WEBVTT - Another Tech Wreck 0:00:00.440 --> 0:00:03.840 Strap on your parachute. It's time for What Goes Up 0:00:04.120 --> 0:00:13.880 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:13.960 --> 0:00:17.960 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzak, 0:00:18.079 --> 0:00:20.840 a reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.040 --> 0:00:24.000 a senior editor at Bloomberg. This week on the show, 0:00:24.160 --> 0:00:28.040 it was just last month that this episode's guests said 0:00:28.040 --> 0:00:31.080 this big tech will need to continue delivering and the 0:00:31.120 --> 0:00:34.760 tremendous equity market rally will remain vulnerable to the performance 0:00:34.800 --> 0:00:37.800 of a handful of companies. Well, in recent days, we've 0:00:37.840 --> 0:00:40.600 got in a firsthand look at just how vulnerable it 0:00:40.680 --> 0:00:43.400 may be. We discussed the possible causes of this and 0:00:43.440 --> 0:00:46.360 also the outlook from here, and as always, we will 0:00:46.400 --> 0:00:49.720 close out the episode with our tradition, the craziest thing 0:00:49.960 --> 0:00:52.920 I saw in markets this week, Sarah, I trust you 0:00:52.960 --> 0:00:56.200 saw some crazy things. Trust correctly, And I have to 0:00:56.240 --> 0:00:58.960 make up for last week. I came a little bit unprepared. 0:00:59.400 --> 0:01:02.120 Um so this week I came more prepared than last week. 0:01:02.160 --> 0:01:04.480 I can say that, Mike, Okay, that that's kind of 0:01:04.520 --> 0:01:09.280 a low hurdle to clear, So I know, but you 0:01:09.280 --> 0:01:11.119 you pulled one out at the last minute last week, 0:01:11.200 --> 0:01:13.400 so I even see that that was a nice save. 0:01:14.319 --> 0:01:17.480 But anyways, you said, very happy to have our guest 0:01:17.560 --> 0:01:19.759 back this week. I believe she was on the show 0:01:19.840 --> 0:01:23.720 once last year and before the world went crazy, uh, 0:01:23.760 --> 0:01:26.920 and we got her perspective on the velocity of risk 0:01:27.040 --> 0:01:30.840 and how it is accelerated. Boy um, that thesis was 0:01:30.880 --> 0:01:33.680 sure proven true in the age of COVID. So happy 0:01:33.720 --> 0:01:35.840 to have her back on the show. Her name is 0:01:36.080 --> 0:01:41.400 Sema Shaw. She is the chief strategist at Principal Global Investors. 0:01:41.440 --> 0:01:43.920 She joins US from London, where it's a little bit 0:01:44.000 --> 0:01:47.080 later than it is here in the US. So, Seema, 0:01:47.120 --> 0:01:49.200 I don't know if you're in your pajamas or what 0:01:49.280 --> 0:01:51.760 I've I've been in my pajamas since March, so it's 0:01:51.800 --> 0:01:54.440 it's totally fine if you are. It is my permanent 0:01:54.760 --> 0:01:59.760 uniform thesis, at least pajamas from the waist down, just 0:01:59.840 --> 0:02:01.960 in case you have any virtual meetings. No one, No 0:02:01.960 --> 0:02:05.720 one will know exactly exactly. It's important that the top 0:02:05.760 --> 0:02:13.760 of it is looking good. See, I'm gonna dispense. Usually 0:02:13.760 --> 0:02:16.520 I have about a twelve part question that I start with, 0:02:16.560 --> 0:02:19.760 but I'm gonna make it simple. Uh, this time what 0:02:19.919 --> 0:02:23.480 a wild summer. I mean, it was the biggest August 0:02:23.560 --> 0:02:25.919 gain for the US market. I don't know, Sarah wasn't. 0:02:25.960 --> 0:02:31.639 It's like the biggest August gain in since the while 0:02:31.680 --> 0:02:35.519 the whole country was basically more or less lockdown in quarantine. 