359 Speaker 1: really obvious, and things like you know that really you know, 738 00:41:06,760 --> 00:41:10,360 Speaker 1: techie stuff and arc and those type of things where 739 00:41:10,400 --> 00:41:13,640 Speaker 1: you know they just cannot handle a hawk is shed. 740 00:41:13,840 --> 00:41:15,280 Speaker 1: But I think, you know, in terms of the market 741 00:41:15,280 --> 00:41:17,920 Speaker 1: at large and in terms of the SMP, I think 742 00:41:17,960 --> 00:41:21,799 Speaker 1: we're getting to actually closer to an equilibrium point. And 743 00:41:21,800 --> 00:41:24,879 Speaker 1: I think a lot of people I think I I mean, 744 00:41:25,280 --> 00:41:27,359 Speaker 1: I think going into next year, we're getting to the 745 00:41:27,400 --> 00:41:32,640 Speaker 1: point now where a lot more hikes next year versus 746 00:41:32,719 --> 00:41:36,080 Speaker 1: you know, too fewer hikes next year. It's actually getting 747 00:41:36,120 --> 00:41:38,160 Speaker 1: pretty close in the odds. I mean, I think given 748 00:41:38,200 --> 00:41:42,399 Speaker 1: where spot inflation is, there is this bias too kind 749 00:41:42,400 --> 00:41:44,719 Speaker 1: of assumed that you know, the asymmetry is into more 750 00:41:44,960 --> 00:41:47,479 Speaker 1: and the asymmetry was into more hikes for a long time. 751 00:41:47,880 --> 00:41:49,920 Speaker 1: But I think the interesting thing now is we're getting 752 00:41:49,960 --> 00:41:53,839 Speaker 1: close to a pretty nice de Delibrium point where you know, 753 00:41:54,040 --> 00:41:57,400 Speaker 1: inflation maybe four, but it also maybe two and a half. 754 00:41:57,920 --> 00:42:01,720 Speaker 1: And I think like the odds are kind of close, 755 00:42:01,800 --> 00:42:03,840 Speaker 1: and I really think you should be on the side 756 00:42:03,840 --> 00:42:06,200 Speaker 1: of two and a half given what base effects will 757 00:42:06,200 --> 00:42:09,040 Speaker 1: do starting Q two next year. And when you get 758 00:42:09,080 --> 00:42:10,719 Speaker 1: into that two and a half world, that's still a 759 00:42:10,760 --> 00:42:13,800 Speaker 1: world where the feed is hiking because inflation is above target, 760 00:42:13,840 --> 00:42:15,960 Speaker 1: and in terms of the fake checklist, it's all hit. 761 00:42:16,400 --> 00:42:18,600 Speaker 1: But it's not a world where the FED is kind of, 762 00:42:18,640 --> 00:42:20,480 Speaker 1: you know, hitting the brakes on the cycle. And I 763 00:42:20,480 --> 00:42:21,840 Speaker 1: think as long as the feed is not hitting the 764 00:42:21,880 --> 00:42:25,120 Speaker 1: brakes on the cycle, market and the economy can deal 765 00:42:25,200 --> 00:42:28,160 Speaker 1: with with higher interest rates. Now can it deal with 766 00:42:29,080 --> 00:42:31,080 Speaker 1: you know, in two years or three years, when the 767 00:42:31,080 --> 00:42:33,680 Speaker 1: FED gets back to an assemblance of neutral. But I 768 00:42:33,719 --> 00:42:36,080 Speaker 1: have a different view. Yes, but I think you know, 769 00:42:36,080 --> 00:42:38,799 Speaker 1: in terms of next year, and you told me, you 770 00:42:38,840 --> 00:42:41,880 Speaker 1: know that the unemployment rate is three and a half, 771 00:42:41,960 --> 00:42:45,000 Speaker 1: inflation is two and a half to seventy five, and 772 00:42:45,040 --> 00:42:46,800 Speaker 1: the FED is at eighty seven and a half basis 773 00:42:46,840 --> 00:42:50,600 Speaker 1: points on FED funds. My guesses stocks did Okay, I'm 774 00:42:50,680 --> 00:42:53,560 Speaker 1: not saying that you know, it's another twenty percent year, 775 00:42:54,000 --> 00:42:56,919 Speaker 1: But in that kind of backdrop, I think I'd rather 776 00:42:57,040 --> 00:43:03,719 Speaker 1: over twelve months. I'd rather be imbed. John Turk, thank 777 00:43:03,760 --> 00:43:06,239 Speaker 1: you so much for coming out odd lots always a 778 00:43:06,280 --> 00:43:09,000 Speaker 1: pleasure and I always I always learned a ton of 779 00:43:09,160 --> 00:43:12,800 Speaker 1: have a have a happy New Year, and well looking 780 00:43:12,840 --> 00:43:15,120 Speaker 1: forward to revisiting. Maybe we'll get you on a summer 781 00:43:15,160 --> 00:43:19,360 Speaker 1: of to do the halfway mark sounds good. Thank you 782 00:43:19,440 --> 00:43:20,960 Speaker 1: so much for having me. Yeah, I mean I think 783 00:43:21,000 --> 00:43:23,400 Speaker 1: you know, summer is