Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz.
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Speaker 2: Kathy Wood came out of USC a long time ago,
Speaker 2: put out a shingle with a lovelace family at Capitol Group,
Speaker 2: and then built an investment career quite different from others,
Speaker 2: not so much based on the long term solidity of
Speaker 2: a given portfolio, but capturing the trend going up large
Speaker 2: and at sometimes going down large. She holds court on
Speaker 2: the ark. Noah's Ark is where she is right now.
Speaker 2: I want to know, with all you've been through the
Speaker 2: last number of years, are you going to shift to
Speaker 2: a more long term strategy. I look at morning Star
Speaker 2: one year, three year, five year, your bottom coure tile,
Speaker 2: but your claim is more short term. With your new
Speaker 2: ETF effort and with what you're doing with ARC, are
Speaker 2: you going to be still on trend or do you
Speaker 2: invest more for long term?
Speaker 3: We We've always invested for the long term. And what
Speaker 3: interrupted what was a very nice move up in innovation stocks,
Speaker 3: especially disruptive innovation, was a massive increase in interest rates,
Speaker 3: the likes of which we have never seen, of course,
Speaker 3: twenty fourfold increase. So all long duration assets, especially in
Speaker 3: twenty twenty two, were destroyed, including bonds, which are usually
Speaker 3: a flight to safety. They had their worst year last
Speaker 3: year since the seventeen hundreds. There's no way in that
Speaker 3: environment that our strategy would have done well. But I
Speaker 3: do think that what's happening this year is that the
Speaker 3: market is starting to look over the moves, whether there's
Speaker 3: one more or not into falling interest rates. You know,
Speaker 3: we started underperforming in twenty one just with the anticipation
Speaker 3: of rising rates, and even more so in twenty two.
Speaker 1: Are you going to change?
Speaker 2: I want to know how you're going to change the
Speaker 2: sobering quarters.
Speaker 1: You've been through. What is the new?
Speaker 2: Kathy would approach to macroeconomics, frankly, pandemic economics intruding on
Speaker 2: your belief and innovation.
Speaker 3: If anything, innovation gains traction during tough times, and if
Speaker 3: you look at how the reason our portfolios are outperforming
Speaker 3: this year is they are and they are is it
Speaker 3: is because they are gaining share in what is becoming
Speaker 3: a difficult environment, right, and so one by one we're
Speaker 3: going to earn our way back and it's all about
Speaker 3: revenue growth, margin expansion.
Speaker 2: In the Wall Street Journal, they do a fabulous thing
Speaker 2: with al farts like me, and it's people with over
Speaker 2: five million dollars and they believed in Kathy would to
Speaker 2: a person, those retirees bought innovation, they bought tech, they
Speaker 2: bought apple, Apple, Apple Apple, and they didn't listen to
Speaker 2: financial TV or radio. Can you do the Kathy would
Speaker 2: approach for one three five years given the volatility you've.
Speaker 3: Seen, Yes, I think we're on the other side of
Speaker 3: that massive interest rate increase which did destroy a lot
Speaker 3: of performance. That's the most important thing, and we are
Speaker 3: ready for prime time. Many people are concerned about our
Speaker 3: kind of strategy and.
Speaker 4: The company we just.
Speaker 3: Acquired rises because in Europe, in London here, for all
Speaker 3: of Europe and UK, they're focused on global mega trends
Speaker 3: as well, and you know, interest rates hurt everyone in
Speaker 3: that space. If we are right, and rates are going
Speaker 3: to down at some point in the next year. You know,
Speaker 3: the market is a discounting mechanism. Then I think that
Speaker 3: the muscle memory that hurt our strategy, and it all
Speaker 3: has everything to do with the tech and telecom bust
Speaker 3: and people thinking, oh my gosh, are we here again?
Speaker 3: Know what happened during the twenty years that ended in
Speaker 3: the tech and telecom bubble is the seeds for what
Speaker 3: is happening now we're planned in this.
Speaker 2: John is really important that the profitability stream down the
Speaker 2: income statement of new tech is very different than two
Speaker 2: thousand tech.
Speaker 4: Let's talk about evase and not just Tesla. Is it
Speaker 4: good news for Tesla? What's happening in Detroit right now?
Speaker 3: Yes, because if there's a strike, of course there will
Speaker 3: be more production shortfalls. You know, I think that there's
Speaker 3: just now the supply chain is freed up, so unfortunately,
Speaker 3: we'll have all kinds of questions about that. But you know,
Speaker 3: I don't think think it has anything really to do
Speaker 3: with the strike. It has everything to do with a
Speaker 3: consumer preference shift towards better vehicles electric that are falling
Speaker 3: in price. Tesla is leading that price decline simply by
Speaker 3: passing cost declines onto its customers. So I think that's
Speaker 3: what's good for Tesla.
