WEBVTT - Surveillance: Mixed Bank Earnings 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.160 and of course on the Bloomberg terminal. There are these 0:00:30.440 --> 0:00:34.960 large financial institutions and Alison Williams joins us. Now, Alison, 0:00:35.000 --> 0:00:37.800 I figured out today the City Group's revenues three thirty 0:00:37.840 --> 0:00:41.879 four million a day. That often yeah, okay, I did 0:00:41.920 --> 0:00:44.519 some fancy yeah you know, you taught me the f 0:00:44.640 --> 0:00:49.240 A function, and uh, you know it's They're ginormous. And 0:00:49.360 --> 0:00:52.320 what I saw Allison Williams in their view for two 0:00:52.320 --> 0:00:56.279 thousand twenty two is page fourteen, which is a layout 0:00:56.360 --> 0:01:00.400 of their technology to come. How does any buddy and 0:01:00.560 --> 0:01:05.720 banking compete with Lorie Beer in twelve billion dollars a 0:01:05.840 --> 0:01:10.600 year in technology? Well, and I think that the big 0:01:10.720 --> 0:01:14.520 number of seventies seven billion for next year from JP 0:01:14.680 --> 0:01:18.280 Morgan is even more significant. And and the way they're 0:01:18.280 --> 0:01:21.319 competing is they're spending. And I thought that, um, you know, 0:01:21.319 --> 0:01:25.120 the JP Morgan call is going on now. But Jamie 0:01:25.160 --> 0:01:27.360 Diamonds sort of finished up last quarter by saying, we're 0:01:27.360 --> 0:01:30.000 going to spend whatever it takes to compete with all 0:01:30.040 --> 0:01:33.480 these folks in our space. And I think the numbers 0:01:33.480 --> 0:01:36.640 today are showing that they are committed to doing that. 0:01:37.720 --> 0:01:40.160 I think that's might be a reason why people are 0:01:40.200 --> 0:01:43.400 reacting negatively in the short term. But I think, you know, 0:01:43.440 --> 0:01:46.880 the not just the articulated commitment, but seeing it in 0:01:46.920 --> 0:01:50.800 the numbers like that shows you that they are going to, um, 0:01:50.840 --> 0:01:55.120 you know, focus on building their positions, defending their positions. 0:01:55.960 --> 0:01:58.720 Allison talked to us about loan growth out there. UM, 0:01:58.760 --> 0:02:01.360 I know that's one of the key issues you and 0:02:01.400 --> 0:02:04.920 your bank colleagues were focusing on this quarter. What we've 0:02:04.960 --> 0:02:08.440 seen from some of the big banks so far looks 0:02:08.919 --> 0:02:11.440 about in line. I think Bank America will be the 0:02:11.600 --> 0:02:15.120 interesting one next week because they're they've been sort of 0:02:15.160 --> 0:02:18.560 the more bullish one, and the commercial side of things 0:02:18.880 --> 0:02:21.679 is really where we're getting the lift, and I think 0:02:21.680 --> 0:02:25.200 where we're sort of the most bullish on the card 0:02:25.320 --> 0:02:28.800 side of things. You know, payments still continue to be 0:02:28.840 --> 0:02:32.480 elevated and people are spending, so consumers are healthy. It's 0:02:32.480 --> 0:02:34.239 just that they have money in their pockets to pay 0:02:34.280 --> 0:02:37.120 off those balances. So I think that's that's great for 0:02:37.160 --> 0:02:40.840 the economy. It's great for the credit outlook for banks, UM. 0:02:40.880 --> 0:02:44.520 But less borrowing means less interesting come related to that 0:02:44.600 --> 0:02:47.760 bar what's the sweat factor on traditional credit cards? I mean, 0:02:47.760 --> 0:02:49.959 there's like a firm and they're doing something with Amazon 0:02:50.000 --> 0:02:51.880 and you know all this stuff better than me, Allison, 0:02:52.400 --> 0:02:55.720 But like the are the big banks worried about the 0:02:55.960 --> 0:03:00.280 end of charge cards or they're like, so what? I 0:03:00.320 --> 0:03:04.280 think the big banks are aware of by things like 0:03:04.320 --> 0:03:07.680 by now pay later, and you know they have competing products, 0:03:07.720 --> 0:03:11.000 but I would argue that, you know, the distribution at 0:03:11.000 --> 0:03:14.000 point of sale UM is obviously what's given the big 0:03:14.040 --> 0:03:16.560 lift to that product. So I think it is