Speaker 1: Strap on your parachute. It's time for What Goes Up
Speaker 1: with Sarah Ponzack and Mike Reagan. Hello, and welcome to
Speaker 1: What goes Up, a Bloomberg Weekly Markets podcast. I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg, and I'm Katie greidfeldt across
Speaker 1: asset reporter at Bloomberg. And this week on the show,
Speaker 1: markets have really become obsessed with the possibility of faster
Speaker 1: than normal inflation this year as the world reopens from
Speaker 1: COVID lockdowns and the economy booms. That's causing some volatility
Speaker 1: in the stock market, obviously, especially among the big tech
Speaker 1: companies that led the bull market over the last decade.
Speaker 1: So how exactly should we think about inflation and what
Speaker 1: it means for the market and what type of inflation
Speaker 1: exactly should we expect. Katie, our guest, has some thoughts,
Speaker 1: and as always, we'll close out the episode with our
Speaker 1: tradition the craziest thing I saw in markets this week?
Speaker 1: And if you spot something crazy, give the Bloomberg Podcast
Speaker 1: hotline a call at six four six three two four
Speaker 1: three four nine zero and leave a voicemail and maybe
Speaker 1: you'll make it onto the show next week, and speaking
Speaker 1: of making it on the show, we have a special
Speaker 1: message from Sarah Ponzack if we could play that. Hi, everyone,
Speaker 1: it's Sarah. Some bittersweet news to share. I'm moving on
Speaker 1: from Bloomberg, which sadly means leaving what goes up behind.
Speaker 1: So I wanted to say thank you to everyone who listened,
Speaker 1: help the show grow, and of course called intertweeted with
Speaker 1: Crazy Things Takes. The podcast is obviously in very great
Speaker 1: hands with Mike. I just hope he can find someone
Speaker 1: who laughs at his jokes as much as I did.
Speaker 1: Of course, my just kidding. But now from the other side,
Speaker 1: I'm going to be an avid listener and I'm very
Speaker 1: very excited for that, So everyone please keep in touch.
Speaker 1: I would love that. I'm at at Sarah pon sec
Speaker 1: and goodbye, a very bitter sweet farewell. As as Sarah
Speaker 1: said Katie, I think the bitternesses on on our end
Speaker 1: and maybe the sweets on her and because we we
Speaker 1: sure are sad to see her go. Absolutely Luckily, we
Speaker 1: do have a good support group here at Bloomberg to
Speaker 1: UH to help us handle this. So UH next over
Speaker 1: the next few weeks and months, you're gonna be hearing
Speaker 1: from quite a few different voices from around the Bloomberg Company,
Speaker 1: around the world, a lot of colleagues with some fresh perspectives,
Speaker 1: and they'll bring in some fresh guests of their own.
Speaker 1: So stick with us. We're gonna we're gonna keep it going.
Speaker 1: We wish sire the best in her new career in
Speaker 1: wealth management, Katie. If I ever actually managed to accumulate
Speaker 1: some wealth, I might I might give her a call. Absolutely,
Speaker 1: She's at the top of my list. Yeah, So anyway,
Speaker 1: let's get to the markets chat now. We are very
Speaker 1: happy to welcome to the show the head of global
Speaker 1: investment research at Footsie Russell. His name is Philip Lawlor. Philip,
Speaker 1: welcome to the show. Hell Peace be with you and Philip.
Speaker 1: It's funny, you know, uh, guests like you helpfully send
Speaker 1: us some notes about what you're thinking about, and oftentimes
Speaker 1: there's sample questions in them. I always feel like I'm
Speaker 1: cheating a little bit when I asked one of the
Speaker 1: sample questions, but your first one was so good that
Speaker 1: I'm just gonna cheat and and ask it to you.
Speaker 1: You you say, and I think this is a really
Speaker 1: important concept for the market right now. Is good news
Speaker 1: bad news again, you know that famous sort of cliche
Speaker 1: that we stumble into when it's really the central banks
Speaker 1: that are that are running the show. And uh, you know,
Speaker 1: green shoots in the economy or inflation, get the bond
Speaker 1: market spooked, get rates going up, and people are worried
Speaker 1: about that the central banks are gonna have to react,
Speaker 1: and what it all means for this euphoric rally we've
Speaker 1: seen in stocks. So what is the answer to that question?
Speaker 1: Is good news bad news? Again? Do you think are
Speaker 1: we in that stage again? Yeah? But I think look,
Speaker 1: just before we get to the actual answer, let's just
Speaker 1: step back and understand a bit of the journey we've
Speaker 1: been on. And clearly, you know, in this reflation trade
Speaker 1: that really kicked off in in the sort of from
Speaker 1: early November on, which that'svaccine optimism, expectations of the genuine
Speaker 1: V shaped recovery kicking in. That built a lot of
Speaker 1: exuberance and we saw that manifested in the scale of
Speaker 1: the market moves. We've seen the pickup in risk appetite.
