WEBVTT - Surveillance: US Growth with Hatzius (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:13.039 with Jonathan Ferroll and Lisa A. Brawmowitz Jailey. We bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.520 dot Com, and of course on the Bloomberg terminal. Do 0:00:29.600 --> 0:00:31.480 you want to get stand places? Sagi Natsia is the 0:00:31.520 --> 0:00:34.760 chief economist and head of Global Economics and Markets Research 0:00:34.800 --> 0:00:36.839 at Comments Sexy And coming off the back of a 0:00:36.880 --> 0:00:39.040 weekend where you actually cut the outlook for us crow, 0:00:39.120 --> 0:00:42.879 so let's start there with y. We cut the outlook 0:00:42.960 --> 0:00:47.360 because there was there's been a very material tightening in 0:00:47.360 --> 0:00:50.720 financial conditions over the last couple of months. All Financial 0:00:50.720 --> 0:00:54.160 Conditions Index is up by more than two hundred basis 0:00:54.160 --> 0:00:57.880 points from the end of two thousand and twenty twenty one, 0:00:58.480 --> 0:01:02.080 and we think that that's going to keep growth below 0:01:02.160 --> 0:01:05.520 trend over the next several quarters. Over the next year 0:01:05.600 --> 0:01:08.240 or so, so we're now looking for only one and 0:01:08.319 --> 0:01:11.480 a quarter percent growth this year on a fourth quarter 0:01:11.480 --> 0:01:13.920 to the fourth quarter basis and then one and a 0:01:13.920 --> 0:01:17.520 half percent next year. And I think that's needed to 0:01:18.440 --> 0:01:22.000 create a little bit more capacity in the labor market, 0:01:22.040 --> 0:01:27.720 in particular alongside an improvement in labor force participation, because 0:01:27.720 --> 0:01:31.400 we have this huge gap between labor demand and labor supply. 0:01:31.560 --> 0:01:35.440 We've got eleven and a half million open possessions and 0:01:35.680 --> 0:01:38.640 six million unemployed workers, and that gap needs to shrink. 0:01:38.680 --> 0:01:41.720 As share Powell has said, yeah, I want to talk. 0:01:41.920 --> 0:01:43.720 There's any ways to go here, but I do want 0:01:43.760 --> 0:01:46.280 to talk about sub two percent g d P. And 0:01:46.319 --> 0:01:49.000 one of the partitions here is domestic final sales, a 0:01:49.040 --> 0:01:53.560 review of the American economy versus export import dynamics on 0:01:53.600 --> 0:01:56.160 the other side, and your call exact Pandel then can 0:01:56.200 --> 0:01:59.200 throw in dollar dynamics as well. Is your call a 0:01:59.320 --> 0:02:03.240 foreign call or is it a domestical It's really a 0:02:03.280 --> 0:02:08.359 domestic call. Mostly that's the main driver here. I mean 0:02:08.840 --> 0:02:10.960 first quarter, I had a lot of noise in the 0:02:11.120 --> 0:02:13.320 in the trade statistics. I think some of that is 0:02:13.360 --> 0:02:18.079 going to unravel, but I think it's really about higher 0:02:18.120 --> 0:02:23.440 interest rates, lower stock prices, somewhat wider credit spreads, and 0:02:23.520 --> 0:02:26.480 to some degree the appreciation of the dollar. But all 0:02:26.520 --> 0:02:31.160 of those different drivers which are primarily going to impinge 0:02:31.160 --> 0:02:35.359 on domestic demand, slowing growth to a much lower pace. 0:02:35.480 --> 0:02:37.640 Do you see any indications at this time at the 0:02:37.760 --> 0:02:40.520 labor economy is easy? Is it in the micro data 0:02:40.600 --> 0:02:43.440 that you look at every week? Not yet in the data, No. 0:02:43.720 --> 0:02:47.440 I think there are some signs in the more anecdotal reports, 0:02:47.560 --> 0:02:51.280 company by company reports some of the tech firms scaling 0:02:51.320 --> 0:02:55.400 back hiring, lowering open positions. In the hard data that 0:02:55.480 --> 0:02:58.440 get published by the Labor Department not yet. Yeah, And 0:02:58.560 --> 0:03:01.280 how high does unemployment have to get to reach that 0:03:01.360 --> 0:03:04.040 sort of spare capacity they're looking for the labor market? 