WEBVTT - Surveillance: Recession Risk with Dudley (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.160 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.160 and of course on the Bloomberg Terminal. The Chairman will 0:00:30.160 --> 0:00:33.560 speak today. It will be a sober conversation, a sober 0:00:33.560 --> 0:00:36.120 set of Q and A, and part of it will 0:00:36.159 --> 0:00:40.040 be reading William Dudley's essay for Bloomberg Opinion this morning, 0:00:40.440 --> 0:00:43.440 where Bill Dudley, former President the New York Fat of 0:00:43.440 --> 0:00:47.519 course for decades of golden sex, simply says, learn how 0:00:47.520 --> 0:00:51.199 to spell it. It is a hard landing, Bill Dudley. 0:00:51.320 --> 0:00:54.520 How do you know or discern a recession coming? The 0:00:54.640 --> 0:01:00.240 distinction of a soft landing looking at a Goldilocks reset, should, 0:01:00.280 --> 0:01:04.160 if you will, of green span or a more difficult recession. 0:01:04.520 --> 0:01:08.280 How do you get out front of that Intellectually? I 0:01:08.319 --> 0:01:10.440 don't think it has to be a really deep recession. 0:01:10.480 --> 0:01:13.880 I mean keep recessions typically occur when something breaks like 0:01:13.959 --> 0:01:16.080 the global financial crisis is a good example of that. 0:01:16.560 --> 0:01:18.360 I think what the Fed reserve has to do is 0:01:18.400 --> 0:01:21.959 generated enough slack in the economy bring down inflation. That 0:01:22.000 --> 0:01:24.360 means the unemployer rate has to go up. The problem 0:01:24.360 --> 0:01:26.240 that the FED has it's very hard to push the 0:01:26.319 --> 0:01:28.959 unemployer rate up only a little bit. Every time the 0:01:29.000 --> 0:01:31.160 unemployer rates going up by more than a half a percent, 0:01:31.440 --> 0:01:33.920 you've had a full blown reception. There's no reason to 0:01:33.959 --> 0:01:35.840 think that it's going to be any different this time. 0:01:36.440 --> 0:01:40.279 Will the Chairman today say what you say in your essay, 0:01:40.400 --> 0:01:45.360 that suddenly employment is a mandate is subservient? Is that 0:01:45.400 --> 0:01:49.800 where we're heading. Well, that's what the FIT already told 0:01:49.840 --> 0:01:52.440 us in their FLOMC statement. They took out the reference 0:01:52.520 --> 0:01:55.920 to the labor market remains so strong. They're very much 0:01:55.960 --> 0:02:00.240 focused now on inflation as opposed to employment, because the 0:02:00.320 --> 0:02:02.559 layer market is too tight as opposed to not tight enough. 0:02:02.840 --> 0:02:05.160 So I think he'll reiterate the message that we heard 0:02:05.200 --> 0:02:08.320 that we heard in his press conference last week. I 0:02:08.320 --> 0:02:10.959 think also though he will not talk about a hard landing, 0:02:11.200 --> 0:02:13.040 the FETE is still going for a soft landing, and 0:02:13.040 --> 0:02:15.240 of course they should. The problem is it's just gonna 0:02:15.240 --> 0:02:17.079 be very difficult for them to pull this off. But 0:02:17.240 --> 0:02:19.040 a lot of people in the market right now are 0:02:19.080 --> 0:02:22.560 trying to draw a distinction between a soft recession or 0:02:22.639 --> 0:02:25.360 a shallow one, and one that is much more damaging. 0:02:25.560 --> 0:02:28.840 What is the characteristic of the hard landing you and vision. 0:02:30.080 --> 0:02:32.720 I think it's going to be a relatively mild recession 0:02:32.840 --> 0:02:36.440 at this point, because the fit the financial system looks 0:02:36.440 --> 0:02:39.520 like it's pretty solid. Household in business, balance sheets look 0:02:39.600 --> 0:02:42.359 like they're pretty solid. You really get a deep downturn 0:02:42.440 --> 0:02:44.880 when things in the financial system break and the ability 0:02:44.919 --> 0:02:48.240 to supply credit to people becomes impaired. I don't expect 0:02:48.280 --> 0:02:51.000 that they happen this time, So I would expect a 0:02:51.000 --> 0:02:55.520 mild recession like or or two thousand and one, not 0:02:55.680 --> 0:02:58.760 the deep recession like seventy three, seventy four, or of 0:02:58.760 --> 0:03:01.000 course the Great