WEBVTT - Bubble Trouble? 0:00:00.200 --> 0:00:16.520 Hi, and welcome to What Goes Up, a weekly markets 0:00:16.560 --> 0:00:19.840 podcast umbled on a higher across hasset reporter at Bloomberg, 0:00:20.239 --> 0:00:23.360 and I'm Katie Greifeld filling in for Mike Reagan. I 0:00:23.400 --> 0:00:26.520 am also across asset reporter at Bloomberg. I'm also the 0:00:26.680 --> 0:00:29.800 co anchor of Quick Take Stock. It is a daily 0:00:29.800 --> 0:00:33.280 market show for Bloomberg Quick Take, and this week on 0:00:33.320 --> 0:00:35.800 the show, Thanksgiving is around the corner in Wall Street 0:00:35.840 --> 0:00:38.160 is looking back on the stellar year while also trying 0:00:38.200 --> 0:00:41.640 to predict what two might bring. Everyone's still contending with 0:00:41.720 --> 0:00:45.240 lots of things, including hotter than expected inflation, bubble talk, 0:00:45.560 --> 0:00:49.040 and projections that the portfolio is dead. We're going to 0:00:49.080 --> 0:00:51.360 get into all of that with our guest, the head 0:00:51.440 --> 0:00:56.000 of global multi assets at a major investment firm. But first, Katie, 0:00:56.000 --> 0:00:58.080 I wanted to welcome you to the show. Mike's out 0:00:58.160 --> 0:01:01.440 this week and that it's actually really perfect because you 0:01:01.440 --> 0:01:03.520 and I have a lot to talk about. We've been 0:01:03.560 --> 0:01:07.840 hanging out recently, most notably at some football games. And 0:01:07.880 --> 0:01:10.800 then just a reminder from me and you, Mike said 0:01:10.840 --> 0:01:16.600 that we must make a joke on this week's podcast. Listen. 0:01:17.120 --> 0:01:19.480 I don't have jokes I have nothing but facts. I've 0:01:19.560 --> 0:01:23.080 learned a lot about football, in particular in the last week. 0:01:23.800 --> 0:01:27.280 I've heard a lot about Josh Allen. Apparently he's really good. 0:01:27.280 --> 0:01:30.200 I've learned that in trouble you throw to Digs, He'll 0:01:30.240 --> 0:01:34.000 get it done. On the Jets, though, Mike White, I mean, 0:01:34.360 --> 0:01:37.280 next Tom Brady, I don't know. I don't think so 0:01:37.800 --> 0:01:39.760 for all of our listeners. Katie and I went to 0:01:39.800 --> 0:01:42.560 the Bills and Jets game this past weekend and we 0:01:42.640 --> 0:01:45.240 had the best time. And Katie heard a lot of 0:01:45.440 --> 0:01:48.960 really amazing catchphrases that she was using throughout the game, 0:01:49.040 --> 0:01:51.760 and I think it worked out. I think so. I 0:01:51.800 --> 0:01:57.600 mean I was soliciting cool catchphrases I could sprinkle into conversation. Um, 0:01:57.640 --> 0:02:00.400 the Bills, they had a pretty rough game the weekend before, 0:02:00.480 --> 0:02:02.240 so they really needed to come out with their hair 0:02:02.240 --> 0:02:05.400 on fire. With their hair on fire, that's right. They delivered. 0:02:05.480 --> 0:02:10.280 They delivered two touchdowns. And this is now a sports podcast, 0:02:10.320 --> 0:02:12.880 by the way, this is everybody who's tuning in for 0:02:12.880 --> 0:02:15.800 for a commentary on the stock market. You can you 0:02:15.800 --> 0:02:20.880 can delete now, well we can. We can ask our 0:02:21.080 --> 0:02:24.840 guests this week about football as well. Possibly, but let's 0:02:24.840 --> 0:02:27.480 bring in Sebastian Page, who's the head of Global Multi 0:02:27.520 --> 0:02:30.760 Asset at TRO Price and he's also the author of 0:02:30.800 --> 0:02:34.720 a new book called Beyond Diversification, which will also discuss 0:02:34.800 --> 0:02:38.680 on the podcast today. Sebastian, welcome to the show. Thank you, 0:02:38.840 --> 0:02:41.400 Vildana and Katie. Thank you for having me. Really happy 0:02:41.480 --> 0:02:45.720 to participate today. Are you a football fan? Yeah, I'm 0:02:45.760 --> 0:02:48.919 in Baltimore, Maryland, so it's the Ravens for me. Oh 0:02:49.000 --> 0:02:52.519 go Bills all the way. And I don't have any 0:02:52.560 --> 0:02:56.200 fun facts about the Ravens. Unfortunately, you'll have to let 0:02:56.200 --> 0:02:59.359 her know ahead of time next time. But Sebastian, I 0:02:59.520 --> 0:03:02.600 always hope you could help set things up for us 0:03:02.600 --> 0:03:04.400 and just give us a little bit more about your 0:03:04.480 --> 0:03:09.919 role at tro and what your strategy looks like right now. Yeah, 0:03:10.000 --> 0:03:12.320 thank you. You know my role at THRO I like 0:03:12.400 --> 0:03:15.639 to say it's the perfect job for me. I absolutely 0:03:15.720 --> 0:03:20.640 love it. I'm running a large global investment organization, in 0:03:20.680 --> 0:03:24.560 this case over four hundred and fifty billion in a 0:03:24.760 --> 0:03:29.360 u M and we oversee over two D and twenty portfolios. 