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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify, or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. We begin with our

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Speaker 2: top story. CPI is about twenty six minutes away. That

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Speaker 2: inflation print coming as the fmc's two day meeting comes

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Speaker 2: to a close, likely determining what the dot plot looks

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Speaker 2: like going forward. The former sen lewis FED president Jim

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Speaker 2: Bullard saying he only sees one or two cuts on

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Speaker 2: the table this year thanks to slow progress on inflation.

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Speaker 3: Jim is with us here in New York.

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Speaker 4: Jim, good morning to you, Good morning, good morning.

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Speaker 2: Just fantastic to see you, sir. I want to talk

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Speaker 2: about your dot plot from a long time ago. We

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Speaker 2: all remember when it came out years ago and you

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Speaker 2: said enough of this, You put your dot right at

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Speaker 2: the bottom and left it there for the next couple

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Speaker 2: of years. How do you approach the dot plot and

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Speaker 2: how do you think these officials would approach it today?

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Speaker 5: Yeah, I mean at that time I wanted to get

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Speaker 5: the idea across that we had just switched to a

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Speaker 5: low interest rate, low inflation regime and that we were

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Speaker 5: unlikely to break out of that regime anytime soon, and

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Speaker 5: so it was probably a better forecast just to say

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Speaker 5: that you're going to stay in the regime. Now that

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Speaker 5: the pandemic came along and up ended the global macro economy,

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Speaker 5: it looks like we're in a different regime now, So

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Speaker 5: maybe it would be a different dart today.

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Speaker 3: Well, let's play it.

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Speaker 2: Do you think it would be POSTDFC in reverse? Would

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Speaker 2: you just leave it up there at five point fifty

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Speaker 2: for a couple of years out?

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Speaker 4: I think that's a little high.

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Speaker 5: I'd like to see the your curve normalize here as

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Speaker 5: a final piece of the soft landing, But I do

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Speaker 5: think yields will be higher going forward than anything we

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Speaker 5: saw between twenty nine and twenty nineteen.

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Speaker 6: Do you think that the FED is accurately reflecting that

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Speaker 6: in their current projections that.

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Speaker 4: Rates will be higher for longer.

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Speaker 5: They've got their long run dot at two point six.

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Speaker 5: Maybe that'll shift up a little today. I think the

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Speaker 5: idea that you're going to have that low of a

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Speaker 5: policy rate, I don't know, that's getting a harder story

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Speaker 5: to tell.

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Speaker 3: I think, well so steeper.

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Speaker 6: Shudo is on earlier and he said, essentially, there's a

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Speaker 6: real test of the Fed's credibility right now at a

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Speaker 6: time or some people are saying that we're essentially going

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Speaker 6: to vacillate between two and three percent in terms of inflation,

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Speaker 6: or even stay at three percent, given the feds proclivity

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Speaker 6: to cut rates in the near term. Do you agree

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Speaker 6: with that that essentially this is a three percent inflation

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Speaker 6: target that just hasn't been enunciated by the Fed.

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Speaker 5: No, the target is two percent, and if inflation stays

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Speaker 5: above two percent, then policy has to be at least

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Speaker 5: mildly restrictive to try to push inflation back to two

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Speaker 5: percent over a reasonable time horizon. But a key thing

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Speaker 5: is what what time horizon do you think you know

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Speaker 5: it should take to get inflation back to target? And

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Speaker 5: if you look at these projections, they're probably talking.

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Speaker 4: Two years or something like that.

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Speaker 5: So you've got eighty basis points to go on core

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Speaker 5: PC inflation. You know, you can do forty basis points

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Speaker 5: in one year, forty basis points the next year, and

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Speaker 5: so it's not it's not the urgency that we had

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Speaker 5: when inflation was much higher just two years ago.

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Speaker 2: When you put in together these forecasts, how much collaboration

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Speaker 2: is there on the FMC, I'll go off into a

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Speaker 2: corner and just sort of plot it down.

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Speaker 3: Do you do it ahead of science that's proping on

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Speaker 3: it what it is?

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Speaker 5: I have actually tried to call around my colleagues and stuff,

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Speaker 5: but it's very time consuming to call everybody, and they've

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Speaker 5: got their own staffs and their own stories to tell.

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Speaker 5: So it works better just to give your own view.