something 0:03:16.600 --> 0:03:20.400 that they're watching. I would keep in mind that it's 0:03:20.440 --> 0:03:24.359 it's still very small in the scheme of things, UM 0:03:24.400 --> 0:03:26.960 so growing very rapidly. But you know, so if you 0:03:27.000 --> 0:03:29.519 go from one percent share of a market to two 0:03:29.520 --> 0:03:33.000 percent share of a market, UM, you know, that's small 0:03:33.080 --> 0:03:35.680 for the person that owns the lion share of that market, 0:03:35.720 --> 0:03:40.480 but for that fast grow where they're doubling their revenue, right, So, UM, 0:03:40.520 --> 0:03:43.720 I think it is something that um As I said, 0:03:43.720 --> 0:03:46.440 the banks are aware of their not completely dismissing it. 0:03:46.600 --> 0:03:49.480 And I think that goes to um as I said, 0:03:49.480 --> 0:03:52.480 sort of the higher spending and and the focus. That's 0:03:52.560 --> 0:03:55.080 that's what's different. I think that this time around, if 0:03:55.120 --> 0:03:58.400 we looked back to sort of the evolution of the internet, 0:03:58.760 --> 0:04:01.560 you know, way long ago. Uh, I think, you know, 0:04:01.680 --> 0:04:05.520 initially banks were very dismissive of that, and then they 0:04:05.560 --> 0:04:09.800 sort of saw the progress and they saw um, they 0:04:09.840 --> 0:04:12.680 saw sort of things chip away at things that they 0:04:12.760 --> 0:04:16.320 could have done themselves. And they're they're much more aware 0:04:16.360 --> 0:04:20.240 and committed this time to making sure that they stay competitive. Alison, 0:04:20.240 --> 0:04:23.560 how are my friends on the trading desk doing this 0:04:23.680 --> 0:04:26.560 quarter of the equity desk, the fixed income desk, the commodities, 0:04:26.560 --> 0:04:28.560 How are they doing? Because they had such a rip 0:04:28.640 --> 0:04:34.760 roaring they did, and I think they're doing fine. Um. 0:04:34.800 --> 0:04:37.280 You know, trading came in a little bit weaker than expected, 0:04:37.320 --> 0:04:39.640 but but I would I would say it's fine, especially 0:04:40.160 --> 0:04:42.680 you know last you know four Q twenty, as you said, 0:04:42.800 --> 0:04:46.760 was was exceptionally strong. But the big winners are your 0:04:46.800 --> 0:04:50.039 friends in the investment banking department, especially the M and 0:04:50.080 --> 0:04:54.760 A bankers. Fees super strong, um coming in even better 0:04:54.839 --> 0:04:59.240 than expected. Uh, there's momentum I think carrying through at 0:04:59.240 --> 0:05:03.039 the moment of you know, we watched the environment um. 0:05:03.080 --> 0:05:05.640 A big spike in volatility would be the biggest risk 0:05:05.680 --> 0:05:09.640 to disrupting that. Obviously, any correction to ask A prices 0:05:09.760 --> 0:05:13.640 might might hamper that. But but for now things are 0:05:13.680 --> 0:05:16.880 strong and you know that's leading to the higher compensation 0:05:16.960 --> 0:05:20.720 cost that you know, the war for talent and that's awesome. 0:05:20.960 --> 0:05:23.640 Left too expensive. Saw that phrase on top livel of 0:05:23.760 --> 0:05:28.599 Ellison Williams on here soon work about that. That's awesome 0:05:28.760 --> 0:05:33.279 coming Memorial Day, but it's serious, Elison Williams, thank you 0:05:33.320 --> 0:05:40.880 so much and goodbye. We get perspective from Scott Clemen's 0:05:40.960 --> 0:05:44.960 chief investment strategist at Brown Brothers Hareman. Scott, you know, 0:05:45.000 --> 0:05:46.680 it sort of felt like a year so far and 0:05:46.760 --> 0:05:48.839 maybe it's at least a quarter here in the first 0:05:48.880 --> 0:05:51.960 fourteen fifteen days of the year. Have you changed your 0:05:52.000 --> 0:05:58.400 outlook since twee No, I don't think so, Tom. I 0:05:58.440 --> 0:06:00.800 think what we've seen in the first handful of weeks 0:06:00.800 --> 0:06:03.920 of this year, if anything, is a microcosm of how 0:06:04.080 --> 0:06:07.920 the year is likely to unfold. If anything. The surprise 0:06:08.120 --> 0:06:12.960 in one was the relative lack of market volatility. We 0:06:13.040 --> 0:06:15.560 only have seven