Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and I'm gonna hir across acid reporter also at Bloomberg,
Speaker 1: and this week on the show, Well, this was a
Speaker 1: monumental week because it marked the point where the US
Speaker 1: stock market actually doubled from the pandemic lows of at
Speaker 1: least if you're looking at the main benchmark, the SMP five.
Speaker 1: What does that mean going forward? Have easy gains already
Speaker 1: been made? And are we do for a rough patch
Speaker 1: next year? We'll get into it with the co chief
Speaker 1: investment strategist at a major asset management firm and uh Vltana.
Speaker 1: I gotta tell you, I'm very excited this week. Um,
Speaker 1: I'm excited most weeks for the podcast. I gotta say
Speaker 1: I'm I'm very easily excitable, but I'm especially excited this
Speaker 1: week because we got a call a voicemail to the
Speaker 1: Bloomberg podcast hotline. Now, granted it was someone who works
Speaker 1: for Bloomberg, so the call literally was coming from inside
Speaker 1: the house, but it still counts and I'm very excited
Speaker 1: and that that's sort of a reminder to me that
Speaker 1: I have not been reminding people to call the hotline,
Speaker 1: so hopefully you're more organized than me and have the
Speaker 1: number handy. What is what is the hotline number of
Speaker 1: Bill Dona? This is a quiz, This is a test
Speaker 1: for you. I'm way more organized than you, and thankfully
Speaker 1: I have it on hand. So if anybody has the
Speaker 1: craziest thing that they saw internally from Bloomberg or fans
Speaker 1: outside of Bloomberg, you can give us a call at
Speaker 1: six four six three two four three four nine zero
Speaker 1: and we may even play the voicemail on the show.
Speaker 1: Great and you know what, I'm going to start with
Speaker 1: a crazy thing. It's not market related, but I've just
Speaker 1: been informed that our guest this week is up north
Speaker 1: of Boston where they're actually getting tornado warnings, which I
Speaker 1: did not think Boston was a very tornado prone place.
Speaker 1: But tell about that. Our guest this week, her name
Speaker 1: is Emily are Roland. She's the co chief investment strategist
Speaker 1: at John Hancock Investment Management. Emily, are you on a
Speaker 1: bunker right now? Shelter? What what's going on? I'm worried
Speaker 1: about you. This podcast is far too important for me
Speaker 1: to be sheltering from this tornado. I'm willing to be
Speaker 1: blown over for Bloomberg. But yeah, we're we're in a
Speaker 1: tornado watch right now. It looks like the weather is
Speaker 1: starting to improve, so we should be in pretty good
Speaker 1: shape here. I have a swage that children's fears, and
Speaker 1: I think we everybody should be okay, alright, good, good
Speaker 1: to know if you so. If your screen suddenly goes dark,
Speaker 1: I'm gonna I don't know what. We'll send Voldonta up
Speaker 1: to dig you out. Is that all right with you?
Speaker 1: Voldona happy to help. Let's hope it doesn't come to that.
Speaker 1: It's crazier for weather that we had a bunch of
Speaker 1: tornadoes in New Jersey. I don't remember that before. I
Speaker 1: know you had one, your parents had one year Trenton.
Speaker 1: Very strange year for weather. But hopefully, uh, once the
Speaker 1: summer is over, we'll get back normal. But Emily, let's
Speaker 1: get to that market discussion. You know, someone pointed out
Speaker 1: to me this week. Um, it's kind of hard to believe,
Speaker 1: but the US stock market, at least looking at the
Speaker 1: sp has doubled since the pandemic lose, which you know,
Speaker 1: we all sat here on our screens watching it happened.
Speaker 1: So I don't know why it should be such a
Speaker 1: surpriser shock to me. But I think when you hit
Speaker 1: that milestone of a doubled market, it's it's a good
Speaker 1: time to reflect and just sort of get your take
Speaker 1: on you know, what did we learn? What did did
Speaker 1: you learn anything that you didn't know about the market
Speaker 1: in the past year. I'm not sure anyone really would
Speaker 1: have guessed we'd see the market double from the lows
Speaker 1: if if you took a time machine back to March
Speaker 1: of But what's your takeaway about just sort of this
Speaker 1: crazy rally we've seen in equities um and and are
Speaker 1: there any lessons that we should sort of stow away
Speaker 1: for the future from this? Yeah, I mean, I think
Speaker 1: the lesson learned is if you want to stimulate the
Speaker 1: stock market, spend about fIF of GDP on fiscal stimulus
Speaker 1: and have the Fed double the size of their balance
Speaker 1: sheet in pretty short order. So certainly those have been
Speaker 1: the two biggest tail winds for the market since the
Speaker 1: March low of last year. And I think one of
Speaker 1: the most interesting and notable things about this bull market
Speaker 1: that's been unfolding is that it's made of Teflon. There
Speaker 1: have not been any corrections really to speak up, or
Speaker 1: draw downs of more than five percent. The dip buyers
Speaker 1: have come out in full force now. Usually when we
Speaker 1: look at previous bull markets coming off of bear market lows,
Speaker 1: year two is a lot harder than year one. So
Speaker 1: in year one we see this meaningful asset appreciation. We
Speaker 1: see basically the rally and everything, any type of risk
Speaker 1: you want to take is rewarded. Typically in year two
Speaker 1: markets become a bit more choppy, and certainly we saw
Speaker 1: that after oh eight and oh nine where we saw
Speaker 1: a big correction and coming into year two of that
Speaker 1: of that bowl market, and this time we simply have
Speaker 1: not seen the volatility. So markets are looking past it.
