Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: UM Weldna Hire across Acid, reporter of Bloomberg, and I'm
Speaker 1: Mike Reagan, Builda's sidekick and a senior editor at Bloomberg.
Speaker 1: This week, the Federal Reserve laid out plans for hiking
Speaker 1: interest rates in two and the markets initially were thrilled
Speaker 1: before really digesting the news. Our guest this week is
Speaker 1: one of the most well versed n FED policy and history.
Speaker 1: I actually might want to bring him in right away.
Speaker 1: It's Luke Kawa, my former deskmate, and he's currently a
Speaker 1: strategist at U b S. Luke, welcome back to the show.
Speaker 1: Great to be here, Thanks for having me, folks. So
Speaker 1: I said that Luke is well versed in FED stuff,
Speaker 1: he just so happens to also be supremely well versed
Speaker 1: in all of Taylor Swift's versis and Mike, I don't
Speaker 1: know about you, but Luke and I are feeling two,
Speaker 1: which is why I wanted to invite him on the show.
Speaker 1: And I want to ask you if you have any
Speaker 1: idea what I'm referencing. You know, Vilna, I know you
Speaker 1: think you can burn me with the Taylor Swift references.
Speaker 1: It just makes me feel happy, free, confused, and lonely
Speaker 1: at the same time. I remind you I'm I'm the
Speaker 1: father of three daughters, and although I'm more of a
Speaker 1: Halsey guy and I actually prefer Scooters versions better. I
Speaker 1: don't think you can burn me as much on Taylor
Speaker 1: Swift as as you think you can. But let's see,
Speaker 1: you shouldn't say that in front of in front of Luke.
Speaker 1: So I actually have Luke's already left the show. Yeah, Luke,
Speaker 1: he's gone. Next next, next thing. You're going to tell
Speaker 1: me you're a big Jake Jillenhall fans. Yeah, don't, don't.
Speaker 1: Don't say anything else. I actually have a quiz for you.
Speaker 1: Let's test your test your knowledge. I'm going to read
Speaker 1: you some Taylor Swift song titles. All of them are
Speaker 1: going to be applicable to markets, and I want you
Speaker 1: to guess which one is not a Tylor Swift song,
Speaker 1: which one is not a Taylor Swift song. Okay, alright,
Speaker 1: you know the titles of the song I'm less familiar with.
Speaker 1: If you could sing the verses and the quirs, maybe
Speaker 1: maybe Luke will do that first. But here we go. Okay,
Speaker 1: red yep, that's a Teller Shoft song. Gold Rush that
Speaker 1: shake it off? Okay, keep going, break even and treacherous.
Speaker 1: I'm gonna say gold Rush is not a Taylor Swift song. Luke,
Speaker 1: thank you, very very very wrong. Even break even is
Speaker 1: the right answer, all right? I was I was, Chris.
Speaker 1: I thought you were throwing in a Neil Young song
Speaker 1: there to confuse me in honor of Luke's Canadian nous.
Speaker 1: You're gonna hit me with some some Neil Young. I'll
Speaker 1: give you a six. I would say, you still fail,
Speaker 1: but you get a six. All right. Well, you know,
Speaker 1: my my youngest daughter's biggest pastime is eave dropping on
Speaker 1: the podcast to look for things to burn me about.
Speaker 1: And obviously that that's not the first time I've made
Speaker 1: the scooters version joke. And she said, Dad, last time
Speaker 1: I was gonna burst in there and cancel you myself
Speaker 1: personally over that. I don't think it's it's not cancellable maybe,
Speaker 1: but anyway, yeah, I think this will be the last
Speaker 1: time you mentioned it. All right, Luke. Well, let's get Luke.
Speaker 1: Let's get Luke to talk about the real stuff here
Speaker 1: and and look if you can squeeze in some Taylor
Speaker 1: Swift references, then I will be doubly impressed. But let's
Speaker 1: start with what Fildonna was talking about that FED meeting
Speaker 1: this week. Uh, And I know, look, you had a
Speaker 1: tweet that I appreciated where You're like, if you had
Speaker 1: given me the FED statement basically in the the Economic
Speaker 1: Outlook statement, the s EP, you would not have guessed
Speaker 1: the the market reaction. I was kind of in the
Speaker 1: same boat. It's sort of it surprised me because when
Speaker 1: I look at the dot plot um and our colleague
Speaker 1: Cameron Christ has written a lot about this, the notion
Speaker 1: that well, if we get more hikes sooner, you know,
Speaker 1: we'll get less later um in the cycle. So that
Speaker 1: that kind of seems to be the narrative people latched
Speaker 1: onto when when the stock market rallied, you know, we're
Speaker 1: gonna get three hikes next year, three hikes in three
Speaker 1: and just two hikes in But I don't know. Look,
Speaker 1: when I look at the dot plot, I have modest
Speaker 1: to moderate confidence to use some FED speak in sort
Speaker 1: of the near term dots, you know, dots, dots. I've
Speaker 1: very less confidence in that that's what we're actually going
Speaker 1: to see in. I'm like, I I don't even bother
Speaker 1: with that. I think it's way too far in advance.
Speaker 1: So walk us through. I mean, is that the safe narrative?