trading sessions last year in which the 0:06:15.720 --> 0:06:19.720 SMP five index moved by two percent or more up 0:06:19.800 --> 0:06:22.520 or down in either direction, and usually in a given 0:06:22.520 --> 0:06:25.240 a year we have about twenty days like that. So 0:06:25.279 --> 0:06:28.719 we're cautioning our clients they, given all the transitions taking place, 0:06:29.200 --> 0:06:30.800 and we could talk about that for the rest of 0:06:30.839 --> 0:06:33.080 the day, that there is likely to be more market 0:06:33.160 --> 0:06:36.080 volatility in two. That may be a risk, that may 0:06:36.120 --> 0:06:39.080 be disruptive and anxiety inducing. It's also an opportunity as 0:06:39.120 --> 0:06:41.000 well for investors. How do you use it that as 0:06:41.000 --> 0:06:45.360 an opportunity, Scott Well, Really, when you get that dislocation 0:06:45.480 --> 0:06:49.880 between price and value is what a discipline, long term 0:06:49.880 --> 0:06:53.800 patient investor can exploit. And what that really is is 0:06:53.839 --> 0:06:56.279 not so much knowing something more than the market or 0:06:56.279 --> 0:06:59.000 knowing something more than another trader. It's having a different 0:06:59.040 --> 0:07:02.560 time frame for making that investment. So if you see 0:07:02.560 --> 0:07:05.279 a company stumble in the near term of your confident 0:07:05.279 --> 0:07:07.960 in the long term fundamental value direction of the business, 0:07:08.200 --> 0:07:11.200 that near term stumble, maybe a near term EPs miss, 0:07:11.200 --> 0:07:13.320 a product thiss, whatever it may be, is more of 0:07:13.320 --> 0:07:15.360 an opportunity than it is a threat. So I want 0:07:15.400 --> 0:07:16.560 to go to the story of the moment. As the 0:07:16.600 --> 0:07:19.320 banks this morning, they're just killing it. Yet today the 0:07:19.360 --> 0:07:21.960 stoke performance more than ten percent based self through in 0:07:22.000 --> 0:07:24.800 the morning. Some people am willing to chase this. What 0:07:24.880 --> 0:07:29.440 advice do you give them, uh, Jonathan, to take the 0:07:29.480 --> 0:07:32.840 same kind of long term approach. This is an environment 0:07:32.880 --> 0:07:35.080 which ought to be better and better for banks. Banks 0:07:35.120 --> 0:07:38.440 are certainly undervalued relative to where they've been over a 0:07:38.480 --> 0:07:41.760 long run. Higher interest rates ought to be beneficial for banks. 0:07:41.800 --> 0:07:44.600 But as you and chnologist reported on City Bank the 0:07:44.600 --> 0:07:46.720 City Group, there are a lot of moving parts within 0:07:46.840 --> 0:07:49.640 the banks, be the regulatory or be they a market 0:07:49.720 --> 0:07:52.840 environment where the revenues are coming from higher costs of 0:07:52.920 --> 0:07:56.400 employment when they can get back to offices, etcetera, etcetera, etcetera. 0:07:56.520 --> 0:07:58.080 So it is an environment which is going to be 0:07:58.120 --> 0:08:00.480 a great deal of holatility. I'd stay focused on the 0:08:00.480 --> 0:08:04.040 longer term. Well focusing on the longer term though, and 0:08:04.080 --> 0:08:06.200 this really goes to the heart of the moment, which 0:08:06.240 --> 0:08:09.120 is what is being priced in from an interest rate perspective, 0:08:09.320 --> 0:08:12.440 from a way to increased perspective, how do you determine 0:08:12.440 --> 0:08:15.160 that to decide whether or not to say City Group 0:08:15.200 --> 0:08:17.760 down three having a really rough time of it over 0:08:17.800 --> 0:08:19.840 the last twelve months relative to other banks, let's go. 0:08:21.280 --> 0:08:24.280 I think the the the interest rate environment is probably 0:08:24.280 --> 0:08:27.360 the most important economic backdrop over the course of this year, 0:08:27.720 --> 0:08:29.960 and it's really important. This is a subtle nuance, but 0:08:30.000 --> 0:08:32.480 it's an important one. The important thing for markets, the 0:08:32.480 --> 0:08:36.160 important thing for banks in particular, is not that interest 0:08:36.240 --> 0:08:40.720 rates are rising, but why they're rising. And that's admittedly subjective, 0:08:40.760 --> 0:08:43.000 and the push and pull and markets, even on a 0:08:43.080 --> 0:08:45.800 day to day, hour to hour basis, might be precisely that, 0:08:46.520 --> 0:08:49.400 on one hand, of interest rates are rising because people 0:08:49.440 --> 0:08:53.000 are more confident in the economic outlook, the durability of 0:08:53.000 --> 0:08:56.360 the labor market, the sustainability of corporate earnings, etcetera, etcetera. 