Financial Price. A lot of people would 0:03:01.000 --> 0:03:02.560 push back Bill and say that this FED has no 0:03:02.639 --> 0:03:05.240 appetite for causing a recession, they don't seem to want 0:03:05.280 --> 0:03:08.480 to do that, and that they will eventually pivot away 0:03:08.520 --> 0:03:11.520 from raising rates as much as people currently expect. Why 0:03:11.520 --> 0:03:12.959 do you think that's not the case. Why do you 0:03:13.000 --> 0:03:16.680 think they're going to take a page from haul Ulcer? Well, 0:03:16.720 --> 0:03:18.840 I don't think they want a recession. The problem is 0:03:18.840 --> 0:03:21.000 that if you're going to get inflation down, you need 0:03:21.040 --> 0:03:23.320 more slack in the economy, and it's very hard to 0:03:23.360 --> 0:03:27.160 generate more slack in the economy without actually generating recession. 0:03:27.520 --> 0:03:29.960 So that they're they're they're definitely going for a soft lane. 0:03:30.040 --> 0:03:32.400 It's gonna be almost impossible for them to pull it off. 0:03:32.880 --> 0:03:35.080 But as the assumption you're making bill that they're not 0:03:35.160 --> 0:03:38.120 going to blink even when the data turns more dramatically 0:03:38.120 --> 0:03:40.400 than we already have seen it having. I mean, Larry 0:03:40.440 --> 0:03:43.800 Summers was talking about a five percent unemployment rate over 0:03:43.840 --> 0:03:48.080 the next five years. Where do you think they're tolerances Well, 0:03:48.080 --> 0:03:49.680 I think that I think what Larry is talking about 0:03:49.760 --> 0:03:51.560 is certainly reasonable. I think the reason why they're not 0:03:51.560 --> 0:03:52.920 going to blink at the end of the day is 0:03:52.960 --> 0:03:56.080 they know that if they blink and don't get inflation down, 0:03:56.360 --> 0:03:59.920 then they have to do even more later. Postponing procrastinate 0:04:00.280 --> 0:04:02.080 is not a great option. We saw what happened in 0:04:02.120 --> 0:04:04.760 the nineties, sixties and seventies and the Feeder Reserve was 0:04:04.840 --> 0:04:07.920 slow to tackle inflation. What happened was and station got 0:04:07.960 --> 0:04:10.240 out of hand and Paul Broker had to come in 0:04:10.320 --> 0:04:12.720 and put the U s econmy through the ringer. So 0:04:12.760 --> 0:04:15.400 the fact wants to do what's necessary in the near term, 0:04:15.560 --> 0:04:17.200 so they don't have to do a lot more in 0:04:17.240 --> 0:04:20.080 the longer term. But it is in the longer term 0:04:20.080 --> 0:04:22.640 that you really see the full effects of monetary policy 0:04:22.680 --> 0:04:26.760 taking shape. It operates with a lag. We all understand that. 0:04:26.880 --> 0:04:28.679 So I guess the question is if they're front loading 0:04:28.680 --> 0:04:32.120 and aggressive, are they going to see it reflected in 0:04:32.160 --> 0:04:34.640 the actual data we're getting or do they risk just 0:04:34.720 --> 0:04:37.560 moving way too aggressively and then the data turns all 0:04:37.600 --> 0:04:41.360 at once. Well, that's that's what could actually happen, because 0:04:41.400 --> 0:04:44.760 right now the ECMMY has considerable for momentum as the 0:04:44.960 --> 0:04:49.080 commy reopens and imperial games are very strong. Household balance 0:04:49.160 --> 0:04:52.560 sheets are still very solid, boosted by the fiscal stimus 0:04:52.720 --> 0:04:55.000 that we got over the last couple of years. But 0:04:55.520 --> 0:04:59.680 beneath that things are trouble. Uh Inflation is rising faster 0:05:00.040 --> 0:05:04.200 and wages financial conditions have tightened a great deal. So 0:05:04.240 --> 0:05:05.640 what I think is going to happen is the economy 0:05:05.760 --> 0:05:08.360 be fine over the next few months, and then we're 0:05:08.400 --> 0:05:10.839 going to see a very sharp slow down the probably 0:05:10.880 --> 0:05:13.520 in the first half But I just want to build 0:05:13.560 --> 0:05:15.640 on something that Kaylee was talking about with that five 0:05:15.680 --> 0:05:19.640 percent unemployment figure from Larry Summers over the next five years, 0:05:19.680 --> 0:05:21.440 and that that's what he thinks is