Speaker 4: The complaint we hear is that people can't afford these vehicles.
Speaker 4: That is changing in the UKs. You can see Richie
Speaker 4: Sunac is pushing back targets to get rid of all
Speaker 4: of these total combustion engines to twenty thirty five from
Speaker 4: twenty thirty. We're being unrealistic about this transition. We don't
Speaker 4: think so big.
Speaker 3: No, no, no, we do not think so We actually
Speaker 3: the total cost of ownership, Now this is in the
Speaker 3: United States. It's a little bit different here, but the
Speaker 3: total cost of ownership of an electric vehicle fell below
Speaker 3: that of a gas powered vehicle about two to three
Speaker 3: years ago. Soon sticker prices.
Speaker 4: Does that include insurance?
Speaker 3: Yes, includes insurance. Yes, and as I said, local differences,
Speaker 3: but yes, in the United States, that does include insurance.
Speaker 3: And in fact, Tesla is so sure that its cars
Speaker 3: will have fewer accidents and fewer fatalities that it's willing
Speaker 3: to provide insurance. So yes, that does include everything.
Speaker 2: All in you were a USC you didn't get to
Speaker 2: be Laffer called up Robert Kirby a Capitol group, and
Speaker 2: so I just shut up and hire her.
Speaker 1: So you walk into Capitol Group, which is.
Speaker 2: The land of an R square to ninety eight Washington
Speaker 2: Mutual Fund Investment Company of America, everything is completely diversified.
Speaker 2: Out you're the polar extreme that through y'ad you almost
Speaker 2: fell into the Pacific Ocean.
Speaker 1: They were so upset with you.
Speaker 2: So you go out and you're saying, I'm not going
Speaker 2: tight R square to SPX, I'm going out and do
Speaker 2: my own thing. Yes, people have prospered off of innovation
Speaker 2: and technology.
Speaker 1: How does that continue in America?
Speaker 2: Can you be less diversified and win five years out?
Speaker 3: Well, you mentioned Capital Group, and that is where I
Speaker 3: did start my career, and that is where I saw
Speaker 3: tremendous research and a long term time horizon. So really
Speaker 3: what we're doing with ARC is just going back to
Speaker 3: the future my initial experience, which was in the late
Speaker 3: seventies when I was in college. And we're doing deep research,
Speaker 3: first principles based white sheet of paper.
Speaker 2: But you're away from a R square like Washington, neutral
Speaker 2: of the other funds.
Speaker 1: What's your squared right now?
Speaker 3: To be honest, we're the correlation of our performance to
Speaker 3: broad based benchmarks is very low. For better or worse.
Speaker 3: What it tells. What it tells our clients and perspective
Speaker 3: clients is we have a very good diversification strategy. Our funds.
Speaker 3: The active weight if you're comparing to MSCI World or
Speaker 3: SMP or Nasdaq, the active weight is less than five percent,
Speaker 3: So really good diversification strategy focused on companies that are
Speaker 3: going to transform the way the world works. We look
Speaker 3: at the broad based benchmarks and sure there are companies
Speaker 3: that are sustaining innovation, like an Apple, but they are
Speaker 3: not going to transform the way the world works. From here,
Speaker 3: our companies.
Speaker 4: Are Kathy, Thank you, Kathy, work about convesting, joining us
Speaker 4: around the table here in London. The conversations continue. Patrick
Speaker 4: Armstrong's CIO of Plerimi Wealth, Patrick got to see you.
Speaker 4: Things good are just terrible because I can't decide based
Speaker 4: on our conversation so far.
Speaker 5: Normal things are pretty normal. Everything feels so different to
Speaker 5: how it was. But we've got inflation on a track
Speaker 5: down to something that's going to be sub three percent
Speaker 5: next year. I don't think it's going to fall to
Speaker 5: the FEDS mandate. I don't think they want it to.
Speaker 5: You've got economic growth that's potential in the United States.
Speaker 5: Who would have thought that you're probably going to go
Speaker 5: two percent for the US economy this year. That's probably
Speaker 5: the long term potential. Interest rates at five percent on
Speaker 5: the two year pretty normal. Doesn't seem normal over recent years,
Speaker 5: but we're in an environment where things are pretty normal.
Speaker 4: We come back to the old normal.
Speaker 5: I think we are going back to the old normal.