Speaker 1: You think that the market viewed it as dovish at
Speaker 1: least temporarily because the notion that you know, the terminal
Speaker 1: rate will be you know, it won't be a three
Speaker 1: hike a year type of situation, that the terminal rate
Speaker 1: is kind of where everyone expected it. And how do
Speaker 1: you view those dots? Are you in sort of on
Speaker 1: board with me? Where the the further out your dots?
Speaker 1: I I, you know, I don't. I don't put a
Speaker 1: lot of confidence in them. Yeah, I mean I put
Speaker 1: it this way. I think what you're describing is precisely
Speaker 1: where the markets at if you look at you know,
Speaker 1: if you do your dots, go on Bloomberg and look
Speaker 1: at you know, the Fed funds futures are overnight index swaps,
Speaker 1: and how those correspond to the median dot, they're they're
Speaker 1: pretty much there, and then the basis just goes wider
Speaker 1: and wider as you go to the to the out years.
Speaker 1: So I think your description there, you know, really really
Speaker 1: does fit in terms of thinking, you know, and how
Speaker 1: markets reacted, and you know, the digestion phase are going
Speaker 1: on afterwards, I think, you know, focusing on the three
Speaker 1: and two and then thinking, okay, now, now what way
Speaker 1: is the risk you really? Because for at least since
Speaker 1: the you know, let's call it June f O m C,
Speaker 1: when the Fed first kind of introduced this idea that
Speaker 1: they were kind a more more worried, more sensitive to
Speaker 1: these really high realized inflation now comes we were getting.
Speaker 1: It's been a story of the Fed catching up to
Speaker 1: the markets, catching up to the markets on the need
Speaker 1: for some kind of short term, near term right sizing
Speaker 1: of policy. But now we're in a place where, okay,
Speaker 1: what has to happen for the Fed to hike more
Speaker 1: than three times next year? Okay, So that means that
Speaker 1: would mean something like taper ends in March and there's
Speaker 1: no pause and immediate hike and going once a quarter,
Speaker 1: or it means you're going in excess of twenty five
Speaker 1: basis points per quarter. That's that's getting to be a
Speaker 1: you know, a rather high bar to clear. So now
Speaker 1: we're we're finally out of place where the risk you
Speaker 1: for the Fed is a lot more balanced in terms
Speaker 1: of going forward from here. So I think that's something
Speaker 1: that it provides a bit of comfort for markets, and
Speaker 1: and also just the idea that if you're looking at
Speaker 1: the the out year forecast, not that the market necessarily
Speaker 1: thinks the Fed will realize what they've penciled in for
Speaker 1: two and four or rather, but if you if you
Speaker 1: look across that and marry them with the PC forecast,
Speaker 1: you're looking at negative or zero real rates as as
Speaker 1: far as the I can see for for the policy rate.
Speaker 1: That's not a bad backdrop for risk assets with you know,
Speaker 1: above trend growth and negative or zero policy rates. And
Speaker 1: before we even get to that, let's talk about the taper.
Speaker 1: I mean to me, if all of a sudden you
Speaker 1: remove thirty billion dollars a month in bid from treasury
Speaker 1: and mortgage markets, that seems living dangerous to me in
Speaker 1: those first few months. I mean, um, listeners will know
Speaker 1: I tend to worry more than I probably should about
Speaker 1: stuff like that, but that that seems to me like
Speaker 1: a set up for some volatility in the bond market,
Speaker 1: that that maybe could could be contagient to other markets
Speaker 1: and and have a sort of an ugly first quarter there. Um,
Speaker 1: how are you thinking about that, and you know, is
Speaker 1: it possible that you know, the Fed sort of you know,
Speaker 1: changes its mind on how much it's tapering if it does,
Speaker 1: see uh see a little bit of a freak out
Speaker 1: unlike and it's it's clear that, you know, balance sheet
Speaker 1: policy is not on autopilot this time around. The Fed
Speaker 1: is being a little more nimble in terms of how
Speaker 1: it's making adjustments there. But what happened on the tape
Speaker 1: here the doubling of the pace that was kind of
Speaker 1: bang in line with with the consensus estimate. So don't expect,
Speaker 1: you know, that to move markets too much. And just
Speaker 1: the idea that we should be looking primarily at asset
Speaker 1: purchases as you know, affecting prices through this you know,
Speaker 1: supply demand imbalance and you know, portfolio rebalancing channel. I
Speaker 1: I think the evidence for that is point week compared
Speaker 1: to the rate signaling channel, and it's you know, for
Speaker 1: as long as a central bank is buying bonds, you know,
Speaker 1: it's not going to be hiking rates. That's where the
Speaker 1: kind of the main signal and the main accommodative impulse
Speaker 1: comes in through asset purchases. And I think it was
Speaker 1: one of the lessons from the taper tantrum back in
Speaker 1: what happened when the when in you know, May, when
Speaker 1: Bernankee started hinting at possible reduction in the pace of
Speaker 1: asset purchases, the front end got pulled forward a heck
Speaker 1: of a lot. It was traders just pulling forward expectations
Speaker 1: for one liftoff would happen based on that. So I
Speaker 1: think that that was a good test case showing us that, uh,
Speaker 1: that's the main channel through which QI is working. And
Speaker 1: when the tapering paste got doubled at one point on
Speaker 1: on Wednesday March, got prices ast, so again it's that's
Speaker 1: that's the main channel that you know, I see it
Speaker 1: mainly working through rather than rather than any kind of
Speaker 1: supply demand channel. That was the heyday of scooters versions.