necessary to bring 0:05:21.440 --> 0:05:23.960 inflation down. What happens if you start to see the 0:05:24.040 --> 0:05:27.800 unemployment numbers climb, but the inflation figures do not come 0:05:27.839 --> 0:05:30.839 down because of those lag effects like rents, for example, 0:05:30.880 --> 0:05:33.720 that are continuing to climb. How does the FED handle that? 0:05:33.760 --> 0:05:38.320 Based on your conversations and your experience on the Central Bank, Well, 0:05:38.360 --> 0:05:40.280 I think you're right that inflation is probably not gonna 0:05:40.279 --> 0:05:43.320 come down that quickly because there are leads in price 0:05:44.040 --> 0:05:47.560 in companies raising prices. Also, I think the Ukraine Russia 0:05:47.600 --> 0:05:51.560 war complicates things enormously because it looks like the energy 0:05:51.560 --> 0:05:55.200 price shock and the food shock is gonna last longer 0:05:55.240 --> 0:05:57.400 because of the war. So I think that the FED 0:05:57.440 --> 0:06:00.160 has gotten very unlucky in terms of the kind the 0:06:00.160 --> 0:06:03.200 inflation shocks that we're seeing. They're likely to be persistent 0:06:03.440 --> 0:06:05.680 and that's gonna make it difficult for the FED to 0:06:05.680 --> 0:06:09.599 reverse course. Bill Dudley John Taylor's at a school you 0:06:09.600 --> 0:06:12.200 may know it across the bay from Berkeley. It's stand 0:06:12.360 --> 0:06:14.760 Stanford I think is what it's called. And I can 0:06:14.839 --> 0:06:17.840 just see John Taylor with a full balloon in as 0:06:17.920 --> 0:06:21.120 freshman economics class, letting the air out of it ever 0:06:21.240 --> 0:06:25.240 so slowly. We have a fiscal balloon some thirty of 0:06:25.279 --> 0:06:28.719 g d P. How long will it take to let 0:06:28.720 --> 0:06:31.880 the air out of that fiscal balloon? Is a central 0:06:31.920 --> 0:06:34.800 bank is at a three year project or do you 0:06:34.880 --> 0:06:38.280 really see it out almost to a decade. I don't 0:06:38.320 --> 0:06:40.039 think it should take as long as a decade. But 0:06:40.160 --> 0:06:43.080 fiscal policy is a factor behind why we're probably going 0:06:43.120 --> 0:06:45.960 to see a sharp slowdown at some point. Because fiscal policy, 0:06:45.960 --> 0:06:48.240 while it has been very stimular over the last two years, 0:06:48.480 --> 0:06:51.880 that steamless is over. We've also seen households begin to 0:06:51.920 --> 0:06:53.840 pull down their savings race. So the savings rate was 0:06:53.920 --> 0:06:56.560 very elevated as a fiscal policy stamless with being put 0:06:56.600 --> 0:06:59.000 in place, but the savings rate now has already fallen 0:06:59.000 --> 0:07:01.440 below it's long one app which tells you that consumers 0:07:01.440 --> 0:07:03.920 are a little bit stressed, that are starting to experience 0:07:03.920 --> 0:07:06.000 a little bit of stress in terms of their balance sheets. 0:07:06.320 --> 0:07:11.040 Bill Dudley required reading folks before the testimony of Chairman Powell. 0:07:11.040 --> 0:07:14.840 The Humphrey Hawkins testimony a monetary report by the Chairman 0:07:14.880 --> 0:07:17.080 of the Federal Reserve, and we'll get Bill Dudley out 0:07:17.120 --> 0:07:19.480 on social here as quick as we can. You can 0:07:19.480 --> 0:07:22.480 see that, of course at Bloomberg dot com. He speaks 0:07:22.520 --> 0:07:28.040 of a hard uh landing. Uh uh is Well, you know, Bill, 0:07:28.120 --> 0:07:30.280 I look at this and I think if Jerome Powell 0:07:30.400 --> 0:07:34.840 was to read your essay, you wonder how he would 0:07:34.920 --> 0:07:39.160 amend his discussion today. I mean, he's not gonna say 0:07:39.240 --> 0:07:42.600 hard landing, but how does he give up the how 0:07:42.640 --> 0:07:46.640 does he address the probabilities the set of outcomes that 0:07:46.680 --> 0:07:49.560 we may see. Well, he's made it more clear that 0:07:49.600 --> 0:07:52.360 it's going to be more difficult the longer inflation stays 0:07:52.400 --> 0:07:54.920 as high as it's been the heart of the fast jobs, 0:07:54.960 --> 0:07:57.480 and he's he's admitted that in his his press conference. 