Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. The Chairman will
Speaker 1: speak today. It will be a sober conversation, a sober
Speaker 1: set of Q and A, and part of it will
Speaker 1: be reading William Dudley's essay for Bloomberg Opinion this morning,
Speaker 1: where Bill Dudley, former President the New York Fat of
Speaker 1: course for decades of golden sex, simply says, learn how
Speaker 1: to spell it. It is a hard landing, Bill Dudley.
Speaker 1: How do you know or discern a recession coming? The
Speaker 1: distinction of a soft landing looking at a Goldilocks reset, should,
Speaker 1: if you will, of green span or a more difficult recession.
Speaker 1: How do you get out front of that Intellectually? I
Speaker 1: don't think it has to be a really deep recession.
Speaker 1: I mean keep recessions typically occur when something breaks like
Speaker 1: the global financial crisis is a good example of that.
Speaker 1: I think what the Fed reserve has to do is
Speaker 1: generated enough slack in the economy bring down inflation. That
Speaker 1: means the unemployer rate has to go up. The problem
Speaker 1: that the FED has it's very hard to push the
Speaker 1: unemployer rate up only a little bit. Every time the
Speaker 1: unemployer rates going up by more than a half a percent,
Speaker 1: you've had a full blown reception. There's no reason to
Speaker 1: think that it's going to be any different this time.
Speaker 1: Will the Chairman today say what you say in your essay,
Speaker 1: that suddenly employment is a mandate is subservient? Is that
Speaker 1: where we're heading. Well, that's what the FIT already told
Speaker 1: us in their FLOMC statement. They took out the reference
Speaker 1: to the labor market remains so strong. They're very much
Speaker 1: focused now on inflation as opposed to employment, because the
Speaker 1: layer market is too tight as opposed to not tight enough.
Speaker 1: So I think he'll reiterate the message that we heard
Speaker 1: that we heard in his press conference last week. I
Speaker 1: think also though he will not talk about a hard landing,
Speaker 1: the FETE is still going for a soft landing, and
Speaker 1: of course they should. The problem is it's just gonna
Speaker 1: be very difficult for them to pull this off. But
Speaker 1: a lot of people in the market right now are
Speaker 1: trying to draw a distinction between a soft recession or
Speaker 1: a shallow one, and one that is much more damaging.
Speaker 1: What is the characteristic of the hard landing you and vision.
Speaker 1: I think it's going to be a relatively mild recession
Speaker 1: at this point, because the fit the financial system looks
Speaker 1: like it's pretty solid. Household in business, balance sheets look
Speaker 1: like they're pretty solid. You really get a deep downturn
Speaker 1: when things in the financial system break and the ability
Speaker 1: to supply credit to people becomes impaired. I don't expect
Speaker 1: that they happen this time, So I would expect a
Speaker 1: mild recession like or or two thousand and one, not
Speaker 1: the deep recession like seventy three, seventy four, or of
Speaker 1: course the Great Financial Price. A lot of people would
Speaker 1: push back Bill and say that this FED has no
Speaker 1: appetite for causing a recession, they don't seem to want
Speaker 1: to do that, and that they will eventually pivot away
Speaker 1: from raising rates as much as people currently expect. Why
Speaker 1: do you think that's not the case. Why do you
Speaker 1: think they're going to take a page from haul Ulcer? Well,
Speaker 1: I don't think they want a recession. The problem is
Speaker 1: that if you're going to get inflation down, you need
Speaker 1: more slack in the economy, and it's very hard to
Speaker 1: generate more slack in the economy without actually generating recession.
Speaker 1: So that they're they're they're definitely going for a soft lane.
Speaker 1: It's gonna be almost impossible for them to pull it off.
Speaker 1: But as the assumption you're making bill that they're not
Speaker 1: going to blink even when the data turns more dramatically
Speaker 1: than we already have seen it having. I mean, Larry
Speaker 1: Summers was talking about a five percent unemployment rate over
Speaker 1: the next five years. Where do you think they're tolerances Well,
Speaker 1: I think that I think what Larry is talking about
Speaker 1: is certainly reasonable. I think the reason why they're not
Speaker 1: going to blink at the end of the day is
Speaker 1: they know that if they blink and don't get inflation down,
Speaker 1: then they have to do even more later. Postponing procrastinate
Speaker 1: is not a great option. We saw what happened in
Speaker 1: the nineties, sixties and seventies and the Feeder Reserve was
Speaker 1: slow to tackle inflation. What happened was and station got
Speaker 1: out of hand and Paul Broker had to come in
Speaker 1: and put the U s econmy through the ringer. So
Speaker 1: the fact wants to do what's necessary in the near term,
Speaker 1: so they don't have to do a lot more in
Speaker 1: the longer term. But it is in the longer term
Speaker 1: that you really see the full effects of monetary policy
Speaker 1: taking shape. It operates with a lag. We all understand that.