Speaker 1: We've got easy central banks still in place, still, fiscal
Speaker 1: stimulus tail winds, and earnings growth is just going through
Speaker 1: the roof. So those have been really powerful factors I
Speaker 1: think driving markets higher. And then at the same time,
Speaker 1: I had a story earlier this week that said options
Speaker 1: tape for virus traders picked their poison, and I am
Speaker 1: hearing from a lot more people that there's just some
Speaker 1: worries swirling around. So I'm wondering how you guys are positioning.
Speaker 1: If you're positioning more defensively, maybe you can tell us
Speaker 1: a bit more about your strategy. Yeah. I think the
Speaker 1: spread of the delta Varrian has been exacerbating a backdrop
Speaker 1: that was already in place, which is that economic growth
Speaker 1: continues to be strong, and we've seen that this week
Speaker 1: with the leading indicators coming in at ten percent growth
Speaker 1: year every year. That's a great reading. But it's starting
Speaker 1: to moderate, and it's become clear to us that the
Speaker 1: peak and the economic data was probably back in April.
Speaker 1: Now it's not an extraordinarily bearished message. You can still
Speaker 1: be a powerful driver for risk assets as the economy
Speaker 1: continues to improve, but we are seeing that moderation and
Speaker 1: growth play out, and what that means to us from
Speaker 1: an investment positioning standpoint is that it's time to be
Speaker 1: more thoughtful about what you own. We talked before about
Speaker 1: kind of the risk everything rally. It didn't matter what
Speaker 1: you bought over the last twelve months or so. Now
Speaker 1: as we sort of head into the mid cycle environment,
Speaker 1: it becomes harder, and that's one of the reasons we've
Speaker 1: been really focused on things like the quality factor, so
Speaker 1: looking for companies and sectors and have great balance sheets,
Speaker 1: good return on equity, the ability to maintain margins regardless
Speaker 1: of the economic growth backdrop. To us, that's going to
Speaker 1: be increasingly important. I've been thinking about this analogy. Summer's
Speaker 1: winding down here in Boston. My my kids were on
Speaker 1: the swim team this year. Um, they weren't very good,
Speaker 1: but I noticed the other day they handed out all
Speaker 1: the ribbons, right or the medals that they want in
Speaker 1: all their swim team races, and I noticed they came
Speaker 1: home with a bunch of them. I thought, well, every
Speaker 1: kid really does get a ribbon. And then I started thinking,
Speaker 1: it's kind of like the market over the last fifteen
Speaker 1: months or so, everybody gets a ribbon. And I think
Speaker 1: as we transition into this mid cycle environment, it's going
Speaker 1: to be more like the Olympics, where it's just going
Speaker 1: to be the best who are really rewarded. So again
Speaker 1: that's the reason for the focus on fundamentals and the
Speaker 1: focus on that quality factor as we evaluate the investment opportunities.
Speaker 1: God bless you, Emily. I uh, thankfully none of my
Speaker 1: kids were swimmers, but I know that every swim meet
Speaker 1: is approximately thirty seven hours long. Somehow, somehow, so I'm
Speaker 1: sure it's been a long summer, and congratulations on the ribbons, said,
Speaker 1: I think that the reason for the many ribbons is
Speaker 1: there's also about eight hundred events that every swim meet,
Speaker 1: so there's plenty of plenty of chance to to Uh.
Speaker 1: I wanted so I was, I was reading one of
Speaker 1: your recent pieces of commentary, and I wanted to ask
Speaker 1: you about something in it. Um and you, as you
Speaker 1: put it out, you know this the fiscal stimulus that's
Speaker 1: in the rear view mirror, I mean, unprecedented, the five
Speaker 1: trailing as you point out the direct payments, you know
Speaker 1: what they used to call helicopter money basically, and um, yes,
Speaker 1: we've got some more coming from the infrastructure spending bills.
Speaker 1: We don't know exactly how much yet, but there's something
Speaker 1: in the pipeline. Um obviously not going to be as
Speaker 1: big of a a sort of injection of money into
Speaker 1: the economy as as we saw last year. But um
Speaker 1: um And you make a good point, you say, uh,
Speaker 1: you know this and your not this stimulus is unlikely
Speaker 1: to be matched talking about last year's um and if
Speaker 1: that's stimulus that we just did not create a higher
Speaker 1: tenure treasury yield it is n likely that a smaller
Speaker 1: package that is less direct in dissemination into the economy
Speaker 1: creates a meaningful higher yield than where we are. You
Speaker 1: know from sort of the supply of treasuries that that
Speaker 1: makes sense to me. But I do wonder about the
Speaker 1: other side of the ledger with you know, who's buying
Speaker 1: the treasuries. We we have the Fed buying eighty billion
Speaker 1: a month in treasuries forty billion in mortgage backed securities.