0:07:57.800 --> 0:07:59.320 So I think today he's going to make it clear 0:07:59.400 --> 0:08:02.120 that this is not gonna be easy. He's gonna talk 0:08:02.160 --> 0:08:04.440 about that there is a path of soft learning. I 0:08:04.480 --> 0:08:07.280 think that path is extraordinarily narrow. You won't talk about 0:08:07.320 --> 0:08:09.200 how narrow that path is. They'll just talk about that's 0:08:09.200 --> 0:08:11.240 what the Fed Reserve is trying to seek and pull 0:08:11.280 --> 0:08:14.200 off this time. Bill, what kind of financial breaking do 0:08:14.240 --> 0:08:16.640 you foresee being a trigger for the Fed? And I 0:08:16.680 --> 0:08:19.160 say this as the end weekends to the weakest levels 0:08:19.200 --> 0:08:22.600 we've seen versus the dollar since and people are starting 0:08:22.600 --> 0:08:27.440 to get concerned about deteriorating liquidity in certain bond markets. Well, 0:08:27.440 --> 0:08:29.600 I think the biggest area stress, frankly is going to 0:08:29.640 --> 0:08:32.079 be low and moderate income countries who are hurt by 0:08:32.240 --> 0:08:35.880 want a stronger dollar, higher grain prices and higher energy prices. 0:08:36.360 --> 0:08:39.599 For poorer countries, grain and energy is a pretty significant 0:08:39.600 --> 0:08:42.880 portion of the household consumption basket, so they're gonna hit 0:08:43.080 --> 0:08:45.559 be hit very severely over the next twelve to eighteen months. 0:08:45.679 --> 0:08:48.240 So I expect a lot of sovereign debt problems in 0:08:48.559 --> 0:08:50.440 the next year or two, and that's going to just 0:08:50.520 --> 0:08:53.320 be more problematic for the global economy. So, Bill, at 0:08:53.360 --> 0:08:55.760 what point does a strong dollar create a real issue? 0:08:55.800 --> 0:08:57.720 And this is something that I was thinking about, especially 0:08:57.840 --> 0:09:00.160 is a growing number of investors see the dollar are 0:09:00.200 --> 0:09:03.000 as the main hedge against equity weakness. At what point 0:09:03.040 --> 0:09:06.240 is it a trigger for the Fed? Well, the fact 0:09:06.360 --> 0:09:09.079 actually is not unhappy with the dollar being stronger because 0:09:09.080 --> 0:09:11.920 the stronger dollar holds down US inflation by making import 0:09:11.960 --> 0:09:14.800 prices cheaper, and it also slows down the economy by 0:09:14.840 --> 0:09:18.120 reducing US export competents. So when you think about the 0:09:18.120 --> 0:09:22.480 FED once tighter financial conditions, higher bonnials, looperstock prices, stronger dollar, 0:09:22.800 --> 0:09:25.000 the dollar is actually the most attractive of those three 0:09:25.040 --> 0:09:28.360 things because the stronger dollar actually increases your purchasing power. 0:09:28.640 --> 0:09:31.040 So the dollar strength is not something the Federal Reserved 0:09:31.120 --> 0:09:33.840 views as a bug. Thank you, this is a feature. Well. 0:09:33.880 --> 0:09:36.679 Speaking of the financial markets, we heard from Tom Barkin 0:09:36.800 --> 0:09:39.680 yesterday we will again today, but he essentially said that 0:09:39.800 --> 0:09:41.199 you want to get back to where you want to 0:09:41.240 --> 0:09:43.640 go as fast as you can without breaking anything, talking 0:09:43.640 --> 0:09:45.880 about not wanting to cause undue harm, not just to 0:09:45.920 --> 0:09:49.480 the economy but to financial markets. What harm would that be? 0:09:49.640 --> 0:09:52.200 What would make the FED put kicked back in Bill? 0:09:53.679 --> 0:09:55.960 I think you'd have to see some sort of calamity 0:09:56.000 --> 0:09:59.720 and financial markets that impeded market function, impeded the ability 0:09:59.720 --> 0:10:02.720 of thanks to lend money to households and businesses. I 0:10:02.720 --> 0:10:05.000 don't expect that. I think the reforms that we made 0:10:05.440 --> 0:10:08.240 following the Great Financial Crisis, in terms of the banking system, 0:10:08.559 --> 0:10:12.520 more capital, more liquidity, better risk management, better governance, those 0:10:12.640 --> 0:10:14.640 have shown to work. And I think they'll work this 0:10:14.760 --> 0:10:16.520 time as well. Bill, I just want to say, and 0:10:16.559 --> 0:10:19.440 