Speaker 1: Welcome to the Bloomberg Surveillance Podcast home term Keene. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jaylie, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg dot com
Speaker 1: and of course on the Bloomberg terminal. John us now
Speaker 1: is David Paige, Acts Investment Managers, Head of Macro Research. David,
Speaker 1: Does that resonate with you, sir, that we could see
Speaker 1: a broadening and price pressures go again too next year? Yeah,
Speaker 1: I mean it's it's the key debate that every central
Speaker 1: bank has to sort of focus on. How assistent is
Speaker 1: this supply show? No question, there's a supply shop at
Speaker 1: the moment, and we're going to see it in Q
Speaker 1: three g d P numbers. We're thinking of states when
Speaker 1: they come through. But the question is how assistant. So
Speaker 1: for now we've had the view and we share this
Speaker 1: view that we are seeing a relatively transit. Treatments apply restraints.
Speaker 1: So if you look at, for example, participation, it's been
Speaker 1: very lack luster in recent months. We do expect that
Speaker 1: to pick up. I think part of this is just
Speaker 1: a natural indigestion. I don't buy too much that it's
Speaker 1: it's due to unemployment benefits. Certainly in states we've seen
Speaker 1: that drop back. We haven't seen a miraculous recovery and
Speaker 1: labor supply. But I think there is a natural indigestion,
Speaker 1: and I think that indigestion should fade as we move
Speaker 1: into the false quarter. But if it doesn't. If it
Speaker 1: doesn't fade, then you are seeing a more restricted background.
Speaker 1: You are going to see earnings continue at the sort
Speaker 1: of relatively elevated monthly place that we see at the moment,
Speaker 1: and that's something the FED has to take count of. Effectively,
Speaker 1: what you're suggesting, or what it would conclude, is that
Speaker 1: you're seeing a bigger supply shot than this pandemic. Now
Speaker 1: that might be because you know, the workers that we're
Speaker 1: looking for post pandemic a difference to the ones that
Speaker 1: were employed pre pandemic, and there's a skills mismatch. There
Speaker 1: could be all sorts of issues. We don't think that's
Speaker 1: what's going to happen, but that's what we're going to
Speaker 1: see over the next couple of months, and the FED
Speaker 1: will have to if it changes that that transitory outlook David,
Speaker 1: you and everybody else has lauring a GDP estimates. You've
Speaker 1: got five point seven percent now and in the next
Speaker 1: year four point three. Is that a linear extrapolation down
Speaker 1: a potential GDP UM? No, because I think the potential
Speaker 1: GDP adjustment that's going to come through UM is a
Speaker 1: long term figgure, right, So it is a linear extrapolation
Speaker 1: of the supply shop that we see coming through in
Speaker 1: the third quarter. We do think that that that's been
Speaker 1: an impact, but I don't think it's something that we
Speaker 1: should therefore extrapolate going forever forwards. We would still see
Speaker 1: US GDP potential growth in the fullness of time and
Speaker 1: somewhere around two. So I don't think that that's too
Speaker 1: much concerned. But in terms of the supply demand imbalance,
Speaker 1: which is critical for the sort of inflation pressures, then yeah,
Speaker 1: I mean, I think it is that supply has reduced
Speaker 1: rather than to the drop off in the land. David.
Speaker 1: Investment manager after investment manager has come on this show
Speaker 1: and said that right now the dynaminism of the U
Speaker 1: S economy has been pretty much priced in, and it's
Speaker 1: time to turn to to Europe and potentially even to Asia.
Speaker 1: For equity exposure. Do you agree, Well, I think the US,
Speaker 1: the US rebound has been remarkable. It's got to the
Speaker 1: point where we are closing the Apple gap. We're looking
Speaker 1: at a very strong growth for that year next year,
Speaker 1: UM that's going to continue m this this excess demand,
Speaker 1: and I think there's still strength in the US marketing. Now.
