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 Bloomberg,
Speaker 1: and I'm Danna High Across asset reporter with Bloomberg. This
Speaker 1: week on the show, Well, even before Russia invaded Ukraine
Speaker 1: early this year, the world had already hit peak globalization.
Speaker 1: That's according to this week's guest, who is the head
Speaker 1: of institutional portfolio strategy in the asset management unit of
Speaker 1: a major bank, and he says, well, we better get
Speaker 1: used to it that there's more d globalization ahead. So
Speaker 1: what does that mean for markets as we look ahead
Speaker 1: to and beyond. We'll get into it with our guests
Speaker 1: this week. But first of all, Donna, I've got to
Speaker 1: talk to you about one thing. It's your football should
Speaker 1: Why what's wrong with them? They're the best? No, well,
Speaker 1: your fans, the fans of the Buffalo what did they do?
Speaker 1: You know? Fifty some years ago, Philadelphia Eagles fans through
Speaker 1: like one or two snowballs at Santa Claus that not
Speaker 1: even the real Santa Claus, I will point out, and
Speaker 1: we've been hearing about it every day since. What awful
Speaker 1: fans we are here? Your fans. We're throwing the snowballs
Speaker 1: at the actual players that the other team at the Dolphins. Yeah.
Speaker 1: I loved it, Yeah you would. It was so funny
Speaker 1: you would. I think this ends the debate over who
Speaker 1: the worst fans are in this because these two teams
Speaker 1: could face off in the Super Bowl this year. Well,
Speaker 1: fingers crossed, okay, but the referees came out and they said,
Speaker 1: if you continue these shenanigans, Buffalo is gonna We're gonna
Speaker 1: give a penalty to Buffalo. But then don't you think
Speaker 1: if you're a Miami Dolphins fan they're in the stadium,
Speaker 1: that you would purposefully throw snowballs so that Buffalo can
Speaker 1: get the penalty. Seriously, there's like to Miami Dolphins fans, Yeah,
Speaker 1: they don't even know how to throw snowballs. They would
Speaker 1: someone from Miami doesn't even know how to make a snowball.
Speaker 1: You kid mean, yeah, we can learn fast snowballs. I'm
Speaker 1: just saying that the thinking was very flawed. You better
Speaker 1: not throwing the snowballs at this week's guest. Oh yeah,
Speaker 1: our guest. He's waiting for us. I want to bring
Speaker 1: him in. It's Jared gross Managing director and head of
Speaker 1: institutional portfolio Strategy at JP Morgan Asset Management. Jared, thank
Speaker 1: you so much for coming on the show. Thank you
Speaker 1: Old Donna, and thank you Michael. And as a longtime
Speaker 1: Philadelphia Eagles fan, I have to say that I am
Speaker 1: more than happy to see the mantle past to Buffalo
Speaker 1: for sort of trucking the fan behavior. And I'm a
Speaker 1: secret Eagles fan and Mike actually is an Eagles fan,
Speaker 1: trying to pass the blame to the one or two
Speaker 1: Miami fans who might have made the trip in Sextmber
Speaker 1: to see a game in Buffalo, a very thin reed
Speaker 1: to to rest on. So I think, thank you, thank you,
Speaker 1: Jared already my favorite new guests. Oh my god, come on,
Speaker 1: we all talk about this offline. But Jared, I'm so
Speaker 1: happy you're joining us on the podcast. I was actually
Speaker 1: hoping you can just start out telling us about your
Speaker 1: role at JP Morgan, because it sounds very interesting to
Speaker 1: meet sort of a little bit different from like, um
Speaker 1: the usual like institutional portfolio strategist. Yeah, I'm happy too. So,
Speaker 1: you know a lot of firms JP Morgan included have uh,
Speaker 1: you know, a very strong macroeconomic team who you know,
Speaker 1: grinds through a lot of the data in both you know,
Speaker 1: kind of real time as the economic statistics are released,
Speaker 1: but also formulates kind of longer term expectations around the
Speaker 1: economy and the markets. And so I I participate along
Speaker 1: with a lot of our other professionals in that process. UM.
Speaker 1: But where I tend to specialize is in providing advice
Speaker 1: around asset allocation to institutional investors. You know, so sort
Speaker 1: of starting from the strategic asset allocation where they you know,
Speaker 1: allocate their capital across stocks, bonds, and various alternative asset
Speaker 1: classes and trying to be you know, maybe a little
Speaker 1: bit more tactical than just sort of a ten year
Speaker 1: outlook and and think a little bit about what's going
Speaker 1: on in the world and how that can shape their
Speaker 1: investment outlooks. So that's that's what I spend most of
Speaker 1: my time doing. And uh, you know, most of my career,
Speaker 1: I've been around a lot of the the pension community,
Speaker 1: the endowment foundation community, and sort of other large institutional investors. UM.
Speaker 1: So that's that's more or less what I do. And
Speaker 1: Jared your team had this really fascinating report out on
Speaker 1: sort of that idea of globalization. Has it peaked. What's
Speaker 1: it mean for for the markets going forward? Well, you
Speaker 1: just walk us through some of the metrics that make
Speaker 1: it look to you guys like globalization at peak even
Speaker 1: before the Russia Ukraine War, and and maybe just bring
Speaker 1: it home with what what does it mean for asset
Speaker 1: allocation in the near future. First, you have to recognize that,
Speaker 1: you know, we have been in an era of increasing
Speaker 1: globalization for some period of time, and that has and
Speaker 1: enormously powerful in terms of driving market returns. You know,
Speaker 1: we saw declining inflation on a global level, and and
Speaker 1: a lot of that declining inflation was the result of
Speaker 1: the globalization of the economy and the trading system. So
Speaker 1: you had lower wages, you had greater access to you know,
Speaker 1: commodities and other inputs, free flow of technology and data
Speaker 1: and and all of those things made the inflationary impulse
Speaker 1: sort of diminished across time, and that then allowed central
Speaker 1: banks globally to reduce interest rates. You know, and we've
Speaker 1: been in a long term disinflationary cycle going all the
Speaker 1: way back to the era of Paul Vulker. And while
Speaker 1: that doesn't perfectly coincide with the sort of globalization era, um,
Speaker 1: they did overlap for a number of years, and so
Speaker 1: that created a very powerful tail winds to financial markets.