you're wonderful, essay. I don't know which is more important 0:10:19.480 --> 0:10:22.880 that you quoted the great economist Claudia Sam or you 0:10:23.000 --> 0:10:26.480 quoted the other economist, Wiley Coyote. I'll let you decide 0:10:26.480 --> 0:10:29.240 which one. I think. That's uh great to see her, 0:10:29.280 --> 0:10:31.960 Bill Dudley, thank you so much. The former president of 0:10:32.040 --> 0:10:41.480 the New York Right now, Professor Abbie Joseph Cohen joins us. 0:10:41.520 --> 0:10:44.520 She is entrenched at the Columbia Business School and of 0:10:44.559 --> 0:10:49.040 course for decades at Golden sas is a partner. Uh, professor, 0:10:49.160 --> 0:10:51.800 how's it going? What a shift to go from the 0:10:51.840 --> 0:10:55.800 twenty five hour week of Goldman Sachs down to the 0:10:55.840 --> 0:10:59.439 cushy job as a professor at one of our acclaimed schools. 0:10:59.600 --> 0:11:03.600 How abrupt is a shift? Ban? Well, it was twenty 0:11:03.600 --> 0:11:08.320 five hours a day, not a week. Correct that. That's 0:11:08.440 --> 0:11:11.120 that's quite all right. Um. It has been a wonderful 0:11:11.480 --> 0:11:14.880 adjustment for me. Frankly, you know, I was an adjunct 0:11:14.920 --> 0:11:17.440 of Columbia for almost a decade, so I knew what 0:11:17.480 --> 0:11:20.800 I was getting into. Um. I love the students that Columbia. 0:11:20.960 --> 0:11:24.600 Half of them are from overseas, and it's a terrific faculty, 0:11:25.200 --> 0:11:27.480 and I'm spending I'm spending time with a lot of 0:11:27.520 --> 0:11:33.160 the faculty working on new curriculum materials for them, incorporating 0:11:33.440 --> 0:11:36.800 the real world aspects into the academic work. And the 0:11:36.840 --> 0:11:40.240 foundation here, folks, is something that the right of passage. 0:11:40.280 --> 0:11:43.600 If you're in the racket, you must read either nineteen 0:11:43.720 --> 0:11:46.960 thirty four Graham Dot or maybe you catch up with 0:11:47.040 --> 0:11:50.120 Graham Dot and Coddle. Right now we look at Graham 0:11:50.160 --> 0:11:52.480 Dot and Joseph Cohen, which is going to be the 0:11:52.520 --> 0:11:55.720 new definitive book out of Columbia Business School. How do 0:11:55.760 --> 0:11:58.960 you take the fundamentals that we were weaned on and 0:11:59.080 --> 0:12:04.680 drag them forward and Jerome Powell's Modern Age, Tom, that 0:12:04.840 --> 0:12:07.760 is a wonderful question. But first let me set the stage, 0:12:08.200 --> 0:12:11.000 and that is to say, for the last few years, 0:12:11.440 --> 0:12:16.079 the fundamentals have mattered less than things like momentum and 0:12:16.240 --> 0:12:19.480 investor enthusiasm. Now you take a look, for example, of 0:12:19.520 --> 0:12:24.160 the strong correlation between the technology stocks, cryptocurrency and so on, 0:12:24.559 --> 0:12:29.560 and basically say, these are types of financial assets in 0:12:29.600 --> 0:12:34.160 which valuation approaches really didn't matter very much. And I 0:12:34.200 --> 0:12:37.560 think we're now back into a period in which it 0:12:37.640 --> 0:12:41.120 does matter, where it's the fundamentals of earnings, the fundamentals 0:12:41.120 --> 0:12:45.000 of margins, the fundamentals of inflation and interest rates, and 0:12:45.080 --> 0:12:49.720 putting that all together in terms of appropriate valuation models 0:12:50.000 --> 0:12:52.640 that will make a big difference for investors going forward. 0:12:52.679 --> 0:12:55.080 I mean, how do you model the fundamentals at a 0:12:55.120 --> 0:12:57.319 time when people can't come out whether we're going to 0:12:57.440 --> 0:13:00.560 have a sanguid economy or a hard landing that looks 0:13:00.600 --> 0:13:03.040 something like a depression. At what point do you game 0:13:03.080 --> 0:13:08.000 out recessionary outcomes and your fundamental analysis. Yeah, you know, 0:13:08.080 --> 0:13:11.160 there are two different ways to look at that, Leasta. 0:13:11.240 --> 0:13:15.520 First of all, we can game out alternative scenarios, so 0:13:15.559 --> 0:13:18.640 we have some sense of what the range of possibilities 0:13:18.760 --> 0:13:22.080 might be, not just for equities but other financial assets. 