Speaker 1: Let's get to our guest, Christopher Smart, chief global strategist
Speaker 1: at Bearings. Christopher, we were promised pain by J. Powell
Speaker 1: at Jackson Hole. Is this what we're seeing? Are we
Speaker 1: seeing rolling capitulation here in the stock market? Well, we're
Speaker 1: seeing certainly pain in the markets. I'm not sure that's
Speaker 1: what J. Powell had in mind when he was using
Speaker 1: those words. I mean, I think we are in a
Speaker 1: part of the cycle where economy is slowing, where price
Speaker 1: pressures continue to persist, and that is going to put
Speaker 1: a crimp into both profits as well as at some
Speaker 1: point or other, the jobs market. And that's where the
Speaker 1: real pain I think is going to be felt among
Speaker 1: among most Americans when unemployment still, you know, closer to
Speaker 1: three and a half percent, probably has to take significantly
Speaker 1: higher for inflationary pressures to cool. Essentially, Christopher, what is
Speaker 1: being done is the inflation. They're trying to slay the
Speaker 1: beast of inflation at the price of job law is.
Speaker 1: Do you think this is the right strategy. Well, I'm
Speaker 1: afraid it's the only strategy that we have have for
Speaker 1: us right now. Inflation is one of those persistent problems
Speaker 1: that ultimately affects everybody UH, rich and poor. Ultimately leads
Speaker 1: to lower growth, ultimately to higher unemployment. And so you
Speaker 1: have to stabilize prices first, which comes with a certain cost, obviously,
Speaker 1: in order to set the ground UH and the foundation
Speaker 1: for that next leg up of growth. UM. Obviously the
Speaker 1: FET is hoping to do this with as little cost
Speaker 1: as possible. But I think what we are seeing is
Speaker 1: that energy you know, inflationary pressures have been much more
Speaker 1: broad based than we thought. Inflation is coming down, but
Speaker 1: much more slowly than we thought, and that's why the
Speaker 1: FET is, you know, forced into some of these significant
Speaker 1: rate hikes. Here, I would say the bigger question I
Speaker 1: think for markets is not the hikes, but it's the
Speaker 1: it's the cuts when the cuts might come. And I
Speaker 1: think you you are alerted alluded to this earlier in
Speaker 1: one of your reports. UM. Markets are starting to wonder
Speaker 1: when next year the FED will stop raising rates and
Speaker 1: start to cut because the economy of we week, I
Speaker 1: think our view is that there is such momentum, you know,
Speaker 1: behind the economy right now that it those cuts aren't
Speaker 1: going to come anytime soon next year. So we have
Speaker 1: Ford added to FedEx his story is it inevitable here
Speaker 1: or is the jury still out on this spreading to
Speaker 1: all of corporate America. Well, it's gonna spread beyond those
Speaker 1: two names, and obviously others have announced job cuts as well.
Speaker 1: What is still remarkable is, as I mentioned this low
Speaker 1: unemployment rate. Unemployment is a lagging indicator, so we shouldn't
Speaker 1: spend too much time focused on it. But anecdotally, it
Speaker 1: still remains very difficult to hire people in certain areas
Speaker 1: of the economy. U wage growth continues to be uh,
Speaker 1: pretty strong, and the quits rate is quite high. So
Speaker 1: so clearly people most Americans who hold a job feel
Speaker 1: that they can quit and find another job pretty easily.
Speaker 1: So cipher having a look at what we have at
Speaker 1: the moment in terms of the reaction to what the
Speaker 1: FED is doing. Um, the thing is we have many
Speaker 1: things originally which were not part I should say, we're not.
Speaker 1: Really they weren't able to deal with I eat with
Speaker 1: supply side inflation. Now tell me something, how is that morphed?
Speaker 1: And is inflation here to stay? Well? I think it's
Speaker 1: here to stay for for a while, in the sense
Speaker 1: that you know, getting back to that sub two percent
Speaker 1: inflation that we enjoyed before the pandemic looks like it's
Speaker 1: a couple of years off. I think as we look
Speaker 1: at cp I and the different pressures that are driving
Speaker 1: it right now, it includes pressures on housing and shelter
Speaker 1: rent prices still remain high and are likely to continue
Speaker 1: to be sticky on the way down as long as
Speaker 1: wages remain resilient. UM. I think energy prices, you know,
Speaker 1: seem to be cooling off a little bit, but you know,
Speaker 1: this escalation that we're now seeing in Russia and Ukraine
Speaker 1: is likely to lead to tighter sanctions and may lead
Speaker 1: to further disruptions and energy markets. And then of course
Speaker 1: on the food side, it doesn't directly impact the US necessarily,
Speaker 1: but global food markets there might be threatened by um
Speaker 1: this very fragile deal to allow exports from Russia and Ukraine.