Speaker 1: You had, you know, companies that enjoyed lower cost of
Speaker 1: funding with lower interest rates, they you know, were able
Speaker 1: to reduce their operating costs, particularly on the on the
Speaker 1: labor side, and so that led to higher profits and
Speaker 1: higher financial asset values. And so you know, we've been
Speaker 1: enjoying this for a long time. And one of the
Speaker 1: things we note in our paper was that although you know,
Speaker 1: you really don't see much of a decline in globalization
Speaker 1: until more recently, a number of the underlying trends had
Speaker 1: kind of lost their steam a little bit. Um you can,
Speaker 1: you can actually break down globalization. It's kind of a
Speaker 1: fascinating subject into sort of different components. So in our
Speaker 1: paper we highlight three. There's economic globalization, which is i
Speaker 1: think what most people think about its trade flows and
Speaker 1: things like that. There's also political globalization, you know, the
Speaker 1: willingness of companies to sort of countries to join treaty organizations,
Speaker 1: the role of non governmental organizations. And then you have
Speaker 1: social globalization. Um, you know, migration, both for you know,
Speaker 1: kind of relocation or refugee reasons, but also for educational
Speaker 1: reasons and for economic reasons, data, traffic, travel, you know,
Speaker 1: all of these things coincide and sort of this very
Speaker 1: broad definition of globalization. And and what's interesting is that
Speaker 1: across all three of those major categories, economic, political, and social,
Speaker 1: you can see very clearly a plateau ng starting about
Speaker 1: five five seven years ago, and much more recently a decline.
Speaker 1: And so it's that decline that we really zeroed in
Speaker 1: on and to try and figure out what caused it.
Speaker 1: And you know, I think what is often the case
Speaker 1: in sort of very high level discussions of the global
Speaker 1: macroeconomy is that you have these equilibrium points where you know,
Speaker 1: various trends become self reinforcing. And the and the trend
Speaker 1: towards globalization for many years was self reinforcing. I mean
Speaker 1: put simply, the incentives for countries and firms to participate
Speaker 1: in that process, to become more open, to become more global,
Speaker 1: to have longer supply chains in order to take advantage
Speaker 1: of labor costs. That was a very self reinforcing process.
Speaker 1: What it appears to us is happening now is that
Speaker 1: we may have been sort of kicked out of that
Speaker 1: virtuous eical and into a different equilibrium point where the
Speaker 1: incentives have changed, and we're going to see a reversal
Speaker 1: to some extent of those trends. Shorter supply chains, um,
Speaker 1: you know, less willingness to participate in the global economy,
Speaker 1: more focus on sort of national or sort of spheres
Speaker 1: of influence across the global economy. You hear all these
Speaker 1: terms today about you know, on shoring and near shoring
Speaker 1: and friends shoring, etcetera, etcetera, UM, And they all kind
Speaker 1: of point in the same direction, which is that you know,
Speaker 1: this imperative to become as global as possible has to
Speaker 1: a very material degree faded. Now we don't know for
Speaker 1: sure how long this will last, and you know, will
Speaker 1: it be permanent or or more of a a period
Speaker 1: that we live through and then we resume that that
Speaker 1: sort of upward march towards a more globalized economy. But
Speaker 1: from where we stand right now, you can certainly see
Speaker 1: very visible signs that globalization has receded somewhat. And that,
Speaker 1: and to the question you asked, that has some very
Speaker 1: profound impacts on the markets. And we'll come back to
Speaker 1: this later, but I think one of the more profound
Speaker 1: ones is on inflation. You know, as the FED wrestles
Speaker 1: with inflation right now and the market tries to figure
Speaker 1: out how persistent inflation will be and how they should
Speaker 1: react to that, this deglobalizing impulse is inherently inflationary, and
Speaker 1: so you know, that may raise the baseline level of
Speaker 1: inflation across the global economy, and that has very profound
Speaker 1: implications for monetary policy, bond markets, and other markets more broadly.
Speaker 1: And and is the reason simply if you're no longer
Speaker 1: shopping for materials and labor in the cheapest possible country
Speaker 1: that you know, it's just naturally going to cause higher inflation,
Speaker 1: and I would guess sort of dent corporate profit margins
Speaker 1: at the same time, it should have an impact on
Speaker 1: profit margins. I think, you know, the more profound implication,
Speaker 1: and there may be several, but one that I certainly
Speaker 1: like to talk about is we've become very accustomed to
Speaker 1: looking past headline inflation, which is typically driven by you know,
Speaker 1: food and or energy prices, because historically it has been
Speaker 1: relatively mean reverting over a short horizon. Now why is that,
Speaker 1: Why is you know, headline inflation meeting reverting because the
Speaker 1: individual commodities or or sort of resources behind that tend
Speaker 1: to be both substitute herbal and they are part of
Speaker 1: a global market where supply and demand can equalize fairly quickly. Um.