0:03:29.440 --> 0:03:32.200 And by the way, we have the number one actively 0:03:32.280 --> 0:03:37.400 managed retirement product in terms of assets under management and performance. 0:03:38.240 --> 0:03:43.160 The job will Danna involves not only investment oversight, so 0:03:43.520 --> 0:03:46.560 you know, staying on top of capital markets, consuming vast 0:03:46.640 --> 0:03:50.720 amounts of research from Bloomberg of course, and so on. 0:03:51.160 --> 0:03:54.280 But I also run the business, which means setting a 0:03:54.320 --> 0:04:01.120 strategic vision, making sure it's executed well, importantly, recruiting, developing talent, 0:04:01.880 --> 0:04:06.400 managing large product development projects. I'm also a member of 0:04:06.440 --> 0:04:10.760 the firm's management committee, which means I'm representing the division 0:04:11.280 --> 0:04:15.200 at the firm wide level, and I helped manage the firm. 0:04:15.240 --> 0:04:17.680 And by the way, at tour Price, we have one 0:04:17.720 --> 0:04:22.760 point six trillion in assets under management over seven thousand, 0:04:22.839 --> 0:04:27.359 eight hundred employees in sixteen countries. You know, we have 0:04:27.440 --> 0:04:30.760 a good brand, but we also have this ethos of 0:04:31.080 --> 0:04:35.080 keeping our heads down and focusing on investment performance. So 0:04:35.160 --> 0:04:39.159 for some people and maybe some people in our audience today, 0:04:39.279 --> 0:04:42.880 sometimes we're like the biggest asset manager they've never heard of. 0:04:43.720 --> 0:04:46.640 Bottom line is the job is broad. I learned something 0:04:46.760 --> 0:04:52.440 every day. There are investment challenges and leadership challenges. So 0:04:52.600 --> 0:04:55.159 if you follow me on LinkedIn, by the way, I 0:04:55.200 --> 0:04:58.320 realized I'm starting to sound like an influencer. I only 0:04:58.360 --> 0:05:01.400 have LinkedIn. I don't have Twitter, or anything else. But 0:05:01.520 --> 0:05:05.200 you'll see that I started was posting on capital markets, 0:05:05.240 --> 0:05:09.360 of course, but I started posting short articles on psychology 0:05:09.400 --> 0:05:12.360 and leadership as well because that's a part of my job. 0:05:12.640 --> 0:05:16.359 So sorry for the LinkedIn plug. I'm just starting to 0:05:16.800 --> 0:05:19.040 get a few followers and trying. We're trying to ramp 0:05:19.120 --> 0:05:23.040 up our digital brand as a firm. But yeah, the 0:05:23.080 --> 0:05:25.760 bottom line is it's a broad job. It's a leadership 0:05:25.800 --> 0:05:28.880 and an investment job. Sebastian, We've got to get you 0:05:28.920 --> 0:05:31.640 on Twitter. It's where all the action is. You would 0:05:31.680 --> 0:05:34.320 fit right in at fin Twitter. But we are in 0:05:34.360 --> 0:05:36.600 the special time of year where we have about six 0:05:36.640 --> 0:05:40.919 weeks to go until two and as such, we're starting 0:05:40.920 --> 0:05:45.560 to see a lot of your head outlooks trickle out, 0:05:45.839 --> 0:05:48.719 and I'm curious to hear your view on what we're 0:05:48.720 --> 0:05:52.320 heading into next year, because I mean, just we're still 0:05:52.400 --> 0:05:55.960 waiting on tenter hooks to see who Biden's FED nominee 0:05:56.040 --> 0:05:59.560 will be. For example, we know that inflation is at 0:05:59.640 --> 0:06:03.160 level we haven't seen in decades. Curious how you're taking 0:06:03.200 --> 0:06:06.800 all these different inputs and seeing how the year head 0:06:06.880 --> 0:06:11.479 might look Katie. A simple question right now that's on 0:06:11.560 --> 0:06:16.960 everyone's mind is our stocks in the bubble? And it's 