WEBVTT - Surveillance: Labor Market With Luzzetti 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.120 and of course on the Bloomberg terminal. All right now 0:00:31.160 --> 0:00:33.879 to make a smarter Matthew Loseetti with us for you 0:00:33.960 --> 0:00:36.199 on Global Wall Street. Deutsche Bank has just done a 0:00:36.320 --> 0:00:39.400 terrific job. It's maybe a fractious view with a different 0:00:39.479 --> 0:00:42.800 view short term versus their view long term. Let's go 0:00:42.960 --> 0:00:46.200 wicked short to Friday with Matthew Lozetti our first real 0:00:46.240 --> 0:00:49.240 discussion of this job's report. Matthew, I love what you say. 0:00:49.360 --> 0:00:54.040 It is a perplexing labor economy. How will this Friday's 0:00:54.080 --> 0:00:58.640 report be perplexing? Sure, thank you for having me. I 0:00:58.640 --> 0:01:00.600 think what we've seen over the past of the months 0:01:00.680 --> 0:01:03.639 is UH data data points which are pointing at two 0:01:03.640 --> 0:01:06.199 different things. We have an economy which on a number 0:01:06.200 --> 0:01:08.360 of metrics look like looks like there's a lot of slack, 0:01:08.800 --> 0:01:11.520 seven point six million jobs below pre COVID, a labor 0:01:11.520 --> 0:01:14.720 force at three point five million below pre COVID as well. 0:01:15.000 --> 0:01:17.759 On the other hand, you have record quits, record job openings, 0:01:17.840 --> 0:01:20.399 wages have been firm. Uh. And so I think we've 0:01:20.400 --> 0:01:22.679 been looking for data points to try to resolve these 0:01:22.680 --> 0:01:24.399 two issues in our mind, and I know the feed 0:01:24.520 --> 0:01:26.959 is is certainly looking at data points there. I don't 0:01:27.000 --> 0:01:29.280 think we get a resolution this week. We expect seven 0:01:29.440 --> 0:01:32.160 thousand jobs. We expect the employment rates to take down 0:01:32.240 --> 0:01:34.760 by by one t the labor force to pick up 0:01:34.800 --> 0:01:36.759 a little bit. But I think, you know, as FED 0:01:36.800 --> 0:01:38.480 officials have said, it's more likely that we have to 0:01:38.480 --> 0:01:41.040 wait until the fall to we get labor supply coming 0:01:41.080 --> 0:01:43.840 on fully and get a greater resolution of these this 0:01:44.000 --> 0:01:46.200 real dichotomy that we're seeing in the labor market. That 0:01:46.400 --> 0:01:49.760 February before the pandemic, we all look back at that 0:01:49.880 --> 0:01:53.720 Nirvano of what was build as a fully employed America. 0:01:54.360 --> 0:01:57.160 Is that what we're going back to or are we 0:01:57.240 --> 0:02:01.920 going forward to something new and different? Look. I think 0:02:01.920 --> 0:02:04.920 there's definitely some things that have changed, and probably from 0:02:04.920 --> 0:02:08.400 a structural sense, and and the FED and Chair Palace 0:02:08.440 --> 0:02:11.520 has talked about retirements really picking up, probably on the 0:02:11.520 --> 0:02:13.840 back of a big pickup and wealth and and savings 0:02:13.840 --> 0:02:16.680 that the households have had there. But in my mind, 0:02:17.360 --> 0:02:19.640 what we learned from the pre COVID labor market was 0:02:19.680 --> 0:02:23.120 we just continually found labor supply. The primary labor force 0:02:23.160 --> 0:02:26.280 participation rate continue to trend hire people coming off disability 0:02:26.280 --> 0:02:29.480 insurance roles, you know. Vice Chair Clarad at that point 0:02:29.520 --> 0:02:31.440 was saying that NEHRU could be as low as three 0:02:31.440 --> 0:02:33.760 and a half percent. And I don't think that there's 0:02:33.800 --> 0:02:36.639 anything from the shock that prevents us from getting back there. 