0:08:56.679 --> 0:08:59.400 That's a benign backdrop in which banks can do well, 0:08:59.440 --> 0:09:01.840 in which the market can do well. If, on the 0:09:01.880 --> 0:09:04.840 other hand, the market concludes that interest rates are rising 0:09:05.240 --> 0:09:08.280 because the FED has lost a grip on inflation and 0:09:08.320 --> 0:09:10.720 they're behind the curve and you're rushing to catch up, 0:09:11.120 --> 0:09:13.800 that's a rather negative or rather disruptive outlook. And I 0:09:13.800 --> 0:09:15.440 think there's gonna be a lot of push and pull 0:09:15.559 --> 0:09:17.800 back and forth on that as the year unfolds, we 0:09:17.880 --> 0:09:20.280 even see that to my earlier comment to Tom as 0:09:20.320 --> 0:09:24.560 a microposit within individual training sessions, I'm confident that when 0:09:24.600 --> 0:09:28.240 all is said and done, this transition of economic leadership 0:09:28.280 --> 0:09:32.760 away from policy support, government support, monetary policy back to 0:09:32.840 --> 0:09:37.520 the more traditional fundamental drivers of economic activity household spending 0:09:37.600 --> 0:09:40.880 to name the most important one, that will take place. 0:09:40.920 --> 0:09:42.880 But it is not a straight line between here and there. 0:09:43.040 --> 0:09:45.480 Let's thank you, sir as always skilled clements that the 0:09:45.520 --> 0:09:55.040 chief investment strategist at Brand Brothers Harriman, we get perspective 0:09:55.080 --> 0:09:58.480 now and from Dana Peterson, chief economists at the Conference Board, 0:09:58.520 --> 0:10:01.079 this is an important conversation and with a conference boards 0:10:01.160 --> 0:10:05.160 heritage of looking at the American consumer, go beneath the 0:10:05.200 --> 0:10:10.000 headline data. Dana, what is the American consumer telling you? Well, 0:10:10.120 --> 0:10:12.600 I think the American consumer is telling us that December 0:10:12.679 --> 0:10:15.319 was a really rough month. But let's think about this. 0:10:15.720 --> 0:10:17.959 When we look at October sales, they were really strong, 0:10:18.040 --> 0:10:21.480 so lots of people probably accelerated their holiday shopping. In fact, 0:10:21.559 --> 0:10:24.360 I went and bought all my toys in October UM, 0:10:24.400 --> 0:10:27.480 but we also had empty shelves and let's not forget omicron. 0:10:27.720 --> 0:10:30.600 It was a huge issue during December and many people 0:10:30.679 --> 0:10:34.640 probably were uh just not out there shopping because they 0:10:34.640 --> 0:10:36.800 were afraid of getting sick or they were getting sick 0:10:36.840 --> 0:10:39.600 in fact um. And indeed, we wouldn't be surprised if 0:10:39.640 --> 0:10:43.360 consumer confidence in January comes off from what we saw 0:10:43.400 --> 0:10:48.120 in December. But again that's a big function of omicron. Dana. 0:10:48.520 --> 0:10:51.040 The first point that you made empty shelves, how much 0:10:51.360 --> 0:10:53.960 is this a supply chain disruption story? And I just 0:10:54.360 --> 0:11:00.200 frankly supply story. If there wasn't the inventory to sell, well, 0:11:00.480 --> 0:11:02.560 I think it all factors in if you can't if 0:11:02.600 --> 0:11:06.000 there's no inventory, you can't clearly buy anything. And so 0:11:06.320 --> 0:11:10.480 we really need to watch metrics that tell us what's 0:11:10.520 --> 0:11:13.080 going on with inventories. And certainly when we look at 0:11:13.080 --> 0:11:16.559 other private measures, we didn't see some improvement in terms 0:11:16.600 --> 0:11:20.800 of of the movement of goods. But again arm across 0:11:20.800 --> 0:11:24.440 is a big issue, certainly in foreign goods that we're 