the big one. We kind of 784 00:43:23,400 --> 00:43:26,839 Speaker 1: know what the inflation in game is. Thanks so much, Sean, 785 00:43:26,880 --> 00:43:38,680 Speaker 1: all right, take care of John. Thank you. You know what, 786 00:43:38,680 --> 00:43:41,279 Speaker 1: I love talking to John for many reasons, but one 787 00:43:41,320 --> 00:43:44,879 Speaker 1: thing that really stands out to me is just his clarity. Yeah. 788 00:43:45,360 --> 00:43:47,360 Speaker 1: The thing I really like about John is that he 789 00:43:47,440 --> 00:43:52,520 Speaker 1: kind of looks at everything on a probability distribution basis, 790 00:43:52,560 --> 00:43:56,080 Speaker 1: So he's always trying to weigh tale risks on either side, 791 00:43:56,120 --> 00:43:58,480 Speaker 1: whereas I feel like other people are going, you know, 792 00:43:58,520 --> 00:44:01,759 Speaker 1: they're usually just focusing on one thing, like runaway inflation 793 00:44:02,200 --> 00:44:05,600 Speaker 1: and not necessarily looking at the other side of that 794 00:44:05,680 --> 00:44:09,279 Speaker 1: probability distribution. But I thought, for instance, what John was 795 00:44:09,320 --> 00:44:14,520 Speaker 1: saying about these sort of asymmetric risks to the inflation outlook, 796 00:44:14,600 --> 00:44:17,080 Speaker 1: the idea that like, on the one hand, maybe we 797 00:44:17,160 --> 00:44:19,640 Speaker 1: have four and a half percent inflation, on the other hand, 798 00:44:19,680 --> 00:44:22,600 Speaker 1: maybe we get down to two and a half percent, Like, 799 00:44:22,760 --> 00:44:24,960 Speaker 1: this is something that I've been thinking about with the 800 00:44:25,400 --> 00:44:29,719 Speaker 1: piece I did on Whack inflation, and it seems like, yes, 801 00:44:29,840 --> 00:44:33,479 Speaker 1: everyone's worried about inflation right now, but really what's going 802 00:44:33,520 --> 00:44:39,480 Speaker 1: on is it's not necessarily relentless price increases, its volatility 803 00:44:39,800 --> 00:44:44,239 Speaker 1: in those prices and the difficulty of actually predicting where 804 00:44:44,280 --> 00:44:47,440 Speaker 1: they're going to go given all these different factors around 805 00:44:47,680 --> 00:44:53,440 Speaker 1: supply and what's going on. Well now with the omicron variant. Yeah, absolutely, 806 00:44:54,560 --> 00:44:58,200 Speaker 1: the way he talked about distribution very useful, and specifically 807 00:44:58,360 --> 00:45:01,440 Speaker 1: I thought this idea, it's like, okay, like all years 808 00:45:01,440 --> 00:45:03,759 Speaker 1: so we've had this big dollar rally, and I thought 809 00:45:03,760 --> 00:45:06,120 Speaker 1: that was really helpful hearing him explain that, but all 810 00:45:06,200 --> 00:45:08,520 Speaker 1: year we've had this sort of relentless like maybe they'll 811 00:45:08,600 --> 00:45:10,440 Speaker 1: hype a little bit more, maybe go from zero to one, 812 00:45:10,560 --> 00:45:13,280 Speaker 1: maybe we go from one to two. And this idea 813 00:45:13,360 --> 00:45:17,840 Speaker 1: that once you get to around four possible hikes in two, 814 00:45:18,080 --> 00:45:21,239 Speaker 1: once like that becomes closer to say the market's base 815 00:45:21,320 --> 00:45:24,640 Speaker 1: case or a possibility, then we really start to uh, 816 00:45:24,680 --> 00:45:27,120 Speaker 1: it shifts in both directions. So we've had all this 817 00:45:27,160 --> 00:45:30,480 Speaker 1: sort of like upward biased to the possibility range. We 818 00:45:30,560 --> 00:45:33,120 Speaker 1: might still have that, but not much more, and then 819 00:45:33,160 --> 00:45:36,399 Speaker 1: you start thinking about maybe three, you know, once you're 820 00:45:36,440 --> 00:45:39,600 Speaker 1: once you're at four, maybe three is more likely than five. 821 00:45:40,200 --> 00:45:43,600 Speaker 1: And hearing him explain why and that was really useful. 