1 00:00:00,120 --> 00:00:02,440 Speaker 1: Let's get to Cheryl Smith, our guest for the half hour. 2 00:00:02,600 --> 00:00:06,080 Speaker 1: Cheryl is an economist also a portfolio manager a Trillium 3 00:00:06,160 --> 00:00:09,880 Speaker 1: Asset Management on the line from Cambridge, Massachusetts. Thanks for 4 00:00:09,960 --> 00:00:13,360 Speaker 1: joining us, Cheryl. Is it a foregone conclusion that we're 5 00:00:13,360 --> 00:00:15,840 Speaker 1: going to be dealing with recession here in the States, 6 00:00:15,880 --> 00:00:18,160 Speaker 1: given the fact that the FETE is got a big 7 00:00:18,200 --> 00:00:21,160 Speaker 1: problem at getting inflation under control, and I think there's 8 00:00:21,160 --> 00:00:23,520 Speaker 1: no end in sight when it comes to raising rates. 9 00:00:24,320 --> 00:00:27,040 Speaker 1: There are certainly people in the market who are still 10 00:00:27,080 --> 00:00:30,920 Speaker 1: hoping for a soft landing, but I UM and my 11 00:00:31,040 --> 00:00:33,760 Speaker 1: firm are in the camp that we will definitely see 12 00:00:33,800 --> 00:00:39,240 Speaker 1: a recession during the difficulty, as you mentioned, of getting 13 00:00:39,240 --> 00:00:44,199 Speaker 1: inflation down and the strength of some element of retail 14 00:00:44,240 --> 00:00:48,599 Speaker 1: sales the strength of some other elements of spending indicate 15 00:00:48,720 --> 00:00:50,640 Speaker 1: that it's going to take them quite a while to 16 00:00:50,640 --> 00:00:53,800 Speaker 1: get it down. And even though we're happy with the 17 00:00:53,880 --> 00:00:57,040 Speaker 1: lower inflation members that we saw with both the consumer 18 00:00:57,080 --> 00:01:00,200 Speaker 1: price index and the producer price index in the last week, 19 00:01:01,080 --> 00:01:04,520 Speaker 1: they still are, while lower, nowhere near the two percent 20 00:01:04,640 --> 00:01:07,960 Speaker 1: that the Fed is looking for. Okay, well, not all recessions, 21 00:01:07,959 --> 00:01:12,840 Speaker 1: though I created equal. There's still very strong employment retail 22 00:01:12,920 --> 00:01:16,360 Speaker 1: sales look good. Do you foresee this being mild or 23 00:01:16,480 --> 00:01:19,760 Speaker 1: or is there a worst case scenario? I think the 24 00:01:20,400 --> 00:01:24,479 Speaker 1: worst case scenarios, such as the financial crisis, really requires 25 00:01:24,560 --> 00:01:28,000 Speaker 1: a lot more underlying imbalances. So we are not looking 26 00:01:28,080 --> 00:01:31,000 Speaker 1: for something with the depths of the two thousand seven 27 00:01:31,040 --> 00:01:36,160 Speaker 1: to two tho and nine recession. We are anticipating something 28 00:01:36,200 --> 00:01:39,720 Speaker 1: that will be a bit milder. We're certainly starting from 29 00:01:39,760 --> 00:01:44,240 Speaker 1: a low level of unemployment and have some hopes that 30 00:01:44,600 --> 00:01:48,800 Speaker 1: the level of unemployment won't rise too high. But the 31 00:01:48,800 --> 00:01:53,640 Speaker 1: FEDS way of taming inflation is to reduce aggar get 32 00:01:53,640 --> 00:01:57,640 Speaker 1: demand produces agg get demand by raising those interest rates 33 00:01:57,760 --> 00:02:01,680 Speaker 1: and reducing aggregate demand me higher unemployment. Well, the head 34 00:02:01,720 --> 00:02:04,120 Speaker 1: of the Simple Equation, the head of the New York Fed, 35 00:02:04,400 --> 00:02:07,920 Speaker 1: John Williams, today was saying the Fed should avoid incorporating 36 00:02:08,000 --> 00:02:11,960 Speaker 1: financial stability risk as it considers rate hikes. That seems 37 00:02:12,000 --> 00:02:15,079 Speaker 1: to be a recipe for a little bit of perhaps 38 00:02:15,160 --> 00:02:21,160 Speaker 1: an accident that could cost cost us considerably um. That 39 00:02:21,440 --> 00:02:24,799 Speaker 1: is an interesting perspective. I think one way you could 40 00:02:24,800 --> 00:02:27,519 Speaker 1: look at it would be to say that because