Speaker 5: I think inflation is going to prove to be persistent, sticky,
Speaker 5: with intermittent spikes, just because the big picture issues are
Speaker 5: populism and protectionism from governments, and that's just by its
Speaker 5: nature inflationary. You've got unions coming back like the seventies,
Speaker 5: maybe a little bit. You've got job seekers having some
Speaker 5: power that's inflationary, but you've got disinflationary forces coming from China,
Speaker 5: and you've got fed policy at a point where it
Speaker 5: is restrictive. So all of those things normal.
Speaker 2: Your charm is your truly cross asset at the margin,
Speaker 2: How are you changing your cross asset allocation into the
Speaker 2: fourth quarter.
Speaker 5: So what we've done over the summer months is we've
Speaker 5: marginally reduced our equities that have just kept drifting to overweight.
Speaker 5: We wanted to have neutral weight, but just as equities
Speaker 5: performed so well, they kept moving overweight. We've moved marginally
Speaker 5: underweight now, not so much that we're worried about equities.
Speaker 5: That we're getting pretty compelling returns on tips right now
Speaker 5: that you're getting at two percent real yield, And like
Speaker 5: I said, inflations are still a risk in the long term,
Speaker 5: but I'm getting the duration there. If we do fall
Speaker 5: into a recession, we'll see lower yields on conventionals and
Speaker 5: tips will benefit.
Speaker 2: So talk to our audience at radio and television, particularly
Speaker 2: across America. How does Patrick Armstrong utilize the ten year
Speaker 2: inflation adjusted yield or the five year inflation adjusted yield?
Speaker 2: How do you use that as a tool to have
Speaker 2: confidence in market allocation.
Speaker 5: Well, the tenure break even is two point three percent,
Speaker 5: and my view is we're going to have persistent above
Speaker 5: fed target inflation, so I want to be hedged against that.
Speaker 5: I'm happy to get a real yield of two percent.
Speaker 5: You put your capital at risk to preserve capital as
Speaker 5: a starting point and row the purchasing power of that
Speaker 5: over time. The tip provides that to you right now
Speaker 5: in the tenure, So I like duration there, but you're
Speaker 5: being compensated with really high yields on we talked about
Speaker 5: our diamond JP Morgan bonds. I'm getting six percent on
Speaker 5: a two year and that's almost.
Speaker 2: It's a Chris Whalen moment. He's channeling Chris Whalen. Those
Speaker 2: JP Morgan preferreds.
Speaker 4: Whalen would say, should we do single names? A lot
Speaker 4: of people at the start of the year, we're getting
Speaker 4: checked up on LVMH. One of them say you back
Speaker 4: to white, you stepped away. The post of chart of
Speaker 4: the European market now is Nubber Nordisk. Where are you
Speaker 4: on now?
Speaker 5: That's my biggest stock right now. And again it's come
Speaker 5: from drifting. The pandemic used to be COVID. The pandemic's
Speaker 5: obesity and diabetes in the West, and Novo NORDICSIC and
Speaker 5: Eli Lilly. They don't have monopoly positions, but they got
Speaker 5: the dominant share here.
Speaker 2: Boing earnings if luxury come in enough off China gloom
Speaker 2: Bernstein I believe is out with a note overnight saying
Speaker 2: we've got some ratios of luxury back to two thousand
Speaker 2: and eight.
Speaker 1: Is it pulled back enough for Patrick Armstrong almost?
Speaker 2: So?
Speaker 5: I sold LVMH in March. It was at thirty two
Speaker 5: times forecast startings. We're now in the mid twenties. I
Speaker 5: bought it in October the previous year when it was
Speaker 5: at twenty one times. That's a small premium to the
Speaker 5: market multiple. That's where I'd like to buy it. So
Speaker 5: I think it's fair.
Speaker 1: Folks right there.
Speaker 2: We don't do much equity chat because you know who cares.
Speaker 2: The answer is what you just heard there from Patrick
Speaker 2: Armstrong is a clinic and how you bracket a beloved
Speaker 2: dominant stuck?
Speaker 4: I was with you, we were talking about it when
Speaker 4: you backed out of ALVMH. You kept ms though we did. Yeah,
Speaker 4: how was that?
Speaker 3: Well?
Speaker 5: I didn't want to move against what I still think
Speaker 5: is the dominant trend is the spending power of high
Speaker 5: net worth individuals and also the immunity to input prices.
Speaker 5: Rischmond talked about inflation hurting spending power of people, but
Speaker 5: at the input prices are things that are hurting mass
Speaker 5: market retailers and it doesn't impact the high in luxury.
