WEBVTT - Feeling ‘22 0:00:13.320 --> 0:00:16.480 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:16.600 --> 0:00:20.440 UM Weldna Hire across Acid, reporter of Bloomberg, and I'm 0:00:20.480 --> 0:00:24.400 Mike Reagan, Builda's sidekick and a senior editor at Bloomberg. 0:00:25.239 --> 0:00:27.960 This week, the Federal Reserve laid out plans for hiking 0:00:28.000 --> 0:00:31.320 interest rates in two and the markets initially were thrilled 0:00:31.400 --> 0:00:34.559 before really digesting the news. Our guest this week is 0:00:34.560 --> 0:00:37.800 one of the most well versed n FED policy and history. 0:00:38.000 --> 0:00:40.240 I actually might want to bring him in right away. 0:00:40.680 --> 0:00:44.199 It's Luke Kawa, my former deskmate, and he's currently a 0:00:44.240 --> 0:00:47.360 strategist at U b S. Luke, welcome back to the show. 0:00:48.680 --> 0:00:51.400 Great to be here, Thanks for having me, folks. So 0:00:51.520 --> 0:00:54.600 I said that Luke is well versed in FED stuff, 0:00:54.600 --> 0:00:58.440 he just so happens to also be supremely well versed 0:00:58.480 --> 0:01:01.960 in all of Taylor Swift's versis and Mike, I don't 0:01:01.960 --> 0:01:04.679 know about you, but Luke and I are feeling two, 0:01:04.760 --> 0:01:07.480 which is why I wanted to invite him on the show. 0:01:07.800 --> 0:01:09.119 And I want to ask you if you have any 0:01:09.160 --> 0:01:11.840 idea what I'm referencing. You know, Vilna, I know you 0:01:11.880 --> 0:01:14.880 think you can burn me with the Taylor Swift references. 0:01:15.760 --> 0:01:19.160 It just makes me feel happy, free, confused, and lonely 0:01:19.200 --> 0:01:22.400 at the same time. I remind you I'm I'm the 0:01:22.400 --> 0:01:25.960 father of three daughters, and although I'm more of a 0:01:25.959 --> 0:01:30.480 Halsey guy and I actually prefer Scooters versions better. I 0:01:30.480 --> 0:01:32.400 don't think you can burn me as much on Taylor 0:01:32.440 --> 0:01:34.440 Swift as as you think you can. But let's see, 0:01:34.720 --> 0:01:36.680 you shouldn't say that in front of in front of Luke. 0:01:36.800 --> 0:01:39.920 So I actually have Luke's already left the show. Yeah, Luke, 0:01:40.120 --> 0:01:42.720 he's gone. Next next, next thing. You're going to tell 0:01:42.720 --> 0:01:45.640 me you're a big Jake Jillenhall fans. Yeah, don't, don't. 0:01:45.680 --> 0:01:47.440 Don't say anything else. I actually have a quiz for you. 0:01:47.560 --> 0:01:51.040 Let's test your test your knowledge. I'm going to read 0:01:51.080 --> 0:01:55.160 you some Taylor Swift song titles. All of them are 0:01:55.200 --> 0:01:57.880 going to be applicable to markets, and I want you 0:01:57.960 --> 0:02:00.760 to guess which one is not a Tylor Swift song, 0:02:01.120 --> 0:02:05.400 which one is not a Taylor Swift song. Okay, alright, 0:02:05.760 --> 0:02:08.120 you know the titles of the song I'm less familiar with. 0:02:08.160 --> 0:02:12.960 If you could sing the verses and the quirs, maybe 0:02:13.000 --> 0:02:16.040 maybe Luke will do that first. But here we go. Okay, 0:02:16.120 --> 0:02:19.960 red yep, that's a Teller Shoft song. Gold Rush that 0:02:20.560 --> 0:02:25.519 shake it off? Okay, keep going, break even and treacherous. 0:02:26.680 --> 0:02:30.520 I'm gonna say gold Rush is not a Taylor Swift song. Luke, 0:02:32.200 --> 0:02:38.000 thank you, very very very wrong. Even break even is 0:02:38.000 --> 0:02:40.680 the right answer, all right? I was I was, Chris. 0:02:40.720 --> 0:02:42.320 I thought you were throwing in a Neil Young song 0:02:42.360 --> 0:02:45.560 there to confuse me in honor of Luke's Canadian nous. 0:02:45.680 --> 0:02:49.239 You're gonna hit me with some some Neil Young. I'll 0:02:49.240 --> 0:02:53.240 give you a six. I would say, you still fail, 0:02:53.280 --> 0:02:56.440 but you get a six. All right. Well, you know, 0:02:56.600 --> 0:03:00.280 my my youngest daughter's biggest pastime is eave dropping on 0:03:00.320 --> 0:03:02.640 the podcast to look for things to burn me about. 