WEBVTT - Chuck Lieberman on the Markets (Radio)

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<v Speaker 1>All right, let's have a look at what we are

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<v Speaker 1>seeing with the market action and get to our guest.

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<v Speaker 1>Chuck Lieberman is co founder and chief investment officer at

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<v Speaker 1>Advisors Capital Management, discussing all the latest on the markets,

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<v Speaker 1>joining us from New Jersey. So, certainly we are watching

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<v Speaker 1>the protests against the COVID controls spread in China before

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<v Speaker 1>we get to the broader macro picture on the inflation

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<v Speaker 1>and the FED. How much does this complicate things for

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<v Speaker 1>the overall global picture? Well, it certainly does that. Um,

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<v Speaker 1>it's unclear how the Chinese government is going to respond.

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<v Speaker 1>Further lockdowns would obviously be very disruptive to global supplies

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<v Speaker 1>of products coming from China and also undermine demand. Uh.

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<v Speaker 1>But if they allow the virus to spread, that could

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<v Speaker 1>also be very disruptive. Alright, Well, let's talk as well

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<v Speaker 1>about the broader picture, because we're looking at whether or

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<v Speaker 1>not inflation has peaked and how much is going to

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<v Speaker 1>moderate or how quickly after that? In your view, have

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<v Speaker 1>we reached peak inflation yet? Yeah? I think we have,

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<v Speaker 1>although I don't think that's good enough. Um, inflation is

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<v Speaker 1>going to come down because some of the inflation increase

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<v Speaker 1>was transitory and that is coming out. Various goods categories

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<v Speaker 1>saw artificial scarcities. Prices went up. Now that's reversing. Autos

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<v Speaker 1>are perfect example. Auto production was was disrupted. You couldn't

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<v Speaker 1>buy a new car, it was demand for existing cars.

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<v Speaker 1>Used cars was very very strong. They became scarce as well.

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<v Speaker 1>And as the supply of cars increases, prices will weaken.

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<v Speaker 1>And that's coming into the data. But the underlying trend

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<v Speaker 1>is driven by the labor market. There's no relief yet

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<v Speaker 1>in labor market that the labor market continues to be

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<v Speaker 1>very very tight. Wage increases are solid. Uh, labor is

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<v Speaker 1>becoming a bit more aggressive in negotiating for wage increases.

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<v Speaker 1>That's not going away. So it's premature to say that

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<v Speaker 1>the FED is anywhere close to achieving what it needs

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<v Speaker 1>to achieve, and premature then to say pivot as you

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<v Speaker 1>as you point out too. But do we continue to

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<v Speaker 1>see these aggressive rate hikes of basis points. No, they

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<v Speaker 1>have every reason to slow the pace down. At seventy

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<v Speaker 1>basis points to clip, Uh, it doesn't take very long

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<v Speaker 1>before the interest rate, the overnight interest rate is through

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<v Speaker 1>the roof, so inevitably they were going to slow um.

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<v Speaker 1>That was in that literally had to happen. Uh. And

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<v Speaker 1>they also need more data. They need to see how

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<v Speaker 1>much inflation moderates. If inflation comes down easily on its

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<v Speaker 1>own to two percent, which I doubt, then they don't

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<v Speaker 1>have to keep on going that far. But if inflation

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<v Speaker 1>turns out to be more resilient and stays very elevated,

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<v Speaker 1>then they might have to go that much more. So

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<v Speaker 1>I think they're going to slow the pace the market

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<v Speaker 1>expects fifty basis points. I've been in that camp for

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<v Speaker 1>a little while. I expect another fifty thereafter. That would

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<v Speaker 1>take the funds rate up to about five UH. And

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<v Speaker 1>I think they take it to five five and a half,

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<v Speaker 1>and then they plause and they wait to see more data,

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<v Speaker 1>see how the economy is performing, whether the labor market

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<v Speaker 1>is beginning to loosen, whether there's any slowing and hiring,

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<v Speaker 1>and whether inflation is moderating more than that I expect

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<v Speaker 1>um and that all remains to be seen. You talk

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<v Speaker 1>there about the strength of the labor market, and everybody's

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<v Speaker 1>waiting to see what kind of wage increases will happen

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<v Speaker 1>as well, given everybody's dealing with these inflationary pressures. But

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<v Speaker 1>how did you read the kind of sluggish Black Friday

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<v Speaker 1>sales if if the consumer doesn't really want to spend them, well,

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<v Speaker 1>I thought the retail sales numbers were actually pretty decent. Um.

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<v Speaker 1>You know, certainly the mix changes. We've seen multiple changes

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<v Speaker 1>in consumer spending mix during the pandemic. Initially everything was

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<v Speaker 1>for sheltering at home, UH, bringing in goods to provide

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<v Speaker 1>UH services for for people who are literally stuck at home.

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<v Speaker 1>And then once things reopened, then we shifted over to

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<v Speaker 1>services um and and now I think it's a matter

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<v Speaker 1>of UH. As long as income is strong, spending will

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<v Speaker 1>stay strong too. And yet some of your thoughts on

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<v Speaker 1>how to play the markets amidst all the geopolitical headwinds

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<v Speaker 1>that we are facing, and of course as we're looking

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<v Speaker 1>to what the FED does next, you're saying it's too

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<v Speaker 1>late to sell, even if the repricing hasn't hit bottom.