Speaker 2: So what's the distinctive feature of the Duma family? Ermez,
Speaker 2: what are they doing differently? Bloomberg Intelligence Deborah Aiken is
Speaker 2: just brilliant.
Speaker 1: On this, and she singles out a few of these names.
Speaker 2: What is the Ames model that makes them different from
Speaker 2: forty seven other luxury brands.
Speaker 5: The leather goods part of it is incredible, the margins,
Speaker 5: the growth they get there and people pay up for
Speaker 5: that and there's just a waiting lines of cues for
Speaker 5: that sort of things. But it's their brand management. There
Speaker 5: may scarves and ties and the leather goods, it's all.
Speaker 4: We touched on it briefly. Let's finish there another nor Esk.
Speaker 4: We're already out forty percent this year. The stock's been
Speaker 4: climbing for five consecutive years. Can you spend just a
Speaker 4: little bit of time, a couple of minutes just outlining
Speaker 4: how big this opportunity actually is.
Speaker 5: Well, it was a vanity type drug, their weight loss.
Speaker 5: It is vanity product basically, that's people in Europe, America
Speaker 5: and China. They spend the money to look good, field good.
Speaker 5: But what they've found is the heart disease and the
Speaker 5: benefits on that. It may become an ensurable product as well.
Speaker 5: So that just expands the potential market where you're not
Speaker 5: just getting vanity uses, but health uses which may be
Speaker 5: ensurable as well. So a heart and stroke disease it's
Speaker 5: it does expand the market a lot. Because it's an
Speaker 5: expensive product that a lot of people can afford. It
Speaker 5: may move much more mass market because of that.
Speaker 4: The run on the stocks home has been phenomenal, absolutely phenomenal.
Speaker 4: I'm not sure where we are right now versus alvimh
Speaker 4: percently at one point earlier this year it was bigger
Speaker 4: than alviam Ice, right.
Speaker 5: It's I think it's bigger right now. They're basically the
Speaker 5: same market caps.
Speaker 2: Can there be European exceptionalism without technology?
Speaker 1: The way we trumpet Apple in the other eighteenth s.
Speaker 4: Well, and I never noticed. I think is a form
Speaker 4: of US exceptionalist Yeah, the wrong kind of US exceptionalism, right.
Speaker 1: Yeah, it's buoyant, to say the least.
Speaker 5: It's yeah, it's exceptionalism is very clear in US and technology.
Speaker 5: Europe can compete in healthcare. It's showing no ability quickly.
Speaker 1: Are you buying big oil? You buy big oil.
Speaker 5: Here we basically there's going to be more oil consumed
Speaker 5: in the next three months. We've already had more oil consumed.
Speaker 2: Today's single best by come on, Patrick Ironstrong, single best
Speaker 2: buy big.
Speaker 5: Oil EOG I like rather than the Integrated's exploration production.
Speaker 4: Patrick got to say Patrick Armstrong of Plarini Wealth.
Speaker 2: Also Lingos is hugely qualified global had a foreign exchange
Speaker 2: strategy at RBC tour of duty working in Europe with
Speaker 2: different institutions to look at the political economics of the
Speaker 2: moment as well. You know, to you, I can say, like,
Speaker 2: what's euro going to do or what's Sterling you to do?
Speaker 2: What are they going to do if they actually get disinflation?
Speaker 2: Can you call a disinflationary trend in place?
Speaker 1: Yet?
Speaker 6: Too soon for that, But I do think this morning's
Speaker 6: CPI data will be very welcome news from the Bank
Speaker 6: of England perspective, because they'll feel like finally their policy
Speaker 6: measures are biting and they're removing some of that tail
Speaker 6: risk of stagflation.
Speaker 2: How many months or quarters do you need to establish
Speaker 2: a disinflationary trend?
Speaker 1: Not the data dependency.
Speaker 2: The media is focused on one surgical point, Well, what's
Speaker 2: your timeline to say trend in place?
Speaker 6: Well, I think it's also the composition of inflation, right,
Speaker 6: because we've seen headline inflation come off on energy prices.
Speaker 6: In fact, if anything, now ticking back up again, as
Speaker 6: we saw yesterday in Canada. So really what we're focusing
Speaker 6: on is that core measure, or even more so, the
Speaker 6: supercre measure. What's happening to those demand driven components of
Speaker 6: inflation and are those weakening enough to signify that we're
Speaker 6: going to get to target?
Speaker 2: And Paul Krugman with a brilliant essay out Folks Wheelhouse
Speaker 2: for the Nobel Laureate on Trends. He looks at disinflation
Speaker 2: and I love what he says about plane vanilla inflation.