0:03:02.639 --> 0:03:05.280 And obviously that that's not the first time I've made 0:03:05.280 --> 0:03:08.280 the scooters version joke. And she said, Dad, last time 0:03:08.320 --> 0:03:10.680 I was gonna burst in there and cancel you myself 0:03:10.840 --> 0:03:15.080 personally over that. I don't think it's it's not cancellable maybe, 0:03:15.160 --> 0:03:17.679 but anyway, yeah, I think this will be the last 0:03:17.680 --> 0:03:20.119 time you mentioned it. All right, Luke. Well, let's get Luke. 0:03:20.240 --> 0:03:22.160 Let's get Luke to talk about the real stuff here 0:03:22.200 --> 0:03:24.440 and and look if you can squeeze in some Taylor 0:03:24.480 --> 0:03:28.200 Swift references, then I will be doubly impressed. But let's 0:03:28.200 --> 0:03:30.480 start with what Fildonna was talking about that FED meeting 0:03:30.680 --> 0:03:33.000 this week. Uh, And I know, look, you had a 0:03:33.000 --> 0:03:35.880 tweet that I appreciated where You're like, if you had 0:03:35.920 --> 0:03:40.120 given me the FED statement basically in the the Economic 0:03:40.920 --> 0:03:44.520 Outlook statement, the s EP, you would not have guessed 0:03:44.520 --> 0:03:46.360 the the market reaction. I was kind of in the 0:03:46.400 --> 0:03:49.200 same boat. It's sort of it surprised me because when 0:03:49.200 --> 0:03:51.880 I look at the dot plot um and our colleague 0:03:51.920 --> 0:03:54.120 Cameron Christ has written a lot about this, the notion 0:03:54.240 --> 0:03:57.480 that well, if we get more hikes sooner, you know, 0:03:57.680 --> 0:04:00.800 we'll get less later um in the cycle. So that 0:04:00.960 --> 0:04:03.960 that kind of seems to be the narrative people latched 0:04:04.000 --> 0:04:06.120 onto when when the stock market rallied, you know, we're 0:04:06.120 --> 0:04:10.880 gonna get three hikes next year, three hikes in three 0:04:11.720 --> 0:04:14.240 and just two hikes in But I don't know. Look, 0:04:14.240 --> 0:04:16.240 when I look at the dot plot, I have modest 0:04:16.279 --> 0:04:19.000 to moderate confidence to use some FED speak in sort 0:04:19.000 --> 0:04:23.920 of the near term dots, you know, dots, dots. I've 0:04:24.080 --> 0:04:27.599 very less confidence in that that's what we're actually going 0:04:27.680 --> 0:04:30.239 to see in. I'm like, I I don't even bother 0:04:30.520 --> 0:04:32.720 with that. I think it's way too far in advance. 0:04:33.480 --> 0:04:36.840 So walk us through. I mean, is that the safe narrative? 0:04:36.880 --> 0:04:39.800 You think that the market viewed it as dovish at 0:04:39.839 --> 0:04:44.120 least temporarily because the notion that you know, the terminal 0:04:44.200 --> 0:04:47.040 rate will be you know, it won't be a three 0:04:47.160 --> 0:04:49.440 hike a year type of situation, that the terminal rate 0:04:49.520 --> 0:04:51.839 is kind of where everyone expected it. And how do 0:04:51.839 --> 0:04:53.960 you view those dots? Are you in sort of on 0:04:54.000 --> 0:04:56.680 board with me? Where the the further out your dots? 0:04:56.760 --> 0:04:58.440 I I, you know, I don't. I don't put a 0:04:58.440 --> 0:05:01.320 lot of confidence in them. Yeah, I mean I put 0:05:01.320 --> 0:05:03.960 it this way. I think what you're describing is precisely 0:05:04.040 --> 0:05:05.880 where the markets at if you look at you know, 0:05:05.880 --> 0:05:08.120 if you do your dots, go on Bloomberg and look 0:05:08.160 --> 0:05:12.760 at you know, the Fed funds futures are overnight index swaps, 0:05:12.800 --> 0:05:15.480 and how those correspond to the median dot, they're they're 0:05:15.480 --> 0:05:19.719 pretty much there, and then the basis just goes wider 0:05:19.720 --> 0:05:22.280 and wider as you go to the to the out years. 