0:02:36.639 --> 0:02:39.680 If anything, you know, greater workforce flexibility, some of these 0:02:39.960 --> 0:02:42.520 policies that the buying administration is looking at should help 0:02:42.560 --> 0:02:45.840 the lift labor supply. So there is no doubt constraints 0:02:45.840 --> 0:02:47.480 in the near term on labor supply. But if we 0:02:47.520 --> 0:02:50.399 look for by a year, two years, um, I think 0:02:50.400 --> 0:02:52.280 that we should anticipate that we can get back to 0:02:52.360 --> 0:02:54.520 that pre COVID labor market. Some people have made the 0:02:54.600 --> 0:02:57.720 argument that holding back labor supply. Want factor behind that 0:02:57.760 --> 0:03:01.240 has been the additional unemployment insurance. You ke THEOGUMAN you 0:03:01.280 --> 0:03:04.919 find limited evidence that enhanced unemployment insurance benefits were exerting 0:03:04.919 --> 0:03:08.799 a material drag on aggregate employment. What did you look at, 0:03:08.840 --> 0:03:12.480 Matt sure, So I know there's been a lot of 0:03:12.520 --> 0:03:14.840 look at the work done on this, and what we've 0:03:14.880 --> 0:03:16.720 looked at is try to look across states, try to 0:03:16.720 --> 0:03:19.799 look across sectors, and are you seeing labor markets either 0:03:19.840 --> 0:03:22.000 in low wage states that look like they are are 0:03:22.040 --> 0:03:25.080 more constrained because they should be more impacted by enhanced 0:03:25.120 --> 0:03:28.280 unemployment benefits? Are you seeing low wage sectors that are 0:03:28.280 --> 0:03:31.640 also being more constrained and you really don't find that. So, 0:03:31.720 --> 0:03:34.720 for example, leisure and hospitality, we looked at the vacancy 0:03:34.800 --> 0:03:37.000 yield and this is the rate at which they're you're 0:03:37.000 --> 0:03:39.960 turning job openings into hires. The vacancy yield and leisure 0:03:39.960 --> 0:03:42.160 on hospitality, which is a low wage sector, is actually 0:03:42.160 --> 0:03:44.960 well above a lot of high wage sectors. Similarly, if 0:03:44.960 --> 0:03:47.200 you look at across states, it's actually the low wage 0:03:47.240 --> 0:03:49.480 states that are really outperforming here, it's it's the high 0:03:49.520 --> 0:03:52.760 wage states that still have a lot of slack or 0:03:52.920 --> 0:03:55.720 or a well blow pre code levels. So in our mind, 0:03:55.960 --> 0:03:58.440 you know, unemployment trans benefits you no doubt, I would 0:03:58.440 --> 0:04:00.960 not deny that it is probably a factor for some, 0:04:01.360 --> 0:04:04.040 But if you look at the big macro stories, in 0:04:04.080 --> 0:04:07.120 my mind, it's COVID and it's really not unemployment insurance benefits. 0:04:07.160 --> 0:04:08.960 It's the return to school part of the COVID story. 0:04:09.040 --> 0:04:11.480 So two things happen in September. The additional u I 0:04:11.560 --> 0:04:14.920 expires and the schools reopened hopefully and everyone gets to 0:04:14.920 --> 0:04:16.440 go back to school. Match you think that could be 0:04:16.520 --> 0:04:20.120 the dominant factor. Hit Absolutely. I think you have the 0:04:20.160 --> 0:04:22.960 direct effect of that in reopening, which is just getting 0:04:23.000 --> 0:04:26.040 greater education employment. But on the other hand, it opens 0:04:26.080 --> 0:04:28.040 up labor supply to an extent that we haven't seen 0:04:28.200 --> 0:04:30.680 as of yet. So I think in the debates that 0:04:30.720 --> 0:04:33.360 we have with clients on this, uh, there's a very 0:04:33.640 --> 0:04:36.120 forceful debate on on both sides. But but we all 0:04:36.200 --> 0:04:37.680 kind of end up in a place where once we 0:04:37.680 --> 0:04:39.880 get to the fall, as vaccinations have picked up, as 0:04:39.880 --> 0:04:43.839 schools reopened, as unemployment insurance benage bits roll off, all 0:04:43.880 --> 0:04:45.680 of those things should really lead to a lift and 0:04:45.760 --> 0:04:47.760 labor suppli as we get to towards the ball. Yet 0:04:47.839 --> 0:04:49.920 we haven't seen as much progress in the labor market 0:04:49.960 --> 0:04:52.360 as many people had expected. And yes, we have to wait, 0:04:52.400 --> 0:04:55.680 but at what point, well you rethink your your goals 0:04:55.720 --> 0:04:58.159 in terms of getting the unemployment rate back down to 0:04:58.200 --> 0:05:01.400 where it was and frankly getting the participation rate higher. 