Speaker 1: If we are moving to a world where resources are
Speaker 1: more constrained, people are more defensive around, you know, sort
Speaker 1: of husbanding their national resources. Um, and the ability to
Speaker 1: substitute across sort of the global supply is more limited.
Speaker 1: Then you know, the the ability to look past headline
Speaker 1: inflation may diminish as well. And so you know, central
Speaker 1: banks may be forced to reckon with a greater level
Speaker 1: of volatility in their monetary policy, not just a higher
Speaker 1: level of inflation overall. And that, of course, you know
Speaker 1: that that is essentially the risk free rate that we
Speaker 1: apply to most asset classes, and that you know that
Speaker 1: has some very profound implications. So first, um, the title
Speaker 1: of of the report we're talking about is the Lifeboat Economy.
Speaker 1: So I wanted to ask you to sort of describe
Speaker 1: to us what the what do you mean by lifeboat?
Speaker 1: And then the second part is just to ask you
Speaker 1: to add on a bit more on this idea that
Speaker 1: the globalizations trend started before we had COVID, or before
Speaker 1: Russia invaded Ukraine and what some of those uh factors
Speaker 1: were or how you were able to see that. So
Speaker 1: the title, you know, is a sort of a metaphor
Speaker 1: for security. You know, in that you are, you know,
Speaker 1: in a lifeboat. You are sort of first concerned about
Speaker 1: protecting yourself, you know, the and and I think the
Speaker 1: idea that you have sort of sailed off from this
Speaker 1: larger ship that was carrying everyone. You are now in
Speaker 1: a smaller space thinking more about self preservation. To the
Speaker 1: second part of your question, you know, what were some
Speaker 1: of these trends? So when we think about the nature
Speaker 1: of deglobalization, you know, trade had been to some extent
Speaker 1: in decline for a while, and and you know, a
Speaker 1: lot of this data is to some extent anecdotal, but
Speaker 1: when you look at the whole sort of tapestry that
Speaker 1: it creates, it's very clear that there's a trend here.
Speaker 1: And so you think about, you know, the United States
Speaker 1: tariffs with China, you know, which obviously were accelerated by
Speaker 1: the Trump administration but certainly have not been reversed by
Speaker 1: the Biden administration. If anything, the Biden administration is to
Speaker 1: some extent doubling down. And you know that suggests that
Speaker 1: this is going to be a more permanent part of
Speaker 1: our sort of trade politics around the world. Another element
Speaker 1: would be, um, the Committee on the Foreign Investment of
Speaker 1: Asset SIPHIUS, which you know kind of governs, uh, you know,
Speaker 1: sort of capital market flows around the world, UM, and
Speaker 1: sort of various elements of the trade and the competition
Speaker 1: in the Federal Trade Commission and how they look at
Speaker 1: mergers both you know, kind of within the United States,
Speaker 1: but also globally. You can look at the reaction to
Speaker 1: you know, Huawei and the technology and the chips and
Speaker 1: sort of how they've been effectively sort of banned from
Speaker 1: the global uh, you know, sort of telecommunication system, at
Speaker 1: least outside of China. So a lot of this stuff
Speaker 1: was happening well before COVID and well before the Ukraine War,
Speaker 1: and and certainly you could apply a similar description to
Speaker 1: some of the Chen's and immigration you know, which which
Speaker 1: we're trailing off, you know, well prior to UM some
Speaker 1: of the more recent events. What is interesting though, is
Speaker 1: how you know, both COVID, which you know, in theory
Speaker 1: should have been a more temporary response to a pandemic,
Speaker 1: but had much longer lived sort of echoes not just
Speaker 1: from a medical and a sort of social standpoint, but
Speaker 1: you think about the supply chain, the impact on trade,
Speaker 1: and how long that's lasted. It's really only now that
Speaker 1: we're getting out from under some of those supply chain
Speaker 1: disruptions UM, and we're starting to get back to something
Speaker 1: more like a normal balance of trade across major you know,
Speaker 1: or trading partner relationships UM. And then you know, with
Speaker 1: with the Ukraine War, what was interesting is most geopolitical
Speaker 1: events historically have really been more of a blip in
Speaker 1: the markets. You know, they tend to create a spike
Speaker 1: in volatility, and within a few months you're really back
Speaker 1: to where you were and you can look at, you know,
Speaker 1: most of the major you know, either sort of conflicts
Speaker 1: or or other sort of geopolitical fire storms that have
Speaker 1: occurred to the last several decades, and they tend to
Speaker 1: be fleeting in their impacts. What we went back to
Speaker 1: in the paper, which is interesting is the nineteen seventy
Speaker 1: three Arab Israeli War, which not so much the war itself,
Speaker 1: which was relatively contained to Israel, Egypt and a few
Speaker 1: of Israel's near neighbors, UM, but really impacted the oil
Speaker 1: supply chain, you know, through the Saudi embargo and and
Speaker 1: ultimately opex embargo on the United States and other European countries,
Speaker 1: and and that led to some more prof ound sort
Speaker 1: of reordering of the system. So um, you know, I
Speaker 1: think what we saw was again the sort of pattern
Speaker 1: of behavior leading into the sort of joint COVID and
Speaker 1: Ukraine crises, um, which was only sort of accelerated by
Speaker 1: what took place there. And so you know that may
Speaker 1: ultimately be the impetus for this move to kind of
Speaker 1: a new equilibrium where trade and globalization are you know,
Speaker 1: just less significant a driver of behavior, both at the
Speaker 1: national and not the corporate lane. You mentioned sort of
Speaker 1: the three categories of globalization economic, social, and political, and