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Speaker 5: And and so there's a lot of communication by asthmosis

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Speaker 5: to you kind of know what everybody's saying because you

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Speaker 5: see them all the time and you hear their speeches

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Speaker 5: and everything.

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Speaker 2: Because we heard from someone yesterday that kind of implied

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Speaker 2: basically said that for the Federal Reserve would be better

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Speaker 2: if the implied cuts. This year, the median DOT for

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Speaker 2: twenty four came down from three to two and not

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Speaker 2: down to one at least when I would basically send

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Speaker 2: to that individual.

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Speaker 3: But what are you talking about.

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Speaker 2: You're telling me that Chairman Pal is going to get

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Speaker 2: on the phone and say, look, guys, we need to

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Speaker 2: massage this and collaborate and make sure the median dot

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Speaker 2: just shows two cuts for this year and not one.

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Speaker 2: That's not how it works, is it.

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Speaker 5: No, And people have strong views, so I don't think,

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Speaker 5: you know, they take their role very seriously on the

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Speaker 5: committee and they're not really willing to say, you know,

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Speaker 5: I'm going to compromise my view just because of, you know,

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Speaker 5: something that might happen on that particular day.

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Speaker 6: Yeah, but this says raised this question of how do

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Speaker 6: you message it perfectly? Is there a true consensus and

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Speaker 6: what's the differential between consensus view and I dare say

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Speaker 6: group think or something where people all to sort of

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Speaker 6: are coalescing around this idea that inflation is maybe a

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Speaker 6: little bit higher but not that much higher, that rates

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Speaker 6: are restrictive even though the economy keeps chugging along.

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Speaker 4: Yeah.

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Speaker 5: I think one thing to keep in mind about this

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Speaker 5: is that the board staff serves the whole Board of Governors,

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Speaker 5: so they kind of have Thus they all see the

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Speaker 5: same analysis and the same have the same projection, and

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Speaker 5: then they may have a view relative to what the

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Speaker 5: staff presents, and then they might deviate a little bit.

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Speaker 4: But they don't have their own independent.

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Speaker 5: Staff, whereas at the banks, all the banks have their

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Speaker 5: own research teams and they might have very different views

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Speaker 5: from what the board staff thinks. So so you know,

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Speaker 5: the tendency for some of the dots to be clustered

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Speaker 5: would be at the Board of Governors.

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Speaker 6: You were on a FED in twenty twenty when you

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Speaker 6: were dealing with some of these issues, and that was

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Speaker 6: the last time that we had a CPI print the

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Speaker 6: same day as a FED decision.

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Speaker 5: Yeah, it's like a solar eclipse or yeah, yeah, business.

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Speaker 6: So we're tearing into the sun, the political sun, and

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Speaker 6: it's a solar eclipse.

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Speaker 4: You're here for us.

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Speaker 6: How much does it really alter the discussion?

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Speaker 7: Yeah?

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Speaker 5: I think I just caution viewers here and listeners that

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Speaker 5: what happens is on this day of the meeting.

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Speaker 4: This meeting will start at nine o'clock this morning.

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Speaker 5: The first thing will happen is that the staff will

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Speaker 5: come out and say here's what the CPI reports said.

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Speaker 5: And most people will know the number, at least the

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Speaker 5: headline number at that point, but they'll give a brief

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Speaker 5: analysis of that. But the only thing that will matter

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Speaker 5: is is it different from what the staff forecast? So

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Speaker 5: did it come in hotter or colder than the staff forecast?

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Speaker 5: If it came in about is expected, and the staff

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Speaker 5: will say, well, this didn't change anything because we already

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Speaker 5: expected this.

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Speaker 4: So usually it's not big news at the committee. It

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Speaker 4: would have to be some blowout difference.

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Speaker 6: Do you think that it is correct that the balance

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Speaker 6: of risks between inflation and slow down in growth is

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Speaker 6: roughly balanced or do you think that it's more heavily

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Speaker 6: weighted to one than the the.

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Speaker 5: Well, inflation's been high, and I think you want to

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Speaker 5: finish the job here and get inflation back to target.

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Speaker 5: So I think that's still job one. And labor market

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Speaker 5: seems pretty strong based on the jobs report you know

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Speaker 5: last Friday, and other aspects of the economy seem pretty good.