0:05:01.440 --> 0:05:03.920 I mean, what is concerning you and keeping you up 0:05:04.040 --> 0:05:07.480 at night with respect to this, Yeah, I think the 0:05:07.920 --> 0:05:10.720 lack of response from labor force participation has has certainly 0:05:10.720 --> 0:05:13.200 been one of them. Um. You know, the trend that 0:05:13.240 --> 0:05:16.280 we've seen in employment gains has been weaker than than 0:05:16.320 --> 0:05:20.280 we anticipated. There's an interesting um if you look at 0:05:20.279 --> 0:05:22.600 the non seasonally adjusted data, we've been printing about one 0:05:22.640 --> 0:05:25.279 million jobs per month on average over over the past 0:05:25.320 --> 0:05:28.719 four months, a very steady pace, and Charepal noted this. 0:05:28.760 --> 0:05:30.919 There may just be speed limits on how quickly we 0:05:30.960 --> 0:05:33.279 can rehire people into this economy, and maybe it's one 0:05:33.320 --> 0:05:36.240 million jobs per month on a nonseasonally adjusted basis. UH 0:05:36.360 --> 0:05:39.000 indeed has some great data looking at a really big 0:05:39.000 --> 0:05:42.160 pickup in job postings for HR departments, and so maybe 0:05:42.240 --> 0:05:44.320 this is business is trying to get around this natural 0:05:44.320 --> 0:05:47.080 speed limit. UH. In any event, as if we continue 0:05:47.080 --> 0:05:49.760 to print those types of nonseasonally adjusted jobs, it will 0:05:49.800 --> 0:05:51.720 get a boost over over the next few months. So 0:05:52.120 --> 0:05:53.680 I you know, with a labor demand that we have 0:05:53.720 --> 0:05:57.280 out there, as labor supply does normalize, I anticipate that, 0:05:57.440 --> 0:05:59.559 you know, our our bullish outlook for the labor market 0:05:59.600 --> 0:06:01.640 should be fulfilled as we get towards the end of 0:06:01.680 --> 0:06:03.320 this year, and then as we get into next year. 0:06:03.480 --> 0:06:05.000 A lot of people will talk about the frictions in 0:06:05.040 --> 0:06:08.280 the labor market as leading to a lot of wage increases. 0:06:08.360 --> 0:06:11.359 How persistent. How much has the balance shifted back to 0:06:11.520 --> 0:06:17.040 labor from corporations in terms of demanding higher wages? Yeah, there, 0:06:17.080 --> 0:06:19.360 you know. I think you're seeing different views from different 0:06:19.360 --> 0:06:22.640 wage numbers. So the Atlanta Feds wage metrics have actually 0:06:22.720 --> 0:06:26.800 decelerated in a broadway, and they're tracking individuals over time, 0:06:26.880 --> 0:06:29.000 so they're able to control for a lot of different 0:06:29.000 --> 0:06:32.440 compositional shifts. The average on learnings data will get on Friday, 0:06:32.839 --> 0:06:35.400 it's just skewed by so many compositional issues that they 0:06:35.440 --> 0:06:39.920 don't control for occupation or sectoral shifts. So so it's 0:06:39.920 --> 0:06:42.120 really difficult to read too much into those data. We 0:06:42.120 --> 0:06:44.400 have to wait for the employment cost index to come 0:06:44.400 --> 0:06:46.440 out each quarter. But but what I would say, there 0:06:46.560 --> 0:06:50.039 is no doubt you're seeing wage pressures. I think uh 0:06:50.240 --> 0:06:51.960 in a number of metrics. Now, certainly a lot of 0:06:52.000 --> 0:06:54.919 anecdotes and labor supply is constrained at this point, but 0:06:55.000 --> 0:06:56.960 if I go back to what I said before, I'd 0:06:56.960 --> 0:06:58.920 be very surprised if we go back, you know, if 0:06:58.920 --> 0:07:01.320 we look forward by a year, two years, and we're 0:07:01.360 --> 0:07:05.280 still seeing these same constraints there. I think, on the contrary, 0:07:05.400 --> 0:07:08.000 we should be back towards a pre COVID labor market 0:07:08.000 --> 0:07:11.080 where we are really unleashing significant labor supply. And that 0:07:10.920 --> 0:07:13.280 I that I think keeps price pressures in check, keeps 0:07:13.280 --> 0:07:15.480 wage pressures in check as well. So what is your 0:07:15.600 --> 0:07:19.280 unemployment rate? That is a mental tip point? You know, 0:07:19.320 --> 0:07:23.239 the Deutsche Bank research of folkirts Landau and Hooper worried 0:07:23.280 --> 0:07:26.560 about inflation out three and four years and yet a 0:07:26.600 --> 0:07:30.000 short term view that's very much different than that. Can 0:07:30.040 --> 0:07:33.840 we use a tip point of unemployment rate is a 0:07:33.920 --> 0:07:38.240 signal that we're back to where we're supposed to be. Yeah, 0:07:38.280 --> 0:07:40.200 And I should be clear, you know, we have a 0:07:40.480 --> 0:07:43.840 baseline view that the inflation jumped at this year's transitory 0:07:43.920 --> 0:07:45.840 and I think there's good reasons for that. But you know, 0:07:46.000 --> 0:07:49.000 we completely agree that the risks are very clearly skewed 0:07:49.040 --> 0:07:52.040 to the upside, given substantial fiscal stimulus that we've seen, 0:07:52.120 --> 0:07:55.680 given this regime shift from the FED, it's really unprecedented. 0:07:55.760 --> 0:07:58.360 So I completely agree that the risks are to the upside. 0:07:58.840 --> 0:08:03.840 Specifically to your point, you know, identifying NEHRW pre COVID 0:08:04.040 --> 0:08:07.160 was almost impossible. As I mentioned, Vice Chair Clarida had 0:08:07.160 --> 0:08:08.800 said that neighbor could be as low as three and 0:08:08.840 --> 0:08:10.960 a half percent. In fact, we never really found it. 0:08:11.000 --> 0:08:17.040 He you know, I I would agree with that assessment 0:08:17.200 --> 0:08:19.400 at that point in time, which was we never really 0:08:19.400 --> 0:08:21.160 found it. You know, we tried to do state level 0:08:21.200 --> 0:08:24.560 analysis where could you see a non linear Phillips Pholps 0:08:24.560 --> 0:08:26.840 curve kick in, and the evidence was you really need 0:08:26.840 --> 0:08:29.280 to see the unemployment rate dropped to very low levels, 0:08:29.280 --> 0:08:32.280 you know, low three percents, perhaps one percentage point or 0:08:32.280 --> 0:08:35.520 more below what people thought neighbor was. So my takeaway 0:08:35.520 --> 0:08:38.760 from the pre COVID economy was we did not find neighrew. 0:08:38.800 --> 0:08:41.160 We we could not find, you know, where full employment was. 0:08:41.600 --> 0:08:43.360 And I think the FED that was a big takeaway 0:08:43.360 --> 0:08:46.640 from their policy review that they had, which was you 0:08:46.679 --> 0:08:49.560 really could get broad based gains. The film scrup really 0:08:49.559 --> 0:08:52.520 flattened h and neighbor was probably lower than they always anticipated. 0:08:52.559 --> 0:08:55.360 So let's finish on this. You've just painted this picture 0:08:55.679 --> 0:08:58.199 of a world that we won't see more clearly until 0:08:58.240 --> 0:09:00.160 the end of the year, which is basically the all 0:09:00.760 --> 0:09:04.839 my awesome, your full September October time. Why would the 0:09:04.880 --> 0:09:07.080 Federal Reserve make an announcement on the reduction of asset 0:09:07.120 --> 0:09:11.959 purchases until they've seen that data. Yeah. So I think 0:09:12.000 --> 0:09:15.280 there's there's two things. One, the significant demand that they 0:09:15.320 --> 0:09:18.719 see in the labor market, record, job openings, um, you know, 0:09:18.760 --> 0:09:21.679 all the different survey indicators give them a lot of 0:09:21.720 --> 0:09:25.800 confidence that if supply does become unleashed, the demand is 0:09:25.840 --> 0:09:28.240 there to see substantial further progress in the labor market. 0:09:28.280 --> 0:09:30.640 So I think that's an important data point. The second 0:09:30.880 --> 0:09:34.640 is this risk management. And you know, we agree that 0:09:34.679 --> 0:09:37.520 there is just substantial upside risk to inflation, even though 0:09:37.920 --> 0:09:41.960 I believe in the baseline transitory story. And because there 0:09:42.040 --> 0:09:44.600 is you know, a process here of your tape beginning 0:09:44.640 --> 0:09:47.120 the tapering process, drawing down to the net zero asset purchases, 0:09:47.600 --> 0:09:51.280 raising interest rates. Given the growth outlook, given the labor 0:09:51.320 --> 0:09:54.199 market outlook, it probably does make sense to start that process. 0:09:54.400 --> 0:09:56.520 And again they'll say that it's not tightening, it's just 0:09:56.600 --> 0:09:58.680 pulling back on some of the accommodation that they have. 0:09:59.240 --> 0:10:01.680 So I think by the of the year, given our outlook, 0:10:01.920 --> 0:10:03.880 they should start that process. I think they will start 0:10:03.920 --> 0:10:08.120 that process. Uh. And we have them announcing tapering in December. 