Speaker 1: Oh no, oh my gosh, I thought we were done
Speaker 1: with scooter. That was the good old days. Oh my gosh. Anyway, Luke,
Speaker 1: speaking of signals from the bond market, I know you
Speaker 1: said in a note recently that sticky high inflation and
Speaker 1: the removal of monetary accommodation should lead to higher bond
Speaker 1: yields over time. So that's not something that we've really
Speaker 1: seen recently, and I know Paul was asked about this
Speaker 1: at the press conference this week as well. So can
Speaker 1: you maybe layout for us you reasoning for why it
Speaker 1: hasn't happened, and then second, what might actually start leading
Speaker 1: to us actually seeing higher bond yields. Yeah, so, I
Speaker 1: I think a lot of this is having a lot
Speaker 1: of humility looking at the bond market and thinking about
Speaker 1: the burden of proof required to get yields higher. It's
Speaker 1: one thing to get yields higher when the ten years
Speaker 1: at you know, at fifty basis points and we're we're
Speaker 1: all locked down and in the middle of a crisis,
Speaker 1: it's a it's another thing to expect that above trend
Speaker 1: economic growth can continue. So I think Powell hit on
Speaker 1: some some good or interesting reasons. And the crux of
Speaker 1: the point that all interpret him is trying to make
Speaker 1: in talking about the long end is that you really
Speaker 1: shouldn't extract extrapolated as kind of the pure fed expectations
Speaker 1: over ten years. That there are non economic factors that
Speaker 1: affect the that affect the long end. And you know,
Speaker 1: for for instance, if you talk to you know, any
Speaker 1: big bond manager, they'll they'll talk about kind of liability
Speaker 1: driven invest Smith demand, you'll you'll hear more about the
Speaker 1: the massive yield pickup available for for foreign investors just
Speaker 1: buying hedge US treasuries, things of that nature. So I
Speaker 1: think that's one reason to suspect that the long end
Speaker 1: might not go up as might as much as you
Speaker 1: might think, given the strength of the economic recovery and
Speaker 1: the potential outlook for for Fed policy rate ranks. But
Speaker 1: but I also think that a lot of this is
Speaker 1: you know, the market saying, okay, like this, it's you know,
Speaker 1: it's a good debut album. It's a good you know,
Speaker 1: self titled Taylor Swift. But is there is there a
Speaker 1: fearless coming? What's what's the sophomore album going to be?
Speaker 1: Because the story of last cycle was essentially all of
Speaker 1: the risk, and all the shocks that end up manifesting
Speaker 1: were largely to the downside. With the exception i'd say
Speaker 1: of you know, the post election, when we got excited
Speaker 1: for the potential for fiscal stimulus under than then President Trump.
Speaker 1: It was European debt crisis after debt crisis, it was
Speaker 1: SMP rating downgrade it as you know, even brief fears
Speaker 1: of the US double depercession, China hard landing. So all
Speaker 1: of that then conditions I believe traders to think that
Speaker 1: any periods of above trend growth are going to be
Speaker 1: very fleeting, and that the rate hikes that the Fed
Speaker 1: is kind of teeing up next year to quell inflation
Speaker 1: and a certain to a certain extent, uh, you know,
Speaker 1: trim demand growth at least a little bit, that that's
Speaker 1: going to have a very deliterious effect on the economic outlook.
Speaker 1: We we couldn't disagree more. We just think the fundamentals
Speaker 1: for this expansion are so much stronger than they are
Speaker 1: compared to being at this point post global financial crisis.
Speaker 1: If you look at aggregate labor income, if you look
Speaker 1: at capex intentions, if you look at the you know,
Speaker 1: the extent to which fiscal policy is still you know, accommodative,
Speaker 1: given where we are in the in the business cycle,
Speaker 1: all of these just scream much better foundation for growth.
Speaker 1: And that's what gives central banks the confidence right now
Speaker 1: to be pulling back on a common Asian even as
Speaker 1: you have you know the threat of the old macron
Speaker 1: variant and a lot of uncertainty about that. It's you know,
Speaker 1: it's akin to if you if you have a choice
Speaker 1: between if you've got a picture, Garrett Cole, great picture Yankees.
Speaker 1: He's injured, he's rehabbing, suffers a bit of a set
Speaker 1: back in his rehab, so he's just about you know
Speaker 1: at se if you can choose between starting him in
Speaker 1: a game or starting me in a game, you're going
Speaker 1: to choose him. We just have that much. We have
Speaker 1: that much of a better economy right now that central
Speaker 1: banks can you know, afford to do this and still
Speaker 1: have a high degree of confidence. That's how much better
Speaker 1: the underlying fundamentals are this time. Well thought, I'll allow
Speaker 1: a little baseball talk if he starts talking hockey though,
Speaker 1: get that you got the mute button handy right? If
Speaker 1: Luke starts going in a NHL that, uh no, because
Speaker 1: we're big Sabers fans in my household. Hockey. Although look,
Speaker 1: I gotta ask, so what what would their album tell
Speaker 1: uswift album Red b I guess that's like two thousand
Speaker 1: and eight, though you're you're not worried about about that.