0:11:24.440 --> 0:11:28.959 importing are challenged by zero COVID policies abroad, and then 0:11:29.040 --> 0:11:32.440 also even just getting things two shelves, um, we still 0:11:32.480 --> 0:11:36.320 have this huge backlog of ships uh takerships with with 0:11:36.440 --> 0:11:40.400 things that can't be unloaded, and even once they're unloaded, um, 0:11:40.440 --> 0:11:42.800 we can't get it to the stores because truckers are 0:11:43.160 --> 0:11:46.000 in short supply. One Bloomberg Blue viewer rights in and 0:11:46.040 --> 0:11:49.120 says have four kids, Santa had a rough time finding 0:11:49.120 --> 0:11:52.839 at things, so talking about how Santa is pursuing it 0:11:52.920 --> 0:11:57.520 from exactly the UK when I got over that same thing, 0:11:57.559 --> 0:12:00.120 I said chains are tougher and shuff online and it 0:12:00.160 --> 0:12:03.640 was intill. Sorry. Well, I'm sure that that will that 0:12:03.640 --> 0:12:06.360 will read really well across the family and baby Charlie. 0:12:06.440 --> 0:12:08.760 But there is an issue with if December was bad 0:12:08.760 --> 0:12:11.360 because of amacron, we haven't even peaked in the United 0:12:11.400 --> 0:12:13.600 States yet. When it comes to the virus, how bad 0:12:13.679 --> 0:12:16.960 is January could have pay well, certainly we could see 0:12:16.960 --> 0:12:20.240 some poor numbers in January, and at the conference board, 0:12:20.240 --> 0:12:23.520 we've already factored in a pretty weak first quarter, looking 0:12:23.520 --> 0:12:26.440 at two point two percent growth, which is pretty similar 0:12:26.480 --> 0:12:29.600 to what we saw in the third quarter, um with 0:12:29.960 --> 0:12:32.439 the delta variant. But you know, we're coming off a 0:12:32.600 --> 0:12:36.000 very strong quarter in general. Fourth quarter probably looked pretty good. 0:12:36.400 --> 0:12:40.160 We're gonna see a sad second first quarter this year, 0:12:40.360 --> 0:12:42.120 but then the second quarter should pick up as we 0:12:42.160 --> 0:12:45.920 get beyond AMCRON and certainly as in person services reopen 0:12:46.000 --> 0:12:48.640 and people can go out there and enjoy their lives. 0:12:49.320 --> 0:12:52.720 Dana a World Health organization as amicrons starting in South 0:12:52.800 --> 0:12:57.440 Africa and to go north to Botswana A November two 0:12:57.480 --> 0:13:00.800 thousand twenty one. You guys on the high ground on 0:13:00.880 --> 0:13:05.520 this does a conference board see like charge card dynamics, 0:13:05.520 --> 0:13:09.839 in entry dynamics into stores that really changed in December? 0:13:09.880 --> 0:13:15.680 Is there actual granular evidence of what we all felt, Well, 0:13:16.080 --> 0:13:19.400 we don't actually try that data, but um, I think that, 0:13:19.559 --> 0:13:22.200 you know, certainly the retail sales are reflecting what happened 0:13:22.240 --> 0:13:24.880 on the ground again for the reasons that that we've 0:13:24.880 --> 0:13:28.520 all been discussing. And you know. The good news though, 0:13:28.559 --> 0:13:31.760 is that in December, consumers were still kind of optimistic 0:13:31.760 --> 0:13:33.800 in terms of the future. They were still thinking that 0:13:33.840 --> 0:13:36.200 they're going to go on vacation within the next six months. 0:13:36.400 --> 0:13:40.320 They're looking to buy cars, appliances, clothing, you know, all 0:13:40.360 --> 0:13:43.960 that great stuff. And certainly, um, as Lisa mentioned earlier, 0:13:44.000 --> 0:13:47.080 consumers have the capacity to spend. Many people are working, 0:13:47.800 --> 0:13:51.680 people still have savings from the stimulus checks, Household balance 0:13:51.679 --> 0:13:53.800 sheets are in good shape, and so once we get 0:13:53.840 --> 0:13:58.199 past the omicron issue, which may be short lived. Certainly, 0:13:58.240 --> 0:14:00.920 as we saw in South Africa came in strong and 0:14:00.920 --> 0:14:04.280 then faded pretty quickly. We should probably get back to 0:14:04.320 --> 0:14:08.360 an environment where consumers feel comfortable spending. Dina, thank you 0:14:08.440 --> 0:14:10.680 as always to respond to that big