0:10:09.000 --> 0:10:12.200 In December, okay, MONTI with the December called Deutsche Bank 0:10:12.280 --> 0:10:21.840 Chief US economists joining us now is Manama John Alliance 0:10:21.880 --> 0:10:25.480 Global Investors, senior US investment strategist. Moment, let's just start here. 0:10:25.920 --> 0:10:28.760 The cyclical trade seen some cracks through the month. The 0:10:28.760 --> 0:10:31.160 bank struggled at one point, the airlines have been struggling 0:10:31.160 --> 0:10:33.080 over the past dirty days too. Do you want to 0:10:33.080 --> 0:10:37.560 stick with it? Yeah? You know generally obviously, we've had 0:10:37.600 --> 0:10:39.960 a phenomenal run in the value trade, and we talked 0:10:39.960 --> 0:10:43.520 about this since November. UM, we've been up. Energy has 0:10:43.520 --> 0:10:48.960 been up, nearly, financials up fifty, industrials up over so 0:10:49.080 --> 0:10:50.680 you know, it's been a it's been a good run. 0:10:50.720 --> 0:10:54.560 And I think certainly people were anticipating investors were anticipating 0:10:54.600 --> 0:10:56.600 some of the recovery that we are now seeing in 0:10:56.640 --> 0:11:00.160 the economy. UM. But as we're standing here today, the 0:11:00.240 --> 0:11:03.880 tenure again under one fifty. When you think about the 0:11:03.960 --> 0:11:07.720 upside downside on the yield profile, UM, if you really 0:11:07.760 --> 0:11:10.520 think you know yields have much more downside to go, 0:11:10.600 --> 0:11:13.240 then perhaps you step back from the value trade. But 0:11:13.559 --> 0:11:16.439 if you think that yields now may start to either 0:11:16.520 --> 0:11:22.400 stabilize or grind higher, given both technical factors and fundamental factors, 0:11:22.640 --> 0:11:24.599 then I think that there is one more leg in 0:11:24.640 --> 0:11:27.360 the value trade to come. Keep in mind as we 0:11:27.480 --> 0:11:30.160 move through this year, as you know, the FED starts 0:11:30.200 --> 0:11:34.160 to taper eventually as the reopening occurs in earnest UH, 0:11:34.320 --> 0:11:36.320 that will support the value trade. But as we head 0:11:36.320 --> 0:11:40.280 into two, we are looking at comps that might get 0:11:40.280 --> 0:11:43.080 a little bit harder for some of the value sectors 0:11:43.320 --> 0:11:45.960 and compact get once again easier for some of these 0:11:46.000 --> 0:11:50.079 growth tech names. Again, so we do think as your progresses, 0:11:50.480 --> 0:11:52.320 the more and more interests or there will be more 0:11:52.320 --> 0:11:54.880 and more interest in some of the tech trade. But 0:11:55.240 --> 0:11:58.560 for now we stick with the value mon American investors 0:11:58.600 --> 0:12:01.199 like to buy America. They want to go on American. 0:12:01.360 --> 0:12:04.600 You say, go law in the un American European stocks. 0:12:04.600 --> 0:12:07.599 These are unfamiliar names a s mL l V m H. 0:12:07.720 --> 0:12:11.840 We know that's not unfamiliar. Unfortunately, s AP Lindian Totel, 0:12:11.920 --> 0:12:16.280 the French oil company. Should we be buying European big caps? 0:12:17.520 --> 0:12:20.760 You know, we think Europe obviously has leveraged or is 0:12:20.840 --> 0:12:22.720 leveraged towards the value trade. You know, a lot of 0:12:22.760 --> 0:12:27.040 their sectors and industries are long financials, long industrials, and 0:12:27.120 --> 0:12:30.200 a lot of great European industrial companies and long energy, 0:12:30.440 --> 0:12:34.280 so classic value sectors in Europe right now, combined with 0:12:34.440 --> 0:12:37.040 a European economy that's also catching up in terms of 0:12:37.080 --> 0:12:40.480 vaccine rollout in terms of economic recovery. That being said, 0:12:40.480 --> 0:12:42.440 when you look at some of the index performance already 0:12:42.480 --> 0:12:45.320 year to date, a lot of European industries are in line, 0:12:45.360 --> 0:12:47.880 if not outperforming the SMP five hundreds, So some of 0:12:47.920 --> 0:12:50.840 that catch up trade has been had. But that being said, 0:12:50.880 --> 0:12:54.679 we do think that as this global recovery is unfolding, 0:12:55.080 --> 0:12:58.400 investors need to think more global in their portfolios as well. 0:12:58.440 --> 0:13:00.720 You know, earlier this year there as a period of 0:13:00.760 --> 0:13:03.800 what we call us exceptionalism. The US really came out strong, 0:13:04.200 --> 0:13:06.840 uh in the March time frame with their vaccine rollout. 