0:03:04.440 --> 0:03:07.200 I actually don't think that the unemployment rate has to 0:03:07.320 --> 0:03:10.680 rise a lot. What needs to happen, I think is 0:03:10.720 --> 0:03:14.560 that companies bring down open positions. So the path that 0:03:14.600 --> 0:03:18.720 the FEDS tight targeting is to slow growth to a 0:03:18.760 --> 0:03:24.200 pace that is slow enough too for companies to shelve 0:03:24.320 --> 0:03:26.480 some of their expansion plans and bring down some of 0:03:26.480 --> 0:03:30.520 the open positions, but not so slow that you start 0:03:30.560 --> 0:03:34.240 getting large numbers of layoffs. So we're expecting a little 0:03:34.280 --> 0:03:36.800 bit of an increase in the unemployment rate from the 0:03:37.040 --> 0:03:39.640 you know, three and a half percent range to the 0:03:39.680 --> 0:03:43.080 three and three quarter percent range, but not a large increase. 0:03:43.840 --> 0:03:46.640 Do you think that basically Michelle Meyer was correct when 0:03:46.680 --> 0:03:49.000 she was talking about the ability for consumers to lever 0:03:49.200 --> 0:03:51.440 up even if their incomes aren't keeping pace with the 0:03:51.560 --> 0:03:54.600 with the inflation rate right now, and that basically the 0:03:54.600 --> 0:03:57.640 FED has to go a lot faster even still, then 0:03:57.640 --> 0:04:00.680 if then people seem to think in order to slow that, 0:04:00.960 --> 0:04:04.800 otherwise we're going to get even more overheating. Well, I think, 0:04:05.120 --> 0:04:08.040 you know, borrowing is going to be a short term 0:04:08.320 --> 0:04:11.880 uh driver of spending, and I think has been to 0:04:11.960 --> 0:04:14.600 some degree. If you look at the consumer credit numbers 0:04:14.640 --> 0:04:17.240 over the last couple of months, there clearly has been 0:04:17.320 --> 0:04:21.479 some you know, re leveraging to some degree. But I 0:04:21.600 --> 0:04:24.920 don't think that that's going to be a lasting kind 0:04:24.960 --> 0:04:29.159 of uh, you know, support for for spending. So I 0:04:29.160 --> 0:04:31.560 think the sumer spending is going to be relatively slow. 0:04:31.720 --> 0:04:35.239 Income is going to be quite weak in two thousand 0:04:35.240 --> 0:04:38.560 and twenty two. We're looking for only zero point five 0:04:38.640 --> 0:04:41.960 percent real income growth on the fourth quarter to fourth 0:04:42.000 --> 0:04:46.320 quarter basis on an annual average basis actually significantly weaker 0:04:46.360 --> 0:04:47.960 than that. But even on a Q four, the Q 0:04:48.120 --> 0:04:50.360 four basis only zero point five and I think that's 0:04:50.360 --> 0:04:53.359 going to keep spending pretty soft. Long on fair away 0:04:53.400 --> 0:04:56.080 there was Dudley and mclvy and this young whipper snapper 0:04:56.120 --> 0:04:57.960 from Germany. What was his name? I think it was 0:04:58.000 --> 0:05:02.120 heart serious is what it was. You codified emmy W 0:05:02.360 --> 0:05:05.360 mortgage would you withdraw? Let me cut to the chase yourn. 0:05:05.720 --> 0:05:09.760 When does the housing market break? Well, emmy W is 0:05:09.800 --> 0:05:14.200 actually a very important issue. Again, not as important, I 0:05:14.200 --> 0:05:17.280 think as going into the oh eight crisis, but there 0:05:17.320 --> 0:05:20.080 has been a pick up in mortgagee would you withdrawal 0:05:20.480 --> 0:05:23.920 over the last year, and you've got had this increase 0:05:24.000 --> 0:05:28.120 in consumer credit as well. You know, similar kind of dynamic. 0:05:28.520 --> 0:05:31.440 This supports spending in the in the short term, but 0:05:31.640 --> 0:05:35.400 ultimately is not going to be a sustainable source of 0:05:35.480 --> 0:05:39.360 big increases in spending. So builds in a slowdown sort 0:05:39.360 --> 0:05:41.560 of down the road. And I think you know when 0:05:41.640 --> 0:05:45.040 the housing market slows, of course, is going to determine 0:05:45.080 --> 0:05:49.120 the timing of that. We haven't really seen significant slowing 0:05:49.200 --> 0:05:51.640 in the in the part data yet. I do expect 0:05:51.720 --> 0:05:56.520 that mortgage rates up even more than ten. Treasure Pharaoh 0:05:56.600 --> 0:05:58.599 wants to know should he buy in June or July. 0:06:00.000 --> 0:06:04.080 I'm