0:02:36.480 --> 0:02:39.840 How would you explain what happened this summer and now 0:02:39.880 --> 0:02:42.080 that we're seeing sort of the bloom come off the rows, 0:02:42.720 --> 0:02:46.160 what's happening right now with this little correction in the 0:02:46.240 --> 0:02:49.280 U S exuity market and tech specifically. I mean, how 0:02:49.280 --> 0:02:53.560 do you just describe and explain a summer like that? Yeah, 0:02:53.680 --> 0:02:56.880 it's been absolutely astonishing. I don't think when all of 0:02:56.919 --> 0:02:59.640 this kicked off, when lockdowns were announced, that anyone would 0:02:59.639 --> 0:03:02.400 have entered dissipated the kind of summer performance that we've seen. 0:03:03.120 --> 0:03:06.840 I think a lot of the strength was down to 0:03:07.120 --> 0:03:10.560 three factors. One is the release of pent up demand 0:03:10.560 --> 0:03:13.560 that it clearly accumulated during lockdown. So what we've seen 0:03:13.639 --> 0:03:16.560 is a lot of easy gains, you know, people trying 0:03:16.600 --> 0:03:20.960 to return to some semblance of normality and that's propelled markets. 0:03:21.000 --> 0:03:22.840 And then the other two things is policy. So center 0:03:22.880 --> 0:03:26.720 banks clearly have you flooded the market with liquidity. It 0:03:26.800 --> 0:03:28.680 has no else to go, it just goes straight into 0:03:28.720 --> 0:03:31.079 capital markets. So that that's been key, and of course 0:03:31.080 --> 0:03:35.640 fiscal policy has helped with with improving confidence. But within 0:03:35.680 --> 0:03:38.800 all of this, those three factors have driven one sector. 0:03:39.160 --> 0:03:41.320 Each one of them has gone into one sector, and 0:03:41.360 --> 0:03:44.560 that's tech. And when you look at the market recovery, 0:03:44.560 --> 0:03:46.480 it has been driven simply by take You know, it's 0:03:46.560 --> 0:03:49.360 such a narrow recovery. And I think all of that 0:03:49.520 --> 0:03:52.080 incredible exuberance around the big tech sector, which I have 0:03:52.120 --> 0:03:54.839 to say we have real beliefs in, but it went 0:03:54.880 --> 0:03:57.280 a little bit too frothy, and that's why you've seen 0:03:57.400 --> 0:03:59.800 this pullback over the last few days. I don't necessarily 0:03:59.840 --> 0:04:03.160 but there's any major fundamentals that have resulted in this 0:04:03.280 --> 0:04:07.080 jewel back. Seema. I likely spent the entire months of 0:04:07.200 --> 0:04:12.000 July in August writing about reasons for this unbelievable tech 0:04:12.080 --> 0:04:15.000 rally that we saw. Some being that many of these 0:04:15.000 --> 0:04:19.840 companies are beneficiaries of COVID nineteen. Like you mentioned, they 0:04:19.880 --> 0:04:22.000 stand to benefit. And the idea is that a lot 0:04:22.000 --> 0:04:24.840 of these trends have been accelerated by many stay at 0:04:24.880 --> 0:04:29.200 home orders well In recent weeks and days, there have 0:04:29.279 --> 0:04:35.240 been many reports about one soft bank buying many call options, 0:04:35.240 --> 0:04:39.160 and big tech companies also looking at small contract trades 0:04:39.320 --> 0:04:43.000 seeing tons and tons of options volume from the likes 0:04:43.040 --> 0:04:45.680 of small retail traders. And I feel like some are 0:04:45.760 --> 0:04:49.960 questioning if we can actually attribute much of the rally 0:04:50.040 --> 0:04:52.679 to the fact that these companies stand to benefit UH 0:04:52.680 --> 0:04:56.159 and their true earnings potential and their growth power. Is 0:04:56.200 --> 0:04:59.240 there reason to to question that narrative, if that at 0:04:59.279 --> 0:05:02.320 all had a play in this unbelievable run up, like 0:05:02.320 --> 0:05:06.880 like Mike said, the best August since the late eighties, 0:05:07.160 --> 0:05:09.640 or is there more to it than just the option story? 0:05:10.120 --> 0:05:11.520 You know, I think you just have to look at 0:05:11.560 --> 0:05:14.159 some of the charts of these companies performances and you 0:05:14.160 --> 0:05:17.240 can see that something weird went on in August. They 0:05:17.279 --> 0:05:20.119 just you know, they have performed extremely well through till July, 0:05:20.200 --> 0:05:22.960 and then in August they just took off, you know, 0:05:23.000 --> 0:05:25.080 the curves almost turned exponential. So I think there has 0:05:25.120 --> 0:05:27.440 to be something else to play there. Um and the 0:05:27.480 --> 0:05:30.880 option story I think is key. It probably isn't everything, though, 0:05:31.200 --> 0:05:33.000 you know, you have to look at some of the 0:05:33.080 --> 0:05:36.560 smaller orders that went on. They