0:06:17.000 --> 0:06:21.960 really a complicated question. They're both and this is gonna 0:06:22.360 --> 0:06:25.480 sound unusual, but I can make the statement that at 0:06:25.520 --> 0:06:29.360 the same time that stocks are both as expensive as 0:06:29.400 --> 0:06:32.880 they've ever been and as cheap as they've ever been. 0:06:33.640 --> 0:06:36.039 So how do I get to that statement? If I 0:06:36.040 --> 0:06:38.880 look at the price earnings ratio on the stock market 0:06:38.920 --> 0:06:42.840 on the S and P five, it's in the person 0:06:43.000 --> 0:06:46.440 tile compared to the last thirty years. Maybe it got 0:06:46.600 --> 0:06:50.640 more expensive around the tech bubble, but pretty much close 0:06:50.680 --> 0:06:54.359 to as expensive as they've ever been. But if you 0:06:54.400 --> 0:06:57.599 think stocks are expensive, have you looked at bonds recently? 0:06:58.720 --> 0:07:03.400 And if you compare the evaluation of stocks that PE ratio, 0:07:03.720 --> 0:07:05.760 and you can invert it and look at the yield, 0:07:05.920 --> 0:07:10.400 which makes an easier comparison with bond yields and in 0:07:10.440 --> 0:07:14.880 particular real rates, the yield you get on bonds after inflation. 0:07:15.560 --> 0:07:18.280 Then you get to the conclusion that it's it's in 0:07:18.320 --> 0:07:21.560 the bottom one. So stocks are as cheap as they've 0:07:21.560 --> 0:07:25.320 ever been. So it's a confusing time for asset allocators. 0:07:25.440 --> 0:07:27.680 We just had a debate between the bulls and the 0:07:27.760 --> 0:07:31.160 bears in our asset Allocation Committee. So as we look 0:07:31.200 --> 0:07:38.320 into the bears are arguing that we've borrowed from the recovery. 0:07:38.480 --> 0:07:41.800 In other words, valuations are a sign of that. And 0:07:42.000 --> 0:07:46.800 monetary and fiscal policy have been so extreme that one 0:07:46.840 --> 0:07:50.720 of our committee members said, look, every inch of recovery 0:07:50.840 --> 0:07:53.880 will get taken away by the Feds. Need to taper. 0:07:55.080 --> 0:07:58.960 And on the fiscal side, we're kind of at the 0:07:59.120 --> 0:08:01.720 end of the day is of sending checks to people. 0:08:02.400 --> 0:08:06.440 One reason to worry about asset valuations is that it's 0:08:06.480 --> 0:08:11.520 been liquidity driven. I listened to your podcast. I'm a fan, 0:08:11.600 --> 0:08:15.800 by the way, I listened to it every weekend. Um. 0:08:16.160 --> 0:08:20.200 I listened to your Weirdest Things in Market in markets, 0:08:20.280 --> 0:08:23.840 so you see the speculation there when you hear your 0:08:23.880 --> 0:08:26.800 comments about the weirdest things in market. Right, you mentioned 0:08:26.840 --> 0:08:29.680 at one time that someone bought the jpeg and n 0:08:29.720 --> 0:08:32.320 f T the jpeg of a rock, a dancing rock 0:08:32.440 --> 0:08:36.240 or rock with red eyes for one point one million. Right. 0:08:36.880 --> 0:08:39.520 The other one I think you mentioned was the Shiba, 0:08:39.840 --> 0:08:43.440 a new coin which is a spoof coin on a 0:08:43.520 --> 0:08:46.920 spoof coin on doche coin. Right, someone had eight thousand 0:08:47.000 --> 0:08:49.199 dollars in an account and then a year and a 0:08:49.240 --> 0:08:52.560 half later, that account was worth five point seven billion. 0:08:52.920 --> 0:08:57.600 So when I talk about liquidity and speculation in markets, 0:08:57.600 --> 0:09:00.320 you have these micro bubbles, and this is another ration 0:09:00.400 --> 0:09:03.400 of what makes the bears nervous. So thank you for 0:09:03.480 --> 0:09:06.720 these examples. I'm using them in some of my presentations. Now. 0:09:07.080 --> 0:09:10.240 So what are the bulls saying in our committee? Now? 0:09:10.640 --> 0:09:16.600 They're saying that, look, peak growth doesn't mean low growth. 