down side surprise 0:14:10.720 --> 0:14:17.959 on retail. Sus Diana Pattison at the conference, Bolt, Oh, 0:14:18.040 --> 0:14:20.560 you know, I was out with the plague, and you know, 0:14:20.840 --> 0:14:23.080 Mrs Kame was really upset, and she goes, you know 0:14:23.120 --> 0:14:25.200 that were that rash on your face? I mean, what 0:14:25.560 --> 0:14:28.080 is that? And I said, you know, I said, well, 0:14:28.240 --> 0:14:31.600 you know, it's a case of lepto critosis. Um. She 0:14:31.640 --> 0:14:34.240 said lepto critosis. And I said, yeah, it's a bad, 0:14:34.280 --> 0:14:37.080 bad case of lepto critosis. And so I said, get 0:14:37.080 --> 0:14:39.600 Ash ellen care. So we're gonna talk to Ash ellen 0:14:39.640 --> 0:14:43.520 car right now about lepto critosis. Leptocretosis, folks, it's not 0:14:43.600 --> 0:14:47.240 what between your toenails. Lepto Critosis is when the markets 0:14:47.280 --> 0:14:50.640 are out of whack and the distribution is different of 0:14:50.760 --> 0:14:55.640 whatever is going on, and the tails get flatter fatter, 0:14:55.800 --> 0:14:57.720 I should say. And you that's where you hear about 0:14:57.720 --> 0:15:01.160 this phrase fat tails, which is quite talk. We talked 0:15:01.200 --> 0:15:04.240 to ash Allen Carro can translate this right now as 0:15:04.360 --> 0:15:08.840 the dispersion of what's out there, the cacophony of noise. 0:15:08.840 --> 0:15:12.560 We're seeing a crown and everything else. Has that created 0:15:12.720 --> 0:15:18.920 fatter tails with greater potential risk? Yes? Uh? Why why? 0:15:18.960 --> 0:15:21.800 I am familiar with liptocaturus. I'm not exactly sure I 0:15:21.800 --> 0:15:25.480 know how to spell it, but you're exactly right, Like, 0:15:26.000 --> 0:15:28.960 you have a lot of tail risk in the system now, 0:15:29.400 --> 0:15:31.640 and that tail risk can take one of two forms. 0:15:31.720 --> 0:15:35.120 It can be left tail risk, which is that bad tale, 0:15:35.640 --> 0:15:37.680 um or it could be a right tail risk, which 0:15:37.720 --> 0:15:40.760 is that good tale. And it really rests on the 0:15:40.800 --> 0:15:44.760 notion that everyone is focused on today of whether or 0:15:44.800 --> 0:15:48.920 not the US FED can strike that right balance between 0:15:49.120 --> 0:15:52.960 fighting inflation yet keeping growth intact. And if you're a 0:15:53.000 --> 0:15:55.760 betting man, um, and I am a betting man, the 0:15:55.920 --> 0:15:58.280 history is pretty bad. The track record is a FED 0:15:58.400 --> 0:16:02.520 striking that right balance is really really really bad. They 0:16:02.600 --> 0:16:05.400 just never has able been They've never been able to 0:16:05.520 --> 0:16:11.720 historically do to really balance that cause and effect correctly. Um. So, naturally, 0:16:11.760 --> 0:16:13.800 that's the worry on everyone's mind that the days of 0:16:13.840 --> 0:16:16.760 free money are coming to an end Um, the FED 0:16:16.880 --> 0:16:20.440 is going to increase borrowing costs in an economy which 0:16:20.480 --> 0:16:26.280 is fragile. UM. And today you saw retail sales numbers UM. 0:16:26.760 --> 0:16:31.320 You hear JP Morrigan's earnings report, UM that things aren't 0:16:31.320 --> 0:16:35.280 looking that good. Um. Is it a one time blip maybe, 0:16:35.800 --> 0:16:37.560 but it's something we have to pay attention to. And 0:16:37.560 --> 0:16:41.680 if they can strike that balance, then a right tail 0:16:41.960 --> 0:16:45.880 can unfold. Um. The FED is able to contain inflation 0:16:46.400 --> 0:16:51.640 which is killing people purchasing power um, and you could 0:16:51.640 --> 0:16:56.200 see consumption increase. UM. You could see UH credit continue 0:16:56.240 --> 0:17:00.120 to flow, you could see people take on leverage, an 0:17:00.120 --> 0:17:03.200 equity market shoot up. Another just we're just doing this 0:17:03.240 --> 0:17:05.119 for ash because we want to dazzle Im paul I 0:17:05.160 --> 0:17:07.320 went to the Bloomberg and looked at JP Morgan done 0:17:07.320 --> 0:17:12.240 ten dollars, having a difficult morning. JP Morgan down to 0:17:12.320 --> 0:17:16.760 two