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<v Speaker 1>So where should you be looking potentially to buy? Then, Well,

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<v Speaker 1>typically the market always fights the last war. So the

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<v Speaker 1>last war from the market's perspective was the credit crisis

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<v Speaker 1>of two thousand and eight, and so everything related to

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<v Speaker 1>housing is weak. If you look at the banks, the

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<v Speaker 1>house home builders, the suppliers to the industry mortgage insurance,

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<v Speaker 1>Every single one of those sectors is amazingly cheap. You

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<v Speaker 1>have major banks like Wells, Fargo and City Group trading

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<v Speaker 1>around book or less than book. U home builders are

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<v Speaker 1>trading at three, four or five times earnings. Suppliers the

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<v Speaker 1>same thing. UM mortgage insurance companies trading at seven eight

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<v Speaker 1>times earnings. All of these companies are profitable. Many of

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<v Speaker 1>them are buying backstock. UM. That whole part of the

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<v Speaker 1>market is just incredibly cheap. What about tech? Do you

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<v Speaker 1>stay away there or is the opportunity Well, tech is

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<v Speaker 1>more complicated. Uh, it's there. That's the part of the

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<v Speaker 1>market that got hurt the most. Uh. It's the highest

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<v Speaker 1>pe multiples, so it's very long lived asset. Higher interest

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<v Speaker 1>rates hurt that valuation, and we've seen them come down

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<v Speaker 1>a lot. But that's a broad brush. You then have

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<v Speaker 1>to look at individual companies and judge whether or not

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<v Speaker 1>those companies are likely to continue to do well. Uh.

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<v Speaker 1>Some are very well placed. We like, uh, for example,

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<v Speaker 1>a company like Microsoft or Google or Amazon. We think

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<v Speaker 1>those are great long term holdings. In other cases, some

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<v Speaker 1>of the companies are a lot more expensive, and I

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<v Speaker 1>would be cautious about them. We're looking at a U

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<v Speaker 1>S tenure yield around three point six eight percent. About

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<v Speaker 1>a month ago, we're above four percent. You're saying around

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<v Speaker 1>three point seven five doesn't really provide any real return

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<v Speaker 1>without a lower inflation rate. And we've talked about when

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<v Speaker 1>we might see that happen. What is the likelihood then

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<v Speaker 1>that it is more yields rutch at lower Where where

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<v Speaker 1>are you seeing the tenure move? Yeah, I'm on the

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<v Speaker 1>other side of that argument. I think that interest rates

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<v Speaker 1>have got to go up more. The FED is going

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<v Speaker 1>to continue to hike rates at least fifty basis points

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<v Speaker 1>at the next meeting, probably another fifty after that. So

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<v Speaker 1>that'll take the funds rate up to five. And with

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<v Speaker 1>the five percent funds rate, how do you justify a

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<v Speaker 1>tenure at the three point seven percent um? I think

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<v Speaker 1>that's hard to do, and it's especially hard to do

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<v Speaker 1>when you put in the context of inflation at the

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<v Speaker 1>end of I think the FED would be very happy

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<v Speaker 1>if in ation we're around four percent. That still means

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<v Speaker 1>a negative rate of return after inflation for any investor

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<v Speaker 1>in ten years security. So I don't think that the

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<v Speaker 1>bond market has fully discounted what it should discount, namely

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<v Speaker 1>that inflation will be higher for longer and therefore interest

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<v Speaker 1>rates are relatively unattractive. And just a quick word as

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<v Speaker 1>well about the the oil market. Will talking earlier about

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<v Speaker 1>the U S granting Chevron a six month license to

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<v Speaker 1>resume oil production in Villezuela. At the same time, you've

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<v Speaker 1>got this China unrest that we also touched on, sending

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<v Speaker 1>ripples throughout the world markets. When we look at those concerns,

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<v Speaker 1>and of course the other side of the coin, which

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<v Speaker 1>is the reopening, where do you see oil kind of

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<v Speaker 1>trade when we've got it around seventy six dollars about

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<v Speaker 1>at the moment. Yeah, I think oil reflects those concerns

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<v Speaker 1>that you just mentioned, juliet Um. So I think that's

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<v Speaker 1>why oil is where it is. But the fact of

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<v Speaker 1>the matter is oil is pretty scarce. Their shortages, we're

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<v Speaker 1>still scrambling to try to get more natural gas to Europe.

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<v Speaker 1>Um supplies of oil or are moving through the back

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<v Speaker 1>door so Russia can export via India to other parts

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<v Speaker 1>of the world. Oil is still pretty scarce, and so

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<v Speaker 1>I think there's a lot of risk that oil prices

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<v Speaker 1>moved back up to a hundred bucks barrel that'll be

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<v Speaker 1>under a lot of pressure if the winter turns out

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<v Speaker 1>to be cold and we start dipping into our inventories

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<v Speaker 1>of both oil and natural gas, and that will create

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<v Speaker 1>a lot of upward pressure. So I'm more of a

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<v Speaker 1>bull on the energy side um as opposed to thinking

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<v Speaker 1>that there's weakness ahead. Alright, Chuck, great to have your insights.

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<v Speaker 1>Thanks for joining us on Depricasia. Chuck Lieberman's co founder

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<v Speaker 1>and chief investment officer and advises capital management, joining us

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<v Speaker 1>from nu Ja