Speaker 1: I can't help but think that that political spear is
Speaker 1: really what drives it all right. You know, if if
Speaker 1: I think of what, who are some of the main
Speaker 1: influential figures in driving a deglobalization over recent years. While
Speaker 1: we had President Trump with his America First policies and
Speaker 1: the tariffs, as you pointed out, then you have in
Speaker 1: Russia you have Vladimir Putin uh with the invasion of Ukraine,
Speaker 1: and Shijung Ping in China although maybe not as actively
Speaker 1: engaged in the globalization, certainly hit some of his choices
Speaker 1: COVID zero and everything, perhaps compounding uh the the issue
Speaker 1: or you know, you know, at least someone who has
Speaker 1: some control over the whole topic. So I in a way,
Speaker 1: I wonder and and you mentioned CIPHIUS, the Community for
Speaker 1: Foreign Investment in the US. I'm fascinated that they're actually
Speaker 1: looking at at TikTok. Did you realize that Aldana Siphius
Speaker 1: is looking at TikTok and there's a big sort of
Speaker 1: a ground swell to ban TikTok in the US. But
Speaker 1: my point chart is that in a way to do
Speaker 1: these could these influences be sort of self correcting in that,
Speaker 1: if you know, factories start closing in low wage countries
Speaker 1: like China, if inflation you know, becomes embedded in the
Speaker 1: West because of the globalization UM, Vladimir Putin's popularity in
Speaker 1: the country dwindles. You know, is there a way that
Speaker 1: politics could sort of make this be a self correcting
Speaker 1: phenomenon where the backlash against these global leaders who are
Speaker 1: sort of pushing the issue um actually causes them either
Speaker 1: to be voted out hous Did you know and that
Speaker 1: you know, that gravity of globalization reasserts itself, if you
Speaker 1: know what I mean. You know, look, there were many
Speaker 1: winners and losers in globalization, and there will be the
Speaker 1: same impact as it, you know, fades or or diminishes,
Speaker 1: you know, to whatever extent that it does. In the
Speaker 1: United States. You know, I think politically, deglobalization is a
Speaker 1: relatively popular concept. I mean, I don't think you have
Speaker 1: to be a particularly astute analyst of politics to know that,
Speaker 1: you know, supporting kind of domestic manufacturing um, you know,
Speaker 1: even if it's to some extent grandstanding, is a very
Speaker 1: popular stance to take, and it and it crosses party
Speaker 1: lines relatively easily. So I don't see that you know
Speaker 1: that there would be a significant move against that, you know.
Speaker 1: And one of the manifestations of that that that really
Speaker 1: brings the politics into the real world is one of
Speaker 1: the things we cite in the paper as well, is
Speaker 1: an increase in industrial policy, you know, and you think
Speaker 1: about the chip expansion, not just in Arizona, which is
Speaker 1: geared towards Taiwan semiconductor UM, but also in upstate New York.
Speaker 1: Micron is just building a huge plant with massive subsidies
Speaker 1: now they were obviously already a US company, or at
Speaker 1: least a US based company, But you know, that use
Speaker 1: of industrial policy, and and it's not just chips. It's
Speaker 1: on you know, solar technology, it's on energy, transportation and
Speaker 1: delivery systems. There's a whole range of these things, um,
Speaker 1: which are really designed to bring capital back and and
Speaker 1: invested here. Um. It may not be you know, the
Speaker 1: most economically productive place to invest capital if you you know,
Speaker 1: if you leave and sort of the agnostic view of
Speaker 1: free trade, UM, but I think it's politically popular. Now.
Speaker 1: Other countries I think will clearly wind up on the
Speaker 1: losing end of this. Now, I mean China, which has
Speaker 1: benefited enormously from trade and globalization, UM, you know, certainly
Speaker 1: stands to be at least, you know, be a little
Speaker 1: more a little bit more vulnerable as a result. I mean,
Speaker 1: I don't think it's a coincidence that in the same
Speaker 1: week that Apple announced that it was looking to move
Speaker 1: some of its manufacturing base out of China, they had
Speaker 1: a very rapid sort of one eighty on the COVID
Speaker 1: policies and started to loosen up. Now, you know, again,
Speaker 1: I don't know that you can draw a direct line
Speaker 1: of sight between the COVID policy and the you know,
Speaker 1: Apple factory floor. But um, you know, it doesn't seem
Speaker 1: to be totally coincidental. So you know, I think there
Speaker 1: will be some give and take, you know, to sort
Speaker 1: of the point of your question. And you know, countries
Speaker 1: that have benefited and stand now to lose perhaps or
Speaker 1: at least to become, you know, kind of more balanced
Speaker 1: in terms of the benefits and costs that they face, UM,
Speaker 1: are going to be in a tougher spot. You know.
Speaker 1: I think I think the countries like the United States,
Speaker 1: where you know, globalization has been great for corporate profitability,
Speaker 1: but you know, more or less terrible for workers. Um,
Speaker 1: you know, we're seeing a little bit of the reversal
Speaker 1: of that. You know, we're seeing higher wages, We're seeing
Speaker 1: companies bring jobs back on shore. Now that to the
Speaker 1: point you raised earlier about margins, it may not be
Speaker 1: a terrific thing for corporate profitability, at least in the
Speaker 1: near term. If we're thinking about this less globalized world,
Speaker 1: like what what happens in this less globalized world? Like
Speaker 1: what are some of the trends that you expect will
Speaker 1: be seeing. There's there's a couple phases to how this works.
Speaker 1: So in the very short term you're going to have
Speaker 1: a scramble to secure sort of national supplies of key resources. Now,
Speaker 1: the most obvious example of that is Europe and natural gas.
