WEBVTT - Surveillance: Inflation Fears With Fed's Harker 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.680 and of course, on the Bloomberg Terminal. Joining me now 0:00:29.720 --> 0:00:33.559 to talk more about inflation and the outlook for the 0:00:33.600 --> 0:00:36.920 economy is Patrick Harker. He is the President of the 0:00:37.000 --> 0:00:40.080 Federal Reserve Bank of Philadelphia. And good morning to you, Pat, 0:00:40.080 --> 0:00:44.080 Thanks for joining us today. Uh, good morning, Mike. Inflation 0:00:44.159 --> 0:00:47.640 team in February, but that's not what the Fed expects 0:00:47.800 --> 0:00:51.159 going forward. The Philly Fed index that came out this 0:00:51.280 --> 0:00:56.120 month was the highest for prices paid since nineteen Do 0:00:56.160 --> 0:01:00.080 you anticipate a really, really rapid rise in prices? Is 0:01:00.080 --> 0:01:02.800 that what people in your district are telling you. Now, 0:01:02.880 --> 0:01:05.240 that's not where we're hearing across the board. We are 0:01:05.280 --> 0:01:10.280 seeing in certain pockets like manufacturing their supplied they're seeing 0:01:10.400 --> 0:01:15.800 price price pressures, but what they're not doing is planning 0:01:15.800 --> 0:01:18.679 on passing much of that along to their consumer, to 0:01:18.800 --> 0:01:22.760 their own customer. So I think it's the inflation stories complicated. 0:01:23.000 --> 0:01:25.360 As you said, we're going to see March April drop off. 0:01:26.000 --> 0:01:28.720 They were low months, obviously because we were shutting down 0:01:28.760 --> 0:01:31.319 the economy. So we're going to see a spike in inflation. 0:01:31.760 --> 0:01:34.360 But I think we're our forecasts for inflation to creep 0:01:34.440 --> 0:01:36.160 up the two and our goal is to have it 0:01:36.640 --> 0:01:39.520 hit above two percent this year. Our forecasts around two, 0:01:40.680 --> 0:01:43.840 but we don't see it running out of control. What 0:01:43.920 --> 0:01:47.280 about the idea that UM on the spending side, people 0:01:47.319 --> 0:01:50.960 are reluctant to go out. What are you hearing in Philadelphia? 0:01:51.120 --> 0:01:54.280 We're getting more jabs in arms, and yet we see 0:01:54.960 --> 0:01:59.000 personal spending decline in the month of February. It's been 0:01:59.080 --> 0:02:03.400 chopping right because the viruses UH in variable. We've had 0:02:03.680 --> 0:02:07.560 good months, bad months. We're seeing numbers rise now in 0:02:07.640 --> 0:02:11.840 this region. And so until we get through this period, 0:02:11.840 --> 0:02:14.440 we're going to see a lot of volatility in all 0:02:14.520 --> 0:02:17.320 these measures and that makes them hard to read. So 0:02:17.440 --> 0:02:20.560 for me, as a policy maker in that kind of situation, 0:02:21.040 --> 0:02:23.480 I want to hold steady, make sure we get through 0:02:23.520 --> 0:02:27.160 this period. Then we can start to normalize once we 0:02:27.240 --> 0:02:29.880 get through this. When you say get through this period, 0:02:29.880 --> 0:02:32.880 how long do you think it lasts well. Again, if 0:02:32.880 --> 0:02:36.880 you talk to epidemiologists not economists, uh, they'll say sometime 0:02:36.919 --> 0:02:40.160 in the fall, we should start to get hurt of unity. 0:02:40.360 --> 0:02:42.239 I'm a little concerned though. Some of the things we're 0:02:42.280 --> 0:02:47.080 hearing right now is vaccine hesitancy Israel. We even hear 0:02:47.120 --> 0:02:51.639 this from our healthcare contacts. Right. Healthcare workers themselves are 0:02:51.720 --> 0:02:53.720 reluctant to get the vaccine. So we need to make 0:02:53.760 --> 0:02:57.239 sure we get this vaccine into people's arms as quickly 0:02:57.280 --> 0:03:02.639 as possible. What are he's telling you about finding employees? 0:03:02.680 --> 0:03:06.240 You're you're focused now on getting unemployment down as low 0:03:06.280 --> 0:03:09.079 as you can. Some companies seem to be saying they 0:03:09.080 --> 0:03:13.480 can't find enough people. Other companies say, uh, we don't 0:03:13.480 --> 0:03:17.480 need any more people yet. It varies again by sector. 