not going to give advice on that that I 0:06:04.120 --> 0:06:08.479 think is probably not not don't worried that's too long 0:06:08.600 --> 0:06:11.000 term for you and it's finished here just quickly. What's 0:06:11.040 --> 0:06:14.839 the biggest risk right now to your view? Well, I 0:06:14.839 --> 0:06:18.679 think the the FED is still trying to bring down 0:06:18.880 --> 0:06:24.279 you know, slow slow the economy, slow employment, and bring 0:06:24.279 --> 0:06:28.159 down open positions because they're still worried about inflation being 0:06:28.160 --> 0:06:31.640 too high and it will be well above target for 0:06:31.680 --> 0:06:34.279 the foreseeable future. I do think it's going to come down, 0:06:34.880 --> 0:06:38.480 but if it doesn't come down quickly enough, we can see, 0:06:39.000 --> 0:06:42.200 you know, still significantly higher rates. Our call at the 0:06:42.240 --> 0:06:45.120 moment is three to three in a quarter percent for 0:06:45.160 --> 0:06:48.919 the funds rate. We've stuck with that and it's you know, 0:06:49.000 --> 0:06:51.479 fairly close to market pricing. But I think the risk 0:06:51.520 --> 0:06:55.000 cases that you know, they have to do more, and 0:06:55.040 --> 0:06:58.760 that then also raises the risk of a hard landing. 0:06:59.000 --> 0:07:01.520 Not our baseline, but that would be the rest of 0:07:01.520 --> 0:07:04.599 the upside. Wrist the rights clear in present. Yeah, thank you, 0:07:04.720 --> 0:07:12.600 as always, Saxon. We're thrilled to bring you now someone 0:07:12.800 --> 0:07:17.880 hardwired to the retail of America and particularly the aspiration 0:07:18.400 --> 0:07:21.040 that all of us are guilty of. Dana Telsey, his 0:07:21.120 --> 0:07:25.280 chief executive officer chief research officer at Telsey advisory group 0:07:25.320 --> 0:07:28.400 and lives in New York retail truly like no one 0:07:28.760 --> 0:07:31.920 I know. Dana. I was absolutely crushed at the price 0:07:32.120 --> 0:07:36.680 rise on the Selena hoodie sweatshirt the men's it's got 0:07:36.720 --> 0:07:39.080 the Selene thing on it. I thought it should be 0:07:39.120 --> 0:07:41.560 in my closet. I mean there was. It was eight 0:07:41.640 --> 0:07:44.400 hundred bucks and all of a sudden, it's nine dollars. 0:07:44.680 --> 0:07:48.520 Everything's going up in price, right it has. We're seeing 0:07:48.560 --> 0:07:51.480 price increases and Tom, thank you for having me. Price 0:07:51.520 --> 0:07:55.440 increases across the board on many different categories, especially on 0:07:55.560 --> 0:07:58.840 luxury goods. The consumer is buying, and we're seeing a 0:07:58.880 --> 0:08:02.440 wide range of rumors buying in terms of demographics and 0:08:02.560 --> 0:08:05.400 age group. The brand matters and they find ways to 0:08:05.440 --> 0:08:07.880 pay for it. But what is so important here from 0:08:07.920 --> 0:08:11.200 the days of you, I I bear Stearns, where you're doing, 0:08:11.320 --> 0:08:14.760 you know, channel shops and going through Abercromie and Fitch, 0:08:15.200 --> 0:08:18.760 is the way we buy this stuff is fundamentally changed. 0:08:18.920 --> 0:08:22.880 How important for you and Joe Feldman is a firm 0:08:23.080 --> 0:08:27.080 is PayPal credit? Is the access of get that Selene 0:08:27.120 --> 0:08:31.480 sweatshirt now and pay for it later. That sea change, 0:08:31.960 --> 0:08:34.960 It is a sea change. It's very important and frankly 0:08:35.000 --> 0:08:38.240 it lifts the sales and also the companies are learning 0:08:38.559 --> 0:08:41.160 what to produce because of the options that they have, 0:08:41.720 --> 0:08:45.040 both buying in store and buying online. The world today 0:08:45.120 --> 0:08:48.120 is more integrated than it ever has and we're watching 0:08:48.200 --> 0:08:52.439 sell through, watching influences, We're watching Instagram in order to 0:08:52.480 --> 0:08:54.360 pick up what are the trends that are going to 0:08:54.440 --> 0:08:56.880 mean something on main street? So what are you expecting 0:08:56.960 --> 0:08:59.320 right now in about ten minutes time? And these retail 0:08:59.360 --> 0:09:02.599 