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Speaker 4: Atlanta fed GDP now.

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Speaker 5: For the second quarter up over three percent at an

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Speaker 5: annual rate, so it's daily it does. But I think

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Speaker 5: if you're just tracking and just trying to make a

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Speaker 5: statement based on the data that you have in hand

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Speaker 5: right now, growth looks pretty good, labor market looks pretty.

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Speaker 4: Good, inflation's still too high. Might as well stay a

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Speaker 4: little bit hawkish, Jim.

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Speaker 2: I've never seen people so skeptical of its two seventy

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Speaker 2: two on payros as they were on Friday. Can you

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Speaker 2: walk me through how you interpreted that economic dight butN

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Speaker 2: the establishment survey and a household survey, and how you'd

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Speaker 2: read into that, because when you say maybe we need

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Speaker 2: to be holkish today, some people think based on that

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Speaker 2: number of Friday, we should be dubbish. I mean, how

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Speaker 2: would you incept but that economic tight set.

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Speaker 5: Yeah, unemployment ticked up to four percent, and that's interesting,

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Speaker 5: but it's still below pretty much everyone's estimate of the

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Speaker 5: natural rate of unemployment. So they've been saying that, We've

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Speaker 5: been saying at the FED that unemployment should probably be

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Speaker 5: expected to run a little bit higher than it has

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Speaker 5: and a four low fours or mid flors on the

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Speaker 5: unemployment rate is a very good number still for the US.

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Speaker 5: And then on the headline number, I was just thinking

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Speaker 5: about this, so I plotted something that no one ever plots,

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Speaker 5: which is the percent change year over year in nonfarm

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Speaker 5: payrolls so if you look at that a year ago,

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Speaker 5: you would have been at two and a half percent.

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Speaker 4: Growth year over year.

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Speaker 5: Now you're at one in three quarters year over year.

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Speaker 5: That might so that does show the slowdown, but the

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Speaker 5: one in three quarters would still be faster than so

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Speaker 5: if you took that to be the run rate. We

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Speaker 5: always go on the monthly number, which is so volatile,

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Speaker 5: and you know, how are we supposed to interpret this?

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Speaker 5: But other measures of the economy will go on a

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Speaker 5: year or year rate and that controls a little better

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Speaker 5: for seasonality and stuff like that.

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Speaker 2: Francis doano to Manuel life alongside us as Wow, Francis,

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Speaker 2: I want to get out to you and get your

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Speaker 2: ready reaction to that CPI print.

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Speaker 1: I literally breathed a sigh of relief. For a lot

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Speaker 1: of reasons. I suspect your palladed too, for consumers who

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Speaker 1: are not going to see as much month over month

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Speaker 1: increase in prices. For all the economists out there with

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Speaker 1: a September rate cut in their forecast, they're probably also relieved.

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Speaker 1: But also a bigger picture, higher rates are working to

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Speaker 1: bring down inflation. This was an increasing concern. Our rates

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Speaker 1: restrictive enough? Do we keep them? This high. Why is

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Speaker 1: inflation not moving downward? That said, John, this is one point.

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Speaker 1: We have three more before the September meeting, And as

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Speaker 1: exciting as this is this morning for a few hours,

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Speaker 1: I'm more interested on the CPI print that comes out

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Speaker 1: September eleventh, just one week before the FEDS September cut.

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Speaker 1: That number may end up being much more important than

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Speaker 1: this one, so we'll take it as a win. It's

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Speaker 1: good news for consumers, for markets, for all. But it's

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Speaker 1: one print and we got a lot of information coming through.

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Speaker 3: Today, Francis.

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Speaker 6: Jim Bollerer was also talking about the Pain speech in

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Speaker 6: Jackson Hole that Jay Powell gave a couple of years ago,

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Speaker 6: when he said that essentially, this is inflation that's running

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Speaker 6: too hot, and we are going to get inflation back

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Speaker 6: down and it is going to require pain in the economy. Francis,

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Speaker 6: you are expecting to see that pain. We haven't seen

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Speaker 6: it on a broad based level. Do you have a

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Speaker 6: sense of whether this is inflation, is the immaculate type

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Speaker 6: that we've been talking about, or whether this is just

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Speaker 6: one dot in a series where things are kind of shifting.

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Speaker 6: We're at a tipping point.