Speaker 1: See yeah, no, Red is uh Red is what we
Speaker 1: thought one like was going to be. Just you know
Speaker 1: this back to back to normal kind of polly and
Speaker 1: we're all better everything inspiring on all cylinders, didn't didn't
Speaker 1: quite get there, but red was red with what we
Speaker 1: thought one was going to be at as soon as
Speaker 1: we heard about a vaccine. At the end of all, right,
Speaker 1: why want to I want to get back to that
Speaker 1: idea of you're very confident in this economy. I was
Speaker 1: reading your Macro quarterly for the fourth quarter you and
Speaker 1: Evan Brown and Ryan Primer put out and credit this
Speaker 1: is a few weeks old. I don't know the exact
Speaker 1: date of it, but basically, you know, the title of
Speaker 1: it is preparing for another round of kind up demand.
Speaker 1: You say, supply chain issues that are contributing to slower
Speaker 1: growth and higher inflation will get better, not worse, as
Speaker 1: vaccinations improve public health outcomes. That all made a lot
Speaker 1: of sense at the time, and I suppose it still
Speaker 1: makes a lot of sense. But by this Ammycron is
Speaker 1: a wild card. You know, we're sitting here in the
Speaker 1: office seeing headlines go by about companies signing their employees
Speaker 1: home again. You know, it's it seems like pretty much
Speaker 1: a wild card variable again coming from me, the guy
Speaker 1: who worries about everything. But did that send you back
Speaker 1: to the drawing board at all? This new variant UH
Speaker 1: to sort of reassess your outlook for for GDP and
Speaker 1: and pent up demand and everything going forward in the Yeah,
Speaker 1: I I say, it's definitely something that if you had
Speaker 1: a base case that was very optimistic and a bowl
Speaker 1: case on top of that, you have to say, well, actually,
Speaker 1: you know, we we gotta we gotta take out the
Speaker 1: bowl case. The you know, the base case is now
Speaker 1: the bowl case. And what was our and what was
Speaker 1: kind of our more muddling through case, You've got to
Speaker 1: raise the probability on that more so, I I would
Speaker 1: view oh, Macron as more cutting off the right tail
Speaker 1: of growth and growth outcomes as we as we head
Speaker 1: into Remember that prior to what the day before Thanksgiving,
Speaker 1: we were poised to see a pretty material acceleration and
Speaker 1: economic activity in both the US and China, the world's
Speaker 1: too largest economies, from Q three to Q four, and
Speaker 1: we're about to head into this new year with a
Speaker 1: full head of steam. So that's that's obviously not going
Speaker 1: to happen at all to the same degree. So you're
Speaker 1: it's I see more of this as more reducing the
Speaker 1: right tail of activity than as something that you know
Speaker 1: very much throws us to the left tail side of
Speaker 1: equation where we have to be worried about recession again.
Speaker 1: And from a more portfolio and asset allocation standpoint, I'd
Speaker 1: say what this does is that it makes you think
Speaker 1: a little more about what assets you think are going
Speaker 1: to be you know, appropriate hedges and how so you know,
Speaker 1: for instance, we we still kind of had a good
Speaker 1: view on the U S dollar and its role as
Speaker 1: a portfolio hedge. In the event that investors are going
Speaker 1: to have a growth scare are going to worry about
Speaker 1: the pandemic a fair bit that usually gives a U.
Speaker 1: S dollars some kind of you know, flight to safety benefit.
Speaker 1: But on the other hand, given how much near term
Speaker 1: fed pricing we've had, it also means that concerns about
Speaker 1: growth decelerations, how the potentialists suck out some of that
Speaker 1: pricing in the US front end. So on. On the margin,
Speaker 1: this is something that would increase the attractiveness of US
Speaker 1: duration a little more as a hedge relative to the
Speaker 1: US dollar from that kind of portfolio asset allocation standpoint,
Speaker 1: So that's you know, that's something we continue to think
Speaker 1: through and try and make sure we're as effectively and
Speaker 1: efficiently balanced in the way we're protecting ourselves from different scenarios. So, look,
Speaker 1: can you actually talk about some of the areas of
Speaker 1: the stock market that you guys do like, Because I
Speaker 1: was reading your note it says you like risk assets,
Speaker 1: most leverage, typical strength. So you mentioned small caps as
Speaker 1: well as financials and energy regions such as Japan and Europe.
Speaker 1: So can you talk about what's behind that. I was
Speaker 1: actually struck by the energy call and what's behind that
Speaker 1: as well? Yeah, so, and I would say that if
Speaker 1: we're talking about, you know, sectors versus regions, and whereas
Speaker 1: they're they're more conviction, there's there's more conviction the in
Speaker 1: the sector calls than the than the regional calls. But still,
Speaker 1: you know it broadly the story is is similar across
Speaker 1: all and that these are relatively relatively cheap areas of
Speaker 1: the market. We think the kind of the the macro
Speaker 1: catalyst validate being being more involved in them and having
Speaker 1: some of the better or close to as good earnings growth.