Speaker 1: But you know, I think there is now a case
Speaker 1: of markets in a way injecting premature pessimist mint into
Speaker 1: the market. They're getting a bit spooked too early in
Speaker 1: this cycle. The good news, clearly is the degree of
Speaker 1: stimulus the scope for the recovery, and that's all been
Speaker 1: duced up by the stimulus package that's come in on
Speaker 1: your side of the pond. But you know, is this
Speaker 1: really a case of excessive stimulus? So I think we
Speaker 1: need to understand that actually what we witnessed last year
Speaker 1: was an economic shock equivalent to a major, major war.
Speaker 1: And it feels still a trifle premature to be worrying
Speaker 1: about it being too hot on the way out before
Speaker 1: we've even ready started that journey. Well, I'm a little upset, Mike,
Speaker 1: because I wanted to steal that question and ask it first.
Speaker 1: But I think Philip, you're answer tizing pretty nicely to
Speaker 1: what I'd like to ask, because I mean, the big
Speaker 1: event this week, of course, was the FED, and uh,
Speaker 1: this meeting was actually exciting. I mean, we knew exactly
Speaker 1: what we were going to do, but we did get
Speaker 1: an updated DOT plot and that turned some heads because
Speaker 1: two more officials now expect a rate hike by the
Speaker 1: end of the medium Dot of course, it's still says
Speaker 1: that they're on hold until but Bloomberg Intelligence and I've
Speaker 1: seen a few others have already said that, you know,
Speaker 1: there's a possibility this view could catch on, and I'm
Speaker 1: curious to hear your thoughts. You know, especially as we
Speaker 1: start to see stimulus checks start to hit bank accounts,
Speaker 1: do you think that view could catch on and we
Speaker 1: start to see more dots move or definitely I think clearly,
Speaker 1: I think there's very little credibility that the Fed are
Speaker 1: going to hold rates a steady as power has told us,
Speaker 1: and quite rightly, the market, and you can see this
Speaker 1: in the futures market is anticipating mid next year is
Speaker 1: when we're going to start to get the upward inflection.
Speaker 1: But the question is is it axiomatic that arise in
Speaker 1: interest rates is bad for risk appetite And the answer
Speaker 1: is no, patently, it isn't if that drive in rising
Speaker 1: interest rates is being driven by a rise in nominal
Speaker 1: GDP growth. And you know, the time that you worry
Speaker 1: about a tightening cycle is when the perception is the
Speaker 1: Federal Reserve are going from just tapping on the brakes
Speaker 1: to slamming on the brakes. You don't risk assets do
Speaker 1: quite well while they're starting the process of notdging rates higher.
Speaker 1: Because typically markets are enjoying the economic environment that's justifying
Speaker 1: the higher rates. So it's all about timing. I think
Speaker 1: the market is just possibly jumping straight to the that
Speaker 1: the slamming on the brakes stage before we've actually even
Speaker 1: started the genuine kicker of the pick up in growth
Speaker 1: and seeing how savings ratios draw down kicks into economies.
Speaker 1: With with this conjecture about that, but we haven't seen
Speaker 1: that actually happen happening yet. We're going through the classic
Speaker 1: cycle in the way we've had the vigilante movie in
Speaker 1: the bond market. The bond market antenna moving first, and
Speaker 1: that's really been expressed through inflation expectations. But arising bond
Speaker 1: deal is giving us a sense that there's some credibility
Speaker 1: about the Fed's position in going forward. So what we've
Speaker 1: then got to get is the FED shifting its guidance
Speaker 1: and then that being manifested through some sort of tapering
Speaker 1: of their quee. And they've got to go through that
Speaker 1: sequence before they even get the actual part period where
Speaker 1: they're tightening interest rates. So there's a journey to be
Speaker 1: work through here. How quickly, how constantina that is is
Speaker 1: hard to say, but you know, we all we've really
Speaker 1: seen is the bond market vigilantes get to work. They
Speaker 1: might well be getting a little bit ahead of themselves
Speaker 1: in terms to the scale of the inflation shock. We
Speaker 1: can discuss that as well. But even if they're right,
Speaker 1: you still really got to see the tone of the
Speaker 1: messaging from the FED changing, which is the dot plots.