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Speaker 1: I would hope that would be the outcome for the

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Speaker 1: American people. At the same time, are leading economic indicators

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Speaker 1: on the jobs front continue to show weakness ahead. We're

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Speaker 1: at a four percent unemployment rate. I'm watching today to

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Speaker 1: see from the Federal Reserve they already had four percent

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Speaker 1: penciled in for the end of this year. Are we

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Speaker 1: really going to go through the next six months without

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Speaker 1: an additional tick up and the unemployment rate? And let's

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Speaker 1: remember the simple rule of thumb is that it takes

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Speaker 1: about two years for those rate hikes to work their

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Speaker 1: way through the system. And we're two years and some

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Speaker 1: change after that first rate hike. We're not at the

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Speaker 1: end of the impact of rate hikes. We're at the

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Speaker 1: very beginning. So while magnitude of the downside for the

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Speaker 1: US economy is up for debate, the direction shouldn't be.

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Speaker 1: There probably will be much larger slowdown in jobs than

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Speaker 1: the second half of the year, and this is when

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Speaker 1: the Federal Reserve will have sufficient data to begin cutting

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Speaker 1: interest rates and bringing those rates down beginning we think

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Speaker 1: in September.

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Speaker 6: Jim Boy, what's their take on that, given the fact

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Speaker 6: that it seems like something that feels like a stretch.

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Speaker 4: The unemployment rate to stay where.

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Speaker 3: It is for the foreseeable.

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Speaker 5: I think it is immaculate disinflation. And again I think that,

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Speaker 5: you know, by being credible and moving quickly, the FED

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Speaker 5: was able to get firms to change their pricing strategies quickly.

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Speaker 5: The inflation came down relatively quickly. And so, you know,

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Speaker 5: one simple theory about how this works would be that

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Speaker 5: the FED threatens recession, everyone looks ahead, they see that

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Speaker 5: that might be a possibility, they don't want to raise

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Speaker 5: prices into that, and the inflation goes away relatively quickly.

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Speaker 5: So that isn't the most popular theory around here or

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Speaker 5: on Wall Street, but that is, you know, that is

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Speaker 5: something that you have to take into account because the

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Speaker 5: anticipated effects can overwhelm sort of the mechanical effects and

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Speaker 5: you get lower inflation right away. So this is something

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Speaker 5: I was advocating for in twenty twenty two, that we

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Speaker 5: you know, let's move quickly, let's try to quash the

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Speaker 5: inflation quickly. And this report today is helping that story.

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Speaker 2: Forgive me for going off pace, but just entertain me

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Speaker 2: for a moment. French tenure yield's down by about seven

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Speaker 2: or eight basis points right now, that CPI print was

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Speaker 2: more important to the European bond market than anything Macrons

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Speaker 2: had to say in the last twelve hours.

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Speaker 6: The banker to the world, the reason why J. Powace

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Speaker 6: would go on tour. But ultimately it does highlight how

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Speaker 6: this is the market that everyone is watching, regardless of

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Speaker 6: some of the external factors.

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Speaker 2: Ara Jersey Blueberg Extelligence joins us. Now for a little

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Speaker 2: bit on this bond market are the most important data

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Speaker 2: point in global finance?

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Speaker 3: Your thoughts on this one.

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Speaker 8: Yeah, obviously better than some people had feared, you know

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Speaker 8: it on the core CPI it was a low zero

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Speaker 8: point two so it was actually under zero point two percent,

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Speaker 8: and I think that that's something that traders have been

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Speaker 8: able to kind of grasp on to. And like you noted,

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Speaker 8: you know, this is pulling down you know, all global

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Speaker 8: sovereign bonds at the moment where bond yields at the moment.

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Speaker 8: So you look at German yielder down by six basis points,

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Speaker 8: like you said, France down by seven basis points. And

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Speaker 8: but remember the beta to that is only half of

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Speaker 8: what's going on here in the US where you have

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Speaker 8: five year yields off fifteen basis points at at at

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Speaker 8: one point, and that just shows that you know, you know,

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Speaker 8: we're now going to be pricing in for two fol

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Speaker 8: cuts probably before the end of the year. And then

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Speaker 8: as you get additional data, obviously the market's going to

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Speaker 8: have to shift those expectations pretty dramatically.