sales numbers, I mean I think April hopefully should be 0:09:02.640 --> 0:09:04.800 a little bit better. We saw gas prices come in 0:09:04.840 --> 0:09:07.640 a little bit. We still have an environment, like was 0:09:07.679 --> 0:09:11.520 mentioned earlier, a shift to services from goods. We're expecting 0:09:11.520 --> 0:09:14.640 a big summer season and vacation. The other thing is 0:09:14.679 --> 0:09:17.240 you have two point six million weddings occurring this year. 0:09:17.559 --> 0:09:20.680 On average, people spend around four hundred thirty dollars every 0:09:20.679 --> 0:09:22.880 time they go to a wedding, so you'll still have 0:09:22.960 --> 0:09:25.440 some of that good spending. April should have been a 0:09:25.440 --> 0:09:28.680 little bit better. But inflation is a headwind and that 0:09:28.840 --> 0:09:32.120 is in every aspect that companies are dealing with. Its 0:09:32.160 --> 0:09:34.520 people change the way they pay for luxury goods. Do 0:09:34.559 --> 0:09:36.720 we have to change the way we think about who's 0:09:36.760 --> 0:09:39.720 shopping there. Typically we think of the high income earner 0:09:39.960 --> 0:09:42.600 and the luxury goods, and those two are so closely tether. 0:09:42.720 --> 0:09:44.600 I just wanted to Donna if that's changed now over 0:09:44.640 --> 0:09:47.000 the last couple of years. I think it has. I 0:09:47.000 --> 0:09:48.959 think you've gotten the millennials and the gen z s, 0:09:49.000 --> 0:09:51.520 and I think the brand awareness the collaborations that have 0:09:51.600 --> 0:09:55.280 been done is bring making these luxury brands younger and 0:09:55.360 --> 0:09:58.880 younger while still keeping the ethos and the interests of 0:09:58.920 --> 0:10:02.320 the higher income down graphics. As interest rates go up, 0:10:02.400 --> 0:10:05.680 can they maintain the buying? I see the lines outside 0:10:05.720 --> 0:10:08.320 of the luxury stores in Soho, we all do. We 0:10:08.320 --> 0:10:10.440 could spot the average age in that line as well. 0:10:10.840 --> 0:10:12.960 What's gonna happen here does not look good as you 0:10:13.000 --> 0:10:16.200 look further forward. I mean, we need the Chinese to 0:10:16.240 --> 0:10:19.559 come back and spend Right now, you're seeing some tourism 0:10:19.600 --> 0:10:22.400 happen with Europeans coming to the US. Will need that 0:10:22.480 --> 0:10:26.040 Asian traveler. But the product innovation is key. We've seen 0:10:26.080 --> 0:10:29.079 what demand can be when newness is out there. You've 0:10:29.120 --> 0:10:31.440 seen it from LVMH with their brands. You look at 0:10:31.480 --> 0:10:34.680 what's happening with Tiffany's you've seen what it's what's happening 0:10:34.920 --> 0:10:38.160 with bolln Siaga. There there are luxury brands that matter 0:10:38.200 --> 0:10:41.160 to these consumers. There's a bigger issue underpitting John's question. 0:10:41.200 --> 0:10:43.400 It's an important one, which is at what point will 0:10:43.440 --> 0:10:47.120 higher borrowing costs really matter, especially as more consumers do 0:10:47.240 --> 0:10:49.520 start to level up in order to keep their purchasing 0:10:49.720 --> 0:10:52.400 at the same levels as before inflation took off to 0:10:52.440 --> 0:10:55.240 the way that it is now. I think overall, the 0:10:55.240 --> 0:10:58.760 lower income consumer at the lower end, obviously they're struggling. 0:10:59.000 --> 0:11:02.240 The middle income can summer continues to get some higher wages, 0:11:02.600 --> 0:11:05.840 and those wages are allocated. It may not be allocated 0:11:05.880 --> 0:11:09.400 to goods, but allocated to services above that mid tiers. 0:11:09.440 --> 0:11:12.320 The question mark if there's a pullback given what debt 0:11:12.400 --> 0:11:16.080 levels could look like. Dana, your thoughts, thoughts and Joe 0:11:16.120 --> 0:11:19.240 Filman's work on Amazon has been great, but I'm gonna 0:11:19.559 --> 0:11:22.720 editorialize and say Amazon has been a train wreck your 0:11:22.760 --> 0:11:26.400 thoughts and now they turn it around. I mean, there's 0:11:26.400 --> 0:11:29.360 work to be done there and Amazon. The narrative that 0:11:29.480 --> 0:11:31.720 was two and three years ago that Amazon is going 0:11:31.760 --> 0:11:34.880 to take over a retail and the consumer spend isn't there. 