Speaker 1: You know, they have made an affirmative decision to you know,
Speaker 1: basically seal off the pipes from Russia UH and move
Speaker 1: to alternative natural gas supplies. And and that poses a
Speaker 1: very profound challenge in the near term. I don't think
Speaker 1: anyone doubts that over a longer horizon they will be
Speaker 1: able to find substitute supplies, UM, but most certainly at
Speaker 1: a higher price, and you know that's something that they'll
Speaker 1: have to pay for. The other very near term impact
Speaker 1: is defense spending and you know, maybe ancillary areas like
Speaker 1: cybersecurity and other sort of protective almost you know, sort
Speaker 1: of insurance like functions UM that the government's sort of
Speaker 1: step up for UM. So we certainly expect those two
Speaker 1: things to take place in the near term and they
Speaker 1: will drive a lot of capital flows and investment as
Speaker 1: we try to get around some of these issues today.
Speaker 1: Over the medium term, you're looking more at the supply chains.
Speaker 1: How do they get rewired, you know, One of the
Speaker 1: things we're thinking about here in the United States is
Speaker 1: a little bit of a transition from the coastal ports
Speaker 1: to what we would call inland ports, you know, basically
Speaker 1: logistic hubs, logistics hubs inside the United States, areas that
Speaker 1: are you know, terrific at facilitating trade and which then
Speaker 1: allow for sort of the congregation of manufacturing, distribution, logistics
Speaker 1: and a lot of the technology and resources that go
Speaker 1: along with that. You know, areas like Phoenix, like you know, Columbus, Ohio, Nashville.
Speaker 1: These are places that are not thought of as you know,
Speaker 1: sort of principal components in global trade flows. But within
Speaker 1: the United States or within a more of a North
Speaker 1: American sort of trade block, should that continue to develop, um,
Speaker 1: you know, their importance should grow, So there should be
Speaker 1: some very profound implications there. I bunge in industrial policy
Speaker 1: and how you know, government is affirmatively putting a thumb
Speaker 1: on the scale in favor of you know, certain areas
Speaker 1: for increased capital investment. And you know there's a lot
Speaker 1: of reason for that. This is this is not just
Speaker 1: sort of blind um you know, sort of policy. One
Speaker 1: of the things we learned with the with the decline
Speaker 1: in the supply chain over the last couple of years
Speaker 1: was the vulnerability on chips supplies. You know, that's a
Speaker 1: very real thing manufacturers across the economy have to deal with.
Speaker 1: And if the only place you can get chips is
Speaker 1: from Taiwan or South Korea, then you are vulnerable. And
Speaker 1: you know, even if you bring a portion of that
Speaker 1: manufacturing back to the United States, it creates a resiliency
Speaker 1: that has real value. So, you know, I think it's
Speaker 1: it may not be again the most economically efficient policy
Speaker 1: in a very abstract sense, but it's a very pragmatic
Speaker 1: policy that I think will get a lot of support
Speaker 1: infrastructure spending in a variety of ways, particularly around the
Speaker 1: energy grid and distribution, you know, things that will allow
Speaker 1: us to bring together the traditional generation facilities natural gas, nuclear,
Speaker 1: even coal, although that is fading along with the renewable energies,
Speaker 1: you know, and and when you look at solar and wind,
Speaker 1: they're terrific and they're becoming more cost effective, but they
Speaker 1: have an intermittency problem, and you need traditional you know,
Speaker 1: sort of typically hydrocarbon based or nuclear based energy sources
Speaker 1: to make up the gaps. And so how do you
Speaker 1: how do you solve at least some of that problem.
Speaker 1: You need better transmission, you need more uh robust grids.
Speaker 1: You know, the way we built our energy grid in
Speaker 1: this country is broken down into a lot of individual
Speaker 1: sectors that don't necessarily transmit across those lines. So you
Speaker 1: know we're gonna see a lot of changes there. Um
Speaker 1: And then the very long term it really is, and
Speaker 1: this is where it gets a little more speculative. Will
Speaker 1: we continue to see this evolution towards sort of spheres
Speaker 1: of trade. You can very easily in the wake of
Speaker 1: the Ukraine War see a China Russia sphere that largely
Speaker 1: makes Russia almost a you know, I don't want to
Speaker 1: say subservient, but but a sort of minority partner in
Speaker 1: transporting energy resources to China where they are turned into
Speaker 1: manufactured goods and sold elsewhere. You certainly can see the
Speaker 1: United States, Canada, Mexico, and maybe the western sort of
Speaker 1: developed economies more broadly, including Europe and Japan and and
Speaker 1: non China Asia forming a more of a parallel block
Speaker 1: um that trades more freely within it, but less freely
Speaker 1: outside of So so those are the real long term trends,
Speaker 1: um and and I think you know, we do have
Speaker 1: a lot of conviction that those will continue. UM. You know,
Speaker 1: the the endpoint is still very unclear. I mean, we
Speaker 1: write these papers with a bit of a speculative bent
Speaker 1: because we want to try and get ahead of these trends.
Speaker 1: And you know, we have to be humble enough to
Speaker 1: know that we don't have a crystal ball when we
Speaker 1: think of this idea of deglobalization. Obviously we've talked a
Speaker 1: lot about the economic side of the trade political you know,
Speaker 1: tensions growing back and forth. But I wonder if a
Speaker 1: deglobalization of capital markets is guaranteed UH in this scenario,
Speaker 1: you know, And the most sort of easiest example I
Speaker 1: would give is the Chinese companies listed in the US,
Speaker 1: and there's a sort of cloud hanging over them whether
Speaker 1: they might be delisted from the US UH if you know,
Speaker 1: the the agreement on their accounting standards is not um
Speaker 1: fulfilled and and where the US is not allowed to
Speaker 1: examine their books every year. UM, is that a risk
Speaker 1: that you know, in this this environment that that you're
Speaker 1: expecting of less globalization, that it becomes inherently more risky
Speaker 1: to invest overseas um, whether it be equities or even
Speaker 1: sovereign bonds, you know, and I'm thinking of China holding
Speaker 1: a lot of US treasuries obviously UH as a potential
Speaker 1: risk as well. But but do the capital markets have
Speaker 1: to sort of disconnect as well? Do you think that's coming.