Speaker 1: So I guess the question is if they're front loading
Speaker 1: and aggressive, are they going to see it reflected in
Speaker 1: the actual data we're getting or do they risk just
Speaker 1: moving way too aggressively and then the data turns all
Speaker 1: at once. Well, that's that's what could actually happen, because
Speaker 1: right now the ECMMY has considerable for momentum as the
Speaker 1: commy reopens and imperial games are very strong. Household balance
Speaker 1: sheets are still very solid, boosted by the fiscal stimus
Speaker 1: that we got over the last couple of years. But
Speaker 1: beneath that things are trouble. Uh Inflation is rising faster
Speaker 1: and wages financial conditions have tightened a great deal. So
Speaker 1: what I think is going to happen is the economy
Speaker 1: be fine over the next few months, and then we're
Speaker 1: going to see a very sharp slow down the probably
Speaker 1: in the first half But I just want to build
Speaker 1: on something that Kaylee was talking about with that five
Speaker 1: percent unemployment figure from Larry Summers over the next five years,
Speaker 1: and that that's what he thinks is necessary to bring
Speaker 1: inflation down. What happens if you start to see the
Speaker 1: unemployment numbers climb, but the inflation figures do not come
Speaker 1: down because of those lag effects like rents, for example,
Speaker 1: that are continuing to climb. How does the FED handle that?
Speaker 1: Based on your conversations and your experience on the Central Bank, Well,
Speaker 1: I think you're right that inflation is probably not gonna
Speaker 1: come down that quickly because there are leads in price
Speaker 1: in companies raising prices. Also, I think the Ukraine Russia
Speaker 1: war complicates things enormously because it looks like the energy
Speaker 1: price shock and the food shock is gonna last longer
Speaker 1: because of the war. So I think that the FED
Speaker 1: has gotten very unlucky in terms of the kind the
Speaker 1: inflation shocks that we're seeing. They're likely to be persistent
Speaker 1: and that's gonna make it difficult for the FED to
Speaker 1: reverse course. Bill Dudley John Taylor's at a school you
Speaker 1: may know it across the bay from Berkeley. It's stand
Speaker 1: Stanford I think is what it's called. And I can
Speaker 1: just see John Taylor with a full balloon in as
Speaker 1: freshman economics class, letting the air out of it ever
Speaker 1: so slowly. We have a fiscal balloon some thirty of
Speaker 1: g d P. How long will it take to let
Speaker 1: the air out of that fiscal balloon? Is a central
Speaker 1: bank is at a three year project or do you
Speaker 1: really see it out almost to a decade. I don't
Speaker 1: think it should take as long as a decade. But
Speaker 1: fiscal policy is a factor behind why we're probably going
Speaker 1: to see a sharp slowdown at some point. Because fiscal policy,
Speaker 1: while it has been very stimular over the last two years,
Speaker 1: that steamless is over. We've also seen households begin to
Speaker 1: pull down their savings race. So the savings rate was
Speaker 1: very elevated as a fiscal policy stamless with being put
Speaker 1: in place, but the savings rate now has already fallen
Speaker 1: below it's long one app which tells you that consumers
Speaker 1: are a little bit stressed, that are starting to experience
Speaker 1: a little bit of stress in terms of their balance sheets.
Speaker 1: Bill Dudley required reading folks before the testimony of Chairman Powell.
Speaker 1: The Humphrey Hawkins testimony a monetary report by the Chairman
Speaker 1: of the Federal Reserve, and we'll get Bill Dudley out
Speaker 1: on social here as quick as we can. You can
Speaker 1: see that, of course at Bloomberg dot com. He speaks
Speaker 1: of a hard uh landing. Uh uh is Well, you know, Bill,
Speaker 1: I look at this and I think if Jerome Powell
Speaker 1: was to read your essay, you wonder how he would
Speaker 1: amend his discussion today. I mean, he's not gonna say
Speaker 1: hard landing, but how does he give up the how
Speaker 1: does he address the probabilities the set of outcomes that
Speaker 1: we may see. Well, he's made it more clear that
Speaker 1: it's going to be more difficult the longer inflation stays
Speaker 1: as high as it's been the heart of the fast jobs,
Speaker 1: and he's he's admitted that in his his press conference.
Speaker 1: So I think today he's going to make it clear
Speaker 1: that this is not gonna be easy. He's gonna talk
Speaker 1: about that there is a path of soft learning. I
Speaker 1: think that path is extraordinarily narrow. You won't talk about
Speaker 1: how narrow that path is. They'll just talk about that's
Speaker 1: what the Fed Reserve is trying to seek and pull
Speaker 1: off this time. Bill, what kind of financial breaking do
Speaker 1: you foresee being a trigger for the Fed? And I
Speaker 1: say this as the end weekends to the weakest levels
Speaker 1: we've seen versus the dollar since and people are starting
Speaker 1: to get concerned about deteriorating liquidity in certain bond markets. Well,
Speaker 1: I think the biggest area stress, frankly is going to
Speaker 1: be low and moderate income countries who are hurt by
Speaker 1: want a stronger dollar, higher grain prices and higher energy prices.
Speaker 1: For poorer countries, grain and energy is a pretty significant
Speaker 1: portion of the household consumption basket, so they're gonna hit
Speaker 1: be hit very severely over the next twelve to eighteen months.
Speaker 1: So I expect a lot of sovereign debt problems in
Speaker 1: the next year or two, and that's going to just
Speaker 1: be more problematic for the global economy. So, Bill, at
Speaker 1: what point does a strong dollar create a real issue?