almost dwarf what we've 0:05:36.560 --> 0:05:39.479 seen the soft bank. So I think the retail investors, 0:05:39.520 --> 0:05:42.560 you know, you're the Robin Hood app. I think that's 0:05:42.560 --> 0:05:44.720 been a huge driver as well. These are companies that 0:05:44.720 --> 0:05:47.600 people have been watching from home seeing how amazingly the 0:05:47.760 --> 0:05:50.359 well they've been performing, and have tried to jump on 0:05:50.360 --> 0:05:52.760 the bandwagon. The problem is is that a lot of 0:05:52.800 --> 0:05:54.960 these investors and new time investors, this is probably the 0:05:55.000 --> 0:05:58.599 first time that they've experienced any kind of crisis and 0:05:58.720 --> 0:06:03.200 have less ability to try and analyze the fundamentals. So 0:06:03.240 --> 0:06:05.200 I think this has also been playing out, and it's 0:06:05.200 --> 0:06:06.839 again one of the reasons why you get this big 0:06:06.880 --> 0:06:09.279 snap up and then you also get the biggest snap down. 0:06:10.040 --> 0:06:12.680 You know. One theory I've I've seen floated for the 0:06:12.800 --> 0:06:17.280 correction in tech is that people are getting more confident 0:06:17.360 --> 0:06:19.400 that you know, that we're sort of over the hump 0:06:19.800 --> 0:06:23.240 of the COVID virus, that the rest of the struggling 0:06:23.320 --> 0:06:26.440 sectors of the economy, the sort of value stocks, if 0:06:26.520 --> 0:06:28.800 you will, or the you know, non tech parts of 0:06:28.800 --> 0:06:31.560 the economy, the cyclical parts that have really been hurt 0:06:32.160 --> 0:06:36.360 are poised to rebound, and maybe people are getting out 0:06:36.360 --> 0:06:40.080 of tech and preparing to to get back into you know, 0:06:40.279 --> 0:06:44.240 more cyclical and value oriented sectors. I don't know if 0:06:44.240 --> 0:06:46.760 I buy that, Sema. I mean, is that do you 0:06:46.760 --> 0:06:49.039 think that could be what's going on? Or was it 0:06:49.200 --> 0:06:52.920 just you know, this tech rally was bound to hit 0:06:52.960 --> 0:06:56.600 a wall, This melt up was bound to melt down eventually. 0:06:56.680 --> 0:06:59.040 You know what which which camper you on for for 0:06:59.120 --> 0:07:01.719 sort of the cattle to behind us? Yeah, So I 0:07:01.720 --> 0:07:04.200 think I think this is really interesting because actually I 0:07:04.240 --> 0:07:07.120 think there's both of them are true. I think the 0:07:07.160 --> 0:07:09.680 technicals are kind of momentum that you've seen in the market, 0:07:09.800 --> 0:07:14.240 the very overcrowding. With all of these positions evaluations together, 0:07:14.320 --> 0:07:18.000 you've created a story which is very very vulnerable to 0:07:18.040 --> 0:07:20.440 any kind of pullback, and that pullback can come from 0:07:20.560 --> 0:07:25.880 either deteriorating sentiment because of geopolitics. But another story is 0:07:25.920 --> 0:07:29.480 just actually the improving economy and also news of a 0:07:29.520 --> 0:07:32.120 potential vaccine. It has been a lot driven by a 0:07:32.240 --> 0:07:35.000 very strong demand for these technology companies over the summer 0:07:35.360 --> 0:07:38.360 as since lockdown was announced, and as a result, as 0:07:38.360 --> 0:07:40.880 soon as you hear news of a vaccine that it 0:07:41.000 --> 0:07:43.360 encourage people that look, we can maybe return to a 0:07:43.400 --> 0:07:45.200 more normal way of life. We will no longer need 0:07:45.240 --> 0:07:48.320 to be so dependent on companies to deliver our food. 0:07:48.480 --> 0:07:50.360 My husband was saying the other day that actually he's 0:07:50.360 --> 0:07:52.560 border delivering. He wants to go back to a supermarket. 