822 00:45:43,600 --> 00:45:47,680 Speaker 1: And I think also he offers probably the clearest, in 823 00:45:47,719 --> 00:45:50,680 Speaker 1: my opinion, the sort of the clearest explanation for why 824 00:45:50,680 --> 00:45:53,239 Speaker 1: in a year where there's been so much anxiety about inflation, 825 00:45:53,480 --> 00:45:55,920 Speaker 1: we've really just seemed like nothing going on at the 826 00:45:56,400 --> 00:45:59,239 Speaker 1: long end of the yield curve. Yeah. Absolutely, And I 827 00:45:59,280 --> 00:46:03,240 Speaker 1: thought his point about inflation expectations was also very good 828 00:46:03,280 --> 00:46:06,520 Speaker 1: because despite all the handwringing that we're seeing, you know, 829 00:46:07,040 --> 00:46:12,320 Speaker 1: consumer demand has been relatively strong. Most people are saying 830 00:46:12,360 --> 00:46:15,480 Speaker 1: that it's not a good time to buy things at 831 00:46:15,480 --> 00:46:18,600 Speaker 1: the moment, which kind of suggests that they expect prices 832 00:46:18,760 --> 00:46:22,520 Speaker 1: to come down, right. Yes, I don't know about you, though. 833 00:46:22,560 --> 00:46:27,000 Speaker 1: I have like five washing machines in my basement that 834 00:46:27,040 --> 00:46:29,239 Speaker 1: I've been buying on expectations that I'll be able to 835 00:46:29,280 --> 00:46:33,160 Speaker 1: flip them for flip them for more later. So yeah, 836 00:46:33,200 --> 00:46:37,080 Speaker 1: I'm definitely. Uh, I've definitely been hoarding consumer durable goods 837 00:46:37,120 --> 00:46:40,400 Speaker 1: as as investments. You're you're not doing that, Tracy you know. 838 00:46:40,440 --> 00:46:42,319 Speaker 1: The sad thing is I can't even tell if you're 839 00:46:42,360 --> 00:46:45,759 Speaker 1: joking or not. I am joking. You might actually have 840 00:46:45,920 --> 00:46:49,280 Speaker 1: five washing machines. I do not have five washing machines. 841 00:46:49,360 --> 00:46:51,400 Speaker 1: I do have a washing machine, though, which I feel 842 00:46:51,440 --> 00:46:54,440 Speaker 1: extremely privileged to have in New York City. I've never 843 00:46:54,480 --> 00:46:59,520 Speaker 1: had one in my apartment before. Yeah, that is very convenient. 844 00:47:00,040 --> 00:47:01,920 Speaker 1: So we leave it there before we start doing like 845 00:47:02,000 --> 00:47:05,319 Speaker 1: washing machine product reviews. Yeah, although we could do that too, 846 00:47:05,320 --> 00:47:08,640 Speaker 1: but yes, let's leave it. Let's leave it. Wait, actually, wait, 847 00:47:08,680 --> 00:47:10,279 Speaker 1: can I see one thing? Wait? Wait, can I see 848 00:47:10,280 --> 00:47:14,200 Speaker 1: one thing? Yeah, of course, I speaking of washing machines. 849 00:47:14,320 --> 00:47:17,960 Speaker 1: I had the most problem, which is that a I 850 00:47:18,000 --> 00:47:20,440 Speaker 1: have like some smart washing machine, so I couldn't use 851 00:47:20,480 --> 00:47:22,759 Speaker 1: it for a couple of weeks due to like a 852 00:47:22,800 --> 00:47:26,360 Speaker 1: software glitch. So that's a modern problem, but that'd be 853 00:47:27,000 --> 00:47:29,640 Speaker 1: I couldn't get a repair person for the washing machine 854 00:47:29,800 --> 00:47:32,560 Speaker 1: for like over two weeks because, of course, you know, 855 00:47:32,880 --> 00:47:36,239 Speaker 1: labor market tightness and service market types and everything. So 856 00:47:36,320 --> 00:47:38,920 Speaker 1: I do think by the story of my washing machine 857 00:47:39,400 --> 00:47:44,480 Speaker 1: is a sort of like quintessential micro economy story. Maybe 858 00:47:44,480 --> 00:47:47,080 Speaker 1: you need to write that up as an add thoughts post. 859 00:47:47,920 --> 00:47:49,640 Speaker 1: That's a good idea. I will do that this week. 860 00:47:49,960 --> 00:47:51,640 Speaker 1: All right, let's leave it there. All right, we are 861 00:47:51,719 --> 00:47:55,120 Speaker 1: actually leaving it there. This has been another episode of 862 00:47:55,160 --> 00:47:57,960 Speaker 1: the ad Thoughts podcast. I'm Tracy Alloway. You can follow 863 00:47:58,000 --> 00:48:01,359 Speaker 1: me on Twitter at Tracy Alloway and I'm Joe wisn't Thal. 864 00:48:01,480 --> 00:48:04,520 Speaker 1: You can follow me on Twitter at the Stalwart. Follow 865 00:48:04,560 --> 00:48:06,680 Speaker 1: our guest John Turrek. He's the author of the Chief 866 00:48:06,760 --> 00:48:10,960 Speaker 1: Convexity blog. His hand on Twitter is at j Turrek eighteen. 867 00:48:11,480 --> 00:48:15,760 Speaker 1: Follow our producer Laura Carlson at Laura M. Carlson. Follow 868 00:48:15,800 --> 00:48:19,200 Speaker 1: the Bloomberg head of podcast, Francesco Leavi at Francesco Today, 869 00:48:19,520 --> 00:48:22,359 Speaker 1: and check out all of our podcasts at Bloomberg unto 870 00:48:22,400 --> 00:48:25,120 Speaker 1: the handle at podcasts. Thanks for listening.