Speaker 1: And this is something that I was thinking about, especially
Speaker 1: is a growing number of investors see the dollar are
Speaker 1: as the main hedge against equity weakness. At what point
Speaker 1: is it a trigger for the Fed? Well, the fact
Speaker 1: actually is not unhappy with the dollar being stronger because
Speaker 1: the stronger dollar holds down US inflation by making import
Speaker 1: prices cheaper, and it also slows down the economy by
Speaker 1: reducing US export competents. So when you think about the
Speaker 1: FED once tighter financial conditions, higher bonnials, looperstock prices, stronger dollar,
Speaker 1: the dollar is actually the most attractive of those three
Speaker 1: things because the stronger dollar actually increases your purchasing power.
Speaker 1: So the dollar strength is not something the Federal Reserved
Speaker 1: views as a bug. Thank you, this is a feature. Well.
Speaker 1: Speaking of the financial markets, we heard from Tom Barkin
Speaker 1: yesterday we will again today, but he essentially said that
Speaker 1: you want to get back to where you want to
Speaker 1: go as fast as you can without breaking anything, talking
Speaker 1: about not wanting to cause undue harm, not just to
Speaker 1: the economy but to financial markets. What harm would that be?
Speaker 1: What would make the FED put kicked back in Bill?
Speaker 1: I think you'd have to see some sort of calamity
Speaker 1: and financial markets that impeded market function, impeded the ability
Speaker 1: of thanks to lend money to households and businesses. I
Speaker 1: don't expect that. I think the reforms that we made
Speaker 1: following the Great Financial Crisis, in terms of the banking system,
Speaker 1: more capital, more liquidity, better risk management, better governance, those
Speaker 1: have shown to work. And I think they'll work this
Speaker 1: time as well. Bill, I just want to say, and
Speaker 1: you're wonderful, essay. I don't know which is more important
Speaker 1: that you quoted the great economist Claudia Sam or you
Speaker 1: quoted the other economist, Wiley Coyote. I'll let you decide
Speaker 1: which one. I think. That's uh great to see her,
Speaker 1: Bill Dudley, thank you so much. The former president of
Speaker 1: the New York Right now, Professor Abbie Joseph Cohen joins us.
Speaker 1: She is entrenched at the Columbia Business School and of
Speaker 1: course for decades at Golden sas is a partner. Uh, professor,
Speaker 1: how's it going? What a shift to go from the
Speaker 1: twenty five hour week of Goldman Sachs down to the
Speaker 1: cushy job as a professor at one of our acclaimed schools.
Speaker 1: How abrupt is a shift? Ban? Well, it was twenty
Speaker 1: five hours a day, not a week. Correct that. That's
Speaker 1: that's quite all right. Um. It has been a wonderful
Speaker 1: adjustment for me. Frankly, you know, I was an adjunct
Speaker 1: of Columbia for almost a decade, so I knew what
Speaker 1: I was getting into. Um. I love the students that Columbia.
Speaker 1: Half of them are from overseas, and it's a terrific faculty,
Speaker 1: and I'm spending I'm spending time with a lot of
Speaker 1: the faculty working on new curriculum materials for them, incorporating
Speaker 1: the real world aspects into the academic work. And the
Speaker 1: foundation here, folks, is something that the right of passage.
Speaker 1: If you're in the racket, you must read either nineteen
Speaker 1: thirty four Graham Dot or maybe you catch up with
Speaker 1: Graham Dot and Coddle. Right now we look at Graham
Speaker 1: Dot and Joseph Cohen, which is going to be the
Speaker 1: new definitive book out of Columbia Business School. How do
Speaker 1: you take the fundamentals that we were weaned on and
Speaker 1: drag them forward and Jerome Powell's Modern Age, Tom, that
Speaker 1: is a wonderful question. But first let me set the stage,
Speaker 1: and that is to say, for the last few years,
Speaker 1: the fundamentals have mattered less than things like momentum and
Speaker 1: investor enthusiasm. Now you take a look, for example, of
Speaker 1: the strong correlation between the technology stocks, cryptocurrency and so on,
Speaker 1: and basically say, these are types of financial assets in
Speaker 1: which valuation approaches really didn't matter very much. And I
Speaker 1: think we're now back into a period in which it
Speaker 1: does matter, where it's the fundamentals of earnings, the fundamentals
Speaker 1: of margins, the fundamentals of inflation and interest rates, and
Speaker 1: putting that all together in terms of appropriate valuation models
Speaker 1: that will make a big difference for investors going forward.
Speaker 1: I mean, how do you model the fundamentals at a
Speaker 1: time when people can't come out whether we're going to
Speaker 1: have a sanguid economy or a hard landing that looks
Speaker 1: something like a depression. At what point do you game
Speaker 1: out recessionary outcomes and your fundamental analysis. Yeah, you know,
Speaker 1: there are two different ways to look at that, Leasta.
Speaker 1: First of all, we can game out alternative scenarios, so
Speaker 1: we have some sense of what the range of possibilities
Speaker 1: might be, not just for equities but other financial assets.
Speaker 1: But of course, at the end of the day, an
Speaker 1: investor portfolio manager has to say, what do I think
Speaker 1: is the most likely scenario. You can always plan for
Speaker 1: the worst if you have very little risk tolerance. You
Speaker 1: can always plan for the best if you're highly risk averse.