0:11:35.360 --> 0:11:38.160 It definitely cost more to be able to shift than 0:11:38.160 --> 0:11:43.720 ever before. Everyone basically expected what was happening online sales 0:11:43.760 --> 0:11:46.440 to continue the growth, and we're seeing that shift now. 0:11:46.679 --> 0:11:49.000 We're seeing the shift of a return to stores from 0:11:49.000 --> 0:11:53.079 digital sales. That's helping the physical store retailer. And frankly, 0:11:53.360 --> 0:11:56.480 digital sales are moderating, and that Sianca is a brand. 0:11:56.520 --> 0:11:59.560 I just don't get t k. What is a Cianca about? 0:12:00.120 --> 0:12:05.480 You know, to be honest, I just but you know, 0:12:05.480 --> 0:12:07.920 on data will be dazzled by this. I actually watched 0:12:07.920 --> 0:12:12.360 a little short video on the Guide Balanceaga that he went. 0:12:12.480 --> 0:12:15.040 He went bankrupt like three times, and every time he 0:12:15.080 --> 0:12:19.160 came out he revolutionized what he did out of Spain 0:12:20.000 --> 0:12:22.960 and it was with always with drama, John and I 0:12:23.040 --> 0:12:25.120 guess that's what it is. I don't get it, Dana. 0:12:25.160 --> 0:12:27.640 I'm convinced that in a few years time they come 0:12:27.640 --> 0:12:30.199 out of the head office and say, got you. This 0:12:30.280 --> 0:12:32.520 was all a joke, but you bought it anyway. I 0:12:32.600 --> 0:12:35.560 just don't get it. I think one of the things 0:12:35.559 --> 0:12:37.760 they do, you can go buy their windows like I 0:12:37.800 --> 0:12:40.880 did last night. They're putting things in their windows that 0:12:41.160 --> 0:12:45.920 whether it's big inflated balloons in the in the look 0:12:45.920 --> 0:12:49.120 of a person, they're basically creating that something you need 0:12:49.200 --> 0:12:52.319 to see. And frankly, there's a difference between heritage and 0:12:52.400 --> 0:12:55.200 authentic luxury, like what you have with the quality of 0:12:55.200 --> 0:12:57.839 the goods at our mez, and there's a difference with 0:12:58.200 --> 0:13:02.120 what's happening now that is in demand because of limited supply. 0:13:02.480 --> 0:13:04.760 That's what some of the brands. Dana, what does your 0:13:04.880 --> 0:13:08.920 universe do when we come off China lockdown? Uh, the 0:13:09.040 --> 0:13:12.679 luxury goods universe will do very well. But also don't 0:13:12.679 --> 0:13:17.040 forget what China supplies. Every manufacturer is looking to diversify 0:13:17.120 --> 0:13:20.440 their supply and being able to get the goods is key, brilliant, 0:13:20.800 --> 0:13:25.559 thank you, awesome advantag Do you know that the sweatshirts 0:13:25.600 --> 0:13:27.800 I thought, if you bought a luxury sweatshirt that didn't 0:13:27.840 --> 0:13:31.079 shrink in the wash, I guess you got to watch 0:13:31.080 --> 0:13:33.720 out for tom as if the other half takes set 0:13:33.520 --> 0:13:37.679 sweatshirt and shrinks it deliberately so that they can wear it. 0:13:37.760 --> 0:13:40.440 To bet the idea that women spend so much more 0:13:40.520 --> 0:13:46.160 than men, I mean, that's typically the stereotype. It's going 0:13:46.200 --> 0:13:48.040 to paint out that's exactly right. I just want to 0:13:48.080 --> 0:13:56.280 make that very clear now joining us, and this is 0:13:56.280 --> 0:13:59.480 a really important conversation for you on radio and television 0:13:59.520 --> 0:14:03.000 because Sky Clemens, with thirty plus years of Brown Brothers 0:14:03.040 --> 0:14:07.960 hareman synthesizes in all the eco babble into the market 0:14:08.040 --> 0:14:12.400 strategy and your foundation, Scott Clemens, is everybody calm down 0:14:12.800 --> 0:14:16.440 about inflation? If you're brief and Chairman Powell today in 0:14:16.440 --> 0:14:19.480 the forty seven other FED speakers, how do you tell 0:14:19.560 --> 0:14:24.200 them to calm down about inflation? Um, I think it 0:14:24.280 --> 0:14:28.680 pays to be a simple minded