Speaker 1: As you know, a lot of the tech heavyweights that
Speaker 1: about earned for a generation now have that some of
Speaker 1: that valuation gap be remedied. When it comes to financials,
Speaker 1: what we see, as you know, global financials is real
Speaker 1: rates marching higher as central banks withdraw policy withdraw policy stimulus,
Speaker 1: and you know, that's something that if it's not something
Speaker 1: that immediately kind of tips over a global econom like activity,
Speaker 1: and particularly if it's something that's happening in a synchronized
Speaker 1: fashion globally rather than just being the US, uh, this
Speaker 1: is something that it's going to benefit banks in generally
Speaker 1: the higher real rates, even if the curve is biased
Speaker 1: towards flattening. Also, if you look at forward earnings for
Speaker 1: share estimates for the banking group, those those seem like
Speaker 1: they have a pretty low bar to be revised up
Speaker 1: going forward. And part of that is the fact that,
Speaker 1: especially at the U S, banks have have had a
Speaker 1: lot of lone loss reserve releases this year. You know,
Speaker 1: we COVID wasn't as out of a credit event as expected,
Speaker 1: in large part because of all the fiscal and monetary stimulus.
Speaker 1: So you know, therefore they were able to kind of
Speaker 1: release that cushion more so than others. And in another
Speaker 1: segments like European banks for instance, there's a lot more
Speaker 1: room for that to come down and for shareholder return
Speaker 1: programs dividends and buy backs to to also go up.
Speaker 1: When it comes to energy, this is you know, a
Speaker 1: a view that energy stocks are discounting a lower price
Speaker 1: of boy will then you currently exists in the market,
Speaker 1: and that kind of this uh, this higher higher range
Speaker 1: for oil compared to last cycle is going to persist.
Speaker 1: We're not necessarily in the camp that you're going to get,
Speaker 1: you know, this hundred and fifty two dollar oil. That's
Speaker 1: not kind of what informs our optimism on the on
Speaker 1: the energy sector. It's that energy companies are trading as
Speaker 1: though the price of oil is significantly lower than it
Speaker 1: is now, so there's further room for earnings, for share
Speaker 1: estimates to go up. And also just looking at the
Speaker 1: the kind of reasons why you might think the oil
Speaker 1: market could go out of kilter in the near term.
Speaker 1: We see OPEC as mostly on a preset course in
Speaker 1: terms of how they're returning oil to the market in
Speaker 1: a fairly telegraphed fashion. And what we also see then
Speaker 1: is a ton of capital discipline from US shale producers.
Speaker 1: So one thing that's been interesting to look at is
Speaker 1: that if you look at the you know, the drilled
Speaker 1: but uncompleted wells the ducks. Those are the ones that
Speaker 1: essentially can get turned on the fastest when you're when
Speaker 1: you're trying to kind of boost production. What US oil
Speaker 1: producers have been doing to help boost supply off the
Speaker 1: you know, very low levels it was at post pandemic,
Speaker 1: but not necessarily the levels that it's that it was
Speaker 1: at in the kind of the zenith of the shail
Speaker 1: boom is that they've just been running down those inventories.
Speaker 1: What that means going forward is you need capex and
Speaker 1: as we see rig counts go up, that's going to
Speaker 1: be about not about boosting production, that's going to be
Speaker 1: about right sizing inventory accounts to a large extent, So
Speaker 1: U shail companies right now are very openly being run
Speaker 1: for the benefit of shareholders, for the benefit of the
Speaker 1: balance sheet, and production growth is far down the list
Speaker 1: of priorities. That's something that keeps a bit of a
Speaker 1: lid on the supply outlook and the demand outlooks. As
Speaker 1: you know, we have a very optimistic view there, so
Speaker 1: you know, continue to see that market remaining pretty tight.
Speaker 1: Well that I do have kind of an ulterior motive.
Speaker 1: I was hoping we could ask Luca question so loaded
Speaker 1: that he gets fired and has to come back to Bloomberg.
Speaker 1: What do you what do you think is that? Does
Speaker 1: that mean I would love to sit next to Luke again?
Speaker 1: In my eyes, it's I mean, it's kind of mean,
Speaker 1: but I'm for it. I'm dropping a Teller Swift reference there,
Speaker 1: you guys. Pray didn't even Oh yes, oh I didn't
Speaker 1: because I figured you wouldn't know it so well. You
Speaker 1: know how much grief I'm gonna get from my old
Speaker 1: man friends for for Taylor Swift. I'm never gonna hear
Speaker 1: none of this. But anyway, Luke, I'm gonna go there.
Speaker 1: You know, it's not quite Thanksgiving, it's not quite Christmas,
Speaker 1: and you're not supposed to talk about this stuff but politics.
Speaker 1: I want to talk politics with you. I think you
Speaker 1: are one of the few who can talk political economy
Speaker 1: type of things, and I'm just curious. You know, we've
Speaker 1: got the mid term elections coming up in November. Obviously,
Speaker 1: it's that's a world away in market time. You know,
Speaker 1: inflation obviously has been the biggest political talking point right
Speaker 1: from the from the right. Is it too early to
Speaker 1: sort of factor in politics the mid term? A lot
Speaker 1: sctions into any any market used for for next year
Speaker 1: and beyond, and I especially you know when you think
Speaker 1: about the fiscal headwind or tail wind that we had
Speaker 1: last year, and you know, surprise, surprise, all of a sudden,
Speaker 1: fiscal policy was a fabulous thing for the markets. But
Speaker 1: you know, this year, I gotta think, you know, at
Speaker 1: best it's neutral, At worst, it becomes a headwind if
Speaker 1: they managed to actually raise the corporate taxes. UM, I
Speaker 1: certainly don't see any big stimulus package getting past uh.