Speaker 2: John Ferrell's family in England is living plain vanilla six
Speaker 2: percent plus inflation. Do people like you and these elites
Speaker 2: do they look at plain vanilla inflation?
Speaker 6: I mean, you see plain vanilla inflation across the board, right,
Speaker 6: And I think that's the important part about the current
Speaker 6: rise and energy prices because for all that, central banks
Speaker 6: like to look through those and focus on core inflation.
Speaker 6: If headline inflation goes up, comes down, a bit goes
Speaker 6: up again because in oil prices or commodity prices don't
Speaker 6: really come off. What does that mean to your average consumer?
Speaker 6: Their kind of lived experience is that prices just keep
Speaker 6: going up.
Speaker 4: I can't believe we're sitting here and we've got this
Speaker 4: note from bank, not the bank of England from the
Speaker 4: Goldman Sax team on the Bank of England suggesting we're
Speaker 4: done here when inflation is in the high sixes. Can
Speaker 4: you make sense of that for our audience? If we
Speaker 4: were in the high sixes in the United States, we'd
Speaker 4: be talking about the prospect of a fifty basis point
Speaker 4: height from the Federal Reserve this afternoon. Why are we
Speaker 4: talking about the Bank of England being done with inflation
Speaker 4: in the high sixes and wage growth pushing eight percent.
Speaker 6: I think it's the wage growth that's more important, right
Speaker 6: because don't forget the Bank of England look through high
Speaker 6: inflation in the immediate aftermath of the GFC, and there
Speaker 6: was a long period wheen Mervin King was writing regular
Speaker 6: letters the Chancellor about inflation being outside the target ban
Speaker 6: and yet you know they were happy to leave it zero.
Speaker 6: It's that which is the difference. It's the fact that
Speaker 6: they're happy to look through it if they feel like
Speaker 6: their policy is working. And I will say this morning, stated,
Speaker 6: do make tomorrow's decision much more finely balanced.
Speaker 4: As Simon French with panmil Gilden was in your seat yesterday,
Speaker 4: he suggested that this Bank of It has a communication problem,
Speaker 4: a credibility issue.
Speaker 6: Do you agree, Yeah, it's hard to say they don't.
Speaker 6: And I think more than anything, it's the inconsistency in
Speaker 6: the messaging that people struggle with. I mean, sure, this
Speaker 6: is a particularly difficult time to be forecasting. I think
Speaker 6: economists have struggled in the Byside. But from the Bank
Speaker 6: of Indians perspective, it's the fact that that message seems
Speaker 6: to change every month, rather than just sticking to this
Speaker 6: data dependency mantra.
Speaker 2: You speak fourteen languages, you've got parchment and physics from Cambridge.
Speaker 2: I want you to talk about the physics of Christine
Speaker 2: Legard's speech at Jackson Hall. You live the ECB theory,
Speaker 2: the ECB process, if you will.
Speaker 1: Is there any hope.
Speaker 2: In prayer that the ECB can get away from the
Speaker 2: data dependency that she despises sadly?
Speaker 6: Not really, And I think the reality is that you've
Speaker 6: got so many competing views on governing council. You saw
Speaker 6: that just over the weekend, right, they had that announcement
Speaker 6: last week and then they already came out with voice
Speaker 6: of saying, oh you we should be doing more. We're
Speaker 6: not quite done yet. And it's that kind of coophony
Speaker 6: of voices which ends up with the data departs.
Speaker 2: Are you tour expert in this, John, you've lived it
Speaker 2: as well as is also And what I find fast
Speaker 2: in your is a simplistic American view of Bundesbank versus Portugal.
Speaker 1: Now it's not that way. You both know, it's richer
Speaker 1: and more complex.
Speaker 2: To be honest, my good friend Christine Leakarr doesn't have
Speaker 2: a chance on this.
Speaker 1: There's no chance that they're going to take a.
Speaker 2: More holistic, longer Philip Lane trend.
Speaker 1: Is the difference in this policy.
Speaker 4: Under Dragi, who was not a consensus builder, he would
Speaker 4: builly the Government Council into a corner and say we're
Speaker 4: doing this, and he'd have to get the Bundesbank to
Speaker 4: come along. The god is a consensus builder, but she
Speaker 4: gets an easy time of it now because Germany is
Speaker 4: the weak spot. Germany is the Weekskan And what I
Speaker 4: don't hear from the hawks on the Governing Council they're
Speaker 4: not screaming rate hikes. They're not screaming rate hikes at all.
