WEBVTT - Christopher Smart on the Markets (Radio)

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<v Speaker 1>Let's get to our guest, Christopher Smart, chief global strategist

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<v Speaker 1>at Bearings. Christopher, we were promised pain by J. Powell

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<v Speaker 1>at Jackson Hole. Is this what we're seeing? Are we

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<v Speaker 1>seeing rolling capitulation here in the stock market? Well, we're

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<v Speaker 1>seeing certainly pain in the markets. I'm not sure that's

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<v Speaker 1>what J. Powell had in mind when he was using

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<v Speaker 1>those words. I mean, I think we are in a

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<v Speaker 1>part of the cycle where economy is slowing, where price

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<v Speaker 1>pressures continue to persist, and that is going to put

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<v Speaker 1>a crimp into both profits as well as at some

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<v Speaker 1>point or other, the jobs market. And that's where the

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<v Speaker 1>real pain I think is going to be felt among

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<v Speaker 1>among most Americans when unemployment still, you know, closer to

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<v Speaker 1>three and a half percent, probably has to take significantly

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<v Speaker 1>higher for inflationary pressures to cool. Essentially, Christopher, what is

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<v Speaker 1>being done is the inflation. They're trying to slay the

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<v Speaker 1>beast of inflation at the price of job law is.

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<v Speaker 1>Do you think this is the right strategy. Well, I'm

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<v Speaker 1>afraid it's the only strategy that we have have for

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<v Speaker 1>us right now. Inflation is one of those persistent problems

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<v Speaker 1>that ultimately affects everybody UH, rich and poor. Ultimately leads

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<v Speaker 1>to lower growth, ultimately to higher unemployment. And so you

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<v Speaker 1>have to stabilize prices first, which comes with a certain cost, obviously,

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<v Speaker 1>in order to set the ground UH and the foundation

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<v Speaker 1>for that next leg up of growth. UM. Obviously the

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<v Speaker 1>FET is hoping to do this with as little cost

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<v Speaker 1>as possible. But I think what we are seeing is

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<v Speaker 1>that energy you know, inflationary pressures have been much more

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<v Speaker 1>broad based than we thought. Inflation is coming down, but

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<v Speaker 1>much more slowly than we thought, and that's why the

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<v Speaker 1>FET is, you know, forced into some of these significant

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<v Speaker 1>rate hikes. Here, I would say the bigger question I

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<v Speaker 1>think for markets is not the hikes, but it's the

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<v Speaker 1>it's the cuts when the cuts might come. And I

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<v Speaker 1>think you you are alerted alluded to this earlier in

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<v Speaker 1>one of your reports. UM. Markets are starting to wonder

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<v Speaker 1>when next year the FED will stop raising rates and

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<v Speaker 1>start to cut because the economy of we week, I

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<v Speaker 1>think our view is that there is such momentum, you know,

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<v Speaker 1>behind the economy right now that it those cuts aren't

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<v Speaker 1>going to come anytime soon next year. So we have

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<v Speaker 1>Ford added to FedEx his story is it inevitable here

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<v Speaker 1>or is the jury still out on this spreading to

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<v Speaker 1>all of corporate America. Well, it's gonna spread beyond those

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<v Speaker 1>two names, and obviously others have announced job cuts as well.

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<v Speaker 1>What is still remarkable is, as I mentioned this low

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<v Speaker 1>unemployment rate. Unemployment is a lagging indicator, so we shouldn't

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<v Speaker 1>spend too much time focused on it. But anecdotally, it

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<v Speaker 1>still remains very difficult to hire people in certain areas

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<v Speaker 1>of the economy. U wage growth continues to be uh,

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<v Speaker 1>pretty strong, and the quits rate is quite high. So

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<v Speaker 1>so clearly people most Americans who hold a job feel

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<v Speaker 1>that they can quit and find another job pretty easily.

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<v Speaker 1>So cipher having a look at what we have at

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<v Speaker 1>the moment in terms of the reaction to what the

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<v Speaker 1>FED is doing. Um, the thing is we have many

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<v Speaker 1>things originally which were not part I should say, we're not.

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<v Speaker 1>Really they weren't able to deal with I eat with

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<v Speaker 1>supply side inflation. Now tell me something, how is that morphed?

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<v Speaker 1>And is inflation here to stay? Well? I think it's

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<v Speaker 1>here to stay for for a while, in the sense

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<v Speaker 1>that you know, getting back to that sub two percent

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<v Speaker 1>inflation that we enjoyed before the pandemic looks like it's

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<v Speaker 1>a couple of years off. I think as we look

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<v Speaker 1>at cp I and the different pressures that are driving

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<v Speaker 1>it right now, it includes pressures on housing and shelter

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<v Speaker 1>rent prices still remain high and are likely to continue

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<v Speaker 1>to be sticky on the way down as long as

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<v Speaker 1>wages remain resilient. UM. I think energy prices, you know,

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<v Speaker 1>seem to be cooling off a little bit, but you know,

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<v Speaker 1>this escalation that we're now seeing in Russia and Ukraine

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<v Speaker 1>is likely to lead to tighter sanctions and may lead

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<v Speaker 1>to further disruptions and energy markets. And then of course

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<v Speaker 1>on the food side, it doesn't directly impact the US necessarily,

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<v Speaker 1>but global food markets there might be threatened by um

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<v Speaker 1>this very fragile deal to allow exports from Russia and Ukraine.

