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Speaker 1: Let's get to our guest. It is Cheryl Smith, economist

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Speaker 1: and PM at Trillion Asset Management, with us to look

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Speaker 1: at market's So, Cheryl, the latest data here suggest that

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Speaker 1: the FED will probably have to embrace higher rates for

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Speaker 1: even longer than we heard at jackson Hole. It's tempting

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Speaker 1: to say the Bears are going to win this one.

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Speaker 1: I I'm afraid that you are correct. The BED was

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Speaker 1: very very clear on Friday that inflation is going to

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Speaker 1: be their very strongest concern and they are I would

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Speaker 1: say scared that they are going to see a repeat

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Speaker 1: of and they have said. I found one quote that

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Speaker 1: Powell made was really notable. He said, our that is

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Speaker 1: the Fed's responsibility to deliver price ability is unconditional. That

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Speaker 1: is a huge switch from them jackson Hole pledge of

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Speaker 1: just two years ago that they would equally consider unemployment

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Speaker 1: and inflation and is really very much said that they

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Speaker 1: intend to break the back of inflation, and they have

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Speaker 1: a long way to go before they do that. Well,

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Speaker 1: to a degree, they don't have to consider unemployment too much.

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Speaker 1: We had a pretty decent jobs report, the consumer report

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Speaker 1: also looking pretty decent. That the FS got some room

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Speaker 1: to stretch its legs there, right, it has quite a

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Speaker 1: bit of a room. But remember that unemployment is a

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Speaker 1: lagging indicator, and so you won't know how much unemployment

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Speaker 1: you're going to get until you're already started into a recession.

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Speaker 1: And the difficulty for central banks is that the lag

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Speaker 1: on monetary policy is long and variable. It's anywhere between

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Speaker 1: a year to eighteen months before this uh before tightening

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Speaker 1: by a central bank starts to affect economic activity. So

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Speaker 1: FED just started indicating that it was going to tighten

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Speaker 1: in December, started tightening in March, started the quantitative tightening

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Speaker 1: in July, and it's just June and is just now

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Speaker 1: starting the larger amounts of quantitative tightening. So we have

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Speaker 1: a lot that's kind of already in the pipeline that's

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Speaker 1: not going to be coming online until later. So there's

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Speaker 1: a lot of opportunity for unemployment to rise on the

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Speaker 1: back of tightening that's already in the system. It seems

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Speaker 1: like all of that that you just laid out very

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Speaker 1: eloquently deserved more than eight minutes from the FED chief.

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Speaker 1: I think it was a surprise that it was so

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Speaker 1: short and let's not say sweet, but that it was

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Speaker 1: so concise, But I think that the the FED and

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Speaker 1: all of the people at the FED are very concerned

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Speaker 1: that they believe that the market, the equity market misread

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Speaker 1: them after the last meeting, and so by devising a

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Speaker 1: tighter statement with fewer words, I think they believe that

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Speaker 1: there's less room for people to try and take those

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Speaker 1: words and turn them into what they want. And so

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Speaker 1: he was exceptionally clear. Yeah, not a lot of ambiguity there.

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Speaker 1: And we have seen markets declined for a third straight day.

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Speaker 1: When do you think the repricing is going to be

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Speaker 1: done just quickly? The repricing in the market, for just

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Speaker 1: Jackson Hall, I think it will be another week or two.

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Speaker 1: But we I am still expecting. We are still expecting

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Speaker 1: to see profits soften, and we're expecting to see market

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Speaker 1: damage continuing on for quite a time. And Cheryl, we've

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Speaker 1: established earlier in our conversation that the FIDS just not

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Speaker 1: going to be there anymore for markets in terms of

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Speaker 1: easy money, as we've seen for most of the centuries

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Speaker 1: so far. So that means we're back to good old fundamentals.