Speaker 4: So how much of a deal was there actually to
Speaker 4: strike on the Governing Council last week? People make out
Speaker 4: of the deal between doves and hawks. The hawks that
Speaker 4: I'm hearing from aren't that hawkish at the ECP, are they?
Speaker 6: Well, there are a lot less hawkish than they used
Speaker 6: to be, because, as you say, Germany itself is feeling
Speaker 6: the weakness. But also Draghi in many ways had to
Speaker 6: do that right because it was chrisis situation and that
Speaker 6: forced his hand. Whereas now we're not really there. We're
Speaker 6: kind of in a situation where central bankers have a
Speaker 6: bit more time to assess, to be data dependent, to
Speaker 6: build that consensus.
Speaker 4: I teased this a little bit earlier when we were
Speaker 4: assessing what was happening with Sterling, and Lisa raised the
Speaker 4: question I think is a really important question to ask
Speaker 4: regarding the UK and Sterling, but I think we can
Speaker 4: take this broadly to Europe and the euro How important
Speaker 4: are rate differentials for currency pairs at the moment When
Speaker 4: you see developments in the UK, it's this kind of
Speaker 4: development meant to be Sterling weaker or Sterling stronger? What
Speaker 4: does it mean?
Speaker 6: Fully agree with Lisa that it's ambiguous, right. I've heard
Speaker 6: a lot of people, probably more from the cell side
Speaker 6: than the byside, trying to talk up Sterling as this
Speaker 6: carry trade.
Speaker 4: There's much better carry out there. I mean, if you
Speaker 4: really want carry.
Speaker 6: You're going to Mexico, You're going to Brazil, like the
Speaker 6: UK is not necessarily where you're going to get it.
Speaker 6: But at the same time, the fact that, like I
Speaker 6: said earlier, you kind of remove some of that terro
Speaker 6: risk of stagflation. That's a good thing. And from a
Speaker 6: policy credit ability perspective, it's good that the Bank of
Speaker 6: England is finally seemingly getting inflation under control.
Speaker 2: What is your question for Pole today you're in the
Speaker 2: press conference. McKee gives the last question, they go go
Speaker 2: lingos here here, we'll give you one. What's your question?
Speaker 2: Did your own pile today? From your EUO.
Speaker 6: Perspective, I'd be really interested to hear how he's thinking
Speaker 6: about the run up and energy prices and the feed
Speaker 6: through that will have to headline inflation.
Speaker 1: Oh wait, we'll stop the show here. Halima Craft. Okay,
Speaker 1: you've got something. It's pretty good at this right.
Speaker 2: What does the wonderful Helena Craft? Heleima, wonderful to see you,
Speaker 2: Thanks so much for stopping by.
Speaker 1: Helena Croft. What does she say about this move to
Speaker 1: one hundred?
Speaker 6: I think she's been bang on the money with that call.
Speaker 6: Now that we're there, it becomes a lot less obvious
Speaker 6: that we continue further from here. But she was very
Speaker 6: open and talking a lot about it earlier in the year,
Speaker 6: and markets were just ignoring it for a while. They
Speaker 6: were ignoring the supply cuts, the production cuts were here.
Speaker 6: Now we feel the impact.
Speaker 4: You can para ignore this later on this afternoon, and.
Speaker 6: Let's see, it's a very short inter meeting period between
Speaker 6: September and November. December is probably the time they to
Speaker 6: make that call.
Speaker 4: Did you think the Bank of any can ignore it
Speaker 4: a little bit more? I'm just wondering who is this
Speaker 4: more important to? Bailey A Eueida.
Speaker 6: We can almost forget about the Bank of Japan and
Speaker 6: not doing anything anytime soon, and even when they do,
Speaker 6: it's going to be tiny. Now I'd be most concerned
Speaker 6: in the ECB's position energy and porter. You still have
Speaker 6: that regional difference between US energy prices and European and
Speaker 6: they're the ones really that are facing the economic weakness.
Speaker 2: We're staggering beyond Duisenberg through Truche. John mentions the wonderful
Speaker 2: Draugy of Italy and now La guard is the easy
Speaker 2: be a more mature institutional or are they still making
Speaker 2: it up as they go as they did when Mercing
Speaker 2: was there.
Speaker 6: And absolutely more mature. And you know, you've got to
Speaker 6: remember they've been now in existence for over twenty years.
Speaker 6: They've been through several crises. That's knitting them together. But
Speaker 6: more than anything, the fact that it's the core now
Speaker 6: feeling the weakness, I think.
Speaker 1: Yeah, I don't mention it naturally. I didn't mention that.