0:13:22.360 --> 0:13:24.439 But of course, at the end of the day, an 0:13:24.480 --> 0:13:28.320 investor portfolio manager has to say, what do I think 0:13:28.480 --> 0:13:31.880 is the most likely scenario. You can always plan for 0:13:31.920 --> 0:13:35.840 the worst if you have very little risk tolerance. You 0:13:35.880 --> 0:13:39.319 can always plan for the best if you're highly risk averse. 0:13:39.600 --> 0:13:42.959 But I think many portfolio managers are aiming for something 0:13:43.000 --> 0:13:45.560 in the middle, where they're trying to identify what is 0:13:45.600 --> 0:13:49.280 the most likely scenario, And as some of your earlier 0:13:49.320 --> 0:13:52.240 guests indicated, what seems to be priced in right now 0:13:52.400 --> 0:13:56.439 is a mild recession. Uh, certainly not a severe recession. 0:13:56.480 --> 0:13:58.520 When you look at the parameters, do you look at 0:13:58.520 --> 0:14:01.240 the end of the era of money or do you 0:14:01.320 --> 0:14:06.079 look at just simply a pause, a momentary reprieve from 0:14:06.120 --> 0:14:08.839 the ultra low rates of more than a decade as 0:14:08.880 --> 0:14:11.200 we try to curtail inflation, and then our aversion back 0:14:11.240 --> 0:14:14.920 to that at the end. Yeah, let me adjust the 0:14:15.000 --> 0:14:18.040 question just a little bit, Lisa, and to say that 0:14:18.320 --> 0:14:21.560 money isn't free anymore, but in many cases it's not 0:14:21.720 --> 0:14:26.280 particularly expensive, particularly by historical standards. And so while we 0:14:26.360 --> 0:14:29.280 have seen this rise and interest rates, and the FED 0:14:29.480 --> 0:14:32.440 is likely to continue to move those short rates higher, 0:14:32.680 --> 0:14:35.760 we've already seen quite an increase in the intermediates and 0:14:35.760 --> 0:14:39.120 the longs and the rates that affect consumers, for example 0:14:39.160 --> 0:14:42.760 through mortgages. UH. And so what we have to recognize 0:14:42.960 --> 0:14:47.120 is that when money becomes more expensive in some ways, 0:14:47.800 --> 0:14:53.160 investors households become much more careful with it UM because 0:14:53.360 --> 0:14:56.680 if it's no longer free, UM, you're going to see 0:14:56.760 --> 0:15:01.480 less leverage, which is a good thing. In portfolios. For example, 0:15:01.600 --> 0:15:06.520 we've had incredible returns, and some private equity portfolios maybe 0:15:06.560 --> 0:15:09.600 the basic returns were good, but in some cases they've 0:15:09.640 --> 0:15:13.400 been turbo charged by significant amounts of leverage. We sort 0:15:13.400 --> 0:15:17.840 of hide the underlying a skill set, if you will, 0:15:17.880 --> 0:15:20.680 of of the portfolio manager. And then, of course there 0:15:20.680 --> 0:15:24.640 are many corporations that took advantage of very inexpensive money 0:15:24.880 --> 0:15:28.040 to leverage up their results um and so when money 0:15:28.080 --> 0:15:30.680 is no longer free, we get to see a better 0:15:30.720 --> 0:15:34.880 picture of whether those corporate managers and those portfolio managers 0:15:35.000 --> 0:15:38.160 are actually doing a good job. Well, Abby, you talk 0:15:38.200 --> 0:15:41.040 about how people are more careful with their money in 0:15:41.040 --> 0:15:43.480 this kind of environment, and we know that it wasn't 0:15:43.520 --> 0:15:47.160 just you know, corporations and big institutional investors that were 0:15:47.160 --> 0:15:50.480 moving money around during the pandemic free money area. You 0:15:50.560 --> 0:15:53.960 also had stimulus that was fueling the retail investor and 0:15:54.000 --> 0:15:57.240 they have been a force within these markets. What happens 0:15:57.280 --> 0:16:01.440 when that goes away? Uh. What we are looking at, 0:16:01.480 --> 0:16:05.040 of course, as a situation in which individuals in many 0:16:05.320 --> 0:16:10.080 cases became overly enthusiastic about some areas of the market, 0:16:10.160 --> 0:16:16.040 equities and elsewhere, including digital currencies that offered good momentum um. 0:16:16.120 --> 0:16:19.200 And what we are moving into and have already gone 0:16:19.880 --> 0:16:23.720 to see is what happens when the momentum breaks down 0:16:24.120 --> 0:16:28.400 and you need to start looking at the valuations per se. Now, 0:16:28.720 --> 0:16:32.160 individual investors, of course, have many different factors that they 0:16:32.200 --> 0:16:34.880 need to be concerned about. Some of it has to 0:16:34.920 --> 0:16:38.600 do with how much longer they have in their investment arizon, 0:16:39.080 --> 0:16:42.320 what else they might need, uh, the capital for and 0:16:42.320 --> 0:16:45.880 and so on, and so we in fact see less money. 