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Speaker 1: When you're investing in companies now, which ones look best

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Speaker 1: poised to survive this new reality? We think that this

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Speaker 1: environment is going to favor companies that have a solid

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Speaker 1: business model and have already been demonstrating profits. The model

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Speaker 1: excuse me, where the FED comes writing to the rescue

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Speaker 1: every time markets dip is a market that really favors

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Speaker 1: more volatile companies. And so I think that investors are

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Speaker 1: going to be looking for companies that have demonstrated ability

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Speaker 1: to get a return on equity, to get a return

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Speaker 1: on assets, and ones that are not highly leveraged, as

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Speaker 1: the said looks to be raising interest rates. That's not

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Speaker 1: a positive sign for any company that's really highly leveraged.

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Speaker 1: So we think it will be back to very much

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Speaker 1: fundamentals that are UM for demonstrated ability to grow profits

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Speaker 1: on their own without FED help. Will the reshoring of

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Speaker 1: companies over the next of different types of manufacturing, especially

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Speaker 1: key manufacturing like semiconductors, without reshoring raise costs uh in

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Speaker 1: you know, in a in a major way and make

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Speaker 1: the jobs even more difficult for the FED. Uh. It's

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Speaker 1: that's one part of the question. The other part is

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Speaker 1: is it a net net much more of a positive

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Speaker 1: than a negative. I actually don't think that the reassoring

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Speaker 1: will raise UM costs at all. UM for a couple

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Speaker 1: of different reasons. One is that over the past thirty

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Speaker 1: years that we've seen the offshoring, we have seen labor

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Speaker 1: rates rise in country after country and the jobs have

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Speaker 1: moved ahead of them, so chasing cheaper labor and cheaper labor.

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Speaker 1: But as that has happened, companies have realized that there

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Speaker 1: are some downside to the off shoring. One UM as

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Speaker 1: we face during the pandemic is a very extended supply

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Speaker 1: chain that is dependent upon really smooth and clockwork like

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Speaker 1: transportation moving from one mode of transportation to another mode

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Speaker 1: of transportations smoothly across the port, smoothly across the border,

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Speaker 1: and they need to build in a UM sort of

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Speaker 1: precautionary balance against that. Having the jobs closer to home

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Speaker 1: makes that a lot simpler and a lot easier. Another element,

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Speaker 1: of course, is the increase in automation, increase in UH

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Speaker 1: machine assisted levels, which mean that the differential in labor

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Speaker 1: costs is not as important, and so I think that

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Speaker 1: UM they've also found that that's an issue. And then

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Speaker 1: UM simply the coordination issues of having production on one

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Speaker 1: side of the world versus the other, with time zones

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Speaker 1: and language. UM I think had introduced some costs that uh,

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Speaker 1: manufacturers really perhaps didn't anticipate how strong moves calls would be.

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Speaker 1: So I think we'll be seeing offshoring and um, you know,

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Speaker 1: on shoing in the United States, but we'll also see

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Speaker 1: on shoring in other countries as well. Yeah, we're seeing

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Speaker 1: a tremendous upheaval in the broad macro picture in the

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Speaker 1: past couple of years. Have you been changing your strategy recently,

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Speaker 1: been making any tweaks to how you approach markets. We've

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Speaker 1: been becoming incrementally more cautious over the past seven eight months,

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Speaker 1: and that says we see the Fed very clearly signaling

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Speaker 1: that they are becoming concerned about inflation, that they are

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Speaker 1: moving inflation into their top priority that they are, and

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Speaker 1: they put out statements like we're going to you know,

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Speaker 1: our responsibility to deliver price stability is unconditional. We'll do

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Speaker 1: whatever it takes. Those are the kinds of phrases that

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Speaker 1: make us um concerned about the degree of monetary tightness

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Speaker 1: that we are going to be seeing over the next

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Speaker 1: six months, the next nine months, and then that's going

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Speaker 1: to be having an effect for the next year and

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Speaker 1: nine months, for the next two years, alright, Cheryl Smith,

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Speaker 1: economist d and pultfolio manager at Trillium Asset Management, Thanks

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Speaker 1: for joining us on the Bloomberg Daybreak Asia