Speaker 1: But I think many portfolio managers are aiming for something
Speaker 1: in the middle, where they're trying to identify what is
Speaker 1: the most likely scenario, And as some of your earlier
Speaker 1: guests indicated, what seems to be priced in right now
Speaker 1: is a mild recession. Uh, certainly not a severe recession.
Speaker 1: When you look at the parameters, do you look at
Speaker 1: the end of the era of money or do you
Speaker 1: look at just simply a pause, a momentary reprieve from
Speaker 1: the ultra low rates of more than a decade as
Speaker 1: we try to curtail inflation, and then our aversion back
Speaker 1: to that at the end. Yeah, let me adjust the
Speaker 1: question just a little bit, Lisa, and to say that
Speaker 1: money isn't free anymore, but in many cases it's not
Speaker 1: particularly expensive, particularly by historical standards. And so while we
Speaker 1: have seen this rise and interest rates, and the FED
Speaker 1: is likely to continue to move those short rates higher,
Speaker 1: we've already seen quite an increase in the intermediates and
Speaker 1: the longs and the rates that affect consumers, for example
Speaker 1: through mortgages. UH. And so what we have to recognize
Speaker 1: is that when money becomes more expensive in some ways,
Speaker 1: investors households become much more careful with it UM because
Speaker 1: if it's no longer free, UM, you're going to see
Speaker 1: less leverage, which is a good thing. In portfolios. For example,
Speaker 1: we've had incredible returns, and some private equity portfolios maybe
Speaker 1: the basic returns were good, but in some cases they've
Speaker 1: been turbo charged by significant amounts of leverage. We sort
Speaker 1: of hide the underlying a skill set, if you will,
Speaker 1: of of the portfolio manager. And then, of course there
Speaker 1: are many corporations that took advantage of very inexpensive money
Speaker 1: to leverage up their results um and so when money
Speaker 1: is no longer free, we get to see a better
Speaker 1: picture of whether those corporate managers and those portfolio managers
Speaker 1: are actually doing a good job. Well, Abby, you talk
Speaker 1: about how people are more careful with their money in
Speaker 1: this kind of environment, and we know that it wasn't
Speaker 1: just you know, corporations and big institutional investors that were
Speaker 1: moving money around during the pandemic free money area. You
Speaker 1: also had stimulus that was fueling the retail investor and
Speaker 1: they have been a force within these markets. What happens
Speaker 1: when that goes away? Uh. What we are looking at,
Speaker 1: of course, as a situation in which individuals in many
Speaker 1: cases became overly enthusiastic about some areas of the market,
Speaker 1: equities and elsewhere, including digital currencies that offered good momentum um.
Speaker 1: And what we are moving into and have already gone
Speaker 1: to see is what happens when the momentum breaks down
Speaker 1: and you need to start looking at the valuations per se. Now,
Speaker 1: individual investors, of course, have many different factors that they
Speaker 1: need to be concerned about. Some of it has to
Speaker 1: do with how much longer they have in their investment arizon,
Speaker 1: what else they might need, uh, the capital for and
Speaker 1: and so on, and so we in fact see less money.
Speaker 1: And we have already seen us going into things like
Speaker 1: cap weighted dtfs. We've not yet seen the intermediate aspect,
Speaker 1: and I don't think it's going to be all that
Speaker 1: bad just looking at the demograph. I say this in
Speaker 1: great honor of your two thousand five paper, which is definitive, folks.
Speaker 1: It's basically codified within the CIFA Institute Aristotle on Investment
Speaker 1: decision Making. We have dragged ourselves, Professor, from the elegance
Speaker 1: of two thousand five to a two thousand twenty two
Speaker 1: discussion of what's called a Cathartic puke. How does catharsis
Speaker 1: play into fundamental analysis and the confidence to own equities?
Speaker 1: Do I need to go down substantially to find a
Speaker 1: base to own equities. We are now, I believe tom
Speaker 1: in a situation where beta will be less important than alpha.
Speaker 1: And that explain that, please, that's what that's really important.
Speaker 1: Explain that investors always think that they are smart in
Speaker 1: a bull market, right, So if you're invested in a
Speaker 1: bull market, almost anywhere in able market, the beta of
Speaker 1: the market, and that has to do just with slopes
Speaker 1: of of lines and so on. UM. Don't confuse um
Speaker 1: basically a bowl market for genius and and so that's beta.
Speaker 1: Alpha is security selection UM. And one of the curious
Speaker 1: things about the last two to three years in particular,
Speaker 1: is that there's it's been really hard to get alpha. UM.
Speaker 1: So investors professionals who have used sophisticated approaches trying to
Speaker 1: identify what particular securities they wanted to invest in often
Speaker 1: stumbled because alpha didn't matter very much. With this dramatical
Speaker 1: reset in the markets, the overall decline number one, Number
Speaker 1: two the breakdown of the momentum orientation, and number three
Speaker 1: the recognition that the economic cycle itself is shifting. We
Speaker 1: see a move now, I believe towards alpha, and that's
Speaker 1: not just within the US equity market. It's likely to
Speaker 1: happen in other developed markets as well. And also think
Speaker 1: of it were broadly in terms of asset categories that
Speaker 1: are no longer all going to be moving in locks.