Speaker 1: But the more significant one will be just at what
Speaker 1: time do they start to pull in their que program
Speaker 1: from a hundred twenty billion a month down to eighty
Speaker 1: or sixty or or whatever, and that that will be
Speaker 1: the next big step. And as I said, I think
Speaker 1: this will all be conditional on the underlying economic environment
Speaker 1: that they're doing this. They won't be doing this in
Speaker 1: a vacuum. So we've got to really position ourselves if
Speaker 1: they start tapering that they're doing that in the latter
Speaker 1: half of the year when the US economy really is
Speaker 1: kicking back. I've yet to really be convinced that that's
Speaker 1: necessarily going to feed into a discernible risk off mode
Speaker 1: for markets. But felt about you know, you brought up
Speaker 1: that notion of a inflation shock, or at least people
Speaker 1: worried about their being an inflation shark. I think inflation
Speaker 1: is such a fascinating topic because it seems way more
Speaker 1: controversial than it should be. Right, you know, the CPI
Speaker 1: index says one thing, but people say, but my hamburger
Speaker 1: price doubled last week. We're look at the asset price
Speaker 1: inflation in the stock market. So I know you've done
Speaker 1: some work sort of trying to suss out exactly how
Speaker 1: we should think about inflation, like what measures to look at,
Speaker 1: and also the difference between kind of the good and
Speaker 1: the bad types of inflation that we might experience. Walk
Speaker 1: us through sort of some of the work you've done
Speaker 1: dissecting inflation. Sure, you know, we're all talking about inflation
Speaker 1: as though it's a it's a single word, but in
Speaker 1: fact it comes in multiple guises. There are multiple drivers
Speaker 1: of inflation, and some are sinister and some of the nine.
Speaker 1: And what we need to understand really is what are
Speaker 1: the core drivers that the inflation we're seeing in this cycle.
Speaker 1: You know that the really bad, sinister inflation that central
Speaker 1: bank will keep central banks up at night is when
Speaker 1: they see a pick up the inflation expectations driven through
Speaker 1: cost push and wage growth. You know, where the labor
Speaker 1: market is red hot, unemployment is incredibly low, and you're
Speaker 1: seeing wage growth really accelerating. That's the type of inflation
Speaker 1: that really makes sent all central banks break out into
Speaker 1: a sweat. Now, clearly we're not in that environment. Now.
Speaker 1: What we're witnessing now, I think we're all aware of
Speaker 1: is the cost push, which is input costs. This is
Speaker 1: supplied disruption, base effects. You know, disrupted supply hitting a
Speaker 1: pickup in demand is going to have a temporary pickup
Speaker 1: in in input costs, and and you know that's feeding
Speaker 1: through into the cp I. Now the question is is
Speaker 1: that is that a permanent or a temporary shift? Is
Speaker 1: that just because of the base effects kind of wash
Speaker 1: itself out in six months time? And in fact, the
Speaker 1: really big problem for for for the economy is this,
Speaker 1: there's just going to be a replay of what we
Speaker 1: lived through into two thousand and eleven. I don't know
Speaker 1: if you remember in two thousand eleven, but you know,
Speaker 1: we come out of the financial crisis, we'd have quantitative easing.
Speaker 1: Accusations are too much liquidity chasing too few goods, says
Speaker 1: all commodity prices going through the roof cp I went
Speaker 1: from one to three, and the Federal Reserve had a
Speaker 1: lot of criticism, but quite rightly, the Federal Reserve saw
Speaker 1: this is actually just a big one off hit at
Speaker 1: the cost of living that was going to damage real
Speaker 1: disposable income, real incomes. If people's pay is not going up,
Speaker 1: they're not getting big pay rises, and the cost of
Speaker 1: living goes up, it ends up being at the end
Speaker 1: of the day, disinflationary. So I think what we've got
Speaker 1: to be is more sophisticated as to what's driving the inflation.
Speaker 1: I think this is all about this temporary base effect
Speaker 1: supply disruption hitting a pickup in demand. That the risk
Speaker 1: is that this is going to hit an economy where
Speaker 1: the labor market is not going to see wage growth.
Speaker 1: You know, we we we've still got some structural headwinds
Speaker 1: in terms of the labor market as we work through
Speaker 1: this COVID impact, And I think the central banks are
Speaker 1: quite right to most probably just say we've got on
Speaker 1: the side of caution and just wait to see how
Speaker 1: this works its way through. Of course, if that leads
Speaker 1: to a structural shift and we do get that being
Speaker 1: reflected pick up in growth, then they need to respond
Speaker 1: more aggressively, but don't act too quickly because that will
Speaker 1: create what we call a policy mistake. So assuming that
Speaker 1: plays out, and this is sort of a similar one off,
Speaker 1: perhaps transitory, dare I say it boosts and inflation. I mean,
Speaker 1: how do you expect that to trickle out in markets?
Speaker 1: Because obviously the cyclical rally that we've seen, which is
Speaker 1: premised on a sort of sustainable rise and inflation, it's
Speaker 1: come pretty far at this point. Yeah, So I mean,
Speaker 1: very good question that lots of sort of knock on
Speaker 1: plays on this. I suspect, you know what, if we
Speaker 1: look at break even inflation rates using the tips, you know,
Speaker 1: I think you might well find that they've done the
Speaker 1: majority of the heavy lifting already that you know, they're
Speaker 1: back up ready to where they started from. There's been
Speaker 1: mean reversion. I've got a feeling we might not see
Speaker 1: the break even inflation rates moved much higher from here.