0:16:45.920 --> 0:16:48.520 And we have already seen us going into things like 0:16:48.640 --> 0:16:53.280 cap weighted dtfs. We've not yet seen the intermediate aspect, 0:16:53.360 --> 0:16:55.400 and I don't think it's going to be all that 0:16:55.440 --> 0:16:58.920 bad just looking at the demograph. I say this in 0:16:59.000 --> 0:17:02.800 great honor of your two thousand five paper, which is definitive, folks. 0:17:02.800 --> 0:17:08.000 It's basically codified within the CIFA Institute Aristotle on Investment 0:17:08.040 --> 0:17:13.480 decision Making. We have dragged ourselves, Professor, from the elegance 0:17:13.480 --> 0:17:16.880 of two thousand five to a two thousand twenty two 0:17:16.880 --> 0:17:21.920 discussion of what's called a Cathartic puke. How does catharsis 0:17:21.920 --> 0:17:27.920 play into fundamental analysis and the confidence to own equities? 0:17:28.160 --> 0:17:31.720 Do I need to go down substantially to find a 0:17:31.840 --> 0:17:36.920 base to own equities. We are now, I believe tom 0:17:37.000 --> 0:17:40.480 in a situation where beta will be less important than alpha. 0:17:41.200 --> 0:17:44.120 And that explain that, please, that's what that's really important. 0:17:44.160 --> 0:17:50.040 Explain that investors always think that they are smart in 0:17:50.080 --> 0:17:52.920 a bull market, right, So if you're invested in a 0:17:52.960 --> 0:17:56.399 bull market, almost anywhere in able market, the beta of 0:17:56.800 --> 0:17:59.480 the market, and that has to do just with slopes 0:17:59.560 --> 0:18:03.760 of of lines and so on. UM. Don't confuse um 0:18:04.359 --> 0:18:09.200 basically a bowl market for genius and and so that's beta. 0:18:09.640 --> 0:18:14.160 Alpha is security selection UM. And one of the curious 0:18:14.240 --> 0:18:16.840 things about the last two to three years in particular, 0:18:17.400 --> 0:18:21.160 is that there's it's been really hard to get alpha. UM. 0:18:21.320 --> 0:18:26.679 So investors professionals who have used sophisticated approaches trying to 0:18:27.119 --> 0:18:31.520 identify what particular securities they wanted to invest in often 0:18:31.760 --> 0:18:36.840 stumbled because alpha didn't matter very much. With this dramatical 0:18:36.840 --> 0:18:40.600 reset in the markets, the overall decline number one, Number 0:18:40.640 --> 0:18:44.320 two the breakdown of the momentum orientation, and number three 0:18:44.480 --> 0:18:49.040 the recognition that the economic cycle itself is shifting. We 0:18:49.160 --> 0:18:52.520 see a move now, I believe towards alpha, and that's 0:18:52.560 --> 0:18:55.639 not just within the US equity market. It's likely to 0:18:55.680 --> 0:18:59.520 happen in other developed markets as well. And also think 0:18:59.560 --> 0:19:02.800 of it were broadly in terms of asset categories that 0:19:02.880 --> 0:19:05.160 are no longer all going to be moving in locks. 0:19:05.480 --> 0:19:07.240 That's exactly where I wanted to go, abby, and we 0:19:07.359 --> 0:19:09.880 just have about a minute left. Does this mean that's 0:19:09.920 --> 0:19:12.919 the end of the sort of standard sixty forty in 0:19:13.040 --> 0:19:17.280 terms of just working and needing a more nuanced, scalpeled 0:19:17.280 --> 0:19:22.320 approach even with acid allocation. Let's recognize that that thirty 0:19:22.400 --> 0:19:26.680 year plus period in which inflation and interest rates were 0:19:26.760 --> 0:19:29.840 under good control and continue to move lower is over. 0:19:30.560 --> 0:19:32.800 That doesn't mean that a year or two