Speaker 4: Jen Foley talked at the prospect of paralty on the
Speaker 4: euro in the new year. You're going there yet? Can
Speaker 4: we finish that?
Speaker 1: Come on?
Speaker 6: We've had one O four for year end podcast since
Speaker 6: the start of the year.
Speaker 4: That hasn't changed.
Speaker 6: But we looked into twenty twenty four and actually said,
Speaker 6: why should it stop?
Speaker 2: Hell?
Speaker 6: Why should it bounce back?
Speaker 4: We've got one O two.
Speaker 6: Could we get to party shore?
Speaker 4: Maybe? I just don't think it. We'll stay that long
Speaker 4: old Alsa. Thank you. That's quite a cool so far.
Speaker 4: The yeh, we'll see how we ended, but quite a
Speaker 4: cool so far. Alsa, Thank you. Aselling us there of RBC, As.
Speaker 2: Joan mentions, the week starts today for Bruce Kasman, it
Speaker 2: does not on Friday, evening, Kasman, along with the dreaded
Speaker 2: doctor Faroli and others, put out their Weekly Prospects. The
Speaker 2: way things are moving, it could be daily Prospects Kasman
Speaker 2: of JP Morgan Jones.
Speaker 1: This morning, Bruce Kasman, what will you listen for from
Speaker 1: Jerome Powell today? Well?
Speaker 7: I think the issue really when the FED certainly stays
Speaker 7: on hold and certainly also continues to maintain an August bias,
Speaker 7: is how on this color are we talking about their
Speaker 7: confidence that they're done here? And I think of course
Speaker 7: they're going to continue to maintain that bias. They're going
Speaker 7: to give us some sense of progress on inflation, some
Speaker 7: ongoing concern. I don't think we're going to get a
Speaker 7: strong message, and quite frankly, I don't think it's going
Speaker 7: to tell us that much. In a world in which
Speaker 7: the data is going to decide what the FED is
Speaker 7: going to do over the next few meetings.
Speaker 2: Our optionality, our ambiguity, our degrees of freedom, and all
Speaker 2: the other mumbo jumbo buttresses up against Michael Faroli's arch
Speaker 2: call and potential GDP that goes into our stard Do
Speaker 2: you have a low statistic on potential GDP?
Speaker 1: Does that give you a low our stard that goal.
Speaker 1: The Jerome Power says he's trying to get to well.
Speaker 7: I think there's two things here. One, which is perhaps
Speaker 7: most important, is potential. GDP is low, but cyclically there
Speaker 7: are a number of forces which have raised. What interest
Speaker 7: rate is consistent with stabilizing inflation and stabilizing utilization rates.
Speaker 7: So I think that's what's operational for the current environment.
Speaker 7: The second point, Mike and I have both been writing
Speaker 7: about the hints that US supply side performance is actually improving.
Speaker 7: We've been running two hundred and fifty thousand a month
Speaker 7: on labor supply this year.
Speaker 8: Productivity growth, which has.
Speaker 7: Been stuck in the low ones, looks like it's moving
Speaker 7: higher on an underlying basis. It's too early to get
Speaker 7: confident about this, but it does feel to us that
Speaker 7: US supply side and pro performance is actually improving here.
Speaker 2: I know you and Bob Michael aren on speaking terms,
Speaker 2: but just a few times where you've got to get
Speaker 2: together in dovetail your economics into Bob Michael's fixed income,
Speaker 2: which I believe is price moving against yield. Can you
Speaker 2: make a yield call here? If we get kasmin disinflation,
Speaker 2: do yields come down.
Speaker 7: I think it's going to be a lot before yields
Speaker 7: come down. If we're right, inflation is going to stay
Speaker 7: sticky here. The Fed is not going to have the
Speaker 7: room to ease anytime soon. The economy is not really
Speaker 7: at material thread of going into recession anytime soon. So
Speaker 7: I think, you know, four percent tenure yields five and
Speaker 7: a half percent policy rates is going to be with
Speaker 7: us for a while.
Speaker 4: Bruce, you touched on it, and I think it's a
Speaker 4: really important aspect. I mentioned of the feder Reserve conversation
Speaker 4: today and into this decision and news conference, the extent
Speaker 4: to which this labor market has rebalanced. Do you think
Speaker 4: that rebalancing is close to complete then, Bruce.
Speaker 7: No, we have a very tight labor market. We still
Speaker 7: have very elevated wage inflation. I think we're seeing good
Speaker 7: signs on the labor market that things are moving in
Speaker 7: the right direction. But whether we get all the way
Speaker 7: back to what is consistent with the Fed achieving its
Speaker 7: inflation target, I think is still not by any means determined.