Speaker 1: So we've done the hard yards in that regard, and
Speaker 1: I think then we as we see this rippling through
Speaker 1: it's this we're looking at this over a six month
Speaker 1: time frame, was probably through to the end of the
Speaker 1: third quarter before it the base effects then were off
Speaker 1: and in between that time, Yes, I think we've had
Speaker 1: a lot of the we're getting a big shift in
Speaker 1: the valuation impact of rising inflation on on the tech stocks,
Speaker 1: the quality the growth stocks. They the highly priced, highly
Speaker 1: valued stocks. But of course that that does imply if
Speaker 1: the inflation rates starts to level out or as we
Speaker 1: approached the fourth quarter, then that creates more of a
Speaker 1: tail when for those sort of stocks. So I think
Speaker 1: we've still got some more rotation to do. Kirt see
Speaker 1: the high valuation impact the rising bond shields planed the
Speaker 1: into that. But you know, I think we've we've we've
Speaker 1: moved quite a long way here. I mean, bond shields
Speaker 1: are really have reversed all the way back to where
Speaker 1: they were before we have the COVID shop. Let's unpack
Speaker 1: a little bit that that relationship between interest rates and valuations.
Speaker 1: You have a great phrase here, valuation vertigo, you call it.
Speaker 1: I might I might be still on that. I'm fair
Speaker 1: warning I might be still on that and using that one.
Speaker 1: That's good, good alliteration there. But I know you did
Speaker 1: a piece um talking about hypothetically if we should get
Speaker 1: a mean reversion in priced earnings ratios or I guess
Speaker 1: it would work for every valuation metric. But if we
Speaker 1: if we sort of mean reverse on valuations um and
Speaker 1: you raise the question you would this be a painful
Speaker 1: reversion to the mean? My new jerk responses, yes, I
Speaker 1: believe it would be very painful. Walk us through it
Speaker 1: would that type of reversion have to by definition be
Speaker 1: a painful time for the market. Okay, Look, I mean
Speaker 1: there's an inference. We all know that last year's move
Speaker 1: results in a significant rerating the markets, most notably the
Speaker 1: US the Russell one thousands large cap you know, significant
Speaker 1: rerating and that was the key driver of returns. And
Speaker 1: as I said, that created this sense of vertico were
Speaker 1: now so elevated where we're going to go. And the
Speaker 1: the inference from a very high valuation is you can
Speaker 1: have a damaging D rating, which is you're just going
Speaker 1: to get the market correct the price, the P element
Speaker 1: of the P correct to bring it down. And the
Speaker 1: problem with that is there no empirical evidence to show
Speaker 1: that valuations very useful market timing tool. If if you
Speaker 1: were a portfolio manager and you were just working on
Speaker 1: the assumption that very high peas we're going to axiomatically
Speaker 1: lead to a market decline over the next six months,
Speaker 1: that tends not to work. High peas tell you something
Speaker 1: about the long term returns you can get from from equities.
Speaker 1: So there are two ways markets then can deemed typically
Speaker 1: de rate. One is actually through that this this this inflation.
Speaker 1: If you get really a pick up an inflation that
Speaker 1: is can be very can lead to a very big
Speaker 1: D rating. If inflation averages five pc on average, you
Speaker 1: get a pe closer to ten ten times. I mean,
Speaker 1: you would see a halving of markets on that type
Speaker 1: of shift, but that's got to be a structural shift
Speaker 1: in inflation. What we're saying is actually we think we're
Speaker 1: at the stage of the cycle where you could actually
Speaker 1: get what we call a benign D rating. And that's
Speaker 1: again deconstructing the P ratio into its two parts. That's saying,
Speaker 1: let's put what happens to the index the price, to
Speaker 1: one side, and let's just look at the earnings. And
Speaker 1: we're saying, if we are confident about the recovery that's coming,
Speaker 1: and we've seen what the Federal Reserve done with their
Speaker 1: forecast for the US, and we've seen what the o
Speaker 1: ec D you've done on the similar sort of upgrade,
Speaker 1: if we start to see that coming through, you're going
Speaker 1: to get very powerful what we call operating leverage kicking in,
Speaker 1: and that that is understanding that for each pick up
Speaker 1: in nominal GDP growth, you tend to get two percent
Speaker 1: pick up in revenue growth. For for you know, traded
Speaker 1: equities are in AGGREGA, that's a long run historical average
Speaker 1: ratio revenue growth being twice that of nominal GDP. So
Speaker 1: you can just do some very simple modeling and saying
Speaker 1: if we're looking at potentially over the next twelve months,
Speaker 1: US nominal GDP getting close to eight percent, and that's
Speaker 1: looking at goods really substantial double digit revenue growth, and
Speaker 1: that's way above the nine revenue growth analysts are currently forecasting. Now,
Speaker 1: if you were to get that for each one on
Speaker 1: revenue growth, it feeds through to the bottom line EPs
Speaker 1: with a multiplier effect. So the point is analysts of
Speaker 1: upgraded their EPs the E, but I suspect they are
Speaker 1: behind the curve in the sense of factoring this top
Speaker 1: down operating leverage. If you get that big kick in
Speaker 1: the E, you can still if the egoes up at
Speaker 1: a faster rate than the P, you actually get a
Speaker 1: D rating. And we've had lots of episodes of that.