Speaker 1: At least I would surprise the market to the upside.
Speaker 1: What are you thinking about the political climate in the
Speaker 1: US and and that fiscal piece of the puzzle for
Speaker 1: this year. So it's it's great that I can artfully
Speaker 1: sidestep this so well because how how how I'm thinking
Speaker 1: about politics and and the policy outlooked generally, is that obviously,
Speaker 1: if we look back through the past eighteen to twenty
Speaker 1: four months, how important has policy been into the matt
Speaker 1: Are economic outlook. It's been the it's been the alpha
Speaker 1: and little mega. It's been pretty much everything until we
Speaker 1: got to the vaccine, and even since then, it's helped
Speaker 1: kind of distinguish relative winners and losers note performers etcetera.
Speaker 1: By by the extent of the stimulus after that. The
Speaker 1: the thing now is that it's less important because you've
Speaker 1: put the private sector in in such a healthy shape
Speaker 1: that we can hand the baton pretty pretty artfully. That
Speaker 1: you know. I don't foresee a large range. I don't
Speaker 1: foresee in the range of fiscal outcomes, especially for the
Speaker 1: for the US, China potentially a different story, more and
Speaker 1: more volatility there. But in the US, I don't see
Speaker 1: within the range of fiscal outcomes next year something that
Speaker 1: jeopardizes above trend growth. Don't see that as a factor.
Speaker 1: I think the private sector is going to grab the
Speaker 1: baton and absolutely dash with it. That's bad news, full down.
Speaker 1: I think he's gonna keep his job. I don't think
Speaker 1: we're gonna get him canceled with that one. Yeah, really,
Speaker 1: I really do miss sitting next to you, Luke. Now,
Speaker 1: I used to pick up digging when pulled on it
Speaker 1: be on calls, so I think that's the bigger part.
Speaker 1: He was. He was the best seatmate. Look, I love
Speaker 1: this bit in one of your recent notes because I
Speaker 1: actually hadn't seen it anywhere else. It said, supply constraints
Speaker 1: are in some instances consumers way of telling corporations to
Speaker 1: increase capital expenditures. I know you mentioned topics earlier, but
Speaker 1: it sounds like you are expecting more topics and I'm
Speaker 1: wondering why and what that means for the market. Yeah, So,
Speaker 1: I mean, I think that's one of the silver linings
Speaker 1: of inflation, right that it's uh in this environment, it's
Speaker 1: a it's a little different because a lot of the
Speaker 1: supply constraints are so COVID induced and artificial. But we
Speaker 1: see that kind of income and measures of demand are
Speaker 1: are above pre COVID levels, and I suspect that that
Speaker 1: body and motion is going to stay in motion. So
Speaker 1: what then has to adjust on on a going forward
Speaker 1: basis is the supply side. I think we can to
Speaker 1: a certain extent trust companies and their and their capex intentions,
Speaker 1: which across regional FED surveys are are extremely high if
Speaker 1: we're looking at the you know, the sixth month forward
Speaker 1: outlook for capex. I think also embedded in this though,
Speaker 1: is the is the downside risk that you know, right
Speaker 1: now nobody's talking about, but I'm sure sometime within the
Speaker 1: next year we'll start to is the idea that because
Speaker 1: of because the inflationary forces were running through. Now the
Speaker 1: eventually we're going to end up with this inflationary forces,
Speaker 1: and part of that might be fueled by the capital
Speaker 1: expenditures we get. Usually it's I forget who said it
Speaker 1: might have been uh nessing talent, but he said something
Speaker 1: akin to I've seen a lot of gluts that aren't
Speaker 1: necessarily followed by shortages. But pretty much every shortage I
Speaker 1: see is you know, followed at some point or another
Speaker 1: by a by a glut. So I think that's kind
Speaker 1: of one risk. But in the near term, it's it's
Speaker 1: let's let's focus on let's look, let's get horse in
Speaker 1: the mouth. We've got a strong capex outlook. And one
Speaker 1: of the great things about capex is if you're looking
Speaker 1: at kind of the profit equation where profits come from
Speaker 1: capital expenditures or something that you know, for one company
Speaker 1: who you're who you're buying the capex from, that's you
Speaker 1: an immediate source of revenues and earnings for them, But
Speaker 1: for the company doing the capital expenditures, that's being depreciated
Speaker 1: over time. So it's something that through its very act
Speaker 1: from an accounting standpoint, does have a very positive effect
Speaker 1: on on earnings the way they're the way they're reported.
Speaker 1: So if something that does inform our view that you're
Speaker 1: going to have some you know, pretty strong at least
Speaker 1: kind of twenty seventeen like levels of EPs growth next year. Yeah,
Speaker 1: I'm glad you brought that. But I've been saying for
Speaker 1: a while, I feel like there's deflation or or low
Speaker 1: inflation on the other end of this when all the
Speaker 1: supply bottlenecks or work through. You know, if we do
Speaker 1: see that, Luke is uh, is that where transitory You're
Speaker 1: gonna be taken out of retirement to describe that scenario,
Speaker 1: do you think or is it something that FED would
Speaker 1: react to? Yeah, I I I mean, that's that's kind
Speaker 1: of an interesting outcome that I think we've seen in
Speaker 1: the past. When the Fed quote unquote wants to hike
Speaker 1: it will it will find a preferred measure of inflation
Speaker 1: that it wants to focus on too, to justify those tykes.