economist given all of 0:14:28.720 --> 0:14:30.840 the moving parts that you've laid out here. At the 0:14:30.880 --> 0:14:33.800 top of the hour, I would remind the FED. Far 0:14:33.880 --> 0:14:35.640 be it for me to lecture the FED, but I 0:14:35.680 --> 0:14:37.880 would remind the FED that the price of everything, in 0:14:37.920 --> 0:14:41.040 the price of anything, is simply the interaction of supply 0:14:41.120 --> 0:14:43.800 and demand, and that the FED has an ability to 0:14:44.000 --> 0:14:47.960 influence demand through monetary policy, but the FED does not 0:14:48.080 --> 0:14:51.560 have the ability to influence supply. So to the degree 0:14:51.600 --> 0:14:56.240 that lingering inflation is a result of lingering supply chain disruptions, 0:14:56.520 --> 0:14:59.240 the FED should not get over eager and raise interest 0:14:59.360 --> 0:15:01.960 rates too much. Much to try to choke off inflation 0:15:02.000 --> 0:15:04.680 that ends up not being demand driven to begin with. 0:15:04.760 --> 0:15:06.960 I think that's the story for inflation and the FED 0:15:07.000 --> 0:15:09.000 for the balance of this year. Let's talk about the 0:15:09.000 --> 0:15:11.840 story for this market. MARKA. Kolanovich of JP Mulgan and 0:15:11.840 --> 0:15:14.400 the investment banks saying we're pricing in too much recession 0:15:14.480 --> 0:15:16.800 risk just two pound question one to agree and to 0:15:17.200 --> 0:15:20.720 how do you measure that? I think that's right. I 0:15:20.720 --> 0:15:23.080 think the market is too pessimistic about the risk of 0:15:23.080 --> 0:15:26.080 inflation in an environment where we're adding jobs and roughly 0:15:26.160 --> 0:15:29.120 let's call it half a million jobs a month, net 0:15:29.120 --> 0:15:33.200 wages arising. Combined those things together, keeping in mind of 0:15:33.240 --> 0:15:36.760 personal consumption is sixty percent of GDP going to twenty 0:15:36.840 --> 0:15:39.360 three twenty four. Yeah, there's a recession out there somewhere, 0:15:39.360 --> 0:15:41.080 but I don't see that in the near term. The 0:15:41.120 --> 0:15:44.160 background was just too strong. Where I think the confusion 0:15:44.240 --> 0:15:47.160 or the anxiety arises is we're still in the midst 0:15:47.160 --> 0:15:51.760 of this transition of economic leadership away from the policy 0:15:51.800 --> 0:15:54.600 support of easy monetary policy and a lot of fiscal 0:15:54.680 --> 0:15:57.920 spending twelve eighteen, twenty four months ago, back to a 0:15:57.960 --> 0:16:02.280 more normal driver of economic active that's naturally anxiety inducing. 0:16:02.320 --> 0:16:04.040 I get it, but I think people are looking at 0:16:04.040 --> 0:16:06.280 the glasses being half empty. There are a lot of 0:16:06.320 --> 0:16:08.600 half full notions out there as well. Well. Are have 0:16:08.760 --> 0:16:11.160 full notion something that would encourage the Fed to hike 0:16:11.200 --> 0:16:13.680 further leading to half empty? And I know this sounds 0:16:13.720 --> 0:16:15.800 like a paradise, a parody of what it is to 0:16:15.840 --> 0:16:17.880 be gloomy, but honestly, this is what a lot of 0:16:17.880 --> 0:16:20.720 people are thinking. That the momentum that we're seeing in 0:16:20.760 --> 0:16:23.160 a lot of the economic data is a bad thing 0:16:23.200 --> 0:16:25.320 because it means the FED has to do more. What 0:16:25.440 --> 0:16:29.680 do you say to counter that? Well, at least I 0:16:29.720 --> 0:16:31.920 think the answer to that is what's really important. And 0:16:31.920 --> 0:16:33.600 this is a subtle nuance, but I think this is 0:16:33.640 --> 0:16:36.200 the source of a lot of the volatility and financial markets. 