of 41 00:02:27,720 --> 00:02:31,640 Speaker 1: the changes in bank regulations that have been put in place, 42 00:02:31,680 --> 00:02:34,519 Speaker 1: since the Great Financial Crisis, banks are in a much 43 00:02:34,600 --> 00:02:38,200 Speaker 1: stronger position than they are now. However, when you look 44 00:02:38,240 --> 00:02:42,960 Speaker 1: at what's happening to other aspects of the shadow banking 45 00:02:43,160 --> 00:02:46,800 Speaker 1: or parallel banking system, for example, what's going on in 46 00:02:46,800 --> 00:02:50,200 Speaker 1: the crypto university Of the last few days, Cheryl, we 47 00:02:50,200 --> 00:02:53,960 Speaker 1: were discussing the macro picture in the United States, you 48 00:02:54,000 --> 00:02:57,600 Speaker 1: see a risk of recission in three But how about 49 00:02:57,600 --> 00:03:00,480 Speaker 1: some of the other major economies offshore, And I'm looking 50 00:03:00,480 --> 00:03:04,119 Speaker 1: at China where there is a rather substantially different set 51 00:03:04,160 --> 00:03:09,400 Speaker 1: of problems to consider. What's your outlook there. I believe 52 00:03:09,680 --> 00:03:12,560 Speaker 1: that China is going to be much more driven by 53 00:03:12,680 --> 00:03:15,840 Speaker 1: its policy actions and maybe a little bit decoupled from 54 00:03:15,880 --> 00:03:19,280 Speaker 1: the rest of the world economy. You know, its decisions 55 00:03:19,320 --> 00:03:23,200 Speaker 1: to follow a zero COVID policy and perhaps look at 56 00:03:23,880 --> 00:03:27,120 Speaker 1: moving away from that right now as well as having 57 00:03:27,160 --> 00:03:30,600 Speaker 1: been somewhat constricted in policy, could have the opportunity to 58 00:03:30,639 --> 00:03:34,120 Speaker 1: loosen it up. So I think China is a little 59 00:03:34,160 --> 00:03:36,480 Speaker 1: bit more decoupled from the rest of the world um 60 00:03:36,600 --> 00:03:40,240 Speaker 1: and maybe won't be seeing quite the same movement towards 61 00:03:40,240 --> 00:03:44,320 Speaker 1: recession that we're seeing across Western Europe, Britain, United States, 62 00:03:44,640 --> 00:03:46,960 Speaker 1: what does that decoupling mean when you have to put 63 00:03:47,000 --> 00:03:49,800 Speaker 1: capital to work in various markets? Does it cause a 64 00:03:49,840 --> 00:03:54,160 Speaker 1: major rethink if you're looking at parts of Asia in 65 00:03:54,280 --> 00:03:59,120 Speaker 1: terms of the outlook of an investor, I would say, Um, 66 00:03:59,160 --> 00:04:01,400 Speaker 1: you know, whatever happen into China is going to be 67 00:04:01,560 --> 00:04:06,600 Speaker 1: clearly going to influence strongly the economies of Australia other 68 00:04:07,120 --> 00:04:14,520 Speaker 1: parts of the Pacific rim. So, Um, I think you 69 00:04:14,640 --> 00:04:21,680 Speaker 1: still have some possibility for investment in China, but it's 70 00:04:21,720 --> 00:04:25,480 Speaker 1: not Um, it's not going to be as straightforward because 71 00:04:25,560 --> 00:04:28,200 Speaker 1: they can definitely be taking actions that are going to 72 00:04:28,240 --> 00:04:31,359 Speaker 1: be dissimilar from the actions being taken elsewhere. So I 73 00:04:31,400 --> 00:04:34,400 Speaker 1: think it just means a little bit more investor caution 74 00:04:34,720 --> 00:04:38,080 Speaker 1: is necessary in looking at the opportunities. Yeah, we haven't 75 00:04:38,080 --> 00:04:41,719 Speaker 1: seen a great deal of caution exercised around stocks in 76 00:04:41,800 --> 00:04:44,640 Speaker 1: Hong Kong. Earlier this week we saw some substantial gains 77 00:04:44,760 --> 00:04:49,400 Speaker 1: for both the property stocks and then e commerce and 78 00:04:49,480 --> 00:04:51,920 Speaker 1: technology stocks as well. I mean, we do have low 79 00:04:52,000 --> 00:04:55,840 Speaker 1: rate sunofficial signs that maybe COVID zero's coming to an end. 80 00:04:55,920 --> 00:04:58,960 Speaker 1: Is it just really impossible to ignore this market considering 81 00:04:58,960 --> 00:05:01,960 Speaker 1: how cheap it is right now? I don't think it's importantly. 