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<v Speaker 1>And I think those are all question marks that have

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<v Speaker 1>to lead people to to be expecting those pressures to

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<v Speaker 1>to continue a little longer, a little higher, and a

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<v Speaker 1>little longer. So some of the pain that we referred

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<v Speaker 1>to is in the markets. Obviously that the pain that j.

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<v Speaker 1>Powe was talking about had to do with the economy,

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<v Speaker 1>but you can't separate the two. So easily. So you

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<v Speaker 1>have the bond market and the all country World index

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<v Speaker 1>down between twenty and say, is there a corner of

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<v Speaker 1>the market that looks safe or attractive to you at

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<v Speaker 1>the moment? Well, I think any corner where there are

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<v Speaker 1>you know, strong balance sheets, relatively low debt service UH,

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<v Speaker 1>fixed rate debt rather than floating rate had I mean,

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<v Speaker 1>I'm not sure I can tell you know. Obviously, defensive

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<v Speaker 1>parts of the market, utilities, um maybe healthcare look like

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<v Speaker 1>better plays than the more um UH than other parts

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<v Speaker 1>of the market that that are going to rely on

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<v Speaker 1>very strong global growth. I think most investors right now,

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<v Speaker 1>you see it in the surveys, I see it talking

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<v Speaker 1>to my colleagues are kind of um much more cautious

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<v Speaker 1>in the short term. But you know, these are things

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<v Speaker 1>that will pass. And as I mentioned earlier on at

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<v Speaker 1>some point the hiking will stop and the market will

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<v Speaker 1>start looking for moments when the Fed may start easing again.

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<v Speaker 1>I think that's the that's the conversation will be having

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<v Speaker 1>early next year. Is that is that why many people

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<v Speaker 1>at the moment really betting there could be a pivot,

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<v Speaker 1>even though they've been told that there won't be. In essence,

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<v Speaker 1>I mean, we've got at the moment a lot of

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<v Speaker 1>CEOs talking about cost reductions, which which which means effectively

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<v Speaker 1>layoffs and you know, in the last of these gone

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<v Speaker 1>from the JPAL said housing activity is weak, and well

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<v Speaker 1>it's really has weakened if we have a look at

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<v Speaker 1>the data. So the thing is that impact, the impact

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<v Speaker 1>of that can start to spread very quickly. Indeed it can,

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<v Speaker 1>and I think, um, you know, that's what we're all

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<v Speaker 1>watching for. Uh. And I think maybe the the pessimists

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<v Speaker 1>are the ones who are hoping and expecting rate cuts

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<v Speaker 1>to come soon. I think as we look at the data,

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<v Speaker 1>as we talk to companies, um, there is still a

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<v Speaker 1>lot of momentum in the market. Um. Uh And I'm sorry,

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<v Speaker 1>a lot of momentum in the economy, which leads us

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<v Speaker 1>to believe that those hikes have to remain in place

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<v Speaker 1>for a little bit longer to again to cool down

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<v Speaker 1>those those inflationary pressures. Um. I think the um, those

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<v Speaker 1>are the kinds of things that have to play out

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<v Speaker 1>before we can expect the FED to really start um

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<v Speaker 1>start lostening again. That being said, of course, you know

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<v Speaker 1>there's always the possibility for an accident in these tightening cycles.

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<v Speaker 1>Something always pops uh in a in a negative surprise.

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<v Speaker 1>Sometimes it's Mexico, sometimes it's Orange County. Um, there's a

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<v Speaker 1>lot of attention today in the in the private equity space.

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<v Speaker 1>You know, it's hard to know, it's impossible to know

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<v Speaker 1>exactly where that could happen. But that's why putting money

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<v Speaker 1>to work today, you want to be in places with

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<v Speaker 1>strong balance sheets and low debt service. If you think

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<v Speaker 1>it's just time that we have to get through, like

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<v Speaker 1>you said, at some point, interest rates will probably stabilize.

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<v Speaker 1>What is that time? If it do you feel like, uh,

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<v Speaker 1>say six months from now, we're nine months from now,

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<v Speaker 1>will be in a better place or not yet it

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<v Speaker 1>feels like we will be in a better place. I

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<v Speaker 1>wouldn't say we're in a place where um inflation is

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<v Speaker 1>back at the FEDS target of two on average. Clearly

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<v Speaker 1>that's a long way away. That's a longer way away.

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<v Speaker 1>But I think the good news or the last couple

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<v Speaker 1>of weeks and months is that inflation seems to have peaked.

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<v Speaker 1>It's not going to higher from here. Christopher, thank you

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<v Speaker 1>so much for joining Excrucifist about the chief global strategy

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<v Speaker 1>that at Bearings giving us his take on the markets