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Speaker 1: Let's get to our guest. Marian Montaigne is with US,

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Speaker 1: portfolio manager at Gradian Investments. She's on the line from Minnesota. Marian,

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Speaker 1: thanks for being with us. A lot of focus on

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Speaker 1: the FED. It's unequivocal commitment to crushing inflation, and the

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Speaker 1: conversation now is really on what we'll break as a

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Speaker 1: result of this aggressiveness. A lot of folks are pointing

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Speaker 1: to the dollar strength and the knock on it's gonna

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Speaker 1: knock on effect. I should say that it's going to

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Speaker 1: create in other parts of the world, particularly in e M.

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Speaker 1: Are there other things that we should be looking at,

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Speaker 1: maybe in the credit markets for signage of of of breakage. Well,

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Speaker 1: we're just looking at rates right now that have become

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Speaker 1: very attractive. And so we think that, yes, the dollar

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Speaker 1: could weaken. Um. It's been extraordinarily strong for two years

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Speaker 1: straight now and uh, that is something that is probably peaking. UM.

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Speaker 1: And you know, we we don't know that point at

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Speaker 1: the inflection exactly, UM, but we think it's coming and uh,

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Speaker 1: probably the inflation slowing is going to be a cause

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Speaker 1: for that. Um. And so we are looking for the

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Speaker 1: dollar to weaken and really for uh, you know, the

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Speaker 1: overseas investment to become more attractive down the road. Not

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Speaker 1: just yet, Marian, I just wonder about dollar strength. I mean,

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Speaker 1: we're seeing the dollar index up from this time last year. Now,

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Speaker 1: if we see a reversal in the dollar in a

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Speaker 1: meaningful way, this could produce a massive headache for the

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Speaker 1: Federal Reserve, given that the United States imports so much,

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Speaker 1: and that will be inflationary ultimately. And is that something

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Speaker 1: that they are looking at, Um, they should be, But

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Speaker 1: I would say that in that scenario you would see

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Speaker 1: more interest in gold the inflationary risk uh beneficiary there. UM.

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Speaker 1: But right now, here's our overall take on the Fed

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Speaker 1: and interest rates. We think that UM, the Federal Reserve

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Speaker 1: is the only one who has any control or mandate

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Speaker 1: right now to reduce inflation. Um. We have inflation because

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Speaker 1: we have so much demand. There's so much money out

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Speaker 1: in the system, UM, chasing little supply. And what really

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Speaker 1: needs to happen is we need more manufacturing in the US,

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Speaker 1: more dependable sources of parts. We need more manufacturing goods available, UH,

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Speaker 1: so that we could have a better economy. And when

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Speaker 1: they use referenced the jobs report tomorrow, UM, really we

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Speaker 1: should see an increase in manufacturing jobs in an effort

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Speaker 1: to reduce inflation. What most people don't realize is the

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Speaker 1: addition of one hicle manufacturing job in this country in

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Speaker 1: the US generates eleven additional jobs in the downstream, and

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Speaker 1: vice versa. The loss of one vehicle manufacturing job causes

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Speaker 1: eleven other job losses. So if we could get more parts,

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Speaker 1: more dependable sources of parts UH, and get those finished

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Speaker 1: vehicles out there, we could cause the price of used

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Speaker 1: cars to drop and other things to drop. So really

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Speaker 1: we're more focused supplies marian looking at what the Federal

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Speaker 1: Reserve is doing right now in terms of the QT program.

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Speaker 1: And also then on the other side, we have bonds

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Speaker 1: which are looking increasingly as though they are presenting value.

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Speaker 1: Will bond prices go even lower given that the Fed

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Speaker 1: is running down its balance sheet. Yes, that is the

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Speaker 1: general direction. UM that combined with the great hikes that

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Speaker 1: they're continuing to install. UM, we think that it's likely

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Speaker 1: to be another seventy five basis point increase UH the

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Speaker 1: next meeting, perhaps the one following that would take us

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Speaker 1: up to four point five by early spring, perhaps a

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Speaker 1: little higher. So we know that rates are still um

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Speaker 1: the increase. But here's where we think things are going

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Speaker 1: to change is the trajectory. Will UM ease towards maybe

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Speaker 1: fifty basis point increases UH or or none after that.