Speaker 1: The tapering, The time to talk about talking about tapering
Speaker 1: is over, and now I think it's the time to
Speaker 1: actually start tapering very soon. Um. If you listen to
Speaker 1: James Bullard of the Fed this week, uh he said,
Speaker 1: And I don't know if this is just sort of
Speaker 1: bravado talk, but he said he wants the tapering to
Speaker 1: be finished by the end of the first quarter of
Speaker 1: next year, which would imply a very aggressive uh pace
Speaker 1: of tapering, at least compared to the last time they
Speaker 1: tried to get out out from under QUEI and which
Speaker 1: you know famously caused the taper attention. UM, So I wonder,
Speaker 1: you know, I guess there's two ways that could play out.
Speaker 1: You know, you remove this huge buyer from the treasury
Speaker 1: market in the fed UM And my first instinct would be, well,
Speaker 1: obviously yields are gonna go higher. But then you know,
Speaker 1: on the second thought, it's like, well, is it going
Speaker 1: to create this risk off environment everyone's going to freak
Speaker 1: out about the tapering And is that actually gonna cause
Speaker 1: people to pile back into treasuries and yields to go lower?
Speaker 1: So how much is the tapering sort of play into
Speaker 1: your view and yields and which side you know it could?
Speaker 1: Could both of those sort of be true and that
Speaker 1: we see a spike and yields and then sort of
Speaker 1: a risk off environment. I don't know, how do you
Speaker 1: all see it playing out once we do push the
Speaker 1: button on tapering? Can I just say sorry? Can I
Speaker 1: just say, Mike, you get ribbons for the longest question
Speaker 1: in the industry of the world. That's nothing much longer.
Speaker 1: I'm about to say the same thing. And there were
Speaker 1: so many juicy nuggets and questions in there, and I
Speaker 1: think you've hit on something that is so crucial tomorrow
Speaker 1: gets right now, which is you know, what impact does
Speaker 1: tapering have? And if you look back at the last
Speaker 1: two examples when QWI ended so if you look at
Speaker 1: you know, QUE two QWE three UM. Actually what happened
Speaker 1: was that when the FED started to taper or started,
Speaker 1: you know, stopped increasing the size of its balance sheets sheet,
Speaker 1: the tenure treasury yield actually fell. And it's for the
Speaker 1: exact reason that you pointed out, which is that the
Speaker 1: Fed's basically removing the punch bowl, which is feeding risk
Speaker 1: assets and causing investors to want to take more risks.
Speaker 1: So when the FED starts to pull the punch bowl away,
Speaker 1: that creates this risk off environment where investors actually start
Speaker 1: to embrace treasuries again. So that's one reason we actually
Speaker 1: see ultimately the path of the ten year treasury moving
Speaker 1: lower for here from here, another thing to think about.
Speaker 1: Typically what happens in terms of the ten year treasury
Speaker 1: is the yield peaks right after a risk session, and
Speaker 1: we saw and that's true if you look back at
Speaker 1: the last four recessions in the US, and so what
Speaker 1: we saw in terms of a closing yield of one
Speaker 1: seventy four on March thirty one of this year, and
Speaker 1: our view, it's got to be on the table in
Speaker 1: the conversation that that was potentially the peak in the
Speaker 1: yield of the ten year treasury. Now we might see
Speaker 1: some further backup, maybe an infrastructure package. Personally, I don't
Speaker 1: think it's gonna be potent enough to really accelerate growth.
Speaker 1: It's going to be spread out over a number of years. Um.
Speaker 1: It's not going to be done via direct transfer payments
Speaker 1: or stimulus checks. I think it'll probably be less stimulative. UM.
Speaker 1: So I just don't see the catalyst to move the
Speaker 1: ten year treasury higher from here in a meaningful way. Emily,
Speaker 1: what about the stock market? Because I was wondering what
Speaker 1: you're playing book might be for FED tapering. Obviously this
Speaker 1: week we had the minutes and they showed that a
Speaker 1: lot of the officials see a taper potentially starting this year.
Speaker 1: So what what will be your playbook for this scenario? Yeah,
Speaker 1: I mean I think it would be a risk to
Speaker 1: the markets. I think the Fed has been so transparent.
Speaker 1: You know, Powell has been so resolute in his messaging
Speaker 1: and crystal clear to us that you know they're they're
Speaker 1: very much committed to this average inflation targeting framework. They're
Speaker 1: very much committed to making substantial progress on their economic goals,
Speaker 1: you know, letting the jobs market fully heal. We just
Speaker 1: had two great jobs reports. Is that enough to create
Speaker 1: this sort of quote unquote string of good economic data
Speaker 1: that the FED would like to see? And we're on
Speaker 1: our way there. So there has been a bit of
Speaker 1: a shift to a more you know, hawkish approach from
Speaker 1: the Fed, but it's been well telegraphed. So I think
Speaker 1: equity markets can handle it. Um. And you know, you've
Speaker 1: got to remember that as the said starts easing up here,
Speaker 1: that's not a necessarily a bad thing. It means the
Speaker 1: economy is continuing to heal, and it means growth is
Speaker 1: picking up. Um. So that's a good thing. Um. So
Speaker 1: I think equity markets could take it in stride. Um.
Speaker 1: I think you know, one of the bigger risk that's
Speaker 1: not being priced into the equity market right now is
Speaker 1: potential tax increases, particularly on the corporate tax side. Um.