0:09:17.800 --> 0:09:21.920 The delta situation ultimately, we hope will be better in six, nine, 0:09:22.000 --> 0:09:25.480 twelve months. Think about a back to normal world where 0:09:25.520 --> 0:09:33.680 there's less COVID supply chains maybe slowly, but still normalize services, 0:09:33.840 --> 0:09:38.600 spending increases, and so on. So the bulls are saying 0:09:39.760 --> 0:09:44.079 growth is slowed and delayed, but it's not derailed. We're 0:09:44.120 --> 0:09:47.800 still in their recovery. The number that sticks in my mind, 0:09:47.880 --> 0:09:50.040 and you hear it a lot in the financial media, 0:09:50.600 --> 0:09:55.679 is this two trillion dollars sitting in people's checking accounts, right, 0:09:55.760 --> 0:09:59.640 this concept of pent up demand and companies are flush 0:09:59.720 --> 0:10:03.679 with hash too. And there's a massive wealth effect at 0:10:03.720 --> 0:10:08.800 some point from asset price appreciation. And here's something that's 0:10:08.840 --> 0:10:14.120 not talked about much. Pent up housing single family housing 0:10:14.240 --> 0:10:17.960 units under construction at its highest level in fifteen years, 0:10:18.040 --> 0:10:21.319 and this is due to supply shortages. We know also 0:10:21.360 --> 0:10:25.160 the percentage of houses for sale but not started is 0:10:25.200 --> 0:10:28.160 at its highest level in history, almost doubled the long 0:10:28.240 --> 0:10:32.520 term average. So just that pent up housing, our economists 0:10:32.559 --> 0:10:35.760 here things that it can add seventy five basis points 0:10:35.760 --> 0:10:38.400 to GDP growth next year as some of these things 0:10:38.440 --> 0:10:41.120 start to normalize. So the bottom line is that over 0:10:41.200 --> 0:10:45.040 the next year we will face decline in growth, but 0:10:45.200 --> 0:10:50.840 still very high growth, declining liquidity, but still very high liquidity, 0:10:50.960 --> 0:10:54.160 and settle into the mid cycle game. For that game, 0:10:54.559 --> 0:10:59.280 you need earnings to sustain stocks more than rising valuations, 0:10:59.520 --> 0:11:04.240 which is what happened this year. Price earnings ratios actually 0:11:04.640 --> 0:11:08.080 went down on the margin, but earnings has been so 0:11:08.160 --> 0:11:12.360 strong that stocks have continued to make new highs. You know, 0:11:12.400 --> 0:11:16.800 it's a massively distorted economy. Ultimately, we're more bearish on 0:11:16.880 --> 0:11:19.800 bonds than stocks. So where do we settle all of 0:11:19.800 --> 0:11:23.280 this between the bears and the bulls. Is that we 0:11:23.360 --> 0:11:28.439 have taken some profits in our portfolios by selling some stocks, 0:11:28.520 --> 0:11:30.800 but on the margin, we've sold about one percent of 0:11:30.840 --> 0:11:34.440 our stock stocks exposure. But we're also long growth. We're 0:11:34.440 --> 0:11:36.840 also a long the economy, so we've added risk back 0:11:36.880 --> 0:11:41.559 into the portfolio through relative valuation, so to go along 0:11:41.600 --> 0:11:46.800 the economy long cyclicality. We have shorted treasuries, we have 0:11:47.000 --> 0:11:50.360 added on the margin to credit, and we're long small 0:11:50.440 --> 0:11:54.440 cap and value stocks. So we're adding baxiclicality into the 0:11:54.480 --> 0:11:57.959 portfolio as we're selling some stocks on the margin. That's 0:11:58.000 --> 0:12:11.560 how we settled the debate, that's how we're thinking about two. So, Sebastian, 0:12:11.640 --> 0:12:14.600 you actually stole my next question because I wanted to 0:12:14.640 --> 0:12:16.960 ask you about I saw in one of your recent 0:12:17.000 --> 0:12:19.800 notes that you guys did recently sell one percent of 0:12:19.800 --> 0:12:23.000 your equity exposure, so I wanted to ask you about that. 0:12:23.040 --> 0:12:25.319 And I wanted to ask you to look ahead to 0:12:25.400 --> 0:12:28.360 next year because my colleagues and I were thinking about 0:12:28.360 --> 0:12:30.520 what some of the strategists have been coming out with, 0:12:30.840 --> 0:12:33.839 as Katie mentioned, for their year ahead outlooks, and I 0:12:33.920 --> 0:12:35.360 wanted to ask you how true it is that a 0:12:35.440 --> 0:12:39.400 lot will depend on where rates and yields are. And 0:12:39.440 --> 0:12:43.079 then another one of your comments recently had said that 0:12:43.120 --> 0:12:47.400 you guys moved some assets into liquid alternatives, and I 0:12:47.400 --> 0:12:50.680 wanted to ask you what specifically that is. Yeah, let 0:12:50.760 --> 0:12:55.559 me start with UM the liquid