0:16:36.200 --> 0:16:39.280 The important thing is not that the Fed is raising 0:16:39.280 --> 0:16:42.920 interest rates, but why they're raising interest rates. And admittedly 0:16:42.960 --> 0:16:45.640 that's very subjective, but if the Fed, on one hand, 0:16:45.720 --> 0:16:48.520 is raising interest rates out of growing confidence that this 0:16:48.600 --> 0:16:51.880 transition and leadership is taking place, that's a pretty benign 0:16:51.920 --> 0:16:54.680 and even supportive outcome. If, on the other hand, the 0:16:54.720 --> 0:16:57.720 market concludes that inflation is running away and the FED 0:16:57.840 --> 0:17:01.120 is playing catch up. That's a very just up to outcome, 0:17:01.280 --> 0:17:03.520 and I think the push and pull between those two 0:17:03.520 --> 0:17:07.000 notions is what drives market volatility, not just day to day, 0:17:07.040 --> 0:17:10.320 but sometimes even hour to hour. We've we've all seen 0:17:10.520 --> 0:17:13.120 these days in which the market opens strongly and closes 0:17:13.160 --> 0:17:17.040 in the red or vice versa. Hopefully today's opening polls, 0:17:17.080 --> 0:17:19.120 but I think that's likely to continue for some time 0:17:19.119 --> 0:17:21.240 to come. We're telling our clients to get used to 0:17:21.280 --> 0:17:24.159 the kind of intra day volatility that has characterized the 0:17:24.160 --> 0:17:26.480 beginning of this year. It's not gonna go away anytime soon. 0:17:26.680 --> 0:17:30.359 So given that, where's your highest conviction right now, Scott Well, 0:17:30.400 --> 0:17:33.120 With the rise in interest rates, we've begun allocating capital 0:17:33.160 --> 0:17:35.960 into traditional fixed income for the first time close to 0:17:36.000 --> 0:17:38.720 a decade. For our clients at Brown withs Harim and 0:17:38.760 --> 0:17:43.160 taxable clients, remmisciple bonds are are offering a better trade 0:17:43.160 --> 0:17:45.000 off of risk and return than we've seen in quite 0:17:45.000 --> 0:17:49.720 some time. Beyond that, the carnage in equity markets has 0:17:49.840 --> 0:17:52.760 left a lot to find. I take a very simple 0:17:52.800 --> 0:17:54.959 measure and look at the percentage of stocks in an 0:17:54.960 --> 0:17:58.359 index trading below their fifty day moving average as of 0:17:58.480 --> 0:18:01.680 last night's close. Seventy eight percent of the SMP was 0:18:01.760 --> 0:18:05.840 below it's fifty day moving average. Of the Russell two 0:18:05.920 --> 0:18:10.720 thousand and nine point nine five percent of the NASTAC 0:18:10.880 --> 0:18:13.399 is trading below it's fifty day moving average. That doesn't 0:18:13.400 --> 0:18:15.439 mean that everything is cheap, but it certainly means that 0:18:15.520 --> 0:18:18.040 among that carnage there are plenty of good trade offs 0:18:18.040 --> 0:18:20.640 of risk and return. Scott, let's think positive. Let's say 0:18:20.680 --> 0:18:23.960 you go down in flames with your inflation call. Instead 0:18:23.960 --> 0:18:28.880 of getting two to three percent inflation, you fail, you're wrong, 0:18:29.480 --> 0:18:32.320 and we get four point two percent inflation by the 0:18:32.440 --> 0:18:35.600 end of the year. That is a c change from 0:18:35.640 --> 0:18:38.560 where we are right now. What does the stock market 0:18:38.600 --> 0:18:43.520 do if Clemens is wrong? That's probably more disruptive for 0:18:43.520 --> 0:18:46.000 the stock market if Clemens turns out to be wrong. 0:18:46.280 --> 0:18:48.840 I think, though, at the same time, the trajectory of 0:18:48.920 --> 0:18:51.960 inflation is important. If at the end of this year 0:18:51.960 --> 0:18:54.200 the inflation number still starts with the four but we're 0:18:54.200 --> 0:18:56.920 headed in the right direction, that's different. In that environment, 0:18:56.960 --> 0:18:59.280 I would want to own companies that have pricing power, 0:18:59.359 --> 0:19:03.840 companies that passed through those higher input costs to their 0:19:04.080 --> 0:19:07.720 end customers. That that tends to be associated with brand, loyalty, 0:19:08.080 --> 0:19:11.199 essential products and services, repeat customers, all the kinds of 0:19:11.280 --> 0:19:15.080 quality markers of a company. Not that they're immune from 0:19:15.080 --> 0:19:17.520 an inflationary environment like that, but there are a lot 0:19:17.560 --> 0:19:20.360 more resistant to it. Right to catch up, scill as 0:19:20.359 --> 0:19:23.040 always a different perspective of things at the moment, skilled 0:19:23.040 --> 0:19:29.800 climates at Brand brother