Speaker 1: I remember when you know the Dallas Fed trimmed to
Speaker 1: mean was was all the rage within the FED. And
Speaker 1: you know, one interesting part of this is that you're
Speaker 1: going to see this this big gap that we have
Speaker 1: between c p I and n PC continue to say
Speaker 1: wide and even wide and further based on just shelter
Speaker 1: being a much bigger part of cp I than it
Speaker 1: is for pc PC more important to the to the FED,
Speaker 1: or at least you know what they what they target.
Speaker 1: So I I think that you know, you you take
Speaker 1: the FED more or less at their at their word
Speaker 1: in terms of dealing with inflation. But I think it's
Speaker 1: important to remember that if inflation is clearly just managing
Speaker 1: the flip side of this kind of managing the high
Speaker 1: readings we have now base effects cutting the other way,
Speaker 1: you know, some build out of excess capacity, then it
Speaker 1: would be it would be very odd if the FED
Speaker 1: that showed a lot of tolerance for very above trend
Speaker 1: inflation right now, because it you know, knows or identifies
Speaker 1: that you know, some of that is transitory. It would
Speaker 1: be very odd if they reacted to a bit of
Speaker 1: disinflation the other way, particularly if real growth is very
Speaker 1: strong and you know, in the employment rate and measures
Speaker 1: of labor utilization are are looking pretty healthy. Yeah, alright,
Speaker 1: look good stuff. Before we get to the crazy thing, Luke,
Speaker 1: I do have to ask you, as your role of
Speaker 1: sort of men's fashion icon around here at Blueberg. Well,
Speaker 1: Don I used to describe Luke's fashion sense as risk
Speaker 1: on Luke. Now that you're at a bank, is it?
Speaker 1: Are you more? Have you toned it down? You still
Speaker 1: risk on a dresser or more of a dresser. I'm
Speaker 1: a I'm a sixty so I'm you know, sixty equities,
Speaker 1: twenty bonds and twenty alternatives. You know that's that's I think,
Speaker 1: what I mean, what I'm aiming for now. Yeah, all right,
Speaker 1: You've got a little he's got a little crypto in
Speaker 1: his wordrobe, some some laser beam ties. Maybe, I don't know,
Speaker 1: we'll see who does really great to have you. But
Speaker 1: you know, we can't let you go without some crazy things,
Speaker 1: so uh stand by for the crazy things. Tiden up
Speaker 1: your straight jackets. It's time for the craziest things we
Speaker 1: saw in markets this week. Fill that'll let's start with you. Okay,
Speaker 1: my weirdest thing, and anybody could have seen this coming,
Speaker 1: but it's still super weird. H and R Block is
Speaker 1: suing Jack Dorsey's Block for trademark infringement. So H and
Speaker 1: R Block said the company formerly known as Square because
Speaker 1: if you'll remember, a couple of weeks ago, Square changed
Speaker 1: its name to block. H and R said it appears
Speaker 1: to be taking a shortcut to capitalize on the well
Speaker 1: known block moniker and that it might create confusion for consumers.
Speaker 1: H and R Block has been around for something like
Speaker 1: six or seven decades, so anybody could have seen this coming. Yeah, yeah,
Speaker 1: I have to follow that one. I don't know. I
Speaker 1: don't know if I'm mature, what I what I would
Speaker 1: decide on that. I that's a tough one. All right, Louke,
Speaker 1: how about you? You You got anything crazy first? Okay? I like,
Speaker 1: I'll give you. I'll give you a couple. The first
Speaker 1: is so on on Thursday, we we woke up to
Speaker 1: a unexpected rate hike from the Bank of England. And
Speaker 1: you know what normally happens when you have a monetary
Speaker 1: surprise of this nature. I would, I personally would expect
Speaker 1: be the curve to flatten. It did not. It it's
Speaker 1: deepened by a very little bit, but it's still steepened.
Speaker 1: Having two ten steepen on a day with a hawkish
Speaker 1: monetary surprise, that is something, you know, very weird for
Speaker 1: you know, for contrast, when the when the Bank of
Speaker 1: Canada cut rates back in January in a very surprising
Speaker 1: move the curve deepened by about you know, ten to
Speaker 1: fifteen basis points that day. That's the kind of you know,
Speaker 1: expectation you have. I would have thought that, you know,
Speaker 1: in reverse, given that this was a more surprising hike.
Speaker 1: The the other thing I'll throw in, and it's from
Speaker 1: I think new New Bloomberg columnists Heavier Blast, pointing out
Speaker 1: that we all know that there's kind of concerns about
Speaker 1: energy shortages, the natural gas shortages, the weather Europe, etcetera,
Speaker 1: what have you. He's already pointing that out, that you're
Speaker 1: seeing traders start to hedge in and build in some
Speaker 1: kind of risk premia for an especially cold winter next year.
Speaker 1: We know that, you know, making predictions is hard, especially
Speaker 1: about the future. But trying to forecast you know, the
Speaker 1: degree of whether severity or what will be the supply
Speaker 1: dynamics demand dynamics in this commodity market over a year
Speaker 1: down the road. Boy, that's uh, that seems pretty odd
Speaker 1: to me. Yeah, whether they got the old Farmers Almanac
Speaker 1: out or something. I guess I wonder, I wonder if
Speaker 1: whether predicting will ever get you know, more accurate into
Speaker 1: the distant future like that. And uh, that's a trick.