Speaker 1: You know, we can talk for all your life about
Speaker 1: whether we see corrections coming up over the next little while,
Speaker 1: but now I think you know, in general the U
Speaker 1: S sector mark is going to remain relatively well underpinned.
Speaker 1: But in terms of should we switch from a sort
Speaker 1: of growth model, which is obviously something the US, you know,
Speaker 1: really exemplifies, or a more value driven active performance, which
Speaker 1: is perhaps something where Europe will do better. Then I
Speaker 1: think as we start see really you pick up towards
Speaker 1: here and we should start to move more into that
Speaker 1: that value area. So I think there is scope, certainly
Speaker 1: for more of a pickup to come through from Europe,
Speaker 1: but we're not. Let's bring things up with the FED
Speaker 1: timeline if we can. In the time we have left,
Speaker 1: we pushed against the clock here. What are you looking
Speaker 1: for into this September twenty two meeting? And beyond December
Speaker 1: gets really interesting. The fIF is the FED, the sixte
Speaker 1: is the e c B. So I think as you
Speaker 1: look at September, they cleared the decks and suggest that
Speaker 1: at any point they could announce paper. They won't do
Speaker 1: it in September. I don't think they won't do it
Speaker 1: at the end of October. I think they'll announced in
Speaker 1: December and papering will start in January. And there's a
Speaker 1: debate about whether it comes a little bit quicker than that,
Speaker 1: But yeah, you're right with with the FED lightly to
Speaker 1: announced paper in December, with DCB clearly lining up a
Speaker 1: big set of policy moves at that time. December is
Speaker 1: going to at the year end, it's gonna be an
Speaker 1: interesting month a month obviously outlook, David, thank you. Going
Speaker 1: to hear from you as always the weekend, Sir David Page,
Speaker 1: actual investment manager's head of macro research. Right now, watching
Speaker 1: all this is m alody and value at Wells Fargo
Speaker 1: Asset Management in active equity as well, and on the
Speaker 1: banking industry right now, on the big banks, on the
Speaker 1: super re generals, is their value There is Shanali mentioned
Speaker 1: they're dealing with a digital onslaught. Do you find value
Speaker 1: in the big banks? I think our investment teams TOM
Speaker 1: really do see value in the long run for the
Speaker 1: big banks UM. But as you know, they're tied to
Speaker 1: rates and UM, so as you see rates rise, the
Speaker 1: banks will benefit. They've also benefit from some of the
Speaker 1: lending UM as you guys talked about earlier. But they
Speaker 1: are still attractive from evaluation standpoint. The secular challenges that
Speaker 1: the banks have, though, are going to continue, so I
Speaker 1: think you have to be selective as an investor. Well,
Speaker 1: can we talk about who that campaigns with now? And
Speaker 1: they're not competing with each other anymore, aren't they? They're
Speaker 1: increasingly competing with others outside of their industry, the traditional industry.
Speaker 1: That's right, they are And I think you know, in
Speaker 1: the past people worried about credit cards, with the credit
Speaker 1: cards were always linked to banks UM and benefited the
Speaker 1: new technology, even bitcoin itself. How does that change the
Speaker 1: future of banking both here and abroad globally. So UM,
Speaker 1: I think those are all the things that investors have
Speaker 1: to think about. And you know, look, I haven't had
Speaker 1: time to really look into these changes at Bank of America,
Speaker 1: but any bank that's thinking about the future is thinking
Speaker 1: about the right things and making changes directed towards that.
Speaker 1: And as an investor, this raises an issue of bold moves.
Speaker 1: Do you want to see banks making bold moves using
Speaker 1: some of their cash maybe to make acquisitions of smaller
Speaker 1: tech firms to try to adapt the new normal and banking.