Speaker 1: That's an interesting question. You know, there's there's definitely uh
Speaker 1: a bit more sort of two way flow there, and
Speaker 1: that you're you're absolutely correct in citing the example of
Speaker 1: China bringing many of its companies sort of back from
Speaker 1: what they would regard as the offshore markets, the U
Speaker 1: S A d R market, even the Hong Kong market
Speaker 1: back to Shanghai and Shenzen to trade and what we
Speaker 1: sort of would generically referred to as the A shares
Speaker 1: market um. And you know, some of that is a
Speaker 1: reflection of the fact that the Chinese domestic equity markets
Speaker 1: have developed to the point where they are much more
Speaker 1: deeper and more liquid and more robust than they used
Speaker 1: to be. And so there may be a little bit
Speaker 1: of a natural evolution that you don't necessarily need to
Speaker 1: sort of ascribe to deglobalization. It may just be the
Speaker 1: maturing of some of these formerly emerging markets. And and
Speaker 1: so that's a good thing. All at all. I mean,
Speaker 1: I think, um, you know, we're not likely to ever
Speaker 1: see a single global equity exchange on which all shares
Speaker 1: trade UM and so absent that you know, you want
Speaker 1: to basically, as an investor, think about the liquidity that
Speaker 1: you have UM in any given market, the depths of
Speaker 1: sort of supply and demand there um. You know, there
Speaker 1: are ancillary features that really do matter, things like the
Speaker 1: rule of law, the enforcement of contracts, and you know,
Speaker 1: I think that is where markets like the United States
Speaker 1: and Europe tend to have a very very big head
Speaker 1: start on a lot of these other areas. And I
Speaker 1: don't think investors, at the end of the day are
Speaker 1: willing to give up on those benefits lightly. So you know,
Speaker 1: the Chinese government you know, can sort of impose its
Speaker 1: will by FIAT on some of these companies, UM, but
Speaker 1: their authority does not extend beyond companies that are located
Speaker 1: in China, And so you know, I don't I don't
Speaker 1: know that ultimately that's going to lead to a particularly
Speaker 1: good outcome. I think, um, you know, they may sort
Speaker 1: of by you know, pushing capital back into their home markets. UM.
Speaker 1: You know, almost signal to investors that that some of
Speaker 1: those other attributes that they value are sort of less
Speaker 1: well respected there, So you know, time will tell. Um.
Speaker 1: You know, market liquidity globally still remains you know, pretty high. Um.
Speaker 1: You know, I think that there's a lot of features
Speaker 1: around liquidity that get back to sort of the global
Speaker 1: bank balance sheets and how much capital stands behind trading
Speaker 1: desks and and those who sort of provide liquidity, particularly
Speaker 1: in uh down markets. And there's a lot of sort
Speaker 1: of market structure questions that really fall kind of outside
Speaker 1: the scope of this globalization conversation. But um, you know,
Speaker 1: I think it is you know, if if the governments
Speaker 1: are going to be playing a more direct role in
Speaker 1: the allocation of capital um and and by definition that's
Speaker 1: going to mean in a domestically focused way, because I
Speaker 1: can't imagine that many governments will be you know, incenting
Speaker 1: capital to move outside of their their sort of national borders. Um,
Speaker 1: then yeah, it is going to lead to a more
Speaker 1: fragmented market across time. And that's not a great thing. Um.
Speaker 1: You know, obviously, the assumption is it will have other
Speaker 1: benefits that offset those costs. And just to bring us
Speaker 1: to what's going on with markets and the economy today,
Speaker 1: I have these really great point from you. It's about
Speaker 1: the three things that the FED will never say out loud,
Speaker 1: but which are clearly true. So I'm wondering if you
Speaker 1: can talk about this. So one is we made a mistake,
Speaker 1: Second is we want a recession, and third is is
Speaker 1: not a real target. And bitcoin fixes this. I doubt
Speaker 1: all the bitcoin fixes of yeah everything, of course, ye,
Speaker 1: well yeah, we can certainly, we can certainly take a
Speaker 1: detour the crypto if you want. I think the doubters
Speaker 1: have have been vindicated pretty decisively in that space. But no,
Speaker 1: so you know what we think about FED policy. It's
Speaker 1: obviously very much front of mind right now. And you know,
Speaker 1: the market is trying to wrestle with this question tion
Speaker 1: of you know, inflation versus recession, how hawkish the FED
Speaker 1: is going to be, And you know right now monetary
Speaker 1: policy is kind of leading the markets, and so it's
Speaker 1: critical to kind of think through what that means. Now,
Speaker 1: you cited these sort of three equips that I that
Speaker 1: I was making in our in our prep. I think, um,
Speaker 1: you know, as I said, these are sort of things
Speaker 1: we know to be true about the FED, or at
Speaker 1: least I believe to be true, and I'm I believe
Speaker 1: many people share these views, but I don't want to
Speaker 1: be presumptuous. Um. The first is that the FED clearly
Speaker 1: made a mistake. You know, the the period leading up
Speaker 1: too um, they were clearly behind the curve with respect
Speaker 1: to the jobs market, with respect to building inflation pressures. Now,
Speaker 1: I don't think anyone could have faulted them for not
Speaker 1: having foreseen the Russian invasion of Ukraine and some of
Speaker 1: the inflationary impulses that that created. But they also can't, uh,
Speaker 1: you know, sort of fall back on that defense because
Speaker 1: inflation was um well out of the bag, you know,
Speaker 1: before that took place. And so you know, the FED
Speaker 1: is never going to say, look, we we made a mistake.