alternatives questions. So as 0:12:56.080 --> 0:12:59.079 you sell some stocks, maybe you start taking a bit 0:12:59.080 --> 0:13:03.040 of profit, you pull back a little bit, You stay diversified, 0:13:03.160 --> 0:13:07.079 you stay invested, but the question becomes where do you 0:13:07.200 --> 0:13:11.520 put the money? And this relates to the six question 0:13:11.600 --> 0:13:17.840 as well. About twelve of our core bonds exposure UM 0:13:17.960 --> 0:13:23.199 has been transferred in our flagship global Allocations strategy to 0:13:23.679 --> 0:13:29.119 liquid alternatives. Those are strategies that are active management focused, 0:13:29.559 --> 0:13:34.400 so you need skilled active management to succeed here, and 0:13:34.600 --> 0:13:38.800 they allow for short positions. They're not linked to the 0:13:38.880 --> 0:13:44.720 big market trends in either equity returns or interest rates. 0:13:45.120 --> 0:13:50.240 So that's how we add some diversification into the portfolio. 0:13:50.720 --> 0:13:55.640 We've also added on the margin two loans as an 0:13:55.640 --> 0:13:58.959 asset class. Bank loans tend to do okay when rates 0:13:59.080 --> 0:14:04.320 rise really too long treasuries for example. And we've also 0:14:04.440 --> 0:14:07.679 added but not too much, but on the margin to 0:14:07.920 --> 0:14:11.960 credit more broadly, high high yield in particular. So that's 0:14:11.960 --> 0:14:15.840 how we're positioned from a tactical perspective at the moment, 0:14:17.000 --> 0:14:21.000 So sepassion. It's been about fourteen minutes that I've been recording. 0:14:21.200 --> 0:14:23.160 Haven't brought up crypto yet. But I'm going to do 0:14:23.160 --> 0:14:27.000 that right now, because when you think about a diversified portfolio, 0:14:27.200 --> 0:14:32.680 obviously the bitcoin is an infleation hedge narrative has reared 0:14:32.760 --> 0:14:36.760 up again, especially after that really really hot cp I 0:14:36.800 --> 0:14:39.800 figure that we got for October. How do you think 0:14:39.840 --> 0:14:44.200 about crypto as an asset class? First of all, just 0:14:44.240 --> 0:14:47.120 look at the size of crypto, and it's hard to 0:14:48.640 --> 0:14:52.680 disagree with the idea that it is an asset class. Overall, 0:14:52.720 --> 0:14:55.720 it's bigger than say, the high yield bond market in 0:14:55.760 --> 0:14:59.080 the US, So it is a force to be reckoned 0:14:59.120 --> 0:15:02.520 with in most of our portfolios in our business or 0:15:02.560 --> 0:15:08.560 clients aren't giving us the mandate to invest in crypto, 0:15:08.680 --> 0:15:12.640 but we do research in that space because it's going 0:15:12.680 --> 0:15:17.400 to influence how a lot of companies do business in 0:15:17.520 --> 0:15:22.840 multiple sectors. We have an army of stock analysts at 0:15:22.840 --> 0:15:27.160 Tyro Price, and so some of them are following the space. 0:15:27.800 --> 0:15:31.240 We're looking at it at this point personally, I can 0:15:31.280 --> 0:15:36.160 say not from an inflation hedge perspective, simply because it's 0:15:36.280 --> 0:15:40.240 just still such a speculative asset class and it's really 0:15:40.320 --> 0:15:46.760 driven by technicals sentiment. Sometimes crypto moves and that's why 0:15:47.280 --> 0:15:50.800 I don't envy being in your business, Katie and Bill Donna, 0:15:50.920 --> 0:15:54.360 because it's just hard to actually explain. Right, Oh, it's 0:15:54.400 --> 0:15:57.320 down ten percent, or maybe it's the sweet and it's 0:15:57.320 --> 0:16:00.760 a little bit mysterious, nebulous. This is a sign that 0:16:00.880 --> 0:16:05.680 it's still an asset class that moves on sentiment and speculation. 0:16:06.400 --> 0:16:08.880 I'm just gonna throw a number. I haven't done the map, 0:16:09.040 --> 0:16:14.480 but let's suppose the volatility of crypto really is speculation 0:16:14.680 --> 0:16:19.880 trend chasing sentiment. Well, that doesn't make for a really 0:16:19.880 --> 0:16:23.160 good inflation hedge, unless maybe you think about it from 0:16:23.160 --> 0:16:27.240 a very, very long term perspective. It's an evolving space. 0:16:27.280 --> 0:16:31.000 It's an important space for asset allocators to think about. 