Speaker 1: In one of our bits, which just showed actually what happened,
Speaker 1: you know from seen through to the middle of you know,
Speaker 1: the market went up ten EPs went up. That meant
Speaker 1: the P and the market fell from nineteen and a
Speaker 1: half time to seventeen and a half. That's a painless
Speaker 1: D rating. So I think it's got to be are
Speaker 1: we on the cusp of the P correcting falling the
Speaker 1: P dropping because the market correct Of course that could happen,
Speaker 1: but actually it feels more realistically if we're looking at
Speaker 1: this pick up in growth coming through, I think analysts
Speaker 1: are going to end up chasing these upgrades upwards over
Speaker 1: the next six months. That analysts have a pretty poor
Speaker 1: track record of getting in front of the macro curve.
Speaker 1: So in thinking about what you're describing with valuations and
Speaker 1: with you know, the stimulus we're getting from both the
Speaker 1: Fed and from Congress, I have have status to throw
Speaker 1: at you. Um. I saw this week that it's the
Speaker 1: best quarter since two thousand for stocks with trailing twelve
Speaker 1: month net losses. I saw another stat um these are
Speaker 1: from Goldman Sacks Baskets that we use a lot, that
Speaker 1: companies with weak balance sheets are on track for their
Speaker 1: best quarter on record. Against companies with strong re balance sheets.
Speaker 1: So I mean, I'm curious, is that a trend that
Speaker 1: can continue? You know, if we're truly in a world
Speaker 1: where the phenominal GDP could get up to eight percent
Speaker 1: or do you see that you know? Unsustainable? This is
Speaker 1: this is I mean, we encapsulate that by talking about
Speaker 1: this in terms of factors. This is basically seeing value
Speaker 1: stocks now starting to outperform. And remember that they've been
Speaker 1: structural under performance for five six seven years, so you
Speaker 1: it had been the US market have been a very focused,
Speaker 1: concentrated market. The top fifteen stocks were driving the US returns.
Speaker 1: US was the standout market. And we know those top
Speaker 1: fifteen stocks were all in tech and you know that
Speaker 1: the likes of Amazon and consumer services, and that was
Speaker 1: driving what we call the quality or growth factor. And
Speaker 1: of course growth does well when you when aggregate growth
Speaker 1: in the economies are reasonably scarce resource, when you're you're
Speaker 1: reasonably suppressed nominal growth level. If nominal GDP is picking
Speaker 1: up on a meaningful basis for a sustained period, when
Speaker 1: I mean by sustained is twelve months to twenty four months,
Speaker 1: growth becomes much more commoditized. So Therefore, people quite logically
Speaker 1: are reluctant to pay the high peas for those growth
Speaker 1: stocks and go down the into the value arena. And
Speaker 1: I think that's really what we've been seeing occurring since November.
Speaker 1: The market's got the message and it started that rotation.
Speaker 1: So when you look at those factors, if you want
Speaker 1: to be in the quality factor, you've got to be
Speaker 1: long basically technology and something like healthcare. And in value
Speaker 1: you've basically got to be long financials, and and that's
Speaker 1: really where we're seeing this this this this major rotation
Speaker 1: going on. So yeah, people are looking at beaten up stops.
Speaker 1: It's the value area that's getting the interest, and they're
Speaker 1: doing that because they can see this pickup in growth coming.
Speaker 1: It's interesting, Philip, I think it's kind of a tricky
Speaker 1: era to to be looking at the market through the
Speaker 1: lenses of factors um because of like you mentioned, the
Speaker 1: base effects from last year are so outrageous that, uh,
Speaker 1: last time I checked anyway, the earnings estimates were the
Speaker 1: value indexes were for higher growth than the earnings growth
Speaker 1: for the growth indexes. So so to me, you know,
Speaker 1: it's it's people are still chasing growth, albeit uh, this
Speaker 1: temporary growth that a lot of the members of the
Speaker 1: value factor are gonna show year over year because of
Speaker 1: the lousy uh environment of last year. To me, that
Speaker 1: makes it feel very much like, um, this rotation has
Speaker 1: an expiration data on it, that it's not necessarily a
Speaker 1: multi year thing. How do you think about that? Yeah,
Speaker 1: totally agree with that. I think this this, this will
Speaker 1: last as long as people have confidence that this pickup
Speaker 1: in growth and that operating leverage has said kicks in.
Speaker 1: But it will that will fade. I mean, it's very
Speaker 1: hard to say whether that's going to fade in twelve
Speaker 1: months time or in twenty four months, but it won't be.