0:03:18.080 --> 0:03:23.160 In manufacturing, skilled labor is a real shortage, and we're 0:03:23.200 --> 0:03:26.560 hearing this from our contact warehousing jobs. There is a 0:03:26.600 --> 0:03:30.520 warehouse in central Pennsylvania that the starting salary for people 0:03:30.560 --> 0:03:33.320 there is twenty three dollars an hour. So again it 0:03:33.360 --> 0:03:37.360 depends a lot on the sector of the economy. Hotel, hospitality, 0:03:37.400 --> 0:03:41.200 and leisure. Some of those are having problems getting people 0:03:41.440 --> 0:03:44.000 back to work because those people have decided to switch 0:03:44.120 --> 0:03:48.400 careers to something that they think is more stable. I 0:03:48.440 --> 0:03:51.120 know that a lot of people say the FED doesn't 0:03:51.120 --> 0:03:53.360 have tools to boost employment, but you've got a new 0:03:53.360 --> 0:03:58.200 one at the Philadelphia FED to help people switch careers. Yeah. So, 0:03:58.400 --> 0:04:02.000 through our community development function at the FED and at 0:04:02.000 --> 0:04:04.120 the Philly FED, we've been doing work now for a 0:04:04.120 --> 0:04:07.640 long time on what are the skills necessary to help 0:04:07.680 --> 0:04:10.800 people get into the middle class where you don't need 0:04:10.920 --> 0:04:14.720 a four year college degree. We call those jobs opportunity occupations, 0:04:15.000 --> 0:04:18.120 jobs that pay above medium wages where you don't necessarily 0:04:18.160 --> 0:04:20.680 need a four year college degree. So we've been doing 0:04:20.720 --> 0:04:22.679 that work for a while. We we've looked at thirty 0:04:22.680 --> 0:04:25.960 three metro areas along with our colleagues of Cleveland UH 0:04:26.000 --> 0:04:28.960 and looked at these areas. We saw an average increase 0:04:28.960 --> 0:04:31.919 of about fifteen thousand dollars. That is, people with some skills, 0:04:31.920 --> 0:04:35.560 with some upskilling to get a better job and improved 0:04:35.560 --> 0:04:38.200 a lot of for themselves and their families. We then 0:04:38.360 --> 0:04:40.440 now built this tool, and this tool is meant for 0:04:40.720 --> 0:04:45.760 job seekers, employers, community colleges, and other training organizations policy 0:04:45.800 --> 0:04:49.200 makers to see what's available in their region. Let me 0:04:49.200 --> 0:04:51.320 give you two examples of what you can find. So 0:04:51.400 --> 0:04:53.680 let's say your receptionists been billed out there, Well, you 0:04:53.720 --> 0:04:56.920 have skills that you can upskill to a medical secretary 0:04:57.360 --> 0:04:59.960 and see an average, on average, an increase of twenty 0:05:00.080 --> 0:05:04.120 six percent in your salary. Or say you're in Cleveland 0:05:04.120 --> 0:05:06.279 and you're a cashier. Were all with some training you 0:05:06.320 --> 0:05:09.000 could be a customer service rate and there you could 0:05:09.000 --> 0:05:11.839 see an average increase in salary of a hundred and thirty. 0:05:13.040 --> 0:05:15.200 It's not just white collar jobs or blue collar jobs. 0:05:15.279 --> 0:05:17.440 So it's nice about these tools. You can lay out 0:05:17.440 --> 0:05:19.839 a map of what skills you need to get to 0:05:19.920 --> 0:05:22.680 get the jobs that are growing or shrinking. Can also 0:05:22.720 --> 0:05:26.480 see whether those jobs are growing or shrinking in your region. Now, 0:05:26.839 --> 0:05:29.360 I know, if I ask you about market interest rates, 0:05:29.360 --> 0:05:31.680 you'll say markets do what markets do? They go up 0:05:31.760 --> 0:05:35.320 or down. But here's what I'm Here's what I'm interested in. 0:05:35.560 --> 0:05:38.680 Is U rates have gone up, mortgage rates have gone up, 0:05:38.760 --> 0:05:41.440 car loans have gone up because the market is pushing 0:05:41.520 --> 0:05:44.360 rates high or not the FED Are people more sensitive 0:05:44.440 --> 0:05:47.279 to that when they have been so low? In other words, 0:05:47.440 --> 0:05:49.800 is it more of a risk that we see activities 0:05:49.839 --> 0:05:53.560 slow because the markets have pushed up rates some Well, 0:05:53.720 --> 0:05:56.520 let's start with business. I've not heard anybody say they're 0:05:56.520 --> 0:05:59.599 not investing because of the the rates. Just don't hear it. 0:06:00.400 --> 0:06:04.520 It's because the demand side or the uncertainty that they're facing. 