Speaker 1: They they will hem and haw about the meaning of
Speaker 1: transit story and whether they were sort of gasolighting the
Speaker 1: markets by constantly referring to supply chains and so forth
Speaker 1: and not staring the fairly obvious situation in the face,
Speaker 1: which was that the labor markets were incredibly tight, wages
Speaker 1: were rising rapidly, and goods prices because of supply chain
Speaker 1: problems were exacerbating what was a more fundamental problem with
Speaker 1: core inflation. But be that as it may we are
Speaker 1: where we are now. The FED, to be fair, has
Speaker 1: now done a complete one eight and has really gotten
Speaker 1: religion on fighting inflation. And that brings me to the
Speaker 1: second point of sort of things the FED won't ever
Speaker 1: say out loud but are probably true, which is they may,
Speaker 1: you know, quite literally want to create a recession. And
Speaker 1: I don't say that to be you know, kind of
Speaker 1: critical of the FED when you have lost your credibility
Speaker 1: as a central bank and you try to contemplate how
Speaker 1: do you regain that credibility? What is it that we
Speaker 1: point to? Well, for historical reasons, everyone points to Paul Volker.
Speaker 1: We say, well, you know, the FED went through a
Speaker 1: period with Arthur Burns in the nineteen seventies where inflation
Speaker 1: got out of hand. How did we fix that? Well,
Speaker 1: Paul Volker, you know who from many people is a hero.
Speaker 1: That may be a strong statement, but you know he
Speaker 1: did what needed to be done in order to bring
Speaker 1: inflation back under control, which was raise interest rates until
Speaker 1: we had a very severe recession. And I don't think
Speaker 1: that lesson has been lost on jeral Powell and the
Speaker 1: current you know, sort of structure of the FED now.
Speaker 1: I don't think they're exactly reprising the vulgar model, which
Speaker 1: was hike kike and then cut cut, cut, cut, cut,
Speaker 1: cut cut. You know, they seem to be adopting a
Speaker 1: slightly different stance, which is, you know, raise rates more quickly,
Speaker 1: so there's almost sort of a shock and awe factor
Speaker 1: plateau of them at a level that should be high
Speaker 1: enough to bring inflation down them and turn real interest
Speaker 1: rates positive, at which point they will have the flexibility
Speaker 1: should it be necessary because of declining economic growth and
Speaker 1: labor markets, to cut rights. But we're still early in
Speaker 1: that process. We don't know exactly where we stand, um,
Speaker 1: but I think it's just important to recognize that, you know,
Speaker 1: from where the FED sits, if their number one objective
Speaker 1: is restoring their credibility, a recession may really be the
Speaker 1: only way to be sure that they've done that, and
Speaker 1: and a soft landing where inflation fades, they may not
Speaker 1: have really bought back much of their credibility, you know,
Speaker 1: with that sort of an outcome, And so you know,
Speaker 1: I wouldn't go so far as to say that they
Speaker 1: absolutely want one, but I think they're they're probably far
Speaker 1: more indifferent to that outcome, particularly given where the labor
Speaker 1: markets are. You know, we are very early in this process,
Speaker 1: and the economy is still doing quite well, so I
Speaker 1: think it gives them a lot of air cover to
Speaker 1: take on a hawkish stance. Um And and and there's very
Speaker 1: little you can point to, maybe outside of the housing
Speaker 1: market that has felt the brunt. So that was the
Speaker 1: That was the second one. The third one is that
Speaker 1: two percent is not a real target. I I make
Speaker 1: this point only because you know, two percent is obviously arbitrary.
Speaker 1: There is no historical, you know, proof that that is
Speaker 1: the optimal level of inflation. I think we know that
Speaker 1: zero inflation is too low. You know, it helps the
Speaker 1: economy to function to have some level of inflation. Um It,
Speaker 1: it is not clear that two is any better than
Speaker 1: two and a half or one and a half or
Speaker 1: three or some other number. You know. Obviously, if inflation
Speaker 1: starts to spiral out of control, that's when it becomes
Speaker 1: a problem. But but low single digit numbers are generically fine.
Speaker 1: And I think, you know, we we also have to
Speaker 1: just think that not very many years ago, when we
Speaker 1: were approaching two percent from the bottom and the narrative
Speaker 1: which was initially two is a hard cap and the
Speaker 1: Fed will have to hike as soon as we get
Speaker 1: anywhere near it became two percent was the signal to
Speaker 1: begin hiking, and then it became forward average inflation targeting,
Speaker 1: which was much softer. And you know the idea that
Speaker 1: you know we're going to be on the down slope
Speaker 1: in a year or two as we approach two percent
Speaker 1: from the high end, and that somehow, in a recessionary environment,
Speaker 1: the Fed is going to feel utterly compelled to continue
Speaker 1: cranking down the level of monetary accommodation just to force
Speaker 1: the economy into that sort of spot. I don't I
Speaker 1: just don't think that's all that likely. Now. They're not
Speaker 1: gonna they're not gonna give up that number too soon.