Speaker 1: You know, this isn't a structural move. This is the
Speaker 1: part of the process of this V shaped recovery coming
Speaker 1: out of you know, there's just the sheer scale of
Speaker 1: the economic hit. We're going to get into that sweet
Speaker 1: spot where we're all going to really enjoy just the upticks,
Speaker 1: the up legger that the V recovery kicks in. But
Speaker 1: it will the sugar high rush springs to mind. There's
Speaker 1: a bit of you know, this is going to be
Speaker 1: a sugar high rush, and then the fundamental problem that
Speaker 1: developed G seven economies have all gots is they've been
Speaker 1: establishing much lower trend growth characteristics, So you get the
Speaker 1: Sugar High rush, this snap back, and then the gravitational
Speaker 1: pull is back down to that trend growth trajectory. Once
Speaker 1: we get to that tipping point, you're going to get
Speaker 1: people wanting to look back to these really high growth
Speaker 1: the business models that can deliver the sustainable cash flow growth.
Speaker 1: But I just think that's most probably not going to
Speaker 1: be the story for the next six to twelve months.
Speaker 1: As we get we entered this arena where people are
Speaker 1: going to want the positive earning surprises, and those are
Speaker 1: much more likely to come from the very beaten up
Speaker 1: stocks that have survived the COVID shock and then able
Speaker 1: to announce on a quarter on quarter basis that actually
Speaker 1: the kick backing growth is feeding through to them very positively.
Speaker 1: As a father of three kids, right here, Sugar High,
Speaker 1: I get nervous. It's it's a it's a scary scary Yeah,
Speaker 1: there might be some PTSD there. I don't know, well, anything, Katie,
Speaker 1: anything other smart questions for Philip here before we get
Speaker 1: to the craziest things. I guess, well, I have you.
Speaker 1: I do want to ask you know, a trend we're
Speaker 1: seeing more and more is stocks and bonds falling together.
Speaker 1: And I mean that just could be, you know, because
Speaker 1: tech tends to move inversely with yields. But given that
Speaker 1: tech is such a big component of all these benchmarks,
Speaker 1: it's actually dragging down benchmarks as well when tech falls.
Speaker 1: I guess I'm just curious in that environment. And given
Speaker 1: that this is happening more and more often, I mean,
Speaker 1: where where do investors hide? Great question? In fact, we've
Speaker 1: just been been doing some work unless the correlation, and
Speaker 1: in fact we're just looking at putting out of things. Say,
Speaker 1: actually we are going back to the old normal in
Speaker 1: terms of equity bond correlations. So you know, we're all
Speaker 1: taught in finance one oh one equities and bonds negatively correlated.
Speaker 1: But the problem is, in the last ten years and
Speaker 1: the post GFC world quantitive easing, we've got conditioned to
Speaker 1: them being positively correlated. What was good for bonds was
Speaker 1: also good for equities. Actually, what we've seen in February
Speaker 1: is of this start of getting back into the negative
Speaker 1: bonds of underperformed or even near today bonds of underperformed
Speaker 1: and equities are still managed to deliver positive return. So
Speaker 1: I think we're at that tipping point as we go
Speaker 1: into possibly the Fed shifting their guidance, as I said,
Speaker 1: an into taper, where we are going back into the
Speaker 1: negative correlation. This is totally logical. This is what is
Speaker 1: bad for bonds. Bonds don't really like a pickup in
Speaker 1: nominal GDP growth, whereas equities quite enjoyed that for a while,
Speaker 1: and they that's why they tend to respond very positively
Speaker 1: even when the Fed get to the stage of putting
Speaker 1: up interest rates for a while, and they do that
Speaker 1: until they suddenly think, hang on the Fed of put
Speaker 1: up rates enough that if they keep pulling rates up,
Speaker 1: that's going to slow us down. And that's exactly what happened.
Speaker 1: If you can recall back in you know, the Fed
Speaker 1: had been putting rates up for a while and we
Speaker 1: got to the fourth quarter of eighteen where the market
Speaker 1: worked out that if the Fed we're going to deliver
Speaker 1: what they told us they were going to do, which
Speaker 1: has put rates up to three and a half percent,
Speaker 1: the market worked out that that was going to really
Speaker 1: start to slow the economy. That's when we have that
Speaker 1: quite big correction. But you know that we had a
Speaker 1: twelve months lead up to that where the FED were
Speaker 1: actually just nudging rates up and the equities kept kept
Speaker 1: powering ahead. So I think we just don't we want
Speaker 1: to just see in that sequencing and don't get you know,
Speaker 1: just just don't panic. I think I kind of colors
Speaker 1: perhaps why drum Power is just so reluctant to even
Speaker 1: talk about the exit strategy. And you know why, why
Speaker 1: spook the market at a time when the economy stolen?