0:07:52.600 --> 0:07:55.240 I mean, I don't share the same sentiment, but I 0:07:55.280 --> 0:07:57.760 think he speaks for a few people out there, so 0:07:58.000 --> 0:07:59.480 and I think so as you get that turned to 0:07:59.520 --> 0:08:03.000 the vaccine, then actually reliance and dependence on technology starts 0:08:03.040 --> 0:08:06.640 to pull back. And given that all those indicators together, 0:08:06.680 --> 0:08:10.080 we're building up an environment of vulnerability. It was almost 0:08:10.080 --> 0:08:12.760 a perfect storm to create that pullback. Maybe if he 0:08:12.800 --> 0:08:14.520 goes back to the grocery store, he just feels like 0:08:14.560 --> 0:08:17.600 his life will be one step closer to normal. I 0:08:17.720 --> 0:08:20.680 made the supermarkets want us all doing that too, because 0:08:20.720 --> 0:08:22.440 I know I went into Whole Foods the other day 0:08:22.720 --> 0:08:24.520 and I had like a list of three items I 0:08:24.560 --> 0:08:26.240 wanted to get, and I ended up with like eighty 0:08:26.320 --> 0:08:29.640 five things, uh in the check outlines. So I wonder 0:08:29.640 --> 0:08:32.680 if there's something, you know, there's something about that impulse 0:08:32.720 --> 0:08:36.520 purchasing power. I wonder that uh, you know, is being 0:08:36.559 --> 0:08:40.520 lost in this whole, this whole online regime. Yeah, the 0:08:40.600 --> 0:08:42.760 kids sweets are no longer in demand as the kids 0:08:42.760 --> 0:08:46.960 are walking past and demanding their parents by Yeah, I've 0:08:46.960 --> 0:08:49.440 got to say I made a Trader Joe's run the 0:08:49.440 --> 0:08:55.320 other weekend, and I left with many more treating suites 0:08:55.360 --> 0:08:57.200 than I planned on when I went in there, because 0:08:57.240 --> 0:08:59.960 they just, you know, they looked good. We're a stuck 0:09:00.040 --> 0:09:03.240 at home for the most part. I needed something extra. 0:09:03.360 --> 0:09:05.400 Trader Chose has got to be the market leader and 0:09:05.480 --> 0:09:09.480 impulse purchases. They know what they're doing with their store layout. 0:09:09.520 --> 0:09:11.240 I can tell you that you go in without a 0:09:11.280 --> 0:09:14.959 shopping list and end up with five things. So I see, 0:09:15.040 --> 0:09:16.520 m I tell your husband I agree with him. I 0:09:16.720 --> 0:09:38.120 can relate. He'll be happy someone does. So see. I know, 0:09:38.200 --> 0:09:40.600 I know it's obviously so difficult to make short term 0:09:40.600 --> 0:09:44.160 market calls, but I just want to get your view. Yes, 0:09:44.320 --> 0:09:47.920 we got a an eleven percent correction in the NASDAC 0:09:48.000 --> 0:09:49.560 in a matter of three days. I mean it was 0:09:49.720 --> 0:09:54.480 the fastest correction from a record for the benchmark. Is 0:09:54.520 --> 0:09:58.520 that enough though, to really wash out the froth is 0:09:58.679 --> 0:10:01.920 optimistic sentiment and move forwards from here? I mean, you look, 0:10:02.080 --> 0:10:05.880 and we're still what more than sixty percent off belows 0:10:05.960 --> 0:10:09.120 from March. I mean that's obviously not a small number. No, 0:10:09.280 --> 0:10:11.160 I would agree. Look, I think there is still froth 0:10:11.200 --> 0:10:14.000 in the market, but ultimately, if there's a really strong 0:10:14.160 --> 0:10:16.439 circular growth story, I don't think that you're going to 0:10:16.520 --> 0:10:20.040 see significant drops from here. You know, chances are that 0:10:20.080 --> 0:10:22.880 you're not going to see the magnitudes of increases certainly 0:10:22.880 --> 0:10:24.559 that we've seen over the last six months. That's not 0:10:24.600 --> 0:10:27.680 going to be repeated. But do we expect the market 0:10:27.760 --> 0:10:30.760 to come tumbling down from here? I'm certainly not a 0:10:30.800 --> 0:10:32.760 buyer of that idea, and I think, as I said, 0:10:32.800 --> 0:10:34.840 the reason is is that we may have increased our 0:10:34.840 --> 0:10:36.920 aliance and we may pull back some of that dependence 0:10:36.960 --> 0:10:39.760 on technology, but a fundamental core of that is here 0:10:39.800 --> 0:10:42.400 to stay. And also in an environment where there is 0:10:42.480 --> 0:10:45.640 so much uncertainty, we still don't know what's around the corner. 