Speaker 1: Is that something you would reward? Again, it depends on
Speaker 1: the individual company, because when our investment teams are looking
Speaker 1: at companies, they're looking at what does their balance sheet
Speaker 1: look like, what has been their growth rate? And then
Speaker 1: you know, sometimes you want to see a measured response,
Speaker 1: both thinking about current business conditions and the business you
Speaker 1: have at hand, but investing for that growth over a
Speaker 1: long period of time. You don't want to just and
Speaker 1: you don't want to lose the customers you have today
Speaker 1: or the business you have today on your way to
Speaker 1: the future. So most of the time it's measured, especially
Speaker 1: for mature industries, but there are times where you have
Speaker 1: to accelerate, especially a piece of the business. And as
Speaker 1: you pointed out, the banks have gotten very far behind
Speaker 1: in technology. They have outsourced a lot of it to
Speaker 1: make it easy for you and I as consumers. Um
Speaker 1: not that surprising now, coming out of oh eight oh nine, um,
Speaker 1: the financial crisis, all of the other things they had
Speaker 1: to focus on. Right now, it seems like the banks
Speaker 1: are trading in a bucket of cyclicals. The banks are
Speaker 1: trading alongside airlines and other reopening stocks as people look
Speaker 1: towards the post pandemic reality. I'd love to get your
Speaker 1: sense and something that we saw yesterday where when we
Speaker 1: see dat or information that puts a damper on this narrative,
Speaker 1: like Airlines coming out and down grading their expectations, you
Speaker 1: saw the shares rally significantly and lead the charge. What
Speaker 1: do you make of that? Is this basically the appropriate
Speaker 1: response from investors like yourself? But I think what the
Speaker 1: market is finally recognized and as something that we've been
Speaker 1: talking about for a long time. Don't pick growth or value,
Speaker 1: or don't pick the marketing, you know, the economy opening
Speaker 1: or back on shutdown. You have to have a collection
Speaker 1: of both. And it's because the growth rates in some
Speaker 1: of these cyclical companies are the strongest of any industry.
Speaker 1: And it's not surprising. UM. I think there's also a
Speaker 1: lot of demand and pent up demand, as you all
Speaker 1: talk about, and so you see things like yes fears
Speaker 1: of the delta variant, but also a greater proportion of
Speaker 1: the population getting vaccinated. And so we're at the tipping
Speaker 1: point where things are going to get better and investors
Speaker 1: are always forward looking at what's going to change and
Speaker 1: always enjoy catching O with you. Thanks for being with us,
Speaker 1: and Lady the West Fonca Basset Management, head of ACTID Equity.
Speaker 1: Right now in bonds the US rates, Sadra Rajapa joins
Speaker 1: us with society general. Wonderful to have you on and
Speaker 1: I just want to go to one phrase within your
Speaker 1: good research note, which is overwhelming demand. What is the
Speaker 1: why of overwhelming demand for bills, notes and bonds? There's
Speaker 1: just a lot of cash in the sidelines, right, I mean,
Speaker 1: this was a week where we got spectacular amounts of
Speaker 1: of supply, not just in treasuries but also in corporate bonds,
Speaker 1: and yet everything was absorbed well by the markets. You
Speaker 1: have over a trillion dollars that the that's parked with
Speaker 1: the Feds over an r RP program. There's just a
Speaker 1: lot of cash to be put to work, and policy
Speaker 1: for the most part looks like it's going to be
Speaker 1: somewhat and nine there's no fears of taper, either from
Speaker 1: the e c B or the U or the the Fed.
Speaker 1: So broadly speaking, I think that the market parties but
Speaker 1: feel very comfortable putting money to work. Here, Which duration
Speaker 1: is most attractive, which duration has the silliest demand? Well,
Speaker 1: I think you're seeing demand pretty much across the curve.