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Speaker 4: So Ira, I have a question for you. So the

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Speaker 4: if you just took.

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Speaker 5: Rebase where inflation is now, and you said point two

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Speaker 5: every report through.

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Speaker 4: The end of the year, you would get year over.

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Speaker 5: Year core PC inflation on a twelve month basis at

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Speaker 5: two point eight at the end of the year. So

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Speaker 5: you started out at two point eight in January.

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Speaker 4: On that metric, we'd end up at two point eight.

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Speaker 4: So maybe that's not really enough. You need you need even.

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Speaker 5: Better reports in order to be able to show progress

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Speaker 5: through through this year, I.

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Speaker 8: Think, But I think I think part of it, James,

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Speaker 8: is the fact that we're you know, not increasing, right.

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Speaker 8: So so a couple of months ago, when we had

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Speaker 8: a couple of inflation scares, the market really dragged onto

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Speaker 8: that and said, okay, what happens if the Federal Reserve

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Speaker 8: doesn't cut it all this year or maybe even hikes

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Speaker 8: Because keep in mind, in January, the market was pricing

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Speaker 8: for almost no chance of the Fed staying on hold

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Speaker 8: this year, and now we're actually pricing, or were pricing,

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Speaker 8: I don't know where we are at the second, but

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Speaker 8: we were actually pricing via options on short term interest

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Speaker 8: rate futures for the about a twenty percent chance of

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Speaker 8: potential hikes by the end of the year. I suspect

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Speaker 8: that when you get if you get another print similar

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Speaker 8: to this, where you have another well at zero point

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Speaker 8: two again on the core, that people will say, like, hey,

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Speaker 8: progress is being made. The federal Reserve is still more

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Speaker 8: likely to remain on hold and or cut than they

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Speaker 8: are to be even thinking about hiking interest rates before

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Speaker 8: you June twenty twenty five at this point, so I

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Speaker 8: do think that there is a sea change and it matters.

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Speaker 8: And to your point, you know, I still think that

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Speaker 8: the that the market is going to say, okay, what's

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Speaker 8: the trend versus where we were as opposed to as

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Speaker 8: opposed to just looking at okay zero point two forever

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Speaker 8: is probably not going to be sustained.

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Speaker 2: Ara Jersey of Flamberg Intelligence. Ara, thanks for that, appreciate it.

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Speaker 2: If you want just joining us about thirteen fourteen, minutes ago,

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Speaker 2: we got this data zero point zero percent month of

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Speaker 2: a month headline inflation against the estimate of zero point

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Speaker 2: one previous number point three stripping out food and energy

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Speaker 2: Bramo zero point two percent was the number.

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Speaker 3: Zero point three was the estimate.

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Speaker 6: And Jim Bullard, a former Saint Louis Fed president, just

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Speaker 6: moments ago saying that this is the immaculate disinflation that

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Speaker 6: many people were looking for. Francis Donald's still with us,

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Speaker 6: and Francis, I'd.

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Speaker 4: Love your take on that.

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Speaker 6: Do you see this as the friend as the immaculate disinflation?

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Speaker 6: Can you bet on that and arrange a portfolio around it?

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Speaker 1: Well, for June it feels like immaculate disinflation, or for

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Speaker 1: May we had this really large decline or no change

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Speaker 1: in inflation month over month and are pretty good non

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Speaker 1: farm payrolls number. That's exactly what this immaculate disinflation would

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Speaker 1: be defined as. So now it's about what do we

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Speaker 1: see next. And on this front, I do see some

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Speaker 1: downward momentum that is occurring in the economy. But let's remember,

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Speaker 1: if you're sitting on a trading floor, you're managing portfolios.

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Speaker 1: Numbers like this aren't just about changing your base case.

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Speaker 1: It's not that something like this would make Q move

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Speaker 1: from a December to November or even to a September

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Speaker 1: rate cut. It can often be about reducing the balance

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Speaker 1: of risks or the tails of the risks to your

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Speaker 1: base case. So this number probably isn't going to change

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Speaker 1: anyone's outlook as to what will happen next. That'll be

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Speaker 1: based on their forecast. But it does reduce the chance

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Speaker 1: that the said would, if you had it in your scenarios,

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Speaker 1: have to hike again, or that they have to stay

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Speaker 1: for a prolonged hold. So sometimes it's about reducing those

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Speaker 1: fat tails on your outlook as opposed to the individual.