0:16:31.680 --> 0:16:36.800 The fact that it's highly volatile is not necessarily an issue. 0:16:38.000 --> 0:16:41.880 It means that it's more capital efficient, all else being equal. 0:16:42.920 --> 0:16:48.880 But it's still, for us, not an inflation hedge um 0:16:48.920 --> 0:16:51.760 as we would think of a traditional inflation hedge. Sorry 0:16:51.760 --> 0:16:55.840 I'm sounding a bit old school here. Now, this is 0:16:55.920 --> 0:16:59.240 this is great and I'm really glad. I'm really glad 0:16:59.280 --> 0:17:02.960 that we brought inflation because Katie wrote the cover of 0:17:03.120 --> 0:17:06.400 Business Week this week, and it's all about the idea 0:17:06.600 --> 0:17:10.920 that technically digital. Dohna wasn't on it too, so I 0:17:10.960 --> 0:17:13.240 was part of it. But her story it was so good. 0:17:13.280 --> 0:17:15.879 If you haven't seen it, you have to go see it. 0:17:15.880 --> 0:17:18.560 It's all about how important it is to get the 0:17:18.600 --> 0:17:23.399 inflation call right for portfolio manager heading into two and 0:17:23.480 --> 0:17:25.240 so I wanted to ask you where you fall on 0:17:25.320 --> 0:17:30.000 the transitory or not debate, and then what some potential 0:17:30.040 --> 0:17:32.919 inflation hedges are, because that was what was part of 0:17:32.960 --> 0:17:37.080 my article for for Business Speak. It was about, you know, 0:17:37.280 --> 0:17:41.240 do you buy bitcoin or gold or reads or whatever else? 0:17:41.359 --> 0:17:45.080 So what might you recommend as an inflation hedge? Yeah, 0:17:45.320 --> 0:17:47.959 really good question Bill that. In fact, it's kind of 0:17:48.000 --> 0:17:53.639 become the question right now. Uh. COVID is an absolute disaster, 0:17:53.840 --> 0:17:57.360 but it's almost taken a back seat to the inflation question. 0:17:58.400 --> 0:18:01.159 First of all, I'll say, well, you've solved the riddle 0:18:01.440 --> 0:18:05.000 of how to create inflation in the developed world. It's 0:18:05.080 --> 0:18:09.639 fiscal policy, not monetary. Right. We've dropped i don't know, 0:18:09.760 --> 0:18:13.440 four hundred million checks of over a thousand dollars right 0:18:13.480 --> 0:18:18.560 from the helicopters. So there's too much money demand chasing, 0:18:18.600 --> 0:18:24.440 too little stuff to buy, especially goods, which creates supply issues. 0:18:25.480 --> 0:18:28.879 This is not new. Everybody's talking about the mother of 0:18:28.920 --> 0:18:33.040 all traffic jams at this point. You know, at TiO, 0:18:33.240 --> 0:18:36.520 we don't have a house view. Sup Portfolio managers across 0:18:36.520 --> 0:18:40.919 our investment platform actually divided on the question as to 0:18:41.119 --> 0:18:47.840 whether will face runaway inflation, which Bill Donna. The trick 0:18:47.920 --> 0:18:51.679 with the transitory question is that everyone has a different 0:18:51.720 --> 0:18:54.800 definition of transitory, so you sort of need to define 0:18:54.840 --> 0:18:58.840 transitory first and then express your view. So here I'm 0:18:58.840 --> 0:19:02.679 gonna say, maybe rephrase the question, are we going to 0:19:02.840 --> 0:19:07.160 face runaway, out of control inflation that will force the Feds? 0:19:07.320 --> 0:19:11.760 And you know, from a long term perspective, technology globalization 0:19:11.960 --> 0:19:15.760 have put downward pressures on prices. And if you go 0:19:15.840 --> 0:19:17.760 back to say two thousand and you look at the 0:19:17.800 --> 0:19:22.960 trends in different components of inflation. Uh, look at say, 0:19:23.040 --> 0:19:26.919 flat screen TVs, computers, all that stuff has gotten really 0:19:27.359 --> 0:19:33.280 cheaper and cheaper since UM two and before. And so 0:19:33.359 --> 0:19:36.480 you have you have China made stuff you can buy 0:19:36.520 --> 0:19:42.000 on Amazon, really cheap stuff, apparel, furnitures, toys. You know, 0:19:42.040 --> 0:19:44.879 maybe we'll buy less stuff from China. But globalization is 0:19:44.880 --> 0:19:48.040 sort of unstoppable, right, So maybe in Vietnam and Malaysia 0:19:48.200 --> 0:19:53.199 and Yea. So those long term trends technology, globalization persists 0:19:53.240 --> 0:19:55.480 in the background. We don't really think about them right 0:19:55.480 --> 0:19:58.840 now because we have supply issues and other more pressing 0:19:59.320 --> 0:20:03.800 concern to address. So from a shorter term perspective, there 0:20:03.840 --> 0:20:07.520 are reopening effects. We just had a print at six 0:20:07.560 --> 0:20:11.640 point two headline. You see a big component of it 0:20:11.720 --> 0:20:15.680 was used cars up about thirty but also inflation is 0:20:15.720 --> 0:20:20.399 becoming more broad based. You see rents, rents lag real estate. 