Speaker 1: I mean, the front end is a little bit distorted
Speaker 1: because bill supplies going down as we head into the
Speaker 1: death ceiling debate, But broadly speaking, across the curve, you know,
Speaker 1: three stents thirties, we've seen very very strong demand from
Speaker 1: end investors. I mean you're seeing demand from pensions and
Speaker 1: insurance companies for the very long end, the intermediate sector,
Speaker 1: the ten year bond as well, we saw very good
Speaker 1: and investor demand. So I think that there's just a
Speaker 1: lot of work cash should be put to work. Equities
Speaker 1: are all time high. It's possible that you're seeing some
Speaker 1: of these acid liability managers put some money into bonds
Speaker 1: as well as a diversification going forward. What is the
Speaker 1: signal from treasure yields where they are at the time
Speaker 1: of supply. Is it just people looking only in the
Speaker 1: next couple of days and weeks, or is it a
Speaker 1: statement about low growth going ahead. Um, I think we're
Speaker 1: really waiting on on center banking policy. I think we're
Speaker 1: looking for you clear sign that we've made substantial for
Speaker 1: the progress on employment so that the FED can start
Speaker 1: tapering acid purchases. But I would say that in my conversations,
Speaker 1: the preoccupation is much more on the inflation side and
Speaker 1: whether the Fed can and will raise rates sooner than
Speaker 1: the market expects. So we just don't have enough clarity.
Speaker 1: So the bond market fields a little bit like a
Speaker 1: deer cotton headlines, waiting for more information before we could
Speaker 1: reprice higher. Although the information that we have, you know,
Speaker 1: the Fed is going to wait for a very long
Speaker 1: time and probably a much longer than they have ever
Speaker 1: before before raising rates, before tightening policy. In any way,
Speaker 1: we are seeing inflation. We just got that PPI data
Speaker 1: that came in, uh, you know, pretty much in line
Speaker 1: with esmiates, but the highest going back a decade. We've
Speaker 1: gotten this idea that wages are going up. At one point,
Speaker 1: we'll inflation called the Fed's hand and actually slow down
Speaker 1: growth while crimping a lot of the economic activity that
Speaker 1: corporations depend on. So that's a very good question. List
Speaker 1: and I think that we just don't have enough data
Speaker 1: yet for to make that assessment. But you're right. I mean,
Speaker 1: to me, what's really concerning is the areas of inflation,
Speaker 1: especially things like rents, medical medical care costs, wages, UH
Speaker 1: and supply chain destructions. These all tend to be somewhat sticky,
Speaker 1: and that could lead to a persistence of inflation, which
Speaker 1: I think is an underpressed risk in the market. We
Speaker 1: just don't have enough data to corroborate that. I think
Speaker 1: what we're getting so far anecdotally from CEOs, even the
Speaker 1: Beige Book shows that there are a lot of supply
Speaker 1: chain instructions and and and uh, you know, corporations not
Speaker 1: being able to source materials. But we just have to
Speaker 1: see more data points before we can see what the
Speaker 1: impact will be on and the feed through to the consumer.
Speaker 1: And Sivadrea said that it's not being priced into the market.
Speaker 1: Which markets. Is it just the rates market that yields
Speaker 1: should be higher, or is it incorporations that yield should
Speaker 1: be higher. And frankly, some of the corporate bind uh
Speaker 1: spremiums or spreads should also be higher. So I think
Speaker 1: it's in all markets, right, even equities don't seem to
Speaker 1: be that concerned about the rise and potential for a
Speaker 1: persistence of inflation or rising inflation. I think the bond
Speaker 1: market has break evens tenny break evens inway between two
Speaker 1: twenty five and two fifty. So again, longer term inflation
Speaker 1: expectations are are quite high, but not out of control.
Speaker 1: But you know, going forward, the question is how persistent
Speaker 1: this inflation will be. And when there's evidence that that
Speaker 1: there's resistence of inflation, you'll see all of these markets
Speaker 1: react very very quickly. You'll see a rise and break evens.
Speaker 1: You'll see that also reflected in the equity market. We're
Speaker 1: just not there yet. We're not there yet. Give us
Speaker 1: a tenure call out twelve months. I mean, I'm absolutely fascinated.