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Speaker 1: Just the concept of that cadence improving, we think is

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Speaker 1: going to be positive to the bottom market. So UM,

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Speaker 1: if we can get a four point four now on

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Speaker 1: a two year treasury, you know will will take that,

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Speaker 1: will be happy with that to get a higher rate

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Speaker 1: out of short term corporate people do want the high quality,

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Speaker 1: but willing to accept that for the risk of additional

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Speaker 1: rate hikes, knowing that they'll probably be temporary trail off,

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Speaker 1: and then the Fed will have ammunition to lower rates

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Speaker 1: when they need to, to stimulate the markets and the

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Speaker 1: economy when needed. Well, one of the things that they're

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Speaker 1: talking about doing is to keeping rates at elevated levels

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Speaker 1: for some time. And if the intent here is to

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Speaker 1: weaken the economy as a way of fighting inflation and

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Speaker 1: growth does contract in a meaningful way, we can debate

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Speaker 1: whether or not the economy is going to suffer recession.

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Speaker 1: It seems like we're almost there already. What happens to earnings,

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Speaker 1: I mean, we're going to be in a full blown

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Speaker 1: earnings recession. Well, here's the thing, right now, you have

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Speaker 1: to have some earnings power as a company to pass

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Speaker 1: along higher costs, but you're also appealing to UH population

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Speaker 1: that has a lot of money in their pocket. There's

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Speaker 1: next to two trillion dollars in savings these days, so

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Speaker 1: people are paying up and secondarily they're having emergent squeeze

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Speaker 1: because of higher costs. But we've seen so many commodity

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Speaker 1: costs roll over starting in June, and we know that

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Speaker 1: they've had to, you know, um UH contract for perhaps

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Speaker 1: ninety days worth of supplies at a time. But we're

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Speaker 1: seeing that pressure ease on the margins. Now, if we

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Speaker 1: look at the fact set Earning's estimate for the current quarter,

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Speaker 1: it's only two percent. This is very very low. It

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Speaker 1: was closer to eight percent for most of the year. UM.

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Speaker 1: We think they're going to be the two percent. We

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Speaker 1: think that they're going to talk about how the margin

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Speaker 1: squeeze is being alleviated, and we think that companies are

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Speaker 1: going to have a better outlook for the fourth quarter.

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Speaker 1: Is two already baked in? We do believe so. We

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Speaker 1: believe so, and probably even more because if you look

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Speaker 1: at the facts that breakdown, you'll see that several sectors

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Speaker 1: are negative for the third quarters. So I would say

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Speaker 1: whisper numbers are even below two percent, maybe minus two percent,

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Speaker 1: but I think even the plus two is going to

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Speaker 1: be exceeded. Okay, so you're positive on the credit side.

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Speaker 1: But if you had to put money to work in equity,

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Speaker 1: with everything that you've just laid out, the contraction in

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Speaker 1: earnings growth dropping to around two, where do you put

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Speaker 1: money to work in equities? Well, we don't think we've

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Speaker 1: hit the bottom in the markets, so I'll say that

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Speaker 1: first of all, and between now and that point where

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Speaker 1: we can see these things, you know, the whites of

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Speaker 1: their eyes if you will, on inflation, on earnings and

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Speaker 1: elections um uh the Chinese uh decision for um president

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Speaker 1: she uh. Until those things fall into place. We like

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Speaker 1: to be in healthcare. Uh. These are pharma and medical devices.

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Speaker 1: They're part of our emphasis on quality balance sheets, good

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Speaker 1: in the innovation, strong cash flow valuations. Um. That's where

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Speaker 1: we think you should be part. Marion, thank you so

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Speaker 1: much for joining us there. And Montane portfolio manager Gradient

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Speaker 1: Investments getting her take on the market