Sentiment. Right now, we are all 0:19:29.840 --> 0:19:33.520 aware it is yield up and price down. That is 0:19:33.600 --> 0:19:36.600 the mix, the toxic mix for something rare in the 0:19:36.760 --> 0:19:39.720 last decades, a bond bear market. When you Seesar's living, 0:19:39.760 --> 0:19:42.840 this is global head of strategy at Credit Sites and 0:19:43.000 --> 0:19:45.359 she knows, well, you can talk about spreads and you 0:19:45.440 --> 0:19:49.280 can analyze loans in different categories and the answer is 0:19:49.359 --> 0:19:52.000 prices down. And she joins us this morning, I want 0:19:52.040 --> 0:19:55.680 to look at the Bloomberg Total Aggregate Index, Total Return Aggregate, 0:19:55.760 --> 0:19:58.840 Full Faith and Credit Index, and the answer is we're 0:19:58.840 --> 0:20:03.360 down twelve ice seven percent. Analyze. Can you state it's 0:20:03.359 --> 0:20:06.119 a bond bear market? It feels like we're in a 0:20:06.160 --> 0:20:08.560 bond bear market. And from talking to the credit investors 0:20:08.640 --> 0:20:10.560 that I speak to on a regular basis, they are 0:20:10.640 --> 0:20:14.119 certainly seeing a lot of signs of kind of continuing negativity. 0:20:14.240 --> 0:20:16.840 Don't fight the FED is definitely the mantra in the 0:20:16.920 --> 0:20:19.560 bond market, and the FED seems to be on a 0:20:19.760 --> 0:20:23.040 very hawkish course to continue to high rates. That being said, 0:20:23.119 --> 0:20:26.280 there are some signs of kind of constructive positivity on 0:20:26.480 --> 0:20:29.520 on the credit market side of things. Well, no, but 0:20:29.640 --> 0:20:33.040 in the equity market, I clawback on growth, I called 0:20:33.160 --> 0:20:36.640 clawback on use of cash. How do you claw back 0:20:36.760 --> 0:20:40.040 from a twelve percent loss? Frankly, and I g it 0:20:40.119 --> 0:20:44.159 could be an eight percent loss? What's the strategy to 0:20:44.400 --> 0:20:48.000 clawback in fixed income? So in fixed income, we've had 0:20:48.040 --> 0:20:50.679 two phases of the sell off. First, it was all duration. 0:20:51.119 --> 0:20:54.480 We saw higher rated, longer duration assets sell off as 0:20:54.520 --> 0:20:57.679 we saw that big sensitivity to the moving yields. Now 0:20:57.760 --> 0:21:00.840 with everybody very concerned about growth or moving into the 0:21:00.920 --> 0:21:03.240 credit risk phase of the sell off, and this means 0:21:03.320 --> 0:21:05.400 you have to be very selective in terms of where 0:21:05.600 --> 0:21:08.639 you are positioning your risk, and that is actually a 0:21:08.760 --> 0:21:11.480 very good sign for these dedicated credit investors who have 0:21:11.600 --> 0:21:14.919 longer term views and longer term mandates rather than kind 0:21:14.960 --> 0:21:17.159 of a three to six month time horizon like we 0:21:17.280 --> 0:21:19.320 usually see in the equity market, when you with about 0:21:19.320 --> 0:21:21.520 an hour ago before we get retail sales. When you 0:21:21.600 --> 0:21:25.199 take a look at the corporate fundamentals, which sectors are 0:21:25.200 --> 0:21:27.760 starting to feel the biggest hit from some of the 0:21:27.840 --> 0:21:30.720 weakness that at least we saw in Walmart, if not beyond. 0:21:31.400 --> 0:21:33.879 So we're definitely seeing a shift away from some of 0:21:34.000 --> 0:21:38.200 the COVID pandemic darlings, some of the consumer staples and 0:21:38.320 --> 0:21:41.879 retails side of things. But we are also seeing a 0:21:42.040 --> 0:21:46.320 continued improvement in energy fundamentals. While we might not hold 0:21:46.480 --> 0:21:50.280 energy prices where they currently are, the levels are still 0:21:50.320 --> 0:21:54.119 going to be quite strong for cash flow and credit investors. 0:21:54.560 --> 0:21:57.920 And we're also seeing some idiosyncredit risk in some sectors, 0:21:58.040 --> 0:22:00.919 things like high yield healthcare and how yield telecom. We're 0:22:00.960 --> 0:22:03.880 seeing some single name stories that are really driving outside 0:22:03.880 --> 0:22:06.399 spread widening in those specific sectors. They're sort of an 0:22:06.440 --> 0:22:10.439