0:05:22.320 --> 0:05:25.240 So I think your description there, you know, really really 0:05:25.320 --> 0:05:28.400 does fit in terms of thinking, you know, and how 0:05:28.440 --> 0:05:31.640 markets reacted, and you know, the digestion phase are going 0:05:31.680 --> 0:05:35.840 on afterwards, I think, you know, focusing on the three 0:05:35.920 --> 0:05:40.599 and two and then thinking, okay, now, now what way 0:05:40.680 --> 0:05:43.800 is the risk you really? Because for at least since 0:05:43.880 --> 0:05:46.080 the you know, let's call it June f O m C, 0:05:46.600 --> 0:05:49.080 when the Fed first kind of introduced this idea that 0:05:49.160 --> 0:05:52.680 they were kind a more more worried, more sensitive to 0:05:52.720 --> 0:05:55.359 these really high realized inflation now comes we were getting. 0:05:55.680 --> 0:05:57.360 It's been a story of the Fed catching up to 0:05:57.400 --> 0:06:00.560 the markets, catching up to the markets on the need 0:06:00.680 --> 0:06:04.240 for some kind of short term, near term right sizing 0:06:04.560 --> 0:06:07.280 of policy. But now we're in a place where, okay, 0:06:07.279 --> 0:06:09.760 what has to happen for the Fed to hike more 0:06:09.800 --> 0:06:13.599 than three times next year? Okay, So that means that 0:06:13.600 --> 0:06:16.479 would mean something like taper ends in March and there's 0:06:16.520 --> 0:06:20.119 no pause and immediate hike and going once a quarter, 0:06:20.720 --> 0:06:23.960 or it means you're going in excess of twenty five 0:06:24.000 --> 0:06:27.080 basis points per quarter. That's that's getting to be a 0:06:27.200 --> 0:06:30.080 you know, a rather high bar to clear. So now 0:06:30.200 --> 0:06:32.800 we're we're finally out of place where the risk you 0:06:32.880 --> 0:06:36.440 for the Fed is a lot more balanced in terms 0:06:36.480 --> 0:06:38.839 of going forward from here. So I think that's something 0:06:38.880 --> 0:06:42.680 that it provides a bit of comfort for markets, and 0:06:42.680 --> 0:06:45.400 and also just the idea that if you're looking at 0:06:45.480 --> 0:06:48.599 the the out year forecast, not that the market necessarily 0:06:48.640 --> 0:06:51.480 thinks the Fed will realize what they've penciled in for 0:06:52.240 --> 0:06:55.919 two and four or rather, but if you if you 0:06:55.920 --> 0:06:58.960 look across that and marry them with the PC forecast, 0:06:59.040 --> 0:07:03.000 you're looking at negative or zero real rates as as 0:07:03.000 --> 0:07:05.240 far as the I can see for for the policy rate. 0:07:05.320 --> 0:07:09.080 That's not a bad backdrop for risk assets with you know, 0:07:09.279 --> 0:07:14.480 above trend growth and negative or zero policy rates. And 0:07:14.760 --> 0:07:16.760 before we even get to that, let's talk about the taper. 0:07:16.760 --> 0:07:19.360 I mean to me, if all of a sudden you 0:07:19.440 --> 0:07:24.080 remove thirty billion dollars a month in bid from treasury 0:07:24.080 --> 0:07:27.360 and mortgage markets, that seems living dangerous to me in 0:07:27.400 --> 0:07:30.640 those first few months. I mean, um, listeners will know 0:07:30.720 --> 0:07:32.840 I tend to worry more than I probably should about 0:07:32.840 --> 0:07:34.600 stuff like that, but that that seems to me like 0:07:34.680 --> 0:07:37.720 a set up for some volatility in the bond market, 0:07:37.760 --> 0:07:40.280 that that maybe could could be contagient to other markets 0:07:40.320 --> 0:07:43.560 and and have a sort of an ugly first quarter there. Um, 0:07:43.680 --> 0:07:46.080 how are you thinking about that, and you know, is 0:07:46.120 --> 0:07:48.680 it possible that you know, the Fed sort of you know, 0:07:48.960 --> 0:07:51.080 changes its mind on how much it's tapering if it does, 0:07:51.120 --> 0:07:53.600 see uh see a little bit of a freak out 0:07:54.880 --> 0:07:58.040 unlike and it's it's clear that, you know, balance sheet 0:07:58.080 --> 0:08:01.120 policy is not on autopilot this time around. The Fed 0:08:01.280 --> 0:08:03.600 is being a little more nimble in terms of how 0:08:03.600 --> 0:08:06.160 it's making adjustments there. But what happened on the tape 0:08:06.200 --> 0:08:08.960 here the doubling of the pace that was kind of 0:08:08.960 --> 0:08:13.080 bang in line with with the consensus estimate. So don't expect, 0:08:13.360 --> 0:08:15.880 you know, that to move markets too much. And just 0:08:15.960 --> 0:08:20.480 