Speaker 1: You know, markets tend we we look at some great
Speaker 1: research and Dan Clifton over its strategious research partner, just
Speaker 1: put Partners just put a note out uh this week
Speaker 1: that you know, basically suggests markets worry about higher corporate
Speaker 1: tax rates when it's time to worry about higher corporate
Speaker 1: tax rates, meaning that when they're actually kind of you know,
Speaker 1: it looks quite likely that they're going to be put
Speaker 1: in into into law, so that might be sometime this fall,
Speaker 1: and you might see equity markets get a little bit
Speaker 1: big jetty around that as it might knock uh you know,
Speaker 1: maybe five or even ten percent off that corporate earnings outlook.
Speaker 1: So something to think about there in terms of what
Speaker 1: might create the volatility in the stock market going forward.
Speaker 1: So is it the type of scenario that perhaps investors
Speaker 1: have already priced in to some degree the infrastructure stimulus,
Speaker 1: but not this notion that we're gonna have to go
Speaker 1: back and talk about paying for government spending again and
Speaker 1: not just run deficits to free fall? Is you know,
Speaker 1: sort of a two sided coin and the market is
Speaker 1: only looking at one at this point. I think that's right.
Speaker 1: And you know, markets were continuing to hit you know,
Speaker 1: new all time Hiyes, recently we've seen a little bit
Speaker 1: of choppiness UM as of late. But I think right
Speaker 1: now markets are not thinking about that, They're not anticipating that, um.
Speaker 1: They're they're focused on some of these these keytail winds
Speaker 1: that continue to exist around reopening, around that strong earnings
Speaker 1: back drop, and around continued supportive policy. I covered the
Speaker 1: Robin Hood earnings earlier this week, and essentially they said
Speaker 1: that retail mania is cooling. I think they warned about
Speaker 1: seasonal headwinds. So I'm wondering if you agree with that
Speaker 1: and what it means for markets. So we look at
Speaker 1: the activity in retail trading, particularly around the meme stocks,
Speaker 1: as our kind of gauge of sentiment, of market sentiment.
Speaker 1: And when you start to see these pockets of frothiness
Speaker 1: or these pockets of speculation building in the market, you know,
Speaker 1: that's a that's a notch against wanting to embrace equities.
Speaker 1: So when we start to see some of that sentiment cool,
Speaker 1: you know, we we also watch things like cryptocurrencies is
Speaker 1: another sort of sentiment indicator. When that starts to cool,
Speaker 1: to us, that's a sign that you know, potentially this
Speaker 1: equity market actually has more legs and sentiment is not
Speaker 1: moving against it. So we still want to own equities here.
Speaker 1: And I'm not totally upset about the fact that, you know,
Speaker 1: maybe some of that frenzy and retail spending is starting
Speaker 1: to cool. Hey, maybe people are just getting back to work. Um,
Speaker 1: you know, we know some of the some of the
Speaker 1: additional jobless benefits are starting to expire in many states,
Speaker 1: or maybe people are getting back to school. I can
Speaker 1: tell you that my eleven year old begged me if
Speaker 1: he could open up a robin Hood account so he
Speaker 1: could start trading using his hundred dollars from his first
Speaker 1: communion money. So now that he's getting back into the classroom,
Speaker 1: maybe his interest in a day trading is starting to
Speaker 1: uh subside. Here something to think about, Oh boy, eleven
Speaker 1: years old, and once though for the rabbit I had
Speaker 1: my seventh year senior old wanted open one and I
Speaker 1: thought that was young. But eleven boy, I'd love to
Speaker 1: know the stock picks of your eleven year old sometime
Speaker 1: though you can. I think you can guess you can
Speaker 1: have anything that's wildly risky. And by the way, his
Speaker 1: I realized this the other day. You know, his entire
Speaker 1: experience with investing, which started in the beginning of the lockdowns,
Speaker 1: involves every everything going up. So he hasn't had the
Speaker 1: experience that the rest of us had and have had
Speaker 1: in terms of thinking about risk tolerance and trying to
Speaker 1: figure out how much you can stomach in terms of losses.
Speaker 1: So I think it's going to be an interesting period
Speaker 1: for him to to learn and grow. But speaking of
Speaker 1: that as well, we were looking at some data that
Speaker 1: was showing cash is actually slowly starting to build up
Speaker 1: in portfolios and potentially, as you said, some of that
Speaker 1: euphoric buying from earlier in the year is potentially fading away.
Speaker 1: So what would that mean for for markets? But what
Speaker 1: do we make of the idea that potentially we don't
Speaker 1: have the buy the dip mentality anymore going forward? Yeah,
Speaker 1: we are seeing if you look at the fun flow data.
Speaker 1: I think it's a great point, Bill Donna, because you're
Speaker 1: seeing investors continue to have a more conservative mindset in
Speaker 1: terms of where they're investing. We saw money market balances
Speaker 1: UM hit something like six trillion dollars at the height
Speaker 1: of the pandemic. That they started to come back down again,
Speaker 1: which they typically do coming out of an election, coming
Speaker 1: out of a recession, but we've actually started to see
Speaker 1: the interest in money market funds go back up. The
Speaker 1: number one asset gathering category UM is tax free bonds,
Speaker 1: and as we know, that's a huge challenge right now
Speaker 1: in terms of finding a way to generate yield in
Speaker 1: an environment which yields are extraordinary look extraordinarily low, and
Speaker 1: in our view, they're probably going to stay that way. Um,
Speaker 1: you know, we don't see the Fed going anywhere. We
Speaker 1: think they're going to have a really hard time raising rates.