0:13:07.160 --> 0:13:10.760 Economic recovery started in earnest during that time period. But 0:13:10.880 --> 0:13:14.160 now we are starting to see this unfold globally. Of course, 0:13:14.160 --> 0:13:16.800 we're watching the variances as you guys noted noted earlier 0:13:16.840 --> 0:13:19.520 as well. Um, but through the summer months, we do 0:13:19.600 --> 0:13:23.480 expect some stability, and not only the European economies, but 0:13:23.559 --> 0:13:26.480 some of those e M economies that really were lagging, 0:13:26.520 --> 0:13:29.160 you know, think areas like India, like Brazil that are 0:13:29.200 --> 0:13:32.080 now starting to show signs of stability. Their markets are 0:13:32.080 --> 0:13:34.960 playing catch up as well. And if we resume a 0:13:35.000 --> 0:13:38.920 softening dollar, friend, we do think that over time that 0:13:39.000 --> 0:13:42.600 supports some of the real egards beyond just Europe, parts 0:13:42.600 --> 0:13:44.720 of those em as well. There was a lot in there. 0:13:44.800 --> 0:13:46.800 Let's unpack one point. You said that that you are 0:13:46.880 --> 0:13:49.800 watching the delta variant and how that is spreading. How 0:13:49.840 --> 0:13:52.440 does that play into your thesis? How much and how 0:13:52.480 --> 0:13:55.560 closely are you watching that to determine when you perhaps 0:13:55.559 --> 0:13:58.680 should shift gears. Yeah, you know, it does really seem 0:13:58.720 --> 0:14:01.480 to be a race betweenvaccines and variants, and I think 0:14:01.480 --> 0:14:03.280 here in the US we've done a really good job. 0:14:03.320 --> 0:14:06.160 I mean, the vaccine roll out perhaps won't hit the 0:14:06.160 --> 0:14:10.000 seventy percent target by July four that President Biden had outlined, 0:14:10.240 --> 0:14:13.559 but we're getting pretty close, and so in many states 0:14:13.679 --> 0:14:16.880 we are now at seventy or higher. We think that's 0:14:16.880 --> 0:14:19.480 a pretty good situation. To be in UM to fight 0:14:19.960 --> 0:14:22.920 or offset some of the growth and the variants. Aside 0:14:22.920 --> 0:14:25.120 from the variance, the other thing that we're watching closely 0:14:25.240 --> 0:14:29.080 is the seasonality of this uh you know this UM covid. 0:14:29.560 --> 0:14:33.720 I guess, uh, you know the COVID itself. And so 0:14:33.880 --> 0:14:36.760 you know, when you think about it as a September 0:14:36.920 --> 0:14:40.160 October months roll around, UM, that really could be when 0:14:40.160 --> 0:14:42.840 we see a surgeon cases once more. And so we 0:14:42.920 --> 0:14:45.560 are you know, looking at the summer months in line 0:14:45.600 --> 0:14:47.640 with last year's summer months where we're seeing a plateau 0:14:47.720 --> 0:14:50.120 in cases. But keep in mind seasonality is a big 0:14:50.160 --> 0:14:53.240 factor here, as are the variants. These are tail risks 0:14:53.280 --> 0:14:55.520 in our case, in our view, not really a base 0:14:55.600 --> 0:15:00.000 case scenario. Mona always gonna see it. Thank you, Globe 0:15:00.040 --> 0:15:08.720 invest the senior US investment strategist. Right now, this is 0:15:08.800 --> 0:15:11.600 really a joy. We don't do enough on the soft 0:15:11.720 --> 0:15:14.480 We talked to Dennis Gartman about red weed, but we 0:15:14.600 --> 0:15:17.920 really just don't do enough on the softs soft. She 0:15:18.120 --> 0:15:21.600 is expert on the soft commodities. ConA Hey, because E. D. 0:15:21.760 --> 0:15:24.440 N f Man, head of research with just a terrific 0:15:24.640 --> 0:15:29.040 distinguished career in these trends, I want you to discuss 0:15:29.120 --> 0:15:33.640 ConA first, the linkage