0:10:45.960 --> 0:10:48.080 You still need companies that have got those really strong 0:10:48.120 --> 0:10:50.960 balance sheets and positive cash flows, and those make acap 0:10:51.040 --> 0:10:55.240 tex stocks meet that criteria seem you know. Let's turn 0:10:55.240 --> 0:10:57.960 our attention to the next big risk, which is on 0:10:58.000 --> 0:11:01.600 everyone's mind. It's the US elections in November. You and 0:11:01.720 --> 0:11:05.240 your colleagues at Principle had an interesting note looking at 0:11:05.240 --> 0:11:09.839 the elections, and you know, this sort of historical precedent 0:11:10.080 --> 0:11:13.559 is that it's pretty common for there to be volatility 0:11:13.559 --> 0:11:16.280 in the market, in the equity market ahead of a 0:11:16.640 --> 0:11:20.400 US presidential election. You know, I don't know what the 0:11:20.400 --> 0:11:23.880 percentage of that happening is, but it's it's pretty high 0:11:24.000 --> 0:11:29.400 and pretty you know, easily telegraphed and predictable. But that 0:11:29.480 --> 0:11:32.800 I'll tell you often typically calms down after the election, 0:11:33.080 --> 0:11:36.439 when investors have a sense of what the next administration's 0:11:36.880 --> 0:11:40.360 priorities are gonna be, what kind of policies may influence 0:11:40.360 --> 0:11:43.520 their portfolios. I have to wonder, though, this is a 0:11:43.640 --> 0:11:47.719 very unique environment leading up to this election. For one thing, 0:11:47.760 --> 0:11:51.160 all this froth that even after this correction still exists 0:11:51.160 --> 0:11:56.040 in the market. Also just the bizarre nature of the 0:11:56.040 --> 0:11:58.920 the election, where you know, the mail in bouting will 0:11:58.960 --> 0:12:02.000 be a big you. President Trump is already you know, 0:12:02.160 --> 0:12:06.920 raising a lot of suspicion at least he alleges as 0:12:06.920 --> 0:12:10.600 far as the you know, how how reliable the vote 0:12:10.640 --> 0:12:15.280 can be when it's done over the mail. In many elections, 0:12:15.320 --> 0:12:17.640 it seems like it's almost a no brainer to buy 0:12:17.720 --> 0:12:20.360 that pre election dip. I wonder if if you think 0:12:20.400 --> 0:12:23.880 that's the case this time. And also given the valuations 0:12:23.880 --> 0:12:26.400 of the market, is that volatility that dip before the 0:12:26.440 --> 0:12:30.600 election failed to be potentially a bigger than the normal 0:12:30.679 --> 0:12:33.040 one this time. Yeah, these are these are really good 0:12:33.040 --> 0:12:36.120 points that I think all investors are are starting to 0:12:36.280 --> 0:12:39.160 consider pretty deeply at this stage. Well, as you said, 0:12:39.600 --> 0:12:42.359 you know, it is still a pretty frothy market. Valuations 0:12:42.440 --> 0:12:45.240 is still very stretched, and in that environment you have 0:12:45.360 --> 0:12:49.520 created almost a perfect scenario where any kind of shifting 0:12:49.559 --> 0:12:53.480 sentiment can result in a sudden drop. Right, So this 0:12:53.520 --> 0:12:55.320 is a risk ve losty story that we talked about 0:12:55.360 --> 0:12:58.880 months ago. The thing is with US elections, typically you 0:12:58.920 --> 0:13:01.319 do see that volatility, but then the foltility fades and 0:13:01.360 --> 0:13:03.760 it goes back to fundamentals. So would have been fundamentals 0:13:03.840 --> 0:13:06.720 driving the markets over the last six seven months. You know, 0:13:06.760 --> 0:13:10.120 we spoke about it before. It's down really to center banks, 0:13:10.440 --> 0:13:13.800 to fiscal policy, but mainly center banks for markets, that's 0:13:13.800 --> 0:13:16.880 really been key. So, yes, we do anticipate a rise 0:13:16.880 --> 0:13:19.280 in volatility. Do we think that would be the right 0:13:19.280 --> 0:13:21.360 time to buy the dip? Actually, I don't think it's 0:13:21.360 --> 0:13:23.400 the right time to try and do any kind of 0:13:23.440 --> 0:13:27.439 trading around the election, because it's so difficult to anticipate 0:13:27.520 --> 0:13:30.440 and read what's going to happen, especially in scenario where 0:13:30.480 --> 0:13:33.640 you could potentially see the election result being questioned not 0:13:33.720 --> 0:13:35.320 just for a week or so, but for even a 0:13:35.320 --> 0:13:38.199 month or two after. So actually, from our perspective, you're 0:13:38.240 --> 0:13:40.640 better off just staying invested. You look away from all 0:13:40.640 --> 0:13:44.160 the noise, keep your positions, and keep your eyes on 0:13:44.240 --> 0:13:48.520 the fundamentals because past the election, coming into the things 0:13:48.520 --> 0:13:49.960 that are going to be driving the market is still 0:13:49.960 --> 0:13:52.640 gonna be the same stuff, and that's mainly the Federal Reserve. 