Speaker 1: That's exactly where I wanted to go, abby, and we
Speaker 1: just have about a minute left. Does this mean that's
Speaker 1: the end of the sort of standard sixty forty in
Speaker 1: terms of just working and needing a more nuanced, scalpeled
Speaker 1: approach even with acid allocation. Let's recognize that that thirty
Speaker 1: year plus period in which inflation and interest rates were
Speaker 1: under good control and continue to move lower is over.
Speaker 1: That doesn't mean that a year or two from now
Speaker 1: inflation will be under incredible uncontrolled and interest rates still
Speaker 1: dramatically rising. I don't expect that, but we are exiting
Speaker 1: that thirty year period in which fixed income securities were
Speaker 1: a very good place to be invested, and that rule
Speaker 1: right now may not be uh, you know, such a
Speaker 1: clever thing. One of the point, if I may that
Speaker 1: Aristotle paper talks about the importance of understand ending the data.
Speaker 1: Let me give you one example. Right now, there's so
Speaker 1: much focus on headline CPS CPI. You guys have done
Speaker 1: a great job of contrasting headline CPI to course cp I.
Speaker 1: What the fit is looking at is the better message measure,
Speaker 1: which is core PC, which is running three to four
Speaker 1: percentage points below the headline cp I. So rather than
Speaker 1: looking at like an eight percent number, they're looking at
Speaker 1: a number which is five percent, maybe a little bit lower.
Speaker 1: It's still arise in inflation. I don't mean to suggest not,
Speaker 1: but it is not quite as awful looking as the
Speaker 1: headlines would suggest. Daddy, Joseph Cohin, thank you so much
Speaker 1: for joining Bloomberg and Bloomberg Surveillance today at Columbia Business School.
Speaker 1: Lisa shallatt from the meeting of Alliance Capital and Sanford
Speaker 1: Bernstein years ago over to her duties as chief investment
Speaker 1: officer at Morgan Stanley Wealth Management. Been there done that
Speaker 1: she has seen the dreaded conversation of recession. Lisa, how
Speaker 1: foolish is it for Morgan Stanley clients to angst over
Speaker 1: the guestimates of what recession will be? Look I I
Speaker 1: We've always said, um that you know, it's it's foolish
Speaker 1: for for clients to to try to guess. I mean
Speaker 1: one of the things, uh, that we were talking about
Speaker 1: with clients yesterday is um. You know, even you know,
Speaker 1: some of the folks who get paid to do this,
Speaker 1: i e. At the FED have never gotten recession forecast correct. Ever.
Speaker 1: I think this is something that David Rosenberg also wrote
Speaker 1: about yesterday, uh in in his wonderful piece that he
Speaker 1: puts out daily. UM. And And the fact of the
Speaker 1: matter is, you know, the best we can do is um,
Speaker 1: try to ascertain direction uh and relative order of magnitude
Speaker 1: and other than that, I don't think we can try
Speaker 1: to you know, hand ring about you know where the
Speaker 1: bottom is uh and you know how far will it go?
Speaker 1: And what you know is going to be effected until
Speaker 1: we're really you know, kind of in it well hand
Speaker 1: ringing aside, when you look at the tea leaves and
Speaker 1: this idea that certain tech companies in particular are starting
Speaker 1: to lay off at members of their staff or cut
Speaker 1: back on hiring plans, Lisa, have we entered a new
Speaker 1: phase of the economic cycle that is beginning on the
Speaker 1: edges and requires a shifting strategy. Look, I think that
Speaker 1: we're actually you know, as you know, markets always you know,
Speaker 1: are are six to nine months ahead of reality. I do.
Speaker 1: I am in the camp UM that that the price
Speaker 1: action we have seen us far this bear market has
Speaker 1: probably discounted at least you know, two thirds to seven
Speaker 1: eighths of the way there to what we're guessing, and
Speaker 1: I use the word guessing UH is going to be
Speaker 1: UM a shallow recession. UM. In that spirit, I think
Speaker 1: what's different about the labor market this time, UH is
Speaker 1: that you know, we have never had UM the number
Speaker 1: of job openings and the ratio of job openings UM
Speaker 1: to applicants that you know, we came into this period having.
Speaker 1: And so while we are starting to see some modest
Speaker 1: uptick UH in layoffs from you know, some uh handful
Speaker 1: of companies, UM, I think that that what's going to
Speaker 1: be different this time UH is that labor and the
Speaker 1: unemployment rate is actually gonna hold up much better because
Speaker 1: we have this cushion that what companies will do first,
Speaker 1: UH is eliminate their job openings as opposed to going
Speaker 1: immediately to firings and staff reductions. Well, on the subject
Speaker 1: of labor, higher labor costs obviously are one of the
Speaker 1: higher cost companies are facing. Raising the question of margin pressure.
Speaker 1: Is there's continued kind of inflationary dynamics in this economy.