0:20:20.640 --> 0:20:25.879 Real estate is up by about expect rents to go 0:20:26.240 --> 0:20:30.600 up based on the historical relationship when people get to 0:20:30.680 --> 0:20:35.560 renew their lease um, they will most likely see a 0:20:35.640 --> 0:20:39.199 price increase. And then there's energy, which is also a puzzle. 0:20:39.320 --> 0:20:42.520 So gasoline is up fifty percent over the last twelve months, 0:20:42.560 --> 0:20:45.960 So if you're looking at projecting inflation into next year, 0:20:46.000 --> 0:20:48.280 it could say, look, it's unlikely that gasoline will be 0:20:48.359 --> 0:20:52.159 up another fifty percent and news cars probably won't be 0:20:52.280 --> 0:20:56.200 up another But if you look at shelter, a third 0:20:56.200 --> 0:20:59.320 of the CPI, you know it was up only three 0:20:59.320 --> 0:21:03.399 point five cent over the period for that last print 0:21:03.480 --> 0:21:07.439 of six so it kind of doesn't add up with 0:21:07.600 --> 0:21:11.199 real estate being up. That is more structural, and of 0:21:11.240 --> 0:21:15.200 course wage inflation is more structural. So I think overall, 0:21:15.280 --> 0:21:19.560 I think we're close to pick and peak inflation, but 0:21:19.640 --> 0:21:23.159 we won't settle back down to pre COVID sub two 0:21:23.160 --> 0:21:29.119 percent numbers in the foreseeable future. Right now, as we speak, 0:21:29.440 --> 0:21:33.000 five year break even inflation is trending up. It's at 0:21:33.080 --> 0:21:36.679 three point two, and that seems reasonable to me. But 0:21:36.760 --> 0:21:39.679 it's a problem because the FED is you know, you 0:21:39.720 --> 0:21:42.680 can be flexible. The FED can be flexible targeting two. 0:21:43.840 --> 0:21:47.840 But there's flexible, and then there's as break events are implying, 0:21:48.040 --> 0:21:53.320 letting inflation average above three over the next five years, 0:21:53.359 --> 0:21:56.760 something has to give just to quickly hit Bill down 0:21:56.840 --> 0:22:00.359 on how do you hedge those risks? We hold short 0:22:00.480 --> 0:22:04.200 term tips in the portfolio. Interestingly, those are up about 0:22:04.520 --> 0:22:08.439 seven percent this year compared to minus one for the 0:22:08.480 --> 0:22:12.879 Barkley Zagg but overall expected returns on short short short 0:22:12.960 --> 0:22:16.640 term tips are are fairly low where we sit now. 0:22:17.400 --> 0:22:21.919 We also hold people talk about gold crypto we've just 0:22:22.000 --> 0:22:27.200 talked about. We also hold a fund of real asset equities. 0:22:27.520 --> 0:22:31.679 So these are stocks, Katie and Bill Dana, these are stocks, 0:22:31.720 --> 0:22:36.680 but these are stocks that are inflation sensitive. So think 0:22:36.760 --> 0:22:42.400 about real estate reads, metals and mining companies, precious metals, 0:22:42.960 --> 0:22:46.800 energy companies. So what you get with this real asset 0:22:46.920 --> 0:22:52.960 equity strategies is a levered response to inflation. Right, so 0:22:53.000 --> 0:22:55.119 if you get an inflation shock, it will go up 0:22:55.160 --> 0:22:59.720 by five six x and you also get stock exposure 0:23:00.000 --> 0:23:02.919 in the long run that tends to pay off. And 0:23:02.960 --> 0:23:07.639 so that's strategies up significantly over the last year as 0:23:07.960 --> 0:23:13.400 it's done its job of hedging the surprises. Uh in inflation. 