the idea that we should be looking primarily at asset 0:08:20.560 --> 0:08:24.000 purchases as you know, affecting prices through this you know, 0:08:24.040 --> 0:08:28.760 supply demand imbalance and you know, portfolio rebalancing channel. I 0:08:28.760 --> 0:08:31.080 I think the evidence for that is point week compared 0:08:31.120 --> 0:08:34.000 to the rate signaling channel, and it's you know, for 0:08:34.040 --> 0:08:36.840 as long as a central bank is buying bonds, you know, 0:08:36.920 --> 0:08:39.360 it's not going to be hiking rates. That's where the 0:08:39.520 --> 0:08:43.320 kind of the main signal and the main accommodative impulse 0:08:43.400 --> 0:08:46.760 comes in through asset purchases. And I think it was 0:08:46.800 --> 0:08:48.680 one of the lessons from the taper tantrum back in 0:08:50.360 --> 0:08:54.480 what happened when the when in you know, May, when 0:08:54.600 --> 0:08:57.719 Bernankee started hinting at possible reduction in the pace of 0:08:57.760 --> 0:09:01.040 asset purchases, the front end got pulled forward a heck 0:09:01.080 --> 0:09:04.200 of a lot. It was traders just pulling forward expectations 0:09:04.240 --> 0:09:06.760 for one liftoff would happen based on that. So I 0:09:06.800 --> 0:09:10.440 think that that was a good test case showing us that, uh, 0:09:11.120 --> 0:09:15.000 that's the main channel through which QI is working. And 0:09:15.280 --> 0:09:18.319 when the tapering paste got doubled at one point on 0:09:18.320 --> 0:09:22.959 on Wednesday March, got prices ast, so again it's that's 0:09:23.080 --> 0:09:25.800 that's the main channel that you know, I see it 0:09:25.880 --> 0:09:29.000 mainly working through rather than rather than any kind of 0:09:29.040 --> 0:09:33.560 supply demand channel. That was the heyday of scooters versions. 0:09:34.080 --> 0:09:36.320 Oh no, oh my gosh, I thought we were done 0:09:36.320 --> 0:09:40.240 with scooter. That was the good old days. Oh my gosh. Anyway, Luke, 0:09:40.400 --> 0:09:43.160 speaking of signals from the bond market, I know you 0:09:43.200 --> 0:09:46.000 said in a note recently that sticky high inflation and 0:09:46.040 --> 0:09:49.800 the removal of monetary accommodation should lead to higher bond 0:09:49.840 --> 0:09:52.440 yields over time. So that's not something that we've really 0:09:52.440 --> 0:09:55.200 seen recently, and I know Paul was asked about this 0:09:55.320 --> 0:09:57.959 at the press conference this week as well. So can 0:09:58.000 --> 0:10:01.000 you maybe layout for us you reasoning for why it 0:10:01.000 --> 0:10:04.360 hasn't happened, and then second, what might actually start leading 0:10:04.400 --> 0:10:09.520 to us actually seeing higher bond yields. Yeah, so, I 0:10:09.520 --> 0:10:12.280 I think a lot of this is having a lot 0:10:12.320 --> 0:10:14.920 of humility looking at the bond market and thinking about 0:10:14.920 --> 0:10:18.240 the burden of proof required to get yields higher. It's 0:10:18.280 --> 0:10:20.680 one thing to get yields higher when the ten years 0:10:20.720 --> 0:10:23.600 at you know, at fifty basis points and we're we're 0:10:23.600 --> 0:10:25.720 all locked down and in the middle of a crisis, 0:10:26.000 --> 0:10:29.160 it's a it's another thing to expect that above trend 0:10:29.480 --> 0:10:33.320 economic growth can continue. So I think Powell hit on 0:10:33.360 --> 0:10:36.840 some some good or interesting reasons. And the crux of 0:10:36.920 --> 0:10:39.160 the point that all interpret him is trying to make 0:10:39.440 --> 0:10:42.960 in talking about the long end is that you really 0:10:42.960 --> 0:10:47.719 shouldn't extract extrapolated as kind of the pure fed expectations 0:10:47.760 --> 0:10:51.240 over ten years. That there are non economic factors that 0:10:51.360 --> 0:10:53.880 affect the that affect the long end. And you know, 0:10:53.920 --> 0:10:55.400 for for instance, if you talk to you know, any 0:10:55.440 --> 0:10:58.920 big bond manager, they'll they'll talk about kind of liability 0:10:59.080 --> 0:11:02.640 driven invest