Speaker 1: What are your thoughts on the trajectory of margins from here, Lisa,
Speaker 1: and if if expectations of them are still too high. Absolutely. Look,
Speaker 1: I mean, uh, you know, back in the fourth quarter
Speaker 1: of last year, one of the things you know, that
Speaker 1: we were you know, trying to be very loud about
Speaker 1: was the unsustainability of margins. We felt that, you know,
Speaker 1: when we were seeing these peak operating margins for the
Speaker 1: SMP five well into the double digits, uh, you know,
Speaker 1: profits as a share of GDP where they were UM
Speaker 1: that we were witnessing, you know, record operating leverage that
Speaker 1: was a result of this mismatch between UM, you know,
Speaker 1: the pricing power that companies had UH at the beginning
Speaker 1: of the reopening of the economy, and their actual costs
Speaker 1: and their lags because of the way we account for
Speaker 1: inventory and the way we hire UH and the way
Speaker 1: you know we expense cap acts and thinks of that nature.
Speaker 1: Now we're in the catch up phase and our view
Speaker 1: is that margins are are really going to be vulnerable.
Speaker 1: And this has been one of the you know, great
Speaker 1: mysteries I think, UM is why the cell side has
Speaker 1: been so so so complacent. That's earnings estimates. This is critical.
Speaker 1: This is right where I wanted to go, running out
Speaker 1: of time. If the cell side has been complacent, are
Speaker 1: we going to be surprised by corporate use of cash
Speaker 1: that shrinks potentially? And I think that that you know,
Speaker 1: this has been the problem is that the cell side
Speaker 1: analysts have stopped actually doing work since the era of
Speaker 1: you know, regg f D, and you know, they just
Speaker 1: listened to what executives say and anything until the exact
Speaker 1: minute that their lawyers. Lisa, I've been screaming here. You
Speaker 1: don't see this, folks off camera, but I've been screaming
Speaker 1: about regg f D and the effect here on surprise.
Speaker 1: I mean, Lisa, it's tangible. They can't talk until they're
Speaker 1: right there. They can't talk until they're right there. And
Speaker 1: the analysts have stopped doing work and they just listen
Speaker 1: to the words coming out of the mouths of either
Speaker 1: corporate managements or our Federal Reserve chairman. It is really awful.
Speaker 1: And you know investors are smarter than that. Uh, And
Speaker 1: our gases is that you know, there is a large
Speaker 1: amount of the earnings disappointment that has been priced in. UM.
Speaker 1: We just need to see those estimate cuts kick in
Speaker 1: so that we can ascertain what is the real price
Speaker 1: earnings ratio of this market? I mean, right now, I
Speaker 1: think it's a bit artificial bottle it. Lisa Shell out
Speaker 1: there with a quote of the week, Lisa Shell, Morgan Stanley,
Speaker 1: thank you so much. An extraordinary time, Tim, to cut
Speaker 1: to the chase in the I e A report. What
Speaker 1: is the distinction that the Prime Minister, in the leader
Speaker 1: of labor need to know. What do they need to
Speaker 1: know right now from I e A. I think one
Speaker 1: thing they need to know is that we simply haven't
Speaker 1: been putting enough capital into the energy sector in recent years.
Speaker 1: I'm and that's true whether you look at it from
Speaker 1: the perspective of energy transitions. So we haven't been investing
Speaker 1: enough in clean and then partially because we haven't done that,
Speaker 1: that means that the amount of money going into the
Speaker 1: traditional sector, so oil and gas has also been in
Speaker 1: not enough to avoid the sort of volatility that we're
Speaker 1: seeing today. Tim, I've got a really basic question. Has
Speaker 1: Russian oil actually been taken off the market or just
Speaker 1: rediverted through China, through India and the refineries they are
Speaker 1: then sold back to the West. So there is clearly
Speaker 1: some impacts on Russia already of the measures that are
Speaker 1: in place. But if you look at the data for exports,
Speaker 1: there hasn't been a huge amount of chain since the
Speaker 1: invasion in February, and so there is that evidence of
Speaker 1: a reorientation rather than a reduction when it comes to
Speaker 1: Russian flows into international markets. So who's pocketing the difference?
Speaker 1: I mean, if you're dealing with the gas and and
Speaker 1: and and the crew that's being sold at a discount
Speaker 1: from Russia, and then it's being sold at anything but
Speaker 1: a discount everywhere else within the developed world, who's getting
Speaker 1: that delta? I mean, it's it's it's an unusually profitable
Speaker 1: moment to be in the refining business right now. I
Speaker 1: mean there are refining margins are very high, and refining
Speaker 1: margins are particularly high if your input crude is heavily
Speaker 1: discounted Russian crew. Well, but quickly here, tim, there is
Speaker 1: an allegation that some people have that actually India and
Speaker 1: refineries there are benefiting on all sides, and a lot
Speaker 1: of the gasoline and the refined goods the United States
Speaker 1: and other nations in the developed world are importing are
Speaker 1: actually Russian crewde that just have been funneled into a
Speaker 1: form that they can use. Is that accurate? I think
Speaker 1: it's very difficult to tell the provenance of the molecules
Speaker 1: that come out of a refinery. There's no that there's
Speaker 1: no way to distinguish the outputs of a refinery based
Speaker 1: on the normally based on the on the on the
Speaker 1: origins of the crew. So I think that's that's a
Speaker 1: very difficult question to answer directly. Okay to him, Well,
Speaker 1: you're an economist. And as the Buying Administration pushes Congress
Speaker 1: to enact a pause on the gasoline tax here in
Speaker 1: America to provide some relief at the pump, will that
Speaker 1: actually work as intended even if it got through Congress?