of your world to Brazil. Why 0:15:33.760 --> 0:15:38.040 is Brazil so important in getting on board a soft 0:15:38.120 --> 0:15:43.920 commodity trend? Yeah, it's super important. Brazil is the biggest 0:15:43.960 --> 0:15:49.880 exporter for coffee, for sugar, It's a huge exporter of cotton, um, 0:15:50.120 --> 0:15:53.160 you name it. It's massive. So everything that goes on 0:15:53.240 --> 0:15:56.120 in Brasil, whether it's the currency or whether it's the weather, 0:15:56.440 --> 0:16:00.800 will have a direct impact on sugar, coffee in Cordon, Yeah, 0:16:00.800 --> 0:16:04.000 it's and corn and soybeans. These are massive, massive. My 0:16:04.480 --> 0:16:06.520 my take on your world is you've got to get 0:16:06.520 --> 0:16:08.760 on a trend and stay on the trend as well. 0:16:08.800 --> 0:16:13.120 What's the most identifiable trend right now in soft commodities? 0:16:13.160 --> 0:16:17.000 It gives comfort to be either long or short. It's 0:16:17.080 --> 0:16:19.640 very similar to what we're seeing in the general commodity space. 0:16:19.720 --> 0:16:22.760 So obviously the inflation trade, the fact that we've had 0:16:22.760 --> 0:16:27.080 a post commodity inflation, rising inflationary expectations has led to 0:16:27.120 --> 0:16:30.360 a boom in commodities. Now. Whether we're a supercycle or not, 0:16:30.720 --> 0:16:33.960 that's still debatable, but for sure we are seeing money 0:16:34.000 --> 0:16:38.160 flowing into commodities, and the soft commodity sector has definitely 0:16:38.160 --> 0:16:41.440 been a beneficiary to that. So we have seen speculative 0:16:41.600 --> 0:16:45.240 and investor buying across coffee sugar, and it helps that 0:16:45.320 --> 0:16:48.640 the forward curves are in backwardation, so you know, that's 0:16:48.640 --> 0:16:51.760 basically suggesting that the markets are slightly tight, and that's 0:16:51.760 --> 0:16:54.200 helped by the fact that Brazil has been very dry 0:16:54.280 --> 0:16:56.480 in the first half of the year and that's really 0:16:56.760 --> 0:17:00.400 caused some concerns for yields. With just fuels concerned, well, 0:17:00.400 --> 0:17:02.680 there's a question about the elasticity of some of the 0:17:02.760 --> 0:17:05.080 soft commodities, a question of how quickly you com plant, 0:17:05.280 --> 0:17:08.879 how quickly you can compensate for the increase in demand 0:17:08.960 --> 0:17:13.080 or the reduction in supply based on the droughts that 0:17:13.119 --> 0:17:15.159 we're seeing not only in Brazil but also across the 0:17:15.240 --> 0:17:20.240 United States. What asset classes, what commodities have the least elasticity, 0:17:20.320 --> 0:17:23.600 are the least capable of being produced quickly to meet 0:17:23.640 --> 0:17:29.520 the demand. So I suppose firsh things like soybean and corns. 0:17:29.600 --> 0:17:32.840 At least you have other countries like the USA and 0:17:32.960 --> 0:17:36.200 Argentina that can competit. So if Brazil has a disaster crop, 0:17:36.560 --> 0:17:38.959 you can look to the USA. But right now we 0:17:39.040 --> 0:17:41.240 have seen some issues, you know, it's very drying parts 0:17:41.240 --> 0:17:43.840 of the US UM. The weather is turning a little 0:17:43.840 --> 0:17:46.399 bit better, so corn and soybeans. The rally those in 0:17:46.440 --> 0:17:49.760 those commodities have come off a little bit um, so 0:17:49.840 --> 0:17:51.760 we wait to see. The nice thing about the way 0:17:51.920 --> 0:17:54.760 these commodities work is that just when Brazil is exporting, 0:17:55.160 --> 0:17:57.840 that's when um you know, and then when they finished 0:17:57.880 --> 0:17:59.920 export season, that's when the U S starts expertting. So 0:18:00.040 --> 0:18:04.040 you have a nice little supply UM chain across the 0:18:04.080 --> 0:18:07.359 calendar year. With when it comes to coffee and sugar, 0:18:07.400 --> 0:18:10.080 you're looking at more sort of the beginning the middle 0:18:10.119 --> 0:18:13.000 of the year when you start seeing harvests. So then 0:18:13.119 --> 0:18:15.639 and there really isn't a lot of substitute areas to 0:18:15.720 --> 0:18:19.800 provide that kind of huge