0:13:53.040 --> 0:13:55.240 The election is less than two months away. I know, 0:13:55.360 --> 0:14:00.960 I can't believe it well, and the result or maybe 0:14:01.480 --> 0:14:06.560 conclusive results or maybe a year away, Sarah. So we hope, hopefully, 0:14:06.640 --> 0:14:09.439 we hope, hopefully we're going to be the inauguration day. 0:14:09.520 --> 0:14:12.280 That's my hope for this country. God help us. If 0:14:12.320 --> 0:14:15.640 we don't, we'll see what you mentioned the Federal Reserve. 0:14:16.280 --> 0:14:18.840 And of course we have the next FED meeting coming 0:14:18.960 --> 0:14:22.920 up next week, so the next really near term risk 0:14:23.040 --> 0:14:26.080 probably for the markets. Is there anything that you would 0:14:26.080 --> 0:14:28.520 expect or maybe you are looking out for that might 0:14:28.560 --> 0:14:31.440 be unexpected, especially after the release of the policy review 0:14:31.760 --> 0:14:35.000 and the latest speech from Powell in Jackson Hall. Well, 0:14:35.040 --> 0:14:37.720 I think there is one thing that Jerome really needs 0:14:37.760 --> 0:14:41.160 to to discuss, and he needs to give some parameters 0:14:41.200 --> 0:14:44.080 around this new inflation framework. That's what people want to know. 0:14:44.200 --> 0:14:46.800 You know, what is too high above two You know, 0:14:46.880 --> 0:14:49.520 at what point do they feel like, Okay, this is 0:14:49.520 --> 0:14:51.440 the time to stop pulling back. How long does it 0:14:51.480 --> 0:14:53.840 need to be over two percent? Uh? These are the 0:14:53.880 --> 0:14:56.200 things that I think investors need to get a better 0:14:56.200 --> 0:14:58.640 hold of. We're also going to be looking out for 0:14:58.840 --> 0:15:02.520 more information and pretend chill yield, curve control, any kind 0:15:02.560 --> 0:15:05.680 of explicit forward guidance, although at the stage, you know, 0:15:05.720 --> 0:15:09.760 having listened to the various FED presidents over the last 0:15:09.800 --> 0:15:12.080 couple of weeks, I'm not sure we're actually going to 0:15:12.120 --> 0:15:14.480 receive much more news. I feel like they are trying 0:15:14.480 --> 0:15:17.640 to pull back from providing too much information on anything 0:15:18.200 --> 0:15:21.360 and hoping that actually just the inflation framework itself is 0:15:21.560 --> 0:15:23.920 enough to get the market going. And I think it 0:15:24.000 --> 0:15:26.280 may be in some ways right, because you know, they've 0:15:26.360 --> 0:15:28.800 gone out of their way to make sure that people 0:15:28.880 --> 0:15:32.080 know there is no chance of FED rate hikes over 0:15:32.080 --> 0:15:35.760 the foreseeable future, and of course hopefully we'll get some 0:15:36.160 --> 0:15:40.160 more details on this sort of new inflation targeting regime 0:15:40.200 --> 0:15:43.320 that the FED has where they we're looking at that 0:15:43.360 --> 0:15:47.280 two percent target as as an average rather than sort 0:15:47.280 --> 0:15:52.000 of a maximum of what they would tolerate for inflation. 0:15:52.320 --> 0:15:54.080 See if I don't wonder, though, how big of a 0:15:54.120 --> 0:15:56.920 deal is that, if we've struggled for so long to 0:15:57.040 --> 0:15:59.760 hit two pc inflation, is there any reason to believe, 0:16:00.120 --> 0:16:04.239 in your opinion, that we are in an accelerating inflationary 0:16:04.320 --> 0:16:08.680 environment and that will really see that average inflation target 0:16:08.720 --> 0:16:11.320 put into practice at any time in the near future. 