Speaker 1: I think so, I think, so we're on the side
Speaker 1: of caution here. I agree, Yeah, stand clear of the
Speaker 1: craziest things we saw in markets this week. Alright, Well,
Speaker 1: one segment where we do not err on the side
Speaker 1: of caution, we aer on the the side of the opposite.
Speaker 1: What's the opposite of caution? I don't know. I guess
Speaker 1: it's the craziest things we saw in markets this week.
Speaker 1: So let's uh, let's get into it. And Katie Sarah
Speaker 1: promised that she would call the hotline once in a
Speaker 1: while and give us her crazy things. So I we
Speaker 1: didn't get a call this week, but if you talk
Speaker 1: to her, I we need to hold her, hold her
Speaker 1: to that. I'll shake her down, shake her down. But
Speaker 1: let's start with you, Katie. I wanna I'm gonna put
Speaker 1: the pressure on you. What's the craziest thing you saw
Speaker 1: this week? Okay, so this is crazy to me, and
Speaker 1: I promise it has a markets element. But this was
Speaker 1: a story that read spiked on the terminal. Apparently, thirteen
Speaker 1: first year analysts at Goldman Sacks in their IB group,
Speaker 1: they surveyed the theirselves and UM presented a presentation to
Speaker 1: management and uh, it's been making the rounds on social media,
Speaker 1: and there's some solutions that they suggested that their work
Speaker 1: weeks should max out at eighty hours. There shouldn't be
Speaker 1: last minute changes to presentations the night before UM. And
Speaker 1: I mean, obviously Twitter is blowing up about it. But
Speaker 1: I promised that the markets element is that Goldman Sacks
Speaker 1: chars actually hit a record high this week, which I
Speaker 1: found surprising, and it ties in neatly to the uh,
Speaker 1: the rotation trade we've been talking about. Wow, eighty hour limit.
Speaker 1: What a bunch of whimps. My day, I tell you was.
Speaker 1: I think the same story. They're they're feel like they're
Speaker 1: being overworked because of all the spack deals, right, is
Speaker 1: that is that part of this story? I mean I
Speaker 1: don't see it in this story, but I wouldn't be surprised.
Speaker 1: It's actually been a really interesting week for Goldman Sacks
Speaker 1: because Bloomberg had that great story about how CEO David
Speaker 1: Solomon was upset because he's all, you know, someone out
Speaker 1: to launch and take a watch break these kids today.
Speaker 1: I don't get it. I don't get it. I know.
Speaker 1: And plusit there is that Solomon was also was that detail,
Speaker 1: wasn't That's a pretty good one though. I like that.
Speaker 1: I would love to have been a fly on the
Speaker 1: wall to see how that presentation landed with the management.
Speaker 1: I'm sure they were took it under it took it
Speaker 1: under advisement. So that's a good one. Alright, Philip, how
Speaker 1: about you? Have you seen anything crazy this week? I
Speaker 1: know we live in crazy times, so I mean this
Speaker 1: this is boringly dry in the sense it relates to markets.
Speaker 1: But this this genuinely made me splutter over my morning
Speaker 1: coffee when I read it in a in a paper.
Speaker 1: And that was some data relating to the Eurozone, and
Speaker 1: it was collated by an investment bank who just pointing
Speaker 1: out that the capital outflows of the Eurozone and during
Speaker 1: this reflation trade here it is amounting to roughly of
Speaker 1: Eurozone GDP at an annualized rate. This is the fastest
Speaker 1: rate of capital outflows there has been seen for twenty
Speaker 1: years now. This in my mind has gone completely under
Speaker 1: the radar screen. And I think if this gets more
Speaker 1: into it remains sustained and gets more into the market narrative,
Speaker 1: this has really big ripple effects. You know, this has
Speaker 1: very big implications in terms of where the dollar goes.
Speaker 1: The dollar at being perceived to be a reflation was
Speaker 1: a negative for the dollar. But if we started to
Speaker 1: get this data being substantiated and continued this this, this
Speaker 1: I think could be a really big event. So it
Speaker 1: was just the share scale of it. When you see
Speaker 1: anything that's amounting to of of a region that's as
Speaker 1: big as the Ourozone, seeing that type of capital outflow,
Speaker 1: this this is big time stuff. That's that's fascinating. Something
Speaker 1: to keep it onund Katie perked up there when you
Speaker 1: started talking about the dollar. In fact, she was she's
Speaker 1: getting excited. I feel like I'm a former currency reporter.
Speaker 1: Now I cover everything markets, but you know, my first
Speaker 1: love was effects, so I appreciate that her heart is
Speaker 1: still with the well the dot dollars that the dollars
Speaker 1: that are really interesting juncture, isn't it. That's the thing here,
Speaker 1: and you know it have been weak, but it's been
Speaker 1: hovering around these key support levels and well turned to
Speaker 1: the d x Y and possibly people are totally underestimating
Speaker 1: the growth differentials, the interest rate differentials, and these capital flows.