Speaker 1: Are you Are you in the range or you outside
Speaker 1: the range? Um? We are thinking that a year from now,
Speaker 1: we just published our forecast yesterday will be somewhere between
Speaker 1: two and two UM. Again, I think that this is
Speaker 1: we're on the high side because we think that uh,
Speaker 1: you know, the market's enterprising these these risks, and also, uh,
Speaker 1: you know, ten year yields could gradually rise from from
Speaker 1: here on if they're if fundamentals start to improve. I
Speaker 1: think that there's a lot of pessimism on delta delta
Speaker 1: variants as well as a lot of pestimism on the
Speaker 1: stowdown in growth. So once we get through that wall
Speaker 1: of worry, I think that there's a trajectory towards higher
Speaker 1: yiels from here on. I looked abroad at the demands
Speaker 1: of the market, and you know, it's just simple or
Speaker 1: clipping a coupon. Is anybody with that call on yield
Speaker 1: managing for total return? I don't think so. Yeah. So
Speaker 1: I think that the real risk in the bond market.
Speaker 1: I think that is that is the fact that people
Speaker 1: aren't really focused on on real returns. Right, you look
Speaker 1: at tenny real yields, they're negative one percent. Even if
Speaker 1: you look at high yield. If you inflation is going
Speaker 1: to be in the context of fortified percent for the
Speaker 1: next several months, you're not getting very strong you know,
Speaker 1: negative in real returns. So that has to be a
Speaker 1: concern for anybody that's holding bonds, and that's not again
Speaker 1: a concern that's reflected in the in the market. Given
Speaker 1: the fact that deals are stubbornly low, I think that
Speaker 1: that repressing has to happen over the next year. We're
Speaker 1: on the Canada' Sadbantra. Do you think the fetch starts
Speaker 1: to worry they've got it wrong? I would say probably
Speaker 1: sometime early next year. If these inflation prints that we're seeing,
Speaker 1: the hild fish prints that we're seeing persist, I think
Speaker 1: that that's definitely going to be concerned, and the Fed's
Speaker 1: actually being very very prudent. What they're doing is preparing
Speaker 1: for that now. I think that they start tapering acid
Speaker 1: purchases early next year. They probably end by the middle
Speaker 1: of the year, so that they can start raising rates
Speaker 1: if they need to in the second half of next year.
Speaker 1: So they're prepared for that scenario, but they're just not
Speaker 1: expressing that concern as of now. How they manage that
Speaker 1: message if they have to, will be fascinating. Sabantra, Thank you,
Speaker 1: Sapantraampre sock Gen. They had a US right strategy. John
Speaker 1: us now is David Paigeacks investment manager's head and macro research. David.
Speaker 1: Does that resonate with you, sir, that we could see
Speaker 1: a broadening and price pressures going againto next year? Yeah,
Speaker 1: I mean, it's it's the key debate that every central
Speaker 1: bank has to sort of focus on how persistent is
Speaker 1: the supply show a question. There's a supply shock at
Speaker 1: the moment, and we're going to see it in Q
Speaker 1: three g d P numbers we think in the States
Speaker 1: when they come through. But the question is how persistent.
Speaker 1: So for now we've had the view and we share
Speaker 1: this view that we are seeing a relatively transitory supply restraints.