Smith demand, you'll you'll hear more about the 0:11:02.640 --> 0:11:05.800 the massive yield pickup available for for foreign investors just 0:11:05.840 --> 0:11:09.319 buying hedge US treasuries, things of that nature. So I 0:11:09.600 --> 0:11:13.600 think that's one reason to suspect that the long end 0:11:13.720 --> 0:11:16.000 might not go up as might as much as you 0:11:16.080 --> 0:11:19.640 might think, given the strength of the economic recovery and 0:11:19.679 --> 0:11:23.680 the potential outlook for for Fed policy rate ranks. But 0:11:23.679 --> 0:11:25.480 but I also think that a lot of this is 0:11:25.880 --> 0:11:29.360 you know, the market saying, okay, like this, it's you know, 0:11:29.400 --> 0:11:31.520 it's a good debut album. It's a good you know, 0:11:31.559 --> 0:11:34.560 self titled Taylor Swift. But is there is there a 0:11:34.640 --> 0:11:38.240 fearless coming? What's what's the sophomore album going to be? 0:11:38.240 --> 0:11:41.520 Because the story of last cycle was essentially all of 0:11:41.559 --> 0:11:43.760 the risk, and all the shocks that end up manifesting 0:11:44.040 --> 0:11:47.240 were largely to the downside. With the exception i'd say 0:11:47.280 --> 0:11:50.600 of you know, the post election, when we got excited 0:11:50.600 --> 0:11:54.640 for the potential for fiscal stimulus under than then President Trump. 0:11:54.720 --> 0:11:57.920 It was European debt crisis after debt crisis, it was 0:11:58.320 --> 0:12:01.280 SMP rating downgrade it as you know, even brief fears 0:12:01.320 --> 0:12:04.880 of the US double depercession, China hard landing. So all 0:12:04.920 --> 0:12:08.320 of that then conditions I believe traders to think that 0:12:08.440 --> 0:12:11.240 any periods of above trend growth are going to be 0:12:11.400 --> 0:12:14.520 very fleeting, and that the rate hikes that the Fed 0:12:14.679 --> 0:12:18.679 is kind of teeing up next year to quell inflation 0:12:18.800 --> 0:12:21.240 and a certain to a certain extent, uh, you know, 0:12:21.640 --> 0:12:24.240 trim demand growth at least a little bit, that that's 0:12:24.280 --> 0:12:27.800 going to have a very deliterious effect on the economic outlook. 0:12:27.960 --> 0:12:30.719 We we couldn't disagree more. We just think the fundamentals 0:12:30.760 --> 0:12:34.720 for this expansion are so much stronger than they are 0:12:34.720 --> 0:12:38.320 compared to being at this point post global financial crisis. 0:12:38.520 --> 0:12:41.640 If you look at aggregate labor income, if you look 0:12:41.679 --> 0:12:44.720 at capex intentions, if you look at the you know, 0:12:44.840 --> 0:12:48.840 the extent to which fiscal policy is still you know, accommodative, 0:12:49.160 --> 0:12:52.000 given where we are in the in the business cycle, 0:12:52.280 --> 0:12:55.280 all of these just scream much better foundation for growth. 0:12:55.320 --> 0:12:58.600 And that's what gives central banks the confidence right now 0:12:58.640 --> 0:13:01.240 to be pulling back on a common Asian even as 0:13:01.280 --> 0:13:02.959 you have you know the threat of the old macron 0:13:03.040 --> 0:13:05.360 variant and a lot of uncertainty about that. It's you know, 0:13:05.400 --> 0:13:08.640 it's akin to if you if you have a choice 0:13:08.679 --> 0:13:11.640 between if you've got a picture, Garrett Cole, great picture Yankees. 0:13:11.960 --> 0:13:15.000 He's injured, he's rehabbing, suffers a bit of a set 0:13:15.000 --> 0:13:17.040 back in his rehab, so he's just about you know 0:13:17.080 --> 0:13:20.440 at se if you can choose between starting him in 0:13:20.480 --> 0:13:23.160 a game or starting me in a game, you're going 0:13:23.200 --> 0:13:26.440 to choose him. We just have that much. We have 0:13:26.600 --> 0:13:29.520 that much of a better economy right now that central 0:13:29.559 --> 0:13:33.320 banks can you know, afford to do this and still 0:13:33.320 --> 0:13:35.400 have a high degree of confidence. That's how much better 0:13:35.720 --> 0:13:40.000 the underlying fundamentals are this time. Well thought, I'll