Speaker 1: I think. I mean, we're very focused on the underlying dynamics,
Speaker 1: and the fact is that um oil and gas upstream
Speaker 1: investment has come down by half since and that's added
Speaker 1: to some of the pressures that we see on markets today.
Speaker 1: So what we're focused on is which way do we
Speaker 1: get out of today's today's crisis. And essentially there's two
Speaker 1: baskets of options. One is around doubling down on on
Speaker 1: fossil fuels and and the other one investing in new
Speaker 1: areas of of of the energy economy, and certainly from
Speaker 1: an I A perspective, we're very keen that the upswing
Speaker 1: that we've seen in clean energy investment in two, we're
Speaker 1: keen to see that gain further momentum because we think
Speaker 1: that's the only lasting way out of the crisis that
Speaker 1: we're having today. Well and tim of course, by nature,
Speaker 1: it is a transition. We don't just arrive at a
Speaker 1: moment in which we are entirely reliant on clean energy.
Speaker 1: You still need fossil fuels. There is a back stop
Speaker 1: because many of these clean energy sources are intermitted by nature.
Speaker 1: The sun doesn't always shine, the wind isn't always blowing.
Speaker 1: How do both of these things play together. Where we
Speaker 1: can't wean ourselves off of fossil fuels, you can't get
Speaker 1: to green energy at the same time. Does that make sense? Yeah?
Speaker 1: I think. I mean that's one of the things that
Speaker 1: we try and avoid saying, is that there's a very
Speaker 1: sort of binary clean dirty element. You just need to
Speaker 1: scale up one and reduce the other. There is this
Speaker 1: sort of coexistence of energy systems for many, many years
Speaker 1: to come, and you need to make sure at all
Speaker 1: parts of that system of functioning in a way that
Speaker 1: allows us to have affordable, secure energy. So I very
Speaker 1: much agree. You know, we need to focus also on
Speaker 1: all of the energy services, the reliability that you can
Speaker 1: still get from traditional forms of supply. Tim Gould, the
Speaker 1: thickness of the I e A effort here. I think
Speaker 1: of Adam Saminski's work over the years, and then I
Speaker 1: look at Christian Mailik and J. Fren Worrion we're in
Speaker 1: long pages. They say the foundation of all of this
Speaker 1: is population growth in emerging markets. You own this i e. A.
Speaker 1: You've had the courage to go beyond the developed countries
Speaker 1: and look at emerging markets as well. Is the case
Speaker 1: for higher oil prices simply a burgeoning population in emerging markets?
Speaker 1: I think it's I think it's more than that. It's
Speaker 1: about the economic growth. It's the rising incomes. It's the
Speaker 1: aspirations that many people in emerging markets and developing economies
Speaker 1: have for their lifestyles that they that we have in
Speaker 1: many advanced economies, and that is going to drive developments
Speaker 1: in the energy sector for many years to come. But
Speaker 1: the question is what sort of model are these countries
Speaker 1: going to be pursuing Is it the same one, Is
Speaker 1: it the same path that we've trodden all these years,
Speaker 1: or is there a new lower emissions path that is
Speaker 1: now available because of some of the increasingly accessible and
Speaker 1: affordable clean technologies that are on the market. Tim, thank
Speaker 1: you so much for this report from the International Energy Association.
Speaker 1: Tim Goldwin this morning, Paul, I gotta get to this
Speaker 1: real quickly here, because it's too important, least not. I
Speaker 1: was watching Dodgers Reds. Really counseling is just unbelievable, Aid
Speaker 1: and oh there's people comparing in the coffex, and I'm like,
Speaker 1: I'm getting hard into the color. I'm getting upset. Even
Speaker 1: though Cofax went to University of Cincinnatias a walk on
Speaker 1: basketball player. We got to get straight on this right now,
Speaker 1: joining us Douglas cast on the markets will get to it.
Speaker 1: But I'm sorry this guy having a career here with
Speaker 1: the Dodgers Dot cass He's no Sandy Kofax is he
Speaker 1: one year? Does not a career? Making there we go. Oh,
Speaker 1: by the way, did you see the statue? Um? Yes,
Speaker 1: what do you think last week? Yeah? Okay, Doug, I
Speaker 1: got to get to this because I just think it's
Speaker 1: too important. Baseball has gotten boring. And one of the
Speaker 1: things that co Fax to the Gonsilan is also doing
Speaker 1: is limiting their walks per game. That's like the heart
Speaker 1: of the matter. It's just I mean, that's what made
Speaker 1: Sandy Kofax in three. He just cut down on the walks.
Speaker 1: So there is to it. I'm just trying to avoid
Speaker 1: the market, the rules doing everything. And by the way,
Speaker 1: baseball is not boring. It's boring to you, not boring
Speaker 1: to the York Yankees. That's true. That's right, they're killing it. Okay, Doug.
Speaker 1: The market, let's get right to it. Is just Paul
Speaker 1: alluded to earlier. Can you buy stocks? Can you own stocks?