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Speaker 1: That is tradable, but usually around the conviction of your

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Speaker 1: trade or the balance of risks, or how much leverage

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Speaker 1: you're putting onto it as opposed to the trade itself.

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Speaker 6: We could J Powill say, Jay Francis would really move

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Speaker 6: the needle in your book.

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Speaker 1: Well, he could speak to some of his longer term

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Speaker 1: concerns that aren't inflation or jobs for example. Well, he

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Speaker 1: can't do it. But interest cots for the federal government

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Speaker 1: are very high. They are about nineteen percent of revenue

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Speaker 1: is going towards interest cocks. If you were to talk

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Speaker 1: about and he probably wouldn't some of the risks of

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Speaker 1: higher for longer that would move the dial. But we

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Speaker 1: have three more inflation reports, three more just about everything

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Speaker 1: until we get to September. The seat is in a

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Speaker 1: holding period, the market is in a holding period, and

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Speaker 1: each individual data point, each individual FED commentary will be

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Speaker 1: far less important than the sum of all of their parts.

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Speaker 1: So as much as this meaning we'll get a lot

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Speaker 1: of attention, I'm sure we'll talk about it all day.

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Speaker 1: I'm far more interested about the evolution over the next

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Speaker 1: three months. That will be more important than any singular event.

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Speaker 3: Francis one of the best. Thanks for faminess.

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Speaker 2: Francis Doan with Emanualife City. Scott chron right in this

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Speaker 2: the market appears to be pricing a first FED cut

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Speaker 2: in December. Cities economists have confidence in a September cut

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Speaker 2: predicated on desalrating macros. All told, the S and P

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Speaker 2: five hundred continues to be influenced by the structural growth

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Speaker 2: opportunity in generative AI as an offset to the mixed

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Speaker 2: macro picture.

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Speaker 3: Scott's with us.

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Speaker 2: Now for more, Scott, I'm going to say it for

400
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Speaker 2: you because you won't do single names on TV. But

401
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Speaker 2: is this just another way of saying ignore the FED

402
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Speaker 2: and buying video.

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Speaker 7: I think it's another way of saying that Wall Street's

404
00:19:35,040 --> 00:19:37,680
Speaker 7: much different than Main Street, and the fed's influence is

405
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Speaker 7: mainly a Main Street issue. In terms of the economic activity.

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Speaker 7: The underscores us equity fundamentals.

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Speaker 2: We've heard it a million times that the equity market

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Speaker 2: is not the economy. Is this S and P five

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Speaker 2: hundred in its current form a pretty good example of that.

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Speaker 7: So we've done some what we call Sandy Chuck work

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Speaker 7: on this, and if earnings solely followed GDP over time,

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Speaker 7: our back of the envelope is that the SMP would

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Speaker 7: be worth forty six hundred. Okay, So what you're paying

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Speaker 7: in current levels fifty three and above is going to

415
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Speaker 7: tell you at some level what you're paying for the

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Speaker 7: expectation for growth over and above economic activity. And clearly

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Speaker 7: this is being influenced by the megacap component and the

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Speaker 7: AI tailwind that it now has. What he basically says

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Speaker 7: is that for those that think, my gosh, we're in

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Speaker 7: an equity market bubble, I'd say, well, your downside is

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Speaker 7: probably fifteen percent in that regard, and when you step

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Speaker 7: back and look at it with a new growth driver

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Speaker 7: that we do have regarding spending on AI and other

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Speaker 7: metrics around that, the SMP is actually in a pretty

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Speaker 7: good fundamental place.

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Speaker 6: We've been joking Scott. The best bet right now, or

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Speaker 6: the bet that everybody comes on and says, is they're

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Speaker 6: having cash in video. And that's essentially the Barbell approach

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Speaker 6: that they've been taking. Are basically tech and big tech

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Speaker 6: stocks that are generating a lot of cash and then

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Speaker 6: cash itself. And that's the approach to take in a

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Speaker 6: macroeconomic environment that is highly uncertain. How concerned are you

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Speaker 6: about this type of behavior leading to real crowding and

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Speaker 6: a specific number of stocks.