allow 0:13:40.000 --> 0:13:42.520 a little baseball talk if he starts talking hockey though, 0:13:42.559 --> 0:13:45.280 get that you got the mute button handy right? If 0:13:45.360 --> 0:13:48.720 Luke starts going in a NHL that, uh no, because 0:13:48.720 --> 0:13:53.559 we're big Sabers fans in my household. Hockey. Although look, 0:13:53.679 --> 0:13:55.640 I gotta ask, so what what would their album tell 0:13:55.720 --> 0:13:57.880 uswift album Red b I guess that's like two thousand 0:13:57.920 --> 0:13:59.960 and eight, though you're you're not worried about about that. 0:14:00.320 --> 0:14:03.160 See yeah, no, Red is uh Red is what we 0:14:03.280 --> 0:14:06.839 thought one like was going to be. Just you know 0:14:06.960 --> 0:14:09.760 this back to back to normal kind of polly and 0:14:10.040 --> 0:14:13.959 we're all better everything inspiring on all cylinders, didn't didn't 0:14:14.040 --> 0:14:16.199 quite get there, but red was red with what we 0:14:16.240 --> 0:14:19.080 thought one was going to be at as soon as 0:14:19.080 --> 0:14:29.840 we heard about a vaccine. At the end of all, right, 0:14:29.880 --> 0:14:31.720 why want to I want to get back to that 0:14:31.760 --> 0:14:35.080 idea of you're very confident in this economy. I was 0:14:35.080 --> 0:14:38.080 reading your Macro quarterly for the fourth quarter you and 0:14:38.120 --> 0:14:41.400 Evan Brown and Ryan Primer put out and credit this 0:14:41.520 --> 0:14:43.920 is a few weeks old. I don't know the exact 0:14:44.000 --> 0:14:46.280 date of it, but basically, you know, the title of 0:14:46.320 --> 0:14:48.920 it is preparing for another round of kind up demand. 0:14:49.200 --> 0:14:52.440 You say, supply chain issues that are contributing to slower 0:14:52.520 --> 0:14:55.120 growth and higher inflation will get better, not worse, as 0:14:55.240 --> 0:14:59.600 vaccinations improve public health outcomes. That all made a lot 0:14:59.600 --> 0:15:02.680 of sense at the time, and I suppose it still 0:15:02.720 --> 0:15:05.040 makes a lot of sense. But by this Ammycron is 0:15:05.400 --> 0:15:07.680 a wild card. You know, we're sitting here in the 0:15:07.680 --> 0:15:11.080 office seeing headlines go by about companies signing their employees 0:15:11.160 --> 0:15:14.000 home again. You know, it's it seems like pretty much 0:15:14.000 --> 0:15:16.640 a wild card variable again coming from me, the guy 0:15:16.640 --> 0:15:19.760 who worries about everything. But did that send you back 0:15:19.800 --> 0:15:22.040 to the drawing board at all? This new variant UH 0:15:22.080 --> 0:15:24.960 to sort of reassess your outlook for for GDP and 0:15:24.960 --> 0:15:29.560 and pent up demand and everything going forward in the Yeah, 0:15:29.560 --> 0:15:33.160 I I say, it's definitely something that if you had 0:15:33.640 --> 0:15:36.760 a base case that was very optimistic and a bowl 0:15:36.800 --> 0:15:40.680 case on top of that, you have to say, well, actually, 0:15:40.680 --> 0:15:42.520 you know, we we gotta we gotta take out the 0:15:42.560 --> 0:15:44.680 bowl case. The you know, the base case is now 0:15:44.960 --> 0:15:48.240 the bowl case. And what was our and what was 0:15:48.320 --> 0:15:50.600 kind of our more muddling through case, You've got to 0:15:50.640 --> 0:15:53.320 raise the probability on that more so, I I would 0:15:53.360 --> 0:15:56.800 view oh, Macron as more cutting off the right tail 0:15:57.440 --> 0:16:00.920 of growth and growth outcomes as we as we head 0:16:00.920 --> 0:16:05.880 into Remember that prior to what the day before Thanksgiving, 0:16:06.520 --> 0:16:09.440 we were poised to see a pretty material acceleration and 0:16:09.480 --> 0:16:12.760 economic activity in both the US and China, the world's 0:16:12.760 --> 0:16:15.480 too largest economies, from Q three to Q four, and 0:16:15.520 --> 0:16:17.400 we're about to head into this new year with a 0:16:17.400 --> 0:16:19.960 full head of steam. So that's that's obviously not going 0:16:20.000 --> 0:16:22.880 to happen at all to the same degree. So you're 0:16:23.080 --> 0:16:25.200 it's I see more of this as more reducing the 0:16:25.320 --> 0:16:28.480 right tail of activity than as something that you know 0:16:28.760 --> 0:16:31.320 very much throws us to the left tail side of 0:16:31.360 --> 0:16:34.920 equation where we have to be worried about recession again. 