standard deviations of where it's been is down five 0:17:16.840 --> 0:17:20.640 point seven percent rounded out six percent from here from 0:17:20.680 --> 0:17:24.199 where we are right now, from where it was in 0:17:24.240 --> 0:17:27.600 the top band of standard deviation. It's a correction move. 0:17:28.080 --> 0:17:30.760 We would have to go down eleven percent from where 0:17:30.800 --> 0:17:33.680 we were to really show the bottom of a two 0:17:33.720 --> 0:17:36.760 standard deviation truth, nobody cares. I'm just doing it the 0:17:36.840 --> 0:17:39.119 dazzle Ash well, you know, Ash with the m I 0:17:39.160 --> 0:17:41.280 T He's got a PhD from U C. L A. 0:17:41.359 --> 0:17:44.680 I think he knows standard deviations. You know, he's okay 0:17:44.720 --> 0:17:48.040 with that stuff. Ash. A lot of your portfolio managers 0:17:48.080 --> 0:17:51.760 and your analysts and Janice probably haven't really had a 0:17:51.760 --> 0:17:55.639 lot of experience in a rising interest rate environment. What 0:17:55.720 --> 0:17:58.359 are you suggesting to them as they think about the 0:17:58.359 --> 0:18:02.680 next question? Great question, UM that this is a completely 0:18:02.680 --> 0:18:05.480 new regime, but it's a regime which is already priced in. 0:18:05.560 --> 0:18:08.840 So what you have to realize markets are efficient. The 0:18:08.920 --> 0:18:14.240 markets today are pricing in about two hundred or two 0:18:14.920 --> 0:18:18.240 increases in the overnight rate over the next two years. 0:18:18.800 --> 0:18:22.200 That's already being priced in. UM. That's exactly the same 0:18:22.240 --> 0:18:27.440 pace of the interest rate hikes that Powell and team 0:18:27.560 --> 0:18:31.200 UM underwent in two thousand seventeen. So the key question 0:18:31.320 --> 0:18:35.560 is are they going to hike faster and increase rates 0:18:35.600 --> 0:18:39.280 faster than what's already priced? Who knows that the baseline 0:18:39.359 --> 0:18:42.880 is a pretty aggressive baseline. I personally believe it's not 0:18:42.920 --> 0:18:46.800 going to happen because we're entering a completely new post. 0:18:47.280 --> 0:18:51.760 UM pandemic economy. UM. That economy is a new economy 0:18:52.000 --> 0:18:57.439 UM characterized by remote working, characterized the characterized by the 0:18:57.560 --> 0:19:01.280 rise of the suburbs. Character is buy a new endemic 0:19:01.359 --> 0:19:03.879 to add to the seasonal flu. So you have to 0:19:03.920 --> 0:19:08.040 realize the baseline is pretty aggressive. Nevertheless, if they do 0:19:08.280 --> 0:19:12.919 hike faster than that brace line, because inflation pressures really 0:19:12.960 --> 0:19:17.760 need to get into check, what should you do, UM, Well, naturally, 0:19:18.240 --> 0:19:22.600 as rates rise, fixed income holders are going to sell 0:19:22.640 --> 0:19:25.399 out of fixed income and look for other ways to 0:19:25.480 --> 0:19:29.120 capture yield. So think about high divided yielding stocks. That's 0:19:29.119 --> 0:19:33.240 a good rotational play. UM. Think about that left tail 0:19:33.359 --> 0:19:36.439 risks or those tail risks TOM that you articulated to. 0:19:36.840 --> 0:19:40.439 How do you hedge those tail rifts? The big tail 0:19:40.560 --> 0:19:43.600 downside tail risk to the system is an increase in 0:19:43.680 --> 0:19:47.040 real rates, so they sell off. We see an interest 0:19:47.119 --> 0:19:50.359 rates over the past couple of weeks, it's all due 0:19:50.400 --> 0:19:54.040 to the real rate increasing. So heads your real rates. 0:19:54.480 --> 0:19:57.600 Think about buying options on put options on tips UM 0:19:57.680 --> 0:20:01.600 to to hedge that left tail risk, which is not 0:20:01.600 --> 0:20:04.000 not just a left tail risk to tips, it's a 0:20:04.080 --> 0:20:06.800 left tail risk to all risky asset. You know one 0:20:06.840 --> 0:20:08.679 thing that concerns me. Hear in Paul Sweete is an 0:20:08.680 --> 0:20:11.480 old equity guy where he talks about yields up. Nobody cares. 0:20:11.480 --> 0:20:14.439 It's about price. Are we in a bond bear market? 