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Speaker 7: You know, Lisa, I think it's a really good point

436
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Speaker 7: where obviously very concerned about crowding. But what I would

437
00:21:19,040 --> 00:21:23,359
Speaker 7: say so far is that you look at valuations, got it.

438
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Speaker 7: When you look at PEG ratios, which is your pe

439
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Speaker 7: over growth, it turns out that your PEG ratios have

440
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Speaker 7: actually come down. So what's been happening is that the

441
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Speaker 7: underlying earnings expectations for these vega cap growers have actually

442
00:21:35,560 --> 00:21:38,959
Speaker 7: been supporting the price action and the valuations now to

443
00:21:39,040 --> 00:21:39,920
Speaker 7: your earlier point.

444
00:21:40,000 --> 00:21:40,280
Speaker 4: Though.

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00:21:42,600 --> 00:21:43,960
Speaker 7: Whether you want to call it a joke, but I

446
00:21:43,960 --> 00:21:48,119
Speaker 7: think it's reality is that you're right. What you have

447
00:21:48,400 --> 00:21:52,320
Speaker 7: is a FED policy circumstance that is at risk of

448
00:21:52,400 --> 00:21:57,360
Speaker 7: undertended consequences. So on main street, if you're a non saver,

449
00:21:58,040 --> 00:22:01,040
Speaker 7: you've got issues. You've got higher inflation that presumably is

450
00:22:01,080 --> 00:22:03,800
Speaker 7: coming down now, and now higher interest rates. That's a

451
00:22:03,880 --> 00:22:07,120
Speaker 7: much different setup than if you're a saver and you're

452
00:22:07,160 --> 00:22:09,720
Speaker 7: now earning a decent return on your cash, which is

453
00:22:09,800 --> 00:22:12,680
Speaker 7: much different than prior to COVID. It's the same thing

454
00:22:12,760 --> 00:22:15,960
Speaker 7: in corporate America. So the megacap growth tech part of

455
00:22:16,000 --> 00:22:19,000
Speaker 7: the market does tend to carry lower debt, more cash.

456
00:22:19,320 --> 00:22:22,359
Speaker 7: That's a market different discussion from looking at sectors like

457
00:22:22,359 --> 00:22:26,560
Speaker 7: commercial real estate or real estate and utilities staples parts

458
00:22:26,600 --> 00:22:30,600
Speaker 7: of industrials where they do tend to be more debt laden.

459
00:22:30,880 --> 00:22:33,840
Speaker 7: So the fact here is that the FED, whether it's

460
00:22:33,840 --> 00:22:38,080
Speaker 7: intended or not, is providing a different type of headwind

461
00:22:38,200 --> 00:22:41,240
Speaker 7: and tailwind to different parts of the economy and different

462
00:22:41,280 --> 00:22:42,320
Speaker 7: parts of the stock market.

463
00:22:42,440 --> 00:22:44,159
Speaker 6: If the FED were to start cutting rates, would that

464
00:22:44,240 --> 00:22:47,040
Speaker 6: make you more constructive on these other areas or would

465
00:22:47,080 --> 00:22:48,200
Speaker 6: It kind of depend.

466
00:22:49,320 --> 00:22:50,240
Speaker 4: It kind of depends.

467
00:22:50,280 --> 00:22:53,400
Speaker 7: So the other work that we've done recently basically says,

468
00:22:53,840 --> 00:22:56,480
Speaker 7: if you were to cut two hundred basis points of

469
00:22:56,640 --> 00:23:00,360
Speaker 7: FED rates over the next year, that would create, all

470
00:23:00,400 --> 00:23:04,240
Speaker 7: things equal, roughly one point seven percent earnings drag on

471
00:23:04,280 --> 00:23:07,600
Speaker 7: the S and P five hundred. Essentially, those megacap growth

472
00:23:07,640 --> 00:23:14,679
Speaker 7: companies would lose less, would lose more in their cash

473
00:23:14,720 --> 00:23:17,800
Speaker 7: income than they would in what they pay on their debts.