Speaker 1: Can you be long? Given the gloom? Yeah? There is
Speaker 1: an English Russian encapsulates the markets that's claimed to be
Speaker 1: a translation of traditional Chinese curses. That expression is may
Speaker 1: you live in interesting times? And we certainly live in
Speaker 1: interesting times. I think that the one has to be
Speaker 1: struck by the change in the market side. Guys today
Speaker 1: versus six months ago. Um, when I was negative and
Speaker 1: now I'm substantially less cautious, and I have been solely
Speaker 1: accumulating in that long position. Uh six months ago, if
Speaker 1: you remember remember there was a preponderance of negative optionality
Speaker 1: of expected outcome. Speculation was acute. Valuations were priced to
Speaker 1: perfection and very high by his dark standards. There was
Speaker 1: a bull marketing complacency and that was manifested by someone
Speaker 1: you mentioned you are Danny earlier in an earlier segment,
Speaker 1: who was looking for like Belsky in excess of five
Speaker 1: thousand in the SMP and six months ago, bears were
Speaker 1: ridiculed as Cassandra's Today. Uh, Cassandra's Uh. You know, the
Speaker 1: Trojan Lioness is being lionized. UM stocks are no longer
Speaker 1: priced to perfection. Valuations have retreated from twenty three to
Speaker 1: sixteen times, you know the numbers, and many good stocks
Speaker 1: have been re rated by fifty or six without a
Speaker 1: real material change in fundamentals. And I think speculation and
Speaker 1: froth has been rooted out of the markets. Look at Caravana,
Speaker 1: which has gone from three seventy six to coin based
Speaker 1: robin hood. I can you know we have a host
Speaker 1: of companies like that. The market is literally pall littered
Speaker 1: with an unprecedented accumulation of disasters, and even the perma
Speaker 1: bowles have materially lowered their SMP price targets, and Yar
Speaker 1: Danny is a very good example. He seems to have
Speaker 1: thrown in the town the towel um. I think the
Speaker 1: one point I want to make today is that we
Speaker 1: don't invest in the present. Recent or coincident events don't
Speaker 1: move stocks. The rate of future change move stocks. Good
Speaker 1: news has permeated the market six months ago. Today bad
Speaker 1: news surrounds us and it's spreading. And equities are a
Speaker 1: discounting process and mechanism that helps to explain why bear
Speaker 1: markets are born out of good news, and why bull
Speaker 1: markets are born out of bad news, and when this
Speaker 1: bad news, like if you recall back to February, in
Speaker 1: March of the future was murky and we had a
Speaker 1: humongous rally off the COVID low and I so I
Speaker 1: think basically, to summarize, we're rapidly moving from a period
Speaker 1: of gross uh you can say, excessive speculation, elation, complacency
Speaker 1: on the part of most market participants, and the expectations
Speaker 1: of only positive outcomes, to a period in which speculation
Speaker 1: has been decimated, investors have to do risks and de
Speaker 1: gross stock valuations and economic profit expectations have been reset
Speaker 1: lower fear in the vix are rising. I don't know
Speaker 1: if you saw the Bank of America's bull bear indicator yesterday.
Speaker 1: It's a zero out of one zero, not one out
Speaker 1: of our UM. So the general consensus of expectation now
Speaker 1: consists of mostly negative outcomes, and I will I'm the
Speaker 1: first one to admit that conditions are far from an ideal.
Speaker 1: The negative headwinds have become accepted and to some degree
Speaker 1: are in the process of being discounted. And there are
Speaker 1: to me notable opportunities and selected stocks. Do I have
Speaker 1: to be a stock picker here or can I just
Speaker 1: go out and buy an SPS? I think the average investor,
Speaker 1: retail investors should probably buy just by the spy A
Speaker 1: passive a passive each So what are some of that?
Speaker 1: But but you're a professional. You did this for a living. Um,
Speaker 1: you started at Kidder Peabody way back. Uh, exactly a
Speaker 1: Kidder Peabody as a housing analyst. What stocks are you
Speaker 1: looking at? Well? Uh? The first thing to say is
Speaker 1: that I have doubled my net long position decline. So
Speaker 1: that's important to note. I'm still about only net long
Speaker 1: and um, to quote Andy Grove, only the powernoids the five.
Speaker 1: So I come in every day putely on the lookout
Speaker 1: and at least to an open mind. Um I and
Speaker 1: I as I've learned from Druck and Miller and Soros
Speaker 1: that sizing is seven or eight percent of the equation
Speaker 1: whether you're right, how much you make when you're write,
Speaker 1: how much you lose when you're wrong. So the stock
Speaker 1: the sector that I really like to answer your questions specifically, Paul,
Speaker 1: are the banks Okay, okay, we're gonna have it relatively
Speaker 1: sold and brief we're running out of time. We'll get
Speaker 1: you back on to talk about the banks. Also the
Speaker 1: co Fax trophe uh statue, which is wonderful as well.
Speaker 1: But what he just said, they're folks, and position sizing
Speaker 1: is gospel, absolute gospel. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
Speaker 1: ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television
Speaker 1: each day from six to nine am for insight from
Speaker 1: the best in economics, finance, its investment, and international relations.
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm
Speaker 1: Tom Keene, and this is Bloomberg.