Speaker 7: From my point of view, I think it's more likely
Speaker 7: that things stick at a level that's going to keep
Speaker 7: the Fed uncomfortable over the next year.
Speaker 4: Does that mean low unemployment with elevated inflation or higher
Speaker 4: unemployment with elevated inflation, because one makes is a lot
Speaker 4: more toxic than the other.
Speaker 7: I think it's most likely the unplayed rate stays below
Speaker 7: four percent. I think it's most likely that wage inflation
Speaker 7: stays at four percent or higher. I think it's most
Speaker 7: likely in that environment, the FED is not going to
Speaker 7: have the opportunity to ease.
Speaker 8: And the question is whether or not that.
Speaker 7: Restrictive stance over time undermines what is still a pretty
Speaker 7: healthy US private sector and eventually causes an end to
Speaker 7: the expansion, or whether the supply side improvement, whether some
Speaker 7: of the other supports can carry us along here.
Speaker 8: And put us on a path to a soft landing.
Speaker 7: I'm going to boil the frog scenario, which is the
Speaker 7: first one I described, but I think it's still a
Speaker 7: pretty close call here as to how the environment plays
Speaker 7: out over the next year or two.
Speaker 2: I mean, Ris Keseen, what's so important here is simply
Speaker 2: there was a pandemic. Are we beyond the pandemic? Are
Speaker 2: we beyond supply side studies? Getting back to Chasmin one
Speaker 2: oh one.
Speaker 7: Look, I think we're beyond the I hope we're beyond
Speaker 7: the pandemic in terms of its impact direct impact on
Speaker 7: economic activity.
Speaker 8: But I think there's two issues here.
Speaker 7: One, we're still in an unwind of some of the
Speaker 7: pandemic dislocations. That's what inflation coming down is about. That's
Speaker 7: what some of the normalization going on in service sectors
Speaker 7: are about. We're not quite done with it, We're starting
Speaker 7: to get closer to the end. And then we're dealing
Speaker 7: also with the reverberations of this pandemic on a more
Speaker 7: lasting basis, And a couple of them are the damage
Speaker 7: done to the supply side globally. And I also think
Speaker 7: the health of the private sector balance sheet, which is
Speaker 7: a really weird thing to say comes out of such
Speaker 7: a bad event as a pandemic.
Speaker 2: Chirst Let me expand on this was one thought you
Speaker 2: pick up on it. Can China export disinflation or a
Speaker 2: deflationary trend? What does JP Morgan see of domestic China
Speaker 2: exported out across the world.
Speaker 7: I think China is exporting deflation and goods pricing to
Speaker 7: the rest of the world. Chinese production is picking up
Speaker 7: right now. You see impoort prices in Europe and the
Speaker 7: US from China going down sharply. We think global industry
Speaker 7: is starting to pick up, China's benefiting from it. So
Speaker 7: I think the Chinese economy is going to be weak,
Speaker 7: but not hit the fears I think of a real
Speaker 7: disaster that people expect.
Speaker 8: I think global industry is picking up.
Speaker 7: I think China is going to keep a lid on
Speaker 7: global goods price inflation among other things for a while, except,
Speaker 7: of course, for what we're seeing in oil.
Speaker 4: So just before you go, I've got to do a
Speaker 4: little bit of housekeeping. The takeaway from this conversation Hi
Speaker 4: for longer got all of that. Can we just play
Speaker 4: with the dot plot a little bit and get out
Speaker 4: to twenty twenty four. What do you think that doll
Speaker 4: plot will look like lights on this afternoon?
Speaker 7: Well, the most important is probably twenty three, and it
Speaker 7: looks like you're going to have a divided committee. We're
Speaker 7: on the side of them still having the median voter
Speaker 7: with a dot. But it's a close call, I think.
Speaker 7: Regardless of that, and regardless of big changes in the
Speaker 7: forecast for twenty three, the twenty four forecast is still
Speaker 7: going to have something close to one hundred basis points
Speaker 7: of easing it's still going to have a big drop
Speaker 7: in inflation. It's still going to have an aspiration that
Speaker 7: we get an unemployeed rate up to four and a
Speaker 7: half percent without a recession.
Speaker 4: And you don't buy it, Bryce, I'm skeptical.
Speaker 7: I'm not pounding the table on it, but I'm still
Speaker 7: skeptical we can heal here without more damage being done
Speaker 7: to demand.
Speaker 4: Bryce, thank you, sir for the update for Jpie Mulk
Speaker 4: and Bryce Casman Mack.
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