0:16:35.240 --> 0:16:39.760 And from a more portfolio and asset allocation standpoint, I'd 0:16:39.800 --> 0:16:42.640 say what this does is that it makes you think 0:16:42.680 --> 0:16:45.800 a little more about what assets you think are going 0:16:45.840 --> 0:16:49.120 to be you know, appropriate hedges and how so you know, 0:16:49.160 --> 0:16:52.520 for instance, we we still kind of had a good 0:16:52.720 --> 0:16:54.520 view on the U S dollar and its role as 0:16:54.560 --> 0:16:57.960 a portfolio hedge. In the event that investors are going 0:16:58.000 --> 0:17:00.440 to have a growth scare are going to worry about 0:17:00.480 --> 0:17:03.040 the pandemic a fair bit that usually gives a U. 0:17:03.120 --> 0:17:06.160 S dollars some kind of you know, flight to safety benefit. 0:17:06.920 --> 0:17:09.480 But on the other hand, given how much near term 0:17:09.520 --> 0:17:13.000 fed pricing we've had, it also means that concerns about 0:17:13.040 --> 0:17:16.399 growth decelerations, how the potentialists suck out some of that 0:17:16.520 --> 0:17:19.359 pricing in the US front end. So on. On the margin, 0:17:19.440 --> 0:17:23.200 this is something that would increase the attractiveness of US 0:17:23.280 --> 0:17:26.919 duration a little more as a hedge relative to the 0:17:27.000 --> 0:17:31.200 US dollar from that kind of portfolio asset allocation standpoint, 0:17:31.280 --> 0:17:33.960 So that's you know, that's something we continue to think 0:17:33.960 --> 0:17:36.919 through and try and make sure we're as effectively and 0:17:36.960 --> 0:17:42.400 efficiently balanced in the way we're protecting ourselves from different scenarios. So, look, 0:17:42.440 --> 0:17:44.679 can you actually talk about some of the areas of 0:17:44.720 --> 0:17:47.040 the stock market that you guys do like, Because I 0:17:47.080 --> 0:17:49.200 was reading your note it says you like risk assets, 0:17:49.240 --> 0:17:53.439 most leverage, typical strength. So you mentioned small caps as 0:17:53.480 --> 0:17:57.479 well as financials and energy regions such as Japan and Europe. 0:17:57.560 --> 0:17:59.680 So can you talk about what's behind that. I was 0:17:59.680 --> 0:18:03.560 actually struck by the energy call and what's behind that 0:18:03.680 --> 0:18:07.760 as well? Yeah, so, and I would say that if 0:18:07.760 --> 0:18:10.480 we're talking about, you know, sectors versus regions, and whereas 0:18:10.520 --> 0:18:13.359 they're they're more conviction, there's there's more conviction the in 0:18:13.400 --> 0:18:16.959 the sector calls than the than the regional calls. But still, 0:18:17.000 --> 0:18:19.800 you know it broadly the story is is similar across 0:18:19.800 --> 0:18:23.879 all and that these are relatively relatively cheap areas of 0:18:23.880 --> 0:18:26.240 the market. We think the kind of the the macro 0:18:26.440 --> 0:18:30.119 catalyst validate being being more involved in them and having 0:18:30.280 --> 0:18:34.200 some of the better or close to as good earnings growth. 0:18:34.240 --> 0:18:36.440 As you know, a lot of the tech heavyweights that 0:18:36.480 --> 0:18:40.840 about earned for a generation now have that some of 0:18:40.880 --> 0:18:44.280 that valuation gap be remedied. When it comes to financials, 0:18:44.359 --> 0:18:48.119 what we see, as you know, global financials is real 0:18:48.240 --> 0:18:53.320 rates marching higher as central banks withdraw policy withdraw policy stimulus, 0:18:53.640 --> 0:18:56.840 and you know, that's something that if it's not something 0:18:56.880 --> 0:19:00.640 that immediately kind of tips over a global econom like activity, 0:19:00.640 --> 0:19:03.679 and particularly if it's something that's happening in a synchronized 0:19:03.680 --> 