0:06:04.560 --> 0:06:07.279 So we need to resolve this uncertainty so that people 0:06:07.360 --> 0:06:11.919 can make the right decisions. I'm not the consumer, maybe, 0:06:12.160 --> 0:06:15.000 but again, we're not talking about massive increases historically in 0:06:15.120 --> 0:06:18.080 rates when if you really step back, we're not. We're 0:06:18.080 --> 0:06:22.200 talking about what a hundred basis points maybe. Uh, this 0:06:22.279 --> 0:06:26.520 is historically not really something that's really affected people's decision 0:06:26.560 --> 0:06:29.800 to buy a car, maybe on the margin by home 0:06:29.920 --> 0:06:32.080 or the size of the home they get. But again, 0:06:32.120 --> 0:06:34.679 this is a good sign in some ways that rates, 0:06:35.000 --> 0:06:38.280 say the ten years, going up. We don't know exactly why, 0:06:39.040 --> 0:06:42.760 but one of the plausible reasons why is that real 0:06:42.839 --> 0:06:46.400 rates are going up. People are more optimistic about the economy, 0:06:46.600 --> 0:06:49.719 and we've been hovering a zero or negative neutral real 0:06:49.800 --> 0:06:52.320 rates for a while. So the fact that that's rising 0:06:52.760 --> 0:06:56.719 is a good sign because it shows optimism. The question 0:06:56.760 --> 0:06:59.080 I put to the chairman after the news conference that 0:06:59.240 --> 0:07:02.040 didn't quite get an answer to, I'll put to you, Uh, 0:07:02.200 --> 0:07:06.400 you mentioned real rates, and you mentioned, Uh, the long term, 0:07:06.440 --> 0:07:08.359 when do we get to that two and a half 0:07:08.440 --> 0:07:12.560 percent neutral rate that is considered the long term rate 0:07:12.640 --> 0:07:14.240 for the Fed? In other words, if you get to 0:07:14.280 --> 0:07:17.560 two thousand twenty three through through thousand twenty three and 0:07:17.640 --> 0:07:19.960 we don't see inflation out of control, do we just 0:07:20.040 --> 0:07:23.760 leave rates at zero indefinitely. Yeah, We'll have to see 0:07:23.760 --> 0:07:26.960 when we get there. I'm not sure that that would 0:07:26.960 --> 0:07:29.720 be my and I can only speak for myself, Uh, 0:07:29.840 --> 0:07:33.480 my policy prescription. I mean, if we're seeing very strong 0:07:33.880 --> 0:07:36.720 unemployment back to where we were before the pandemic, right, 0:07:36.840 --> 0:07:40.640 low inflation, great unemployment numbers, that's where we're going to 0:07:40.680 --> 0:07:43.280 get back to and so there. I mean there are 0:07:43.320 --> 0:07:46.040 some risks of keeping rates too low too long as well, 0:07:46.080 --> 0:07:49.160 and it's really a matter of bouncing off these risks. 0:07:49.160 --> 0:07:52.280 But it's very situational. I mean, you can't just make 0:07:52.320 --> 0:07:54.480 this decision right now. You really need to see the 0:07:54.600 --> 0:07:57.800 data and see how things are unfolding. Well, you talk 0:07:57.840 --> 0:07:59.840 about the risk of keeping rates too low for too 0:07:59.880 --> 0:08:01.320 low on a lot of people point to the stock 0:08:01.360 --> 0:08:04.400 market or bitcoin and say, you know, the FED is 0:08:04.440 --> 0:08:07.680 really inflating bubbles here. How much of my concern is 0:08:07.720 --> 0:08:11.880 that to you. It's something that I keep in mind 0:08:11.920 --> 0:08:15.720 all the time. That and the cost to savers. People 0:08:15.720 --> 0:08:18.680 will say on fixed income, Uh, there there's a cost. 0:08:18.720 --> 0:08:21.200 So again, this is a balancing act. We need to 0:08:21.240 --> 0:08:23.840 get the economy to recover. We need to get the 0:08:23.840 --> 0:08:27.400 economy to heal with minimal scarring. That's what was the 0:08:27.440 --> 0:08:29.720 whole goal of what we did at the FED for 0:08:29.760 --> 0:08:32.760 the past year is trying to preserve as much as 0:08:32.800 --> 0:08:36.280 we can of the infrastructure of the economy. So, you