Speaker 1: You know, the farther away from it you are, the
Speaker 1: easier it is to just sort of point to it
Speaker 1: as a target because you're nowhere near it. But my
Speaker 1: guess is that as we start to approach inflation from
Speaker 1: the upside, you know, there's gonna be a lot more
Speaker 1: constructive and very specific discussion about what that two percent
Speaker 1: target actually means. Jared gross Managing Director and head of
Speaker 1: Institutional Portfolio Strategy at JP Morgan Asset Management. So great
Speaker 1: to hear your thoughts. Can't let you go just yet, though,
Speaker 1: because it's time for the craziest things we saw this week.
Speaker 1: I'm gonna start for once. Really, I'm gonna start well, Dota.
Speaker 1: You know, my favorite asset class is ridiculously overpriced collectibles
Speaker 1: and artwork auctions. It happened to be the best year
Speaker 1: ever for auction houses, at least for the big three. Christie's, Southebes,
Speaker 1: and Phillips just had their best auction year ever as
Speaker 1: far as total sales of items that were auctioned off.
Speaker 1: I'm surprised it wasn't last year. Yeah, I know. Well,
Speaker 1: there's some caveats in this stay South Bees is including
Speaker 1: real estate, but whatever, We'll let them have their day
Speaker 1: in this sun. This is courtesy of our own James
Speaker 1: Tarmy at Bloomberg. So, Jared, uh, it's time to play
Speaker 1: the prices precise. What do you think the dollar figure
Speaker 1: was on total sales total uh revenue of auctions? Okay,
Speaker 1: I'm gonna go with one point five trillion one? Okay?
Speaker 1: Is that too much? I try to Jared, I try
Speaker 1: to keep a poker face going. Are we are we
Speaker 1: doing prices right? Rules like if I'm under but I
Speaker 1: can just guess a dollar here, and I'll way anything
Speaker 1: with a T handle feels a little high. I mean,
Speaker 1: I will say, though, if you're including real estate, I mean,
Speaker 1: obviously those three don't transact all of the real estate,
Speaker 1: but they do a fair amount. And that's a that's
Speaker 1: a big, big chunk. I will say, three hundred and
Speaker 1: seventy five billion. Wow, I thought you guys are eighteen
Speaker 1: billion for not not one point five trillions. That cannot be.
Speaker 1: There's so many stories that are like so and so
Speaker 1: sold to paintings for a hundred fifty million dollars or something. Yeah,
Speaker 1: but they're the ones that make the headline. Then they
Speaker 1: saw a lot for you know, for a few thousand.
Speaker 1: I guess I don't know, all right, Well, Jared wins
Speaker 1: to the closest to the I don't consider that much
Speaker 1: of a win. That's uses and hand grenades right there.
Speaker 1: You still one, okay. Mine is actually from one of
Speaker 1: our listeners, Tweggy Sundays Tweggy So Tweggy points out that
Speaker 1: the market value of coin base trails that of doge coin,
Speaker 1: which is a joke cryptocurrency. So doge coin is worth
Speaker 1: more than coin based by market value. So if we're
Speaker 1: looking at coin base, it has an eight billion market
Speaker 1: cap and dodge coin has a nine billion dollar that's crazy. Well, Jared,
Speaker 1: how about you? You You see anything crazy this week? Well,
Speaker 1: you know, I I if I can, if you'll indulge
Speaker 1: me and let me go back a little further in time. Um,
Speaker 1: you know, there was an event that just it got
Speaker 1: a little pressed but maybe not you know, too much
Speaker 1: here in the States, which was the near collapse of
Speaker 1: the British or the UK pension system. Um. And it
Speaker 1: was it was really a classic sort of derivatives liquidity squeeze,
Speaker 1: which you know, I guess we we we encounter these
Speaker 1: every couple of years because people seem intent on having
Speaker 1: to learn, you know, lessons that should have been learned
Speaker 1: a long time ago regarding leverage and risk. Um. There's
Speaker 1: a phrase that I learned early on in my career
Speaker 1: which I always found very evocative, which is what they
Speaker 1: call the Texas hedge, which is, you know, it comes
Speaker 1: from owning cattle and also being long cattle futures, and
Speaker 1: when your collateral is the same thing as the futures,
Speaker 1: you can get into a lot of trouble in the
Speaker 1: derivatives markets, and that is the unfortunate position in which
Speaker 1: a lot of UK pension investors found themselves and that
Speaker 1: they were long a lot of guilts and a lot
Speaker 1: of guilt futures and when the market sold off when
Speaker 1: they released this you know, so called mini budget um,
Speaker 1: these trades rapidly on wound and you know, it reminds
Speaker 1: me of a lesson, which is, you know, if you
Speaker 1: don't manage your collateral, your collateral will mantage you. And
Speaker 1: I think you know a lot of these firms found
Speaker 1: themselves in in a very short lived, thank goodness, but
Speaker 1: very desperate moment. You know, you have to give a
Speaker 1: lot of credit to the UK Treasury for stepping up
Speaker 1: and fixing the problem. But it is a strong reminder
Speaker 1: that you know, these pensions, you know, and and and
Speaker 1: the use of derivatives, even by relatively sophisticate institutional investors,
Speaker 1: you know something you have to be careful about. Great stuff,
Speaker 1: Jared Gross, head of Institutional Portfolio Strategy at JP Morgan
Speaker 1: Asset Management. Great to hear your thoughts shared. I hope
Speaker 1: we can do it again sometime. I'd love to Michael
Speaker 1: and Bildana, thank you so much. And co Bird's Fly
Speaker 1: Eagle Fly What Goes Up. We'll be back next week
Speaker 1: and so then you can find us on the Bloomberg Terminal,
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Speaker 1: you next time. APT Not Wanting