0:16:11.880 --> 0:16:14.080 You know, that's such a good question, you know, I 0:16:14.120 --> 0:16:15.640 just want to take it out. Two years ago, at 0:16:15.640 --> 0:16:18.680 the Global Milk and Conference, Christine the Guard spoke. She 0:16:18.800 --> 0:16:20.800 wasn't yet the head of the CD, she's still at 0:16:20.800 --> 0:16:22.680 the i m F, and she was asked on stage, 0:16:22.960 --> 0:16:25.160 you know, what do you think about raising inflation targets? 0:16:25.200 --> 0:16:27.560 Do you think that will help countries? And back then 0:16:27.600 --> 0:16:30.240 she says she saw no sense, said, if you can't 0:16:30.280 --> 0:16:32.080 reach two percent, what makes you think you can reach 0:16:32.120 --> 0:16:34.080 three percent? And it made no sense to her to 0:16:34.160 --> 0:16:36.640 move in that direction. So, and I think there is 0:16:36.680 --> 0:16:38.880 a there is a clear argument there right, Why? Why 0:16:39.040 --> 0:16:41.000 what are they doing which is so special? That means 0:16:41.000 --> 0:16:43.840 that they're more likely to reach a higher target even now. 0:16:44.440 --> 0:16:46.640 And I have to say that, given all the structural 0:16:46.760 --> 0:16:51.320 factors that are underway at the moment, globalization, demographics, technology, 0:16:51.440 --> 0:16:55.560 it's very difficult to come across another reason why there 0:16:55.560 --> 0:16:59.080 should be higher inflation. And in a way, maybe the 0:16:59.120 --> 0:17:02.000 only opportunity if they start to really embrace fiscal spending 0:17:02.040 --> 0:17:04.359 even more than what you've already seen this yet, maybe 0:17:04.359 --> 0:17:06.520 that's the only scenario where you see inflation hitting that 0:17:06.600 --> 0:17:09.520 two percent target and even over shooting. You know, there 0:17:09.520 --> 0:17:11.960 were some big names this past week talking about inflation, 0:17:12.320 --> 0:17:16.240 Drucon Miller talking about the potential for a ten percent 0:17:16.720 --> 0:17:19.080 inflation rate, and I know there was a lot of 0:17:19.119 --> 0:17:22.480 pushback for many investors on this, uh, kind of along 0:17:22.520 --> 0:17:24.240 the same lines of what you just said, Sema. I mean, 0:17:24.560 --> 0:17:26.719 we haven't even been able to get to two percent 0:17:26.880 --> 0:17:29.560 all these deflationary forces over the last couple of years. 0:17:29.560 --> 0:17:31.480 What makes you think that all of a sudden we're 0:17:31.480 --> 0:17:35.240 going to launch into an inflationary upward spiral. Do you 0:17:35.440 --> 0:17:39.159 see potential for that at all? I mean, do you 0:17:39.200 --> 0:17:42.560 see the potential for inflation to even get to the 0:17:42.600 --> 0:17:46.560 point where the feed is actually going to step up 0:17:46.680 --> 0:17:49.440 and say that they are going to raise rates off 0:17:49.480 --> 0:17:53.679 of the zero lower bound and say the next five years. 0:17:54.640 --> 0:17:56.640 I was going to say, what, which lot, which horizon 0:17:56.640 --> 0:17:58.960 are you talking about? I mean, the thing is that 0:17:59.280 --> 0:18:02.680 we look back to global financial crisis since then ten 0:18:02.800 --> 0:18:05.520 years the father struggle to even hit the two percent level, 0:18:06.240 --> 0:18:09.159 and they have thrown almost everything that they have and 0:18:09.240 --> 0:18:12.199 there's still be no no successor So actually what they 0:18:12.240 --> 0:18:14.639 probably need in order to reach a two percent telegate 0:18:14.720 --> 0:18:18.320 level is a complete regime change. Now, the inflation framework 0:18:18.840 --> 0:18:21.480 announcement is good, but it doesn't take you all the 0:18:21.480 --> 0:18:24.800 way to a new regime change. So for me, the 0:18:24.880 --> 0:18:28.280 idea of sending a temper cent inflation result is is 0:18:28.280 --> 0:18:30.520 out of this world. Look, you have to assume that 0:18:30.600 --> 0:18:33.200 inflation is fast asleep and it's suddy going to wake 0:18:33.240 --> 0:18:35.520 up with a bounce. If you think inflation is going 0:18:35.600 --> 0:18:38.160 to hit over three pc within the next couple of years, 0:18:54.520 --> 0:18:56.000 I see if I wanted to get back to that 0:18:56.080 --> 0:18:58.280 idea of velocity of risk, that's what we talked a 0:18:58.359 --> 0:19:01.240 lot about that the first time you were on the podcast. 