know, 0:08:36.360 --> 0:08:39.240 I think once we get through this, we can start 0:08:39.280 --> 0:08:44.000 to then think about how we normalize. Well, we get 0:08:44.040 --> 0:08:47.880 to maybe two point one percent inflation is as you forecast, 0:08:47.960 --> 0:08:50.559 or a little bit higher as some of your colleagues forecast, 0:08:50.640 --> 0:08:52.959 the market's going to start pushing up rates. And the 0:08:53.080 --> 0:08:55.760 question is is this a showdown between the markets and 0:08:55.760 --> 0:08:57.760 the FED? And will the FED blink? You've got a 0:08:57.800 --> 0:09:02.240 new uh framework to work in that you never have before. 0:09:02.240 --> 0:09:05.079 In the markets are gonna want to test it. I'm sure. 0:09:05.720 --> 0:09:08.719 Can you look through rate increases or is there is 0:09:08.760 --> 0:09:12.280 a level at which you get concerned. I mean, there's 0:09:12.320 --> 0:09:15.960 obviously a level which concerned to being some exorbitant level, 0:09:16.320 --> 0:09:21.240 But if they're within the realm of reason. I am 0:09:21.280 --> 0:09:24.920 of the camp where we stick with our framework and 0:09:25.120 --> 0:09:27.360 we let inflation run above two percent for a while, 0:09:27.440 --> 0:09:29.760 not running out of control past two percent, but above 0:09:29.800 --> 0:09:32.480 two percent for a while. That is what we've committed 0:09:32.480 --> 0:09:34.360 to with our framework, and I am committed to that 0:09:34.440 --> 0:09:37.880 as well. Well. Everybody's gonna be looking to wage inflation 0:09:37.920 --> 0:09:40.120 to tell the story of whether or not we're seeing 0:09:40.160 --> 0:09:42.920 inflation rise too quickly. In the last Beige Book, the 0:09:42.920 --> 0:09:46.800 Philadelphia sector said that wages are rising because of demand 0:09:46.840 --> 0:09:49.679 for labor the fifteen dollar minimum wage. They quoted one 0:09:50.280 --> 0:09:54.679 Philadelphia CEO is saying, is already here, are you seeing 0:09:54.720 --> 0:09:58.200 a rise in wage pressures? Yet? Yeah? Again, if you 0:09:58.240 --> 0:10:01.120 look at that warehouse in central Sylvania paying twenty three 0:10:01.120 --> 0:10:04.200 dollars an hour, they're getting their workers from somewhere, and 0:10:04.320 --> 0:10:08.400 those firms in turn respond by trying to raise wages 0:10:08.480 --> 0:10:11.640 to retain or attract new workers. So yeah, we're starting 0:10:11.679 --> 0:10:13.520 to see that, but again, it's not across the board. 0:10:13.559 --> 0:10:16.600 It's in certain sectors right now. Not a wage price spiral. 0:10:17.760 --> 0:10:20.160 I don't say it right now. I mean it could happen, 0:10:20.240 --> 0:10:23.160 but we're not. We're not seeing it running out of control. Now. 0:10:23.880 --> 0:10:26.280 Patrick Harker, thank you very much for joining us this morning. 0:10:26.280 --> 0:10:31.440 He's the president of the Philadelphia FED and reasonably optimistic 0:10:31.480 --> 0:10:35.160 Outlook there, Mike, you see that in the commentary around 0:10:35.160 --> 0:10:37.839 long term rates, reflecting the optimism, sticking to script, and 0:10:37.880 --> 0:10:39.199 I think, what you've got to do, and I know 0:10:39.240 --> 0:10:40.560 you're gonna do a great job of it over the 0:10:40.559 --> 0:10:42.559 next couple of months when we start to see the data, 0:10:43.040 --> 0:10:44.960 see who is committed to the new framework of the 0:10:45.000 --> 0:10:53.560 FED and maybe who isn't. Troy joins as natural Guysky 0:10:53.600 --> 0:10:57.960 Skybridge Capital co c IO and senior portfolio manager. It's transitory, 0:10:58.000 --> 0:10:59.840 and then you see the data, you get slapped around 0:10:59.840 --> 0:11:01.960 with Troy and you think, oh, is it? Is it 0:11:02.000 --> 0:11:03.720 trying to Troy? How do you think people will respond 0:11:03.720 --> 0:11:06.960 when we actually see the numbers over the next several months. Yeah. 0:11:07.000 --> 0:11:10.800 So I think the debate whether it's transitory or more 0:11:10.840 --> 0:11:14.240 permanent will continue to lead to elevated volatility, not only 0:11:14.240 --> 0:11:16.920 in fixed income markets, but also in equity markets, because 0:11:17.200 --> 0:11:19.000 you know, what we've seen this year so far is 0:11:19.440 --> 0:11:23.800 certainly the risks of the recovery. Another stimulus package that 0:11:23.880 --> 0:11:26.520 could have potentially not been signed by the Trump administration. 