82 00:05:02,040 --> 00:05:04,159 Speaker 1: I don't think it's possible to ignore it, but I 83 00:05:04,200 --> 00:05:06,960 Speaker 1: think that investors need to tread with caution. I think 84 00:05:06,960 --> 00:05:10,479 Speaker 1: there's still a very high level of political risk with 85 00:05:10,680 --> 00:05:15,320 Speaker 1: the question of how is China treating Hong Kong and 86 00:05:15,360 --> 00:05:19,240 Speaker 1: what does it mean in terms of the economic openness 87 00:05:19,400 --> 00:05:23,080 Speaker 1: of Hong Kong. UM that would I think that's worth 88 00:05:23,400 --> 00:05:27,920 Speaker 1: um let's call it uh several points on a pe ratio. 89 00:05:28,320 --> 00:05:30,640 Speaker 1: So if I were looking at it, given everything that 90 00:05:30,680 --> 00:05:33,719 Speaker 1: you layering are laying out right now, Cheryl, it seems 91 00:05:33,720 --> 00:05:37,000 Speaker 1: like you're not too enthusiastic about putting money to work 92 00:05:37,040 --> 00:05:40,000 Speaker 1: in the equity market. Are You may be more encouraged 93 00:05:40,040 --> 00:05:42,919 Speaker 1: when you look at what bonds are offering right now globally, 94 00:05:42,920 --> 00:05:46,359 Speaker 1: whether it's sovereign debt or corporate credit, in some cases 95 00:05:46,440 --> 00:05:50,719 Speaker 1: very high quality corporate credit. I would say that bonds 96 00:05:50,760 --> 00:05:53,880 Speaker 1: are considerably more attractive relative to stocks than they have 97 00:05:54,040 --> 00:05:58,520 Speaker 1: been for the past several years. UM our outlook for 98 00:05:58,960 --> 00:06:04,760 Speaker 1: equities requires us to have a two to three year 99 00:06:04,800 --> 00:06:07,800 Speaker 1: outlook to make habit makes sense. We still think that 100 00:06:07,880 --> 00:06:11,559 Speaker 1: there are definitely there are opportunities with inequities, but they're 101 00:06:11,640 --> 00:06:15,839 Speaker 1: in the steadier companies, the companies that have less cyclical earnings, 102 00:06:15,839 --> 00:06:18,640 Speaker 1: the ones that have lower leverage within the debt market, 103 00:06:19,440 --> 00:06:24,279 Speaker 1: the rates are definitely more attractive than they were, and 104 00:06:24,320 --> 00:06:28,120 Speaker 1: I would definitely be staying with the much much higher 105 00:06:28,160 --> 00:06:31,520 Speaker 1: corporate credit quality. I think we're still going to see 106 00:06:32,200 --> 00:06:36,320 Speaker 1: quite a challenging time for companies that are at triple 107 00:06:36,400 --> 00:06:39,200 Speaker 1: B and lower. It's going to be a harder market 108 00:06:39,279 --> 00:06:44,120 Speaker 1: to raise funds and a harder market to get UM 109 00:06:44,160 --> 00:06:48,360 Speaker 1: investors excited about what they're offering, just very quickly as 110 00:06:48,480 --> 00:06:51,600 Speaker 1: rates rise. You mentioned leverage there and lower rated companies. 111 00:06:51,760 --> 00:06:55,560 Speaker 1: How reel is the risk of bankruptcy for you? I 112 00:06:55,600 --> 00:06:59,000 Speaker 1: would say for any company that has a substantial reliance 113 00:06:59,080 --> 00:07:02,880 Speaker 1: on short term at UM, the risk of bankruptcy is 114 00:07:03,800 --> 00:07:07,680 Speaker 1: considerably increased from what it was a year ago. So 115 00:07:07,800 --> 00:07:10,920 Speaker 1: if the rate of bankruptcy, you know, in lower rated 116 00:07:10,960 --> 00:07:14,000 Speaker 1: companies with something in the one or two percent range, 117 00:07:14,000 --> 00:07:15,880 Speaker 1: it could be as high as the five or six 118 00:07:15,880 --> 00:07:19,360 Speaker 1: percent range at this point. Alright. Cheryl Smith, economist and 119 00:07:19,360 --> 00:07:22,440 Speaker 1: portfolio manager at truly am Asset Management, Thanks so much 120 00:07:22,480 --> 00:07:23,120 Speaker 1: for joining us.