0:23:14.160 --> 0:23:17.080 Now everyone's worried about what the Fed will do. We're 0:23:17.080 --> 0:23:21.040 all scared of rising rates. I'm gonna end my answer 0:23:21.119 --> 0:23:24.440 to this really important question on inflation with a riddle 0:23:24.720 --> 0:23:30.280 for for you, Um, Katie Vildanna, what do egg, yolks, 0:23:30.960 --> 0:23:38.199 red wine, coffee, and rising rates have in common? You 0:23:38.200 --> 0:23:42.520 can have them all for breakfast. Well, yeah, we could 0:23:42.560 --> 0:23:49.760 quibble on wine, but not on this podcast. So so, 0:23:49.760 --> 0:23:52.000 so the idea is that you don't really if you 0:23:52.040 --> 0:23:54.280 look at research and you're into health and fitness, you 0:23:54.280 --> 0:23:55.920 don't really know if these things are good or bad 0:23:55.960 --> 0:23:58.680 for you. Right, It kind of can go both ways. 0:23:59.160 --> 0:24:01.200 That's the same thing for a rising rates. We actually 0:24:01.240 --> 0:24:04.359 did a study and we looked at nine times that 0:24:04.520 --> 0:24:09.760 the FED pivoted towards higher rates since nineteen seventy nine, 0:24:10.760 --> 0:24:14.480 and that included the two thirteen paper. And we looked 0:24:14.480 --> 0:24:17.800 at stock returns twelve months before the pivot and twelve 0:24:17.840 --> 0:24:22.480 months after the pivot, which gave us eighteen observations. Seventeen 0:24:22.520 --> 0:24:25.959 of those saw positive stock returns, and the stock returns 0:24:26.000 --> 0:24:30.520 to were fifteen percent on average. So everyone's you know there, 0:24:30.600 --> 0:24:34.199 everyone's freaking out about rising rates. But the FED is 0:24:34.240 --> 0:24:40.160 only comfortable hiking and pivoting in a strong economic environment. 0:24:40.440 --> 0:24:44.560 The FED doesn't raise rates in a recession, so the 0:24:44.600 --> 0:24:48.080 initial pivot is usually not as damaging as you might 0:24:48.160 --> 0:24:53.920 think to risk assets. This is historical evidence. Things could 0:24:53.960 --> 0:24:56.639 play out differently based on what we just talked about 0:24:56.680 --> 0:25:00.760 around inflation, but it just gives you some perspective about 0:25:01.280 --> 0:25:05.359 rising rates. I like that all three of us agree 0:25:05.440 --> 0:25:10.800 we can have rates for breakfast. Absolutely delicious. Uh, you know, 0:25:10.840 --> 0:25:12.800 a little bit of cinnamon, But I didn't want to ask. 0:25:12.880 --> 0:25:15.480 You know, you mentioned that everyone is worried about rising grates. 0:25:15.720 --> 0:25:17.720 It feels like, you know, on and all of everyone 0:25:17.800 --> 0:25:22.120 is also worried about um rising long term bond yields. 0:25:22.160 --> 0:25:23.800 But if you look at the bond market, I feel 0:25:23.800 --> 0:25:26.600 like that has almost become a pain trade because I'm 0:25:26.600 --> 0:25:29.840 looking at thirty year treasury yields right now, especially for 0:25:29.880 --> 0:25:32.640 the past six months or so, it feels like they 0:25:32.720 --> 0:25:36.520 just can't hold above two per cent. Uh. Same with 0:25:36.560 --> 0:25:40.359 ten year yields, I mean one point seven five got 0:25:40.440 --> 0:25:42.480 there for a second, and we went right back down. 0:25:43.000 --> 0:25:46.320 What's going on in that market? Because I mean, inflation 0:25:46.440 --> 0:25:49.560 is here and it's hot, but yet long term treasury 0:25:49.640 --> 0:25:54.640 yields still quite low. It's remarkable, isn't it? What an 0:25:54.640 --> 0:25:59.439 important question? Ten year yield at one point six in 0:25:59.640 --> 0:26:04.399 flay and running at six percent, growth running at five 0:26:04.520 --> 0:26:07.440 six percent, so you talking about nominal growth above ten 0:26:08.880 --> 0:26:12.480 with the ten year yield at one point six it's 0:26:12.520 --> 0:26:17.639 a really big unusual spread. And then when you subtract 0:26:17.680 --> 0:26:21.560 the inflation from the ten year yield, you get an 0:26:21.600 --> 0:26:27.720 all time low number less than minus one. So what's 0:26:27.760 --> 0:26:33.359 going on? Many things influence the direction of rates. Probably 0:26:33.400 --> 0:26:38.960 the most important isn't extremely debbish fed even in the 0:26:39.080 --> 0:26:43.840 face of everything that's happening with inflation in the recovery. 0:26:44.320 --> 0:26:46.240 The other thing is that there is a lot of 0:26:46.280 --> 0:26:52.400