474
00:23:17,880 --> 00:23:20,479
Speaker 7: So you know, it's a bit of a circuitous argument

475
00:23:20,520 --> 00:23:22,639
Speaker 7: on this. But as you go down cap, as you

476
00:23:22,680 --> 00:23:25,320
Speaker 7: go down into small MidCap, this is where now you

477
00:23:25,400 --> 00:23:28,399
Speaker 7: begin to trade more aligned with the underlying economy. You

478
00:23:28,440 --> 00:23:31,879
Speaker 7: don't have that megacap influence in small mid by almost

479
00:23:31,880 --> 00:23:35,160
Speaker 7: by definition or implication, you've got a lesser tech weight,

480
00:23:35,240 --> 00:23:39,480
Speaker 7: you've got higher industrials exposure, you're more economically sensitive as

481
00:23:39,480 --> 00:23:43,639
Speaker 7: the margin small MidCap would benefit from a rate shift.

482
00:23:43,720 --> 00:23:47,040
Speaker 7: But the perspective here is that historically, when we've gone

483
00:23:47,040 --> 00:23:50,679
Speaker 7: into more prolonged periods of fedes, it's usually been on

484
00:23:50,720 --> 00:23:54,000
Speaker 7: the other side of recession, and during those recessions you

485
00:23:54,080 --> 00:23:57,560
Speaker 7: tend to have a major drawdown in earnings. We don't

486
00:23:57,560 --> 00:23:59,399
Speaker 7: think we're looking at that right now, so it is

487
00:23:59,440 --> 00:24:01,400
Speaker 7: a more mixed picture this time, Lisa.

488
00:24:01,280 --> 00:24:03,439
Speaker 2: Scope before you go, I just wanted to mention the

489
00:24:03,440 --> 00:24:05,359
Speaker 2: post model set that even the Taine put out and

490
00:24:05,400 --> 00:24:07,919
Speaker 2: pick out the s. An opportunity, of course to talk

491
00:24:07,960 --> 00:24:10,560
Speaker 2: about the like great Tobias Leftkovich as well. Can you

492
00:24:10,600 --> 00:24:12,640
Speaker 2: talk to us about where sentiment is right now, Scull,

493
00:24:12,720 --> 00:24:15,240
Speaker 2: because it feels like on this program, one minute, Everyone's parish,

494
00:24:15,480 --> 00:24:18,240
Speaker 2: the next minute the super Polish, and it changes date today,

495
00:24:18,359 --> 00:24:20,639
Speaker 2: where are we.

496
00:24:19,720 --> 00:24:22,800
Speaker 7: Well our seniment read we're in euphoria. We've been there

497
00:24:22,800 --> 00:24:24,399
Speaker 7: for a couple of weeks now, We've been in and

498
00:24:24,400 --> 00:24:26,920
Speaker 7: out right. So we went clearly into euphoria at the

499
00:24:27,000 --> 00:24:29,840
Speaker 7: end of Q one. We had that April pullback pulled

500
00:24:29,880 --> 00:24:31,760
Speaker 7: us back out of euphoria, and now we're back in

501
00:24:32,720 --> 00:24:34,800
Speaker 7: the way we're spending it around, John, is that we're

502
00:24:34,880 --> 00:24:38,440
Speaker 7: focused a bit more on your process evaluation work, which

503
00:24:38,840 --> 00:24:41,520
Speaker 7: off of this recent rally, what it has done is

504
00:24:41,560 --> 00:24:44,520
Speaker 7: begun to switch the cross asset valuation a little bit

505
00:24:44,640 --> 00:24:47,639
Speaker 7: more in favor of bonds, and so the combination of

506
00:24:47,680 --> 00:24:51,800
Speaker 7: that where we're trading versus our estimates of fair value

507
00:24:51,800 --> 00:24:55,480
Speaker 7: for the SMP and the Lefkovich Index all suggests to

508
00:24:55,560 --> 00:24:58,040
Speaker 7: us that we're looking at a market that's due for

509
00:24:58,080 --> 00:25:00,200
Speaker 7: a bit of a digestion in here, but that that's

510
00:25:00,200 --> 00:25:03,000
Speaker 7: a different discussion than the longer term fundamental setup, which

511
00:25:03,000 --> 00:25:04,400
Speaker 7: we still think looks pretty good.

512
00:25:04,560 --> 00:25:06,280
Speaker 2: Scott, you're one of the best. I appreciate your time

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00:25:06,320 --> 00:25:09,280
Speaker 2: this morning. Thank you, sir, Scott Croned there. This is

514
00:25:09,320 --> 00:25:13,679
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00:25:13,680 --> 00:25:16,640
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