Speaker 1: I have to read dot com. Javier is great by
Speaker 1: the way. All right, well, I'm gonna try to regain
Speaker 1: some rock and roll dignity here after all this Taylor
Speaker 1: Swift talk with a story from Rolling Stone about Bruce Springsteen. Bildona,
Speaker 1: I trust you've heard of him. He's kind of like
Speaker 1: the Taylor Swift of my generation, I guess you could say.
Speaker 1: And this is not gonna sound that crazy, but it's crazy.
Speaker 1: If you know. Bruce kind of a guy who never
Speaker 1: quote unquote sold out, but he sold the publishing catalog
Speaker 1: all those songs, so all the mass recordings and all
Speaker 1: the publishing rights to Sony and what that basically paves
Speaker 1: the way for is you know Springsteen and some you know, baby,
Speaker 1: we're born to run to Taco bell or or or
Speaker 1: stuff like that, pink Cadillac commercials and whatnot. But I
Speaker 1: want to play a game. Get the game show going
Speaker 1: to and play a little prices right with you? And Luke?
Speaker 1: What do you suppose the publishing rights to the entire
Speaker 1: Bruce Springsteen catalog is worth? If you're Sony Music, what
Speaker 1: are you paying? Well, let's start with you fifty million? Okay,
Speaker 1: I'm keeping I'm gonna keep a poker face here. I've
Speaker 1: both thought you're a Jersey girl. You know at heart,
Speaker 1: that's a high price. I know it's a that's a
Speaker 1: pretty high price tag. I mean usually I like low
Speaker 1: ball things, so I'm going with fifty million. I'm trying
Speaker 1: to keep my poker face here. But Luke, so what
Speaker 1: what I've done is I didn't cheat by looking up
Speaker 1: looking this up, but I was frantically googling just to
Speaker 1: make sure I took the well what it's scooter by
Speaker 1: by Taylor? So for three million, so I'm gonna go.
Speaker 1: You know, we're definitely going under three hundred million, but
Speaker 1: I'm gonna go more than fifty million. I'd say that, like,
Speaker 1: Bruce Springsteen is basically half the Taylor Swift, so we'll
Speaker 1: give it a hundred fifty million. Bruce Springsteen is half
Speaker 1: a Teller Swift. Luke, I hope your colleagues that ubs
Speaker 1: heard that and you get all the grief you deserve
Speaker 1: when you return to the office. Bruce Springsteen is half
Speaker 1: a Taylor Swift. That's a really good strategy though, that
Speaker 1: was that was so smart. Five hundred million for Springstein catalog.
Speaker 1: So he's like a Taylor swift and a half and
Speaker 1: then some wow. I really was sure fifty million was
Speaker 1: a good guest. Fifty We'll not a fifty million Spring
Speaker 1: Springsteen could get fifty million for like a show with
Speaker 1: the Stone Pony. Come on, yes, I guess I'm sorry.
Speaker 1: On the other hand, Taylor, Taylor has at least of
Speaker 1: her career left to go, so three hundred, you know,
Speaker 1: the five hundred I think on atmorize it a little
Speaker 1: bit there on on an expected value basis, I still
Speaker 1: think we've got Taylor reg Andrus here. All right, all right, well,
Speaker 1: what do you think Scooter's steak is worth now that
Speaker 1: she's redoing everything? That's definitely a depreciating asset. I would think, yeah,
Speaker 1: I mean, like, let's let's make that a let's make
Speaker 1: that a doughnut short as the expression goes, fair enough,
Speaker 1: Lucas short Scooter, I don't know. I think Scooter is
Speaker 1: going to figure it out a way to come back
Speaker 1: back from it. All my money, I think I think
Speaker 1: this is the last time we mentioned Yeah, I just
Speaker 1: like to be a troll about Well, we're great to
Speaker 1: catch up with you. We we really appreciate your time
Speaker 1: and and we're gonna have to have you back in
Speaker 1: two and talk about if you've got anything wrong. Invariably, Hey,
Speaker 1: thanks for thanks for having me, folks. The best of
Speaker 1: the holidays to to you and the families, and we're
Speaker 1: we don't really think you'll get anything wrong. I'm assuming
Speaker 1: Luke's reports are all going to be about on these calls,
Speaker 1: and you're doing pretty good. I think, Luka great to
Speaker 1: see it. Thank you, Luke. Care folks, What Goes Up.
Speaker 1: We'll be back next week. Until then, you can find
Speaker 1: us on the Bloomberg Terminal website and app or wherever
Speaker 1: you get your podcasts. We'd love it if you took
Speaker 1: the time to rate and review the show on Apple
Speaker 1: Podcasts so more listeners can find us. And you can
Speaker 1: find us on Twitter, follow me at Reaganonymous. The Dota
Speaker 1: Hirich is that the Dotta Hirich. You can also follow
Speaker 1: Bloomberg Podcasts at podcast and thank you to Charlie Pelletta.
Speaker 1: Bloomberg Radio. What Goes Up is produced by Laura Carlson.
Speaker 1: The head of Bloomberg Podcast is Francesco Levy. Thanks for listening.
Speaker 1: See you next time.