0:20:14.560 --> 0:20:18.680 Or can you predict a bond bear market? Of our 0:20:18.720 --> 0:20:22.439 listeners have never been in It's hard. I don't think 0:20:22.520 --> 0:20:25.760 we're in a bond bear market. Um. I do believe 0:20:25.920 --> 0:20:30.720 that the feds hiking schedule is going to be gradual. Um, 0:20:30.760 --> 0:20:35.159 it's very unlikely they're going to hike more than what 0:20:35.359 --> 0:20:38.800 is it eight times over the next two years. So 0:20:38.840 --> 0:20:41.520 if they stay on course, that should be a non 0:20:41.560 --> 0:20:45.560 event um in terms of fixed income rates. But it 0:20:45.600 --> 0:20:50.280 can be actually a meaningful and significant event when it 0:20:50.320 --> 0:20:53.240 comes to equities because you likely will see a shift 0:20:53.720 --> 0:20:57.919 of your nominal interest rate being more real rate and 0:20:58.080 --> 0:21:01.879 less inflation. And more real rate is bad because at 0:21:01.880 --> 0:21:04.879 the end of the day, your pe ratio, which is 0:21:04.920 --> 0:21:08.920 a real ratio, right, prices are nominal, earnings are nominal, 0:21:09.200 --> 0:21:14.399 your real rate rises. This fantastic p expansion which tons 0:21:14.440 --> 0:21:17.080 of people have made tons of money off of, you 0:21:17.240 --> 0:21:19.920 start to compress. I mean, this is good. We gotta 0:21:20.000 --> 0:21:22.000 leave it their ash, We gotta you gotta Could you 0:21:22.040 --> 0:21:24.480 make a note kill? Can we get ashback on? I 0:21:24.480 --> 0:21:27.160 think we need to. I think the snow is pretty 0:21:27.160 --> 0:21:29.080 good out there in Denver. Ye, listen to you. You're 0:21:29.119 --> 0:21:36.960 trying to get the ski trip. Yes, we get a 0:21:37.000 --> 0:21:41.359 weekend brief from Andrew Pecks. He's professor of Rologists and 0:21:41.480 --> 0:21:44.600 Therapists for the Keen Dining Room table joins us today 0:21:44.600 --> 0:21:48.639 from Johns Hopkins and the Bloomberg School. There. Andy, this 0:21:48.800 --> 0:21:52.160 came up last night at the table. What's after a macron? 0:21:52.720 --> 0:21:58.840 What is after this variant? Well, you know, it's hard 0:21:58.880 --> 0:22:01.840 to predict exact what's going to happen with the with 0:22:01.920 --> 0:22:06.280 these variants were we can say with pretty good certainty 0:22:06.320 --> 0:22:09.600 that there will be more variants coming down the pipeline. 0:22:10.080 --> 0:22:13.199 But we really think that, you know, all Macron was 0:22:13.240 --> 0:22:18.040 a tremendous challenge to the current vaccines and the treatment regimens. 0:22:18.720 --> 0:22:21.960 And if we can handle all Macron, which in many 0:22:21.960 --> 0:22:25.600 ways when it comes to hospitalizations and the rates of hospitalizations, 0:22:25.640 --> 0:22:28.119 we are we probably are going to be in a 0:22:28.160 --> 0:22:30.600 good place to be able to deal with other surges 0:22:30.760 --> 0:22:33.160 and be able to limit them in the future. Where 0:22:33.160 --> 0:22:38.960 did Delta go? Delta is still around a little bit. 0:22:39.440 --> 0:22:41.040 We have a few people here in the hospital that 0:22:41.080 --> 0:22:44.639 are infected with Delta. Delta is at very low levels 0:22:44.640 --> 0:22:49.159 across the country, maybe ten percent of sequences. But all 0:22:49.200 --> 0:22:53.399 Macron has really come in and outpaced Delta and really 0:22:53.400 --> 0:22:56.720 become the dominant virus and an incredibly fast period of time. Andy, 0:22:56.760 --> 0:22:59.879 we're talking about economic momentum in the face of the 0:23:00.000 --> 0:23:02.360 A macron up swaying, and we've been talking about when 0:23:02.400 --> 0:23:05.800 we can expect it to be over. I'm curious about 0:23:05.840 --> 0:23:09.239 what you've observed about a five day isolation period, as 0:23:09.240 --> 0:23:11.399 the CDC guidance lays out as well as now the 0:23:11.480 --> 0:23:15.080 United Kingdom, is that proven to be the effective amount 0:23:15.119 --> 0:23:18.080 of time that people are contagious after which they can 0:23:18.080 --> 0:23:24.000 go back into circulation. The problem is is a very nuanced, 0:23:24.640 --> 0:23:28.840