from now 0:19:33.160 --> 0:19:38.000 inflation will be under incredible uncontrolled and interest rates still 0:19:38.119 --> 0:19:42.359 dramatically rising. I don't expect that, but we are exiting 0:19:42.359 --> 0:19:46.240 that thirty year period in which fixed income securities were 0:19:46.320 --> 0:19:50.000 a very good place to be invested, and that rule 0:19:50.560 --> 0:19:53.199 right now may not be uh, you know, such a 0:19:53.240 --> 0:19:56.000 clever thing. One of the point, if I may that 0:19:56.160 --> 0:20:01.040 Aristotle paper talks about the importance of understand ending the data. 0:20:01.240 --> 0:20:03.800 Let me give you one example. Right now, there's so 0:20:03.880 --> 0:20:08.600 much focus on headline CPS CPI. You guys have done 0:20:08.600 --> 0:20:13.800 a great job of contrasting headline CPI to course cp I. 0:20:13.880 --> 0:20:17.760 What the fit is looking at is the better message measure, 0:20:18.040 --> 0:20:22.040 which is core PC, which is running three to four 0:20:22.480 --> 0:20:27.880 percentage points below the headline cp I. So rather than 0:20:27.920 --> 0:20:31.000 looking at like an eight percent number, they're looking at 0:20:31.000 --> 0:20:34.520 a number which is five percent, maybe a little bit lower. 0:20:34.760 --> 0:20:37.760 It's still arise in inflation. I don't mean to suggest not, 0:20:38.080 --> 0:20:41.280 but it is not quite as awful looking as the 0:20:41.320 --> 0:20:44.040 headlines would suggest. Daddy, Joseph Cohin, thank you so much 0:20:44.080 --> 0:20:48.800 for joining Bloomberg and Bloomberg Surveillance today at Columbia Business School. 0:20:53.040 --> 0:20:57.160 Lisa shallatt from the meeting of Alliance Capital and Sanford 0:20:57.160 --> 0:20:59.959 Bernstein years ago over to her duties as chief investment 0:21:00.119 --> 0:21:04.120 officer at Morgan Stanley Wealth Management. Been there done that 0:21:04.320 --> 0:21:09.160 she has seen the dreaded conversation of recession. Lisa, how 0:21:09.280 --> 0:21:13.880 foolish is it for Morgan Stanley clients to angst over 0:21:14.320 --> 0:21:19.560 the guestimates of what recession will be? Look I I 0:21:20.000 --> 0:21:23.920 We've always said, um that you know, it's it's foolish 0:21:23.960 --> 0:21:27.120 for for clients to to try to guess. I mean 0:21:27.160 --> 0:21:29.680 one of the things, uh, that we were talking about 0:21:29.680 --> 0:21:33.679 with clients yesterday is um. You know, even you know, 0:21:33.760 --> 0:21:35.840 some of the folks who get paid to do this, 0:21:36.040 --> 0:21:42.000 i e. At the FED have never gotten recession forecast correct. Ever. 0:21:43.000 --> 0:21:46.120 I think this is something that David Rosenberg also wrote 0:21:46.160 --> 0:21:50.359 about yesterday, uh in in his wonderful piece that he 0:21:50.400 --> 0:21:53.760 puts out daily. UM. And And the fact of the 0:21:53.800 --> 0:21:57.200 matter is, you know, the best we can do is um, 0:21:57.200 --> 0:22:01.960 try to ascertain direction uh and relative order of magnitude 0:22:02.040 --> 0:22:04.440 and other than that, I don't think we can try 0:22:04.480 --> 0:22:07.119 to you know, hand ring about you know where the 0:22:07.160 --> 0:22:10.280 bottom is uh and you know how far will it go? 0:22:10.600 --> 0:22:12.879 And what you know is going to be effected until 0:22:12.880 --> 0:22:15.360 we're really you know, kind of in it well hand 0:22:15.440 --> 0:22:17.520 ringing aside, when you look at the tea leaves and 0:22:17.560 --> 0:22:20.320 this idea that certain tech companies in particular are starting 0:22:20.359 --> 0:22:23.240 to lay off at members of their staff or cut 0:22:23.240 --> 0:22:26.120 back on hiring plans, Lisa, have we entered a new 0:22:26.160 --> 0:22:29.880 phase of the economic cycle that is beginning on the 0:22:30.000 --> 0:22:35.080 edges and requires a shifting strategy. Look, I think that 0:22:35.160 --> 0:22:39.080 we're actually you know, as you know, markets always you know, 0:22:39.320 --> 0:22:43.680 are are six to nine months ahead of reality. I do. 0:22:43.920 --> 0:22:47.320 I am in the camp UM that that the price 0:22:47.359 --> 0:22:51.040