Speaker 1: So if you look at, for example, participation, it's been
Speaker 1: very lack luster in recent months. We do expect that
Speaker 1: to pick up. I think part of this is just
Speaker 1: a natural indigestion. I don't buy too much that it's
Speaker 1: it's due to unemployment benefits. Certainly in states we've seen
Speaker 1: that drop back. We haven't seen a miraculous recovery and
Speaker 1: labor supply. But I think there is a natural indigestion,
Speaker 1: and I think that indigestion should fade as we move
Speaker 1: into a fourth quarter, but it doesn't. If it doesn't fade,
Speaker 1: then you are seeing a more restricted background. You are
Speaker 1: going to see earnings continue at the sort of relatively
Speaker 1: elevated monthly pace that we see at the moment, and
Speaker 1: that's something the FED has to take count of. Effectively,
Speaker 1: what you're suggesting or what it would conclude is that
Speaker 1: you're seeing a bigger supply shop than this pandemic. Now,
Speaker 1: that might be because you know, the workers that we're
Speaker 1: looking for post pandemic are difference to the ones that
Speaker 1: were employed pre pandemic, and they's a skills mismatch. There
Speaker 1: could be all sorts of issues. We don't think that's
Speaker 1: what's going to happen, but that's what we're going to
Speaker 1: see over the next couple of months, and the FED
Speaker 1: will have to react if it if it changes that
Speaker 1: that transitory outlook. David, you and everybody else's lawing a
Speaker 1: GDP estimates. You've got five point seven percent now and
Speaker 1: in the next year four point Is that a linear
Speaker 1: extrapolation down of potential GDP UM? No, because I think
Speaker 1: the potential GDP adjustment that's going to come through UM
Speaker 1: is a long term figure, right, So it is a
Speaker 1: linear extrapolation of the supply shock that we see coming
Speaker 1: through in the quarter. We do think that that that's
Speaker 1: been an impact, but I don't think it's something that
Speaker 1: we should therefore extrapolate going forever forwards. We would still
Speaker 1: see us GDP potential growth in the fullness of time
Speaker 1: and somewhere around two per cent, So I don't think
Speaker 1: that that's too much concerned. But in terms of the
Speaker 1: supply demand imbalance, which is critical for the sort of
Speaker 1: inflation pressures, then yeah, I mean, I think it is
Speaker 1: that supply has reduced rather than into the drop off
Speaker 1: in the land. David the investment manager after investment manager
Speaker 1: has come on this show and said that right now
Speaker 1: the dynamism of the U S economy has been pretty
Speaker 1: much priced in and it's time to turn to to
Speaker 1: Europe and potentially even to Asia for equity exposure. Do
Speaker 1: you agree, Well, I think the US, the US rebound
Speaker 1: has been remarkable. It's got to the point where we
Speaker 1: are closing the apple gap. We're looking at a very
Speaker 1: strong growth for the year next year. Um that's going
Speaker 1: to continue this this excess demand, and I think there's
Speaker 1: still strengthen the US marketing. Now. You know, we can
Speaker 1: talk for all your life about whether we see corrections
Speaker 1: coming up over the next little while, but no, I
Speaker 1: think you know, in general, the US sector arek's going
Speaker 1: to remain relatively well underpinned. But in terms of should
Speaker 1: we switch from a sort of growth model which is
Speaker 1: obviously something the US, you know, really exemplifies, or a
Speaker 1: more value driven act performance, which is perhaps something where
Speaker 1: Europe will do better. Then I think as we start
Speaker 1: to see really pick up towards here and we should
Speaker 1: start to move more into that that value area. So
Speaker 1: I think there is scope certainly for more of a
Speaker 1: pickup to come through from Europe. But let's bring things
Speaker 1: up with the FED timeline if we can. In the
Speaker 1: time we have left, we pushed against the clock here.
Speaker 1: What are you looking for into the September, the twenty
Speaker 1: two meeting and beyond December gets really interesting. The fift
Speaker 1: is the FED, the sixteenth is the e C big
Speaker 1: So I think as you look at September they clear
Speaker 1: the decks and suggest that at any point they could
Speaker 1: announce paper. They won't do it in September. I don't
Speaker 1: think they won't do it at the end of October.
Speaker 1: I think they'll announced in December and papering will start
Speaker 1: in January. And there's a debate about whether it comes
Speaker 1: a little bit bigger than Yeah, you're right with with
Speaker 1: the FED lightly pronounced paper in December, with bTB clearly
Speaker 1: lining up a big set of policy moves at that time.
Speaker 1: December is going to the year end. It's gonna be
Speaker 1: an interesting oneth A Monstrobos the Outlook, David, thank you.
Speaker 1: Going to hear from you as always each other weekend.
Speaker 1: Sir David Page acts for Investment Manager's head of macro Research.
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