0:19:01.320 --> 0:19:04.520 I find it to be a fascinating topic and correct 0:19:04.520 --> 0:19:07.199 me if I bungle my description of of what you 0:19:07.240 --> 0:19:08.919 mean by But it's, you know, as far as I 0:19:08.920 --> 0:19:12.439 can tell, it's basically the notion that risks from the 0:19:12.480 --> 0:19:17.720 economy or from markets are priced in much more quickly 0:19:17.800 --> 0:19:21.359 now into markets than they had been before. And you know, 0:19:21.400 --> 0:19:25.359 there's a variety of reasons, technology, the proliferation of social 0:19:25.400 --> 0:19:27.920 media being one of them. But boy, you know, as 0:19:28.000 --> 0:19:30.240 as Sarah points out, in journalism, we do we like 0:19:30.320 --> 0:19:33.040 to deal with those superlatives, you know, the fastest correction 0:19:33.800 --> 0:19:38.400 in uh An index ever or the you know, fastest 0:19:39.640 --> 0:19:42.600 gain whatever. I feel like this year we've just been 0:19:42.800 --> 0:19:47.080 filled with those type of superlatives on both the downside 0:19:47.080 --> 0:19:49.879 and the upside for the markets. And I think it 0:19:49.960 --> 0:19:52.560 kind of proves your point that, you know, markets are 0:19:52.560 --> 0:19:56.159 moving a lot quicker than maybe they did in the past. 0:19:56.760 --> 0:20:01.560 What has the this whole raised a year of COVID 0:20:01.920 --> 0:20:05.760 and the recession taught you or what have you learned 0:20:06.400 --> 0:20:09.119 about the velocity of risk from this crazy year that 0:20:09.160 --> 0:20:13.000 we've had. Well, I spoke to you back in January. 0:20:13.680 --> 0:20:17.159 It was when coronavirus was starting to spread, but we 0:20:17.200 --> 0:20:19.920 had no idea about what was in store for us 0:20:20.840 --> 0:20:23.399 now the velocity of risk. You know, of course when 0:20:23.440 --> 0:20:25.720 we wrote the paper, we had no idea of course 0:20:25.720 --> 0:20:28.800 that COVID is on the way, But yes, it worked 0:20:28.800 --> 0:20:31.560 out exactly to the point that we we had set out. 0:20:32.040 --> 0:20:35.600 And as you said, you know, we came into evaluation 0:20:35.920 --> 0:20:40.120 very very stretched. We had social media being used widely 0:20:40.160 --> 0:20:44.080 and also enabling the spreading of of news that maybe 0:20:44.119 --> 0:20:47.880 governments didn't want to share. We have technology very very 0:20:47.880 --> 0:20:50.760 heavily weighted, and then we had very complex global supply 0:20:50.840 --> 0:20:53.800 chains which were able to transmit shocks from one part 0:20:53.840 --> 0:20:56.359 of the world in one sector to a completely different 0:20:56.359 --> 0:20:58.959 part of the world in a totally different sector. And 0:20:59.000 --> 0:21:01.160 I think that's why you all such very very sharp 0:21:01.240 --> 0:21:05.240 movements down. But at the same time it's bounced right 0:21:05.280 --> 0:21:07.239 back up again, and we're almost back to where we 0:21:07.240 --> 0:21:09.800 were at the beginning of the Yet if not even 0:21:09.800 --> 0:21:12.000 more stretched. You know, if we look at some of 0:21:12.040 --> 0:21:14.440 our own valuation indicators, if you look at the MSCI 0:21:14.600 --> 0:21:18.159 Growth Index, you have never ever been more expensive than 0:21:18.200 --> 0:21:21.600 we are today. The same thing with the SP five 0:21:21.960 --> 0:21:24.359 it's never been more expensive. So evaluations are still very 0:21:24.440 --> 0:21:27.879 very stretched, even more than that technology is even even 0:21:27.880 --> 0:21:31.720 bigger waiting. I hear people keep using the words during 0:21:31.760 --> 0:21:35.359 the crisis, it was bread, water and fangs, and I 0:21:35.359 --> 0:21:38.520 think that just gives a distinction of how important have become. 0:21:39.160 --> 0:21:41.920 So now we're getting back to the point where any 0:21:42.000 --> 0:21:45.439