Speaker 1: So the big surprise out there could be for everyone
Speaker 1: that the dollar comes back with a much more vengeance
Speaker 1: than is currently pricingpial with all the the pearl clutching
Speaker 1: over inflation. It's wo'd be funny to see it. Yeah, yeah, exactly. Yeah,
Speaker 1: it's always looking for things that could surprise the potential
Speaker 1: shock shop factors. All right, good stuff. You both brought
Speaker 1: your a game here, Um, Philip. For my crazy thing,
Speaker 1: I specialized in the alternative asset classes. And when I
Speaker 1: say alternative, I mean I really mean alternative. And this
Speaker 1: story is really one of my favorites in a while,
Speaker 1: because I am I love stories about something that someone
Speaker 1: thought was a piece of junk, worthless piece of junk,
Speaker 1: and they and they got rid of it and it
Speaker 1: ended up being priceless. Um, I might I might have
Speaker 1: tipped the my my hand there a little bit about
Speaker 1: how much this thing actually costs. But what happened, and
Speaker 1: this is a story courtesy of the Associated Press um
Speaker 1: out of Connecticut. Uh, someone went to a yard sale
Speaker 1: and they bought a pretty uh bowl. It was clearly
Speaker 1: an antique, a blue cobalt bowl, UH with paintings of
Speaker 1: flowers and other designs on it. And they said that
Speaker 1: this is this is pretty interesting at this yard sale
Speaker 1: and New Haven, Connecticut and uh they bought both for
Speaker 1: thirty five dollars. And then they took it home and
Speaker 1: they said, you know what, I'm gonna send this to Southby's,
Speaker 1: a picture of this to Southeby's and see what they
Speaker 1: think about it. South Beast came back and said, this
Speaker 1: bowl is actually from the fifteenth century, so the fourteen
Speaker 1: hundreds in China, the Ming dynasty. Sotheby's put it up
Speaker 1: for auction, and now Katie it's time and Philip, it's
Speaker 1: time to play the prices right on. How much you
Speaker 1: guys think a fifteenth century Ming Dynasty era bowl. I'm sorry,
Speaker 1: it's a white ball adorned with cobalt blue paintings of flowers.
Speaker 1: That changes things. Yeah, one of only seven such bowls
Speaker 1: known to exist in the world up for sale at Southebyes.
Speaker 1: The only hit I'll give you more than the thirty
Speaker 1: five dollars that was paid at the yard Shale New Haven. So, Katie, crisis, right,
Speaker 1: what's your what's your bid? Well? I mean, given that
Speaker 1: an n f T went for what's sixty nine million
Speaker 1: last week, and at least the bowl is physical, I
Speaker 1: don't know. I'll just say seventy million. Seventy million, okay,
Speaker 1: I'm keeping my poker face on here, Philip. I would
Speaker 1: be quite as aggressive for that, certainly, certainly in the millions.
Speaker 1: But I'll say rough seven million, seven millions, okay. I
Speaker 1: I thought the actual price was high. Seven dollars. But
Speaker 1: but the way you put a Katie with n f
Speaker 1: T selling for you know, with with a bunch of
Speaker 1: bits on a computer server somewhere selling for seventy million dollars,
Speaker 1: you would think the hard asset like this would would
Speaker 1: be a lot more so. Right, My benchmarks are all
Speaker 1: screwed up. I can't keep it straight. I think what
Speaker 1: what you would need to do is buy this bowl,
Speaker 1: take a picture of it, smash the ball, and sell
Speaker 1: the picture as an n f T, and you could
Speaker 1: you could probably get seventy millions, So if you guys
Speaker 1: want to go in, we can go thirds and buy
Speaker 1: it and smash it on the next pot. I feel
Speaker 1: like it's full for what could go wrong? Exactly what
Speaker 1: can go wrong? But I thought that was a good one.
Speaker 1: That was that was certainly the the craziest thing, And
Speaker 1: now I'm thinking it's crazy that it didn't solve for like, honestly, yeah,
Speaker 1: I feel like we should ship in and go in
Speaker 1: on this. Well, you you put up thousand, I'm good
Speaker 1: for like two. Maybe Bloomberg, yeah right, they can Matt
Speaker 1: match it. That's it. But I think with that said,
Speaker 1: that is all the time we have for the show. Philip,
Speaker 1: it was so great to have you. Katie has always
Speaker 1: great to have you. Uh and Philip, let's chat again sometime.
Speaker 1: I really enjoyed it. That's good, Thank you very much.
Speaker 1: What goes up? We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal, website and
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Speaker 1: you can find us on Twitter follow me at ing.
Speaker 1: Anonymous Katie Greifeld is at k Greifeld. You can also
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Speaker 1: by Tofur Foreheads. The head of Bloomberg Podcasts is Francesco Levy.
Speaker 1: Thanks for listening, See you next time.