Speaker 1: Is the yield curve is actually flattening right now. The
Speaker 1: stead doesn't want to risk raising rates into potentially an
Speaker 1: inverting yield curve. So as we watch this investor behavior
Speaker 1: of looking to money market funds, looking to bond strategies,
Speaker 1: we've got to be really careful here about the approach
Speaker 1: to risk while still giving investors the ability to generate yield.
Speaker 1: So for us, the sweet spot really has been going
Speaker 1: into in some grade corporate bonds, looking at the higher
Speaker 1: rungs of the high yield bond market, the double bees
Speaker 1: that have the ability to be upgraded as this economic
Speaker 1: recovery continues to unfold. And then look, every little bit
Speaker 1: counts in terms of generating yield right now. So when
Speaker 1: we put a you know, a potential portfolio together, we're
Speaker 1: trying to get to something like two or three percent.
Speaker 1: I know it doesn't sound exciting. Fixed incomes not always exciting, um,
Speaker 1: but we're looking at that without going over our skis
Speaker 1: too much and taking risk within fixed income and not
Speaker 1: getting ourselves over exposed to just plain old equity market risk.
Speaker 1: So when you look at the lower rungs of the
Speaker 1: high yeld bond market, that's really what you're getting. So
Speaker 1: it's this combination of investment grade corporate bonds, high high
Speaker 1: yield bonds, and then still an allocation to higher quality
Speaker 1: bonds to protect during those periods where you know, equity
Speaker 1: market volatility wears its ugly head. I don't know if
Speaker 1: you can get it to two or three percent. That's
Speaker 1: pretty exciting these days, Emily, is if you can denominate
Speaker 1: that in Euros, I think you'll have a lot of
Speaker 1: people knocking on your door, especially to UH to get
Speaker 1: on that. But I wanted to ask you about you know,
Speaker 1: and uh Vlbonna and her colleagues recently wrote about this. Um.
Speaker 1: Katie grit Felt, one of our colleagues especially, I think,
Speaker 1: wrote about this dirty word that I I I gotta say.
Speaker 1: Earlier in the year, I was afraid to even say
Speaker 1: this word out loud. I was afraid I would get
Speaker 1: chased off of the zoom call or wherever I was speaking.
Speaker 1: But the notion of stag inflation, and I think you know,
Speaker 1: earlier in the year, it seemed like such a ridiculous
Speaker 1: sort of tail risk to worry about because the everyone
Speaker 1: assumed the GDP growth would just be off the charts
Speaker 1: as everyone got vaccinated and got back to the world.
Speaker 1: And I'm I'm winding up here. I'm like a supervillain
Speaker 1: here in a movie. I'm monologue a little bit here.
Speaker 1: But but bear with me. I'll get to the question eventually.
Speaker 1: But you know, you look now, and okay, everyone is
Speaker 1: still sort of confident that the FEDS right inflations transitory.
Speaker 1: I don't know if they're as confident as they were
Speaker 1: about that. Um. And at the same time, you know,
Speaker 1: this delta variant is unlikely to cause sort of these
Speaker 1: draconian lockdown measures that we saw last year. I don't
Speaker 1: think anyone in the country or in the world really
Speaker 1: has the stomach or sort of the political good will
Speaker 1: to be able to pull that off. That said, I know,
Speaker 1: you know, you wonder if people are just sort of
Speaker 1: self imposed going to start thinking twice about taking a trip,
Speaker 1: we're going out to eat, or just you know, doing
Speaker 1: anything in a crowd. Um. And at the same time,
Speaker 1: you look over in China and you see like part
Speaker 1: of a ports being shut down because of one case
Speaker 1: of COVID causing UH these bottlenecks that we had hoped
Speaker 1: would be alleviated by now to sort of be another
Speaker 1: risk to the supply chain. UM, if that sort of
Speaker 1: situation should be repeated. I know there's some some factories
Speaker 1: in in Asia that have closed down already, you know,
Speaker 1: some Samsung UH plants and stuff like that. So where
Speaker 1: do you put stagflation is sort of a market risk
Speaker 1: right now? Is it a very thin tail risk? Or
Speaker 1: you know, is it a is the terrorist that's getting fatter? What?
Speaker 1: What's your take? You know, a few months ago, I
Speaker 1: would have said it's it's highly unlikely. I think now
Speaker 1: it's it's on the table as a risk for a
Speaker 1: lot of the reasons that you've pointed out. We've now
Speaker 1: got supply chain disruptions, UM that are probably going to
Speaker 1: be extended or they're already extended. You look at the
Speaker 1: shortage and chips that continues to impact automakers. You look
Speaker 1: at the shutdown of these ports and the lines of
Speaker 1: of of cargo ships outside this Los Angeles shipping terminals. UM.
Speaker 1: You know all of this is certainly UM, you know,
Speaker 1: a big challenge to the narrative that inflation is transitory.