replacements, So we are more 0:18:19.840 --> 0:18:23.200 concentrated in in the soft as such. But I mean, 0:18:23.320 --> 0:18:25.680 if I wanted to talk about the demands at elasticity, 0:18:25.720 --> 0:18:28.520 I mean we're talking different things now. So for coffee, 0:18:28.520 --> 0:18:33.399 for example, the pandemic meant that lockdown cafes were closed 0:18:33.400 --> 0:18:36.520 across um the world if you like, and people had 0:18:36.520 --> 0:18:39.040 to drink coffee at home. And now there's a real 0:18:39.160 --> 0:18:42.320 hope that as lockdowns are risk lifted, people can go 0:18:42.400 --> 0:18:44.880 back to outdoor coffee consumption. That should provide a nice 0:18:44.920 --> 0:18:47.359 little boost there, all right, Well, maybe some people drink 0:18:47.520 --> 0:18:50.160 more coffee when they go out, other people like myself 0:18:50.480 --> 0:18:52.480 during plenty when I'm at home as well. There is 0:18:52.520 --> 0:18:55.800 a question just more broadly in the entire commodities complex. 0:18:55.840 --> 0:18:59.280 We've been talking about peak reflation, whether we have reached 0:18:59.359 --> 0:19:01.800 peak every thing, and whether that's being reflected and some 0:19:01.840 --> 0:19:04.600 of the commodity prices easing off where they were earlier 0:19:04.640 --> 0:19:07.639 in the year. Do you see that consistently around the 0:19:07.640 --> 0:19:12.879 commodities that are most sensitive to global growth? Um, So, 0:19:13.160 --> 0:19:16.040 the agricultural site, I suppose it is less sensitive to 0:19:16.520 --> 0:19:19.720 economic birth per se. If anything, you'd say that emerging 0:19:19.760 --> 0:19:23.960 markets more of the income is spent on staple food commodities, 0:19:24.000 --> 0:19:27.600 So it's more about the you know, as the countries 0:19:27.600 --> 0:19:31.159 they move out of the COVID, their demand for basic 0:19:31.200 --> 0:19:33.320 romatils is going to be very, very strong, and that 0:19:33.480 --> 0:19:36.840 is definitely happening. Um you know, we have we are 0:19:36.840 --> 0:19:40.240 seeing food inflation, and if governments start taking wind of 0:19:40.240 --> 0:19:42.359 that and they start worrying about food rights the likes 0:19:42.440 --> 0:19:44.760 we saw in two thousand eight, they might want to 0:19:44.760 --> 0:19:48.159 start important to start building the strategics reserves to ensure 0:19:48.200 --> 0:19:51.720 that they don't have domestic food inflation. So I think, 0:19:51.800 --> 0:19:53.640 you know, are we at the peak? I would say 0:19:53.680 --> 0:19:57.480 we're in the middle with I mean, certainly for some commodities, UM, 0:19:57.800 --> 0:20:00.640 harvests are coming up that should provide something life pressure. 0:20:01.040 --> 0:20:04.120 But generally speaking, I think because interest rates are still 0:20:04.160 --> 0:20:06.640 so low, and the rate hikes by the Fed promised 0:20:06.720 --> 0:20:09.560 now are now still two years away, people need to 0:20:09.560 --> 0:20:12.080 put their money in. And I think commodities right now 0:20:12.200 --> 0:20:15.080 still feel like a good bet. Connor has switched to oil, 0:20:15.119 --> 0:20:18.080 and of course you followed out at Macquarie for years. 0:20:18.280 --> 0:20:20.119 I don't want you to single point oil out to 0:20:20.119 --> 0:20:22.840 a hundred dollars, But do you see an identifiable trend 0:20:23.160 --> 0:20:25.719 in Brent crude that launches out to eight And then 0:20:28.160 --> 0:20:31.240 I think, Um, the fact that oil has done so 0:20:31.320 --> 0:20:34.119 much better than even I thought, you know, just a 0:20:34.160 --> 0:20:37.400 few months ago, suggest that the demand we really maybe 0:20:37.480 --> 0:20:41.119 underestimate the demand. So as more and more countries come 0:20:41.160 --> 0:20:45.720 out of lockdown, I think that demand can really spike higher. Um. 0:20:45.760 --> 0:20:49.159 Maybe in the US we've slowed the demand. Birth from 0:20:49.200 --> 0:20:51.680 here is going to be slightly slower. We probably need 0:20:51.720 --> 0:20:55.639 aviation to take off for the next leg higher um. 0:20:55.680 --> 0:20:57.920