Speaker 1: And I think those are all question marks that have
Speaker 1: to lead people to to be expecting those pressures to
Speaker 1: to continue a little longer, a little higher, and a
Speaker 1: little longer. So some of the pain that we referred
Speaker 1: to is in the markets. Obviously that the pain that j.
Speaker 1: Powe was talking about had to do with the economy,
Speaker 1: but you can't separate the two. So easily. So you
Speaker 1: have the bond market and the all country World index
Speaker 1: down between twenty and say, is there a corner of
Speaker 1: the market that looks safe or attractive to you at
Speaker 1: the moment? Well, I think any corner where there are
Speaker 1: you know, strong balance sheets, relatively low debt service UH,
Speaker 1: fixed rate debt rather than floating rate had I mean,
Speaker 1: I'm not sure I can tell you know. Obviously, defensive
Speaker 1: parts of the market, utilities, um maybe healthcare look like
Speaker 1: better plays than the more um UH than other parts
Speaker 1: of the market that that are going to rely on
Speaker 1: very strong global growth. I think most investors right now,
Speaker 1: you see it in the surveys, I see it talking
Speaker 1: to my colleagues are kind of um much more cautious
Speaker 1: in the short term. But you know, these are things
Speaker 1: that will pass. And as I mentioned earlier on at
Speaker 1: some point the hiking will stop and the market will
Speaker 1: start looking for moments when the Fed may start easing again.
Speaker 1: I think that's the that's the conversation will be having
Speaker 1: early next year. Is that is that why many people
Speaker 1: at the moment really betting there could be a pivot,
Speaker 1: even though they've been told that there won't be. In essence,
Speaker 1: I mean, we've got at the moment a lot of
Speaker 1: CEOs talking about cost reductions, which which which means effectively
Speaker 1: layoffs and you know, in the last of these gone
Speaker 1: from the JPAL said housing activity is weak, and well
Speaker 1: it's really has weakened if we have a look at
Speaker 1: the data. So the thing is that impact, the impact
Speaker 1: of that can start to spread very quickly. Indeed it can,
Speaker 1: and I think, um, you know, that's what we're all
Speaker 1: watching for. Uh. And I think maybe the the pessimists
Speaker 1: are the ones who are hoping and expecting rate cuts
Speaker 1: to come soon. I think as we look at the data,
Speaker 1: as we talk to companies, um, there is still a
Speaker 1: lot of momentum in the market. Um. Uh And I'm sorry,
Speaker 1: a lot of momentum in the economy, which leads us
Speaker 1: to believe that those hikes have to remain in place
Speaker 1: for a little bit longer to again to cool down
Speaker 1: those those inflationary pressures. Um. I think the um, those
Speaker 1: are the kinds of things that have to play out
Speaker 1: before we can expect the FED to really start um
Speaker 1: start lostening again. That being said, of course, you know
Speaker 1: there's always the possibility for an accident in these tightening cycles.
Speaker 1: Something always pops uh in a in a negative surprise.
Speaker 1: Sometimes it's Mexico, sometimes it's Orange County. Um, there's a
Speaker 1: lot of attention today in the in the private equity space.
Speaker 1: You know, it's hard to know, it's impossible to know
Speaker 1: exactly where that could happen. But that's why putting money
Speaker 1: to work today, you want to be in places with
Speaker 1: strong balance sheets and low debt service. If you think
Speaker 1: it's just time that we have to get through, like
Speaker 1: you said, at some point, interest rates will probably stabilize.
Speaker 1: What is that time? If it do you feel like, uh,
Speaker 1: say six months from now, we're nine months from now,
Speaker 1: will be in a better place or not yet it
Speaker 1: feels like we will be in a better place. I
Speaker 1: wouldn't say we're in a place where um inflation is
Speaker 1: back at the FEDS target of two on average. Clearly
Speaker 1: that's a long way away. That's a longer way away.
Speaker 1: But I think the good news or the last couple
Speaker 1: of weeks and months is that inflation seems to have peaked.
Speaker 1: It's not going to higher from here. Christopher, thank you
Speaker 1: so much for joining Excrucifist about the chief global strategy
Speaker 1: that at Bearings giving us his take on the markets