Speaker 1: You also see areas like Shelter, which is a third
Speaker 1: of of CPI, which is showing some stickiness in terms
Speaker 1: of rents moving higher. Certainly wage growth another complain on it.
Speaker 1: UM it's awfully hard for companies to learn in workers
Speaker 1: by offering higher wages and then lower them. Uh. You
Speaker 1: know that's not going to happen. And by the way,
Speaker 1: that's not totally bad news. It's clearly good for the consumer,
Speaker 1: particularly if if goods inflation starts to moderate, wage inflations elevated. Uh,
Speaker 1: that that contributes to a strengthening consumer, which we know
Speaker 1: is going to be critical to the the economic recovery. UM.
Speaker 1: We also see you know, consumers starting to in a
Speaker 1: way sort of protest higher prices. You know, you're seeing
Speaker 1: some dents in the housing market now is is housing
Speaker 1: becomes unaffordable. You're seeing investors put off purchases of areas
Speaker 1: that are seeing higher prices. UM. And then of course
Speaker 1: the delta variant. We're seeing that impact all this high
Speaker 1: frequency data that I never would have guessed a couple
Speaker 1: of years ago. I would be looking at things like
Speaker 1: T s a checkpoint numbers and open table reservations. They
Speaker 1: haven't rolled off, but they're starting to level out. So
Speaker 1: it's an indication that, you know, maybe this period of
Speaker 1: uncertainty is prolonged a bit and that couldn't ultimately translate
Speaker 1: into inflation. You know, no one's defined transitory yet, I
Speaker 1: don't know what it means. The FED really hasn't said,
Speaker 1: you know what it means. So potentially it lasts a
Speaker 1: little bit longer. But our base cases that you see
Speaker 1: in inflationary pressures wane as we head into two. And
Speaker 1: one of the key reasons for that um is that
Speaker 1: there's some powerful disinflationary forces that we think should reassert themselves,
Speaker 1: technology being the number one thing. The more improvements you
Speaker 1: make in efficiency using technology that pushes down inflationary pressures.
Speaker 1: And that's the reason that my entire career I've listened
Speaker 1: to investors start to position for higher inflation and guess what,
Speaker 1: it never pans out right, because technology is such a
Speaker 1: wildly disinflationary force. You also start to see the base effects,
Speaker 1: which were your best friend over the last number of
Speaker 1: quarders here become your worst enemy as you head into two.
Speaker 1: So the mass starts to work in the opposite direction
Speaker 1: um where the comps are actually much higher as we
Speaker 1: had into two, and it's likely to see we're likely
Speaker 1: to see lower readings next year because of that. So
Speaker 1: maybe lasts a little bit longer than anticipated, but we
Speaker 1: still believe that into two we should see these pressures
Speaker 1: start to mattery. Emily, if we think about all of
Speaker 1: these things that we just talked about, is it is
Speaker 1: that one of the reasons that it's been a bit
Speaker 1: more difficult to make judgment calls on a lot of things.
Speaker 1: I know there was a Bank of America note that
Speaker 1: said ten year yields could either be sliding below one
Speaker 1: percent by year end, or they could be surging as
Speaker 1: high as two percent, which is just a huge gap.
Speaker 1: And so what how difficult is it to to be
Speaker 1: making projections right now? It's incredibly difficult because we've never
Speaker 1: done this before. Like, think about it. We figured out
Speaker 1: how to generate inflation, right, you poor five trillion dollars
Speaker 1: in the economy, and the Fed just buys buys bis, right,
Speaker 1: we figured it out. We don't know yet how yet
Speaker 1: get out of it in a clean, soft, soft landing
Speaker 1: type way. So I think that that's the biggest challenge here.
Speaker 1: We can look at history, but we've never had an
Speaker 1: environment in which a global economy is completely shut down
Speaker 1: and come back. We've never had a recession that lasted
Speaker 1: a total of two months. So this market cycle is
Speaker 1: happening at warp speed, which is one of the reasons
Speaker 1: that I think that it becomes so challenging to navigate
Speaker 1: these markets. I think what's important to do is maintain
Speaker 1: that balanced approach, but look under the hood for where
Speaker 1: the opportunities are. So looking at areas like US MidCap equities,
Speaker 1: which we think are the right mix of offense in
Speaker 1: a portfol without going over your skis and taking risk,
Speaker 1: they have an overweight to areas like industrials, which we
Speaker 1: think should benefit from things like infrastructure spending as the
Speaker 1: economy reopens, CAPEX, productivity gains. You want to look at
Speaker 1: the US quality factor again for those strong fundamentals and
Speaker 1: great balance sheets. You want to have a little bit
Speaker 1: of value in there. But you know, I think that
Speaker 1: this sort of you know, easy gains happened uh starting
Speaker 1: in the fourth quarter of last year, So you want
Speaker 1: to be thoughtful about how you approach value. It's less
Speaker 1: about the highly cyclical, highest beta sectors, and more about
Speaker 1: looking at areas like healthcare UM that are trading cheap
Speaker 1: relative to the broad market and have those quality elements
Speaker 1: that we that we really are focused on right now.