0:19:06.960 fashion globally rather than just being the US, uh, this 0:19:07.040 --> 0:19:09.600 is something that it's going to benefit banks in generally 0:19:09.720 --> 0:19:12.760 the higher real rates, even if the curve is biased 0:19:12.760 --> 0:19:15.720 towards flattening. Also, if you look at forward earnings for 0:19:15.800 --> 0:19:19.679 share estimates for the banking group, those those seem like 0:19:19.720 --> 0:19:22.439 they have a pretty low bar to be revised up 0:19:23.119 --> 0:19:25.239 going forward. And part of that is the fact that, 0:19:25.600 --> 0:19:27.520 especially at the U S, banks have have had a 0:19:27.520 --> 0:19:30.399 lot of lone loss reserve releases this year. You know, 0:19:30.520 --> 0:19:34.040 we COVID wasn't as out of a credit event as expected, 0:19:34.040 --> 0:19:37.280 in large part because of all the fiscal and monetary stimulus. 0:19:37.440 --> 0:19:39.280 So you know, therefore they were able to kind of 0:19:39.760 --> 0:19:43.920 release that cushion more so than others. And in another 0:19:44.000 --> 0:19:46.679 segments like European banks for instance, there's a lot more 0:19:46.760 --> 0:19:49.639 room for that to come down and for shareholder return 0:19:49.760 --> 0:19:52.800 programs dividends and buy backs to to also go up. 0:19:53.240 --> 0:19:56.120 When it comes to energy, this is you know, a 0:19:56.119 --> 0:19:59.720 a view that energy stocks are discounting a lower price 0:19:59.720 --> 0:20:02.080 of boy will then you currently exists in the market, 0:20:02.480 --> 0:20:07.560 and that kind of this uh, this higher higher range 0:20:07.640 --> 0:20:11.119 for oil compared to last cycle is going to persist. 0:20:11.240 --> 0:20:13.800 We're not necessarily in the camp that you're going to get, 0:20:13.840 --> 0:20:16.720 you know, this hundred and fifty two dollar oil. That's 0:20:16.760 --> 0:20:19.679 not kind of what informs our optimism on the on 0:20:19.720 --> 0:20:22.639 the energy sector. It's that energy companies are trading as 0:20:22.640 --> 0:20:25.240 though the price of oil is significantly lower than it 0:20:25.320 --> 0:20:27.960 is now, so there's further room for earnings, for share 0:20:28.040 --> 0:20:31.920 estimates to go up. And also just looking at the 0:20:31.920 --> 0:20:35.560 the kind of reasons why you might think the oil 0:20:35.640 --> 0:20:38.920 market could go out of kilter in the near term. 0:20:39.960 --> 0:20:43.119 We see OPEC as mostly on a preset course in 0:20:43.240 --> 0:20:45.720 terms of how they're returning oil to the market in 0:20:45.720 --> 0:20:48.639 a fairly telegraphed fashion. And what we also see then 0:20:48.760 --> 0:20:52.159 is a ton of capital discipline from US shale producers. 0:20:52.240 --> 0:20:54.800 So one thing that's been interesting to look at is 0:20:54.800 --> 0:20:56.439 that if you look at the you know, the drilled 0:20:56.440 --> 0:20:59.560 but uncompleted wells the ducks. Those are the ones that 0:20:59.640 --> 0:21:02.600 essentially can get turned on the fastest when you're when 0:21:02.600 --> 0:21:06.399 you're trying to kind of boost production. What US oil 0:21:06.440 --> 0:21:09.639 producers have been doing to help boost supply off the 0:21:09.680 --> 0:21:12.440 you know, very low levels it was at post pandemic, 0:21:12.680 --> 0:21:17.800 but not necessarily the levels that it's that it was 0:21:17.840 --> 0:21:20.000 at in the kind of the zenith of the shail 0:21:20.080 --> 0:21:22.639 boom is that they've just been running down those inventories. 0:21:22.680 --> 0:21:25.399 What that means going forward is you need capex and 0:21:25.400 --> 0:21:27.960 as we see rig counts go up, that's going to 0:21:28.000 --> 0:21:31.000 be about not about boosting production, that's going to be 0:21:31.000 --> 0:21:34.360 about right sizing inventory accounts to a large extent, So 0:21:34.960 --> 0:21:38.080 U shail companies right now are very openly being run 0:21:38.280 --> 0:21:40.520 for the benefit of shareholders, for the benefit of the 0:21:40.560 --> 0:21:43.320