Speaker 1: So it's really becoming more and more important to make
Speaker 1: those decisions within your equity bucket UM as we head forward. Well, Emily,
Speaker 1: as you said, it's a challenging time, a difficult time
Speaker 1: to make projections. It's also difficult to top fill Donna
Speaker 1: when it comes to the craziest things in markets in
Speaker 1: the past week. In our weekly tradition, here stand clear
Speaker 1: of the craziest things we saw in markets this week.
Speaker 1: I'll give you fair warning. Vildanna brings an a game
Speaker 1: to this. But before we before we hear hers, I
Speaker 1: want to hear that voicemail we got it. I gotta
Speaker 1: sneak peek of it. So uh, I'm curious if you
Speaker 1: have some thoughts on this. Listen up, it's a good one.
Speaker 1: Hey guys, it's Police Marints from Bloomberg Markets Live. The
Speaker 1: craziest thing I saw this week was talent here buying
Speaker 1: fifty million dollars worth of gold bars. When's the last
Speaker 1: time you saw a big tech company buying the lowest
Speaker 1: thing gold that there is. It seems like a really
Speaker 1: interesting way for them to invest their cash. Maybe there's
Speaker 1: something that the Peter Kiel backed company knows that the
Speaker 1: rest of US doesn't know, especially since they're one of
Speaker 1: the world's biggest data minors, you know, Emily, this this
Speaker 1: sounds like the flip side of the coin. So like
Speaker 1: micro Strategy or Tesla putting bitcoin on their balance sheets,
Speaker 1: someone actually putting gold. I don't think I've ever heard
Speaker 1: of this is like a cash management, uh solution. Have
Speaker 1: you ever heard of a company with just you know,
Speaker 1: keeping their cash in gold. It's it's bizarre, that's so funny.
Speaker 1: I was thinking the exact same thing when I heard
Speaker 1: that about about cryptocurrencies. Um, No, I haven't. And that
Speaker 1: you know, I think in terms of gold, you know,
Speaker 1: it's it's lost, it's it's luster here, you know, to us,
Speaker 1: and certainly as of late, you know what what gold
Speaker 1: typically needs in order to outperform or to perform well,
Speaker 1: here is a week or dollar in in higher inflation.
Speaker 1: So while it might be kind of a potential play
Speaker 1: on some of those macro forces here over the short term, um,
Speaker 1: I think there's much better options out there for for
Speaker 1: this company. For sure. It's a it's an unusual scenario
Speaker 1: we have now where we have a high inflation and
Speaker 1: a strong dollar. That's a that's a tricky one, not
Speaker 1: something not something you've see in the textbooks very often.
Speaker 1: But Vil donna Um, let's go with you, because I
Speaker 1: know you've got something good for us. What's the craziest
Speaker 1: thing you saw this week? I do if you remember,
Speaker 1: a couple of days ago, there was a huge hack
Speaker 1: of one of the cryptocurrency defied platforms. It was one
Speaker 1: of the biggest in the space, and so earlier this
Speaker 1: week one of our colleagues over care reported that the
Speaker 1: platform Polly Network, the one that got hacked, ended up
Speaker 1: offering a job to the hacker, and they are offering
Speaker 1: him chief security advisor. That would be his I'm assuming
Speaker 1: it's a heat that would be his his role. Which
Speaker 1: is which is so interesting because apparently this hacker has
Speaker 1: been returning some of the money he or she I
Speaker 1: should say, had hacked and and now also has a
Speaker 1: job offer from the company that a white hat hacker
Speaker 1: as they say, who uh, And I've read some interesting
Speaker 1: stuff about it. He I guess the goal is, you know,
Speaker 1: he wants to sort of solve these crypto problems so
Speaker 1: that the whole UH industry does not get get tired
Speaker 1: and feathered. Because I'm pretty pretty interesting. Stuff. That's pretty good, Emily.
Speaker 1: I don't know, do you have anything crazy for us
Speaker 1: this week? You know what, I kind of got a
Speaker 1: heads up that this might be a question, and I
Speaker 1: was thinking about it in a way too studious, in
Speaker 1: serious way. I think, so maybe if you had maybe
Speaker 1: if you have me back on, I'll try to think
Speaker 1: of something more fun. But I think one of the
Speaker 1: most notable dynamics that's played out this week is just
Speaker 1: the continued pressure that we've seen in Chinese equities, in
Speaker 1: particular some of the tech names. And I think it's
Speaker 1: so interesting and I guess weird because coming into this year,
Speaker 1: I think we can all agree that one of the
Speaker 1: biggest consensus calls among investors was to be overweight emerging
Speaker 1: market equities UM, and I think that kind of went
Speaker 1: hand in hand with, you know, a week or dollar
Speaker 1: higher commodity prices. You know, I'm naming like a handful
Speaker 1: of you know, pain trades that we've seen play out
Speaker 1: over the course of the year, and when we actually
Speaker 1: came into the third quarter, UM, we had we downgraded
Speaker 1: emerging market equities and this was before some of these
Speaker 1: regulatory challenges emerged. UM, just on slowing growth. UM. We
Speaker 1: noted that, you know, Chinese policymakers were starting to take
Speaker 1: the foot off the gas in terms of fiscal stimulus,
Speaker 1: so that sort of credit impulse had begun to roll
Speaker 1: over in China, and we started to see p m
Speaker 1: I s, while still elevated about fifty, you know, decelerating,
Speaker 1: so we decided to take some chips off the table
Speaker 1: in the margin market equities. Of course, now I wish
Speaker 1: we had gone more negative on them UM, but we
Speaker 1: did up our exposure to Europe with those UH proceeds
Speaker 1: based on a better economic growth trajectory and backdrop there.
Speaker 1: So I think a big challenge there for investors UM.
Speaker 1: And we're seeing some of those Chinese internet et s.
Speaker 1: The dip buying has has sees has been put on
Speaker 1: pause over the last few days, so no longer sort
Speaker 1: of seeing that bid there from investors. So tough, tough,
Speaker 1: tough times in that part of the market for sure, Yeah,
Speaker 1: you know, and it's it's interesting to see it because
Speaker 1: of sort of such a self inflicted type of situation,
Speaker 1: you know, China really causing all this on its own.
Speaker 1: But I guess you know, uh, someone pointed out to me, well, uh,
Speaker 1: Si Shing Ping has his sort of left flank of
Speaker 1: the political party that he has to deal with as well,
Speaker 1: so not too dissimilar to the US, and they've got
Speaker 1: a big, big political reshuffling coming up. I think it's
Speaker 1: either next year the following year, so um politics, Paul
Speaker 1: Ticks is always the wild card risk factor, I guess.
Speaker 1: But all right, I'm going to dip again, as I
Speaker 1: like to do, into the alternative st class. And I
Speaker 1: really mean it when I say alternative, this time collectible
Speaker 1: bathing suits. Who knew there was such a thing as
Speaker 1: collectible bathing suits? But a funny story from Britain's Telegraph
Speaker 1: about some of the mostly James Bond movies. Apparently the
Speaker 1: bathing suits in the James Bond movies are pretty hot,
Speaker 1: but some other movies too. So I'm gonna put you
Speaker 1: both on the spot here. I'm gonna tell you some
Speaker 1: of the famous bathing suits that have gone up for auction,
Speaker 1: and you tell me I want to hear both of
Speaker 1: you tell me which one you think sold for the most.
Speaker 1: One was the James Bond movie Doctor No. That's one
Speaker 1: of the early ones from the sixties. I guess. Uh.
Speaker 1: The actress Ursula Andress had a white bikini. Uh that
Speaker 1: went off and sold at auction at Christie's last year,
Speaker 1: So that's one of them. For the men's where category,
Speaker 1: we've got the infamous pair of navy and powder blue
Speaker 1: shorts sized charge and made in Italy by La Perla,
Speaker 1: worn by Daniel Craig in two thousand and six is
Speaker 1: Casino Casino Royal and they were actually a tribute to
Speaker 1: that actress from the Doctor No, so they went up
Speaker 1: for sale. Finally, we've got uh, Carrie Fisher's Princess Leia
Speaker 1: bikini Wren in Return of the Jedi, but not is
Speaker 1: rolling her eyes here? I don't know she obvious answer.
Speaker 1: I don't think she's seen any of these movies. So
Speaker 1: I've seen all of them. It's it's the Princess Lea want.
Speaker 1: So you're going, Princess Leia. You just had that much
Speaker 1: faith in the in the Star Wars faith for sure.
Speaker 1: And I love Baby Yoda to all the offshoots and
Speaker 1: everything alright, baby, Emily, you're agree You're going with Princess
Speaker 1: Leiah as the I will say that if I were
Speaker 1: in your shoes, I would have agreed with both of
Speaker 1: you guys. I would have thought that would have been
Speaker 1: the one. Those Star Star Wars nerds are something else.
Speaker 1: But well, tell me this, what do you guys think
Speaker 1: the highest price of all those three? What? What do
Speaker 1: you think Princess Lea is bikini? Fetched? Uh, crickets, because
Speaker 1: we have no idea, like a hundred thousand dollars. I
Speaker 1: would guess that too, but I'm gonna go with a
Speaker 1: hundred and one thousand dollars. Well, you're pretty good at
Speaker 1: banning suit valuations here, I don't know that. That was
Speaker 1: pretty close to all on the nose. Ninety six thousands,
Speaker 1: so we're sixty three thousand British pounds. That, however, was
Speaker 1: not the highest priced banning suit of this list. The
Speaker 1: Daniel Craig blue and white trunks they sold for forty
Speaker 1: four forty four thousand pounds roughly. However, the Doctor no
Speaker 1: Ursula Andress white bikini three hundred and sixty thousand pounds
Speaker 1: at auction last year. I I can't explain it. I
Speaker 1: would have gone with Princess Leah myself too good one.
Speaker 1: What would make that one more valuable? Did it say?
Speaker 1: I don't know. Maybe it's the oldest um possibly, but
Speaker 1: I you know, I don't know. I still would have
Speaker 1: gone with the Star the Star Wars, so it's more
Speaker 1: vintage as they would say, maybe it's more it's timeless.
Speaker 1: It's a white bikini. I mean, you know, it never
Speaker 1: goes out of style. I don't know. Emily really appreciate
Speaker 1: your time in Troida Discussion. Hopefully we can get you
Speaker 1: back again sometime in the future. Great, thanks for having me.
Speaker 1: Thanks what goes up. We'll be back next week and soil.
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