0:11:26.679 --> 0:11:31.959 Check right, a vaccine rollout that started somewhat boxes accelerated dramatically. Checked, 0:11:32.360 --> 0:11:35.840 we've now gotten almost nine percent of GDP uh in 0:11:35.840 --> 0:11:39.079 another physical steamless check. But the downside, of course is 0:11:39.160 --> 0:11:42.680 higher interest rates, higher inflation, and that's really taken some 0:11:42.760 --> 0:11:44.839 of the steam and froth out of markets. If we 0:11:44.960 --> 0:11:48.079 do is a healthy process. Where we'd certainly become more 0:11:48.120 --> 0:11:50.920 concerned is if we start seeing those higher numbers stick 0:11:51.640 --> 0:11:55.920 and that causes the FED to prematurely withdraw aggressive balance 0:11:55.920 --> 0:11:59.160 sheet expansion and money supply growth, because without you know, 0:11:59.240 --> 0:12:03.240 money supplied growth sustainably above nominal GDP, it's really hard 0:12:03.280 --> 0:12:05.959 to justify the valuations that equites are at right now, 0:12:06.080 --> 0:12:08.160 you know, somewhere around twenty one and a half twenty 0:12:08.160 --> 0:12:11.800 one point seven times earning. Let's get to the money question. 0:12:11.840 --> 0:12:15.520 Then what's the game client for Q too? For for 0:12:15.840 --> 0:12:20.160 the FED in particular use Oh yeah, no, so for us? Yeah, Now, 0:12:20.200 --> 0:12:22.439 we're we're pretty pumped about this year. You know, we're 0:12:22.480 --> 0:12:24.640 fortunately off to a really good start. And this is 0:12:24.679 --> 0:12:26.920 really one of these years where the first show bey 0:12:27.000 --> 0:12:29.120 last and the last shall be first. So, you know, 0:12:29.200 --> 0:12:32.480 some of the high performing, high flying tech and growth stories. 0:12:32.600 --> 0:12:35.520 Last year, I've really turned into duds and portfolios like 0:12:35.559 --> 0:12:38.440 ours that are more focused on value or cyclical exposures 0:12:38.480 --> 0:12:42.400 like structure credit or distress credit, which are by definition 0:12:42.440 --> 0:12:46.480 turnaround cyclical stories have done exceptionally well. Um. You know, 0:12:46.559 --> 0:12:49.679 convert upon arbitrage continues to be a strategy that's very 0:12:49.679 --> 0:12:53.640 attractive because of higher degrees of realized vutility. UM. On 0:12:53.760 --> 0:12:57.240 top of that, you have multi strategy managers like Ganlobe. 0:12:57.240 --> 0:13:01.439 They're adding material value as activist not only in in Disney, 0:13:01.440 --> 0:13:04.680 but also it Tell. And then lastly, we're very fortunate 0:13:04.800 --> 0:13:09.080 in taking a meaningful Bitcoin position towards the beginning of December, 0:13:09.480 --> 0:13:12.400 and we think that is the purest macro expression for 0:13:12.480 --> 0:13:14.400 so many things that are going on right now. So 0:13:14.440 --> 0:13:19.400 many phenomenon. One, massive money supply growth more m two 0:13:19.400 --> 0:13:23.040 than we had pre pandemic to budget deficits as far 0:13:23.080 --> 0:13:25.600 as the eye can see. Three, you have the natural 0:13:25.679 --> 0:13:29.240 dynamics the having cycle where when you artificially reduced new 0:13:29.240 --> 0:13:31.439 supply cutting in half, you tend to have a very 0:13:31.440 --> 0:13:35.080 strong bold market. And then lastly, you know what's happening 0:13:35.080 --> 0:13:37.440 in crypto now is you're aware because you guys cover 0:13:37.480 --> 0:13:42.000 it so uh accurately. Is you're going through an adoption 0:13:42.080 --> 0:13:44.679 story very similar to what happened to gold from oh 0:13:44.800 --> 0:13:47.960 six through two thirteen, and you're seeing that happen at 0:13:47.960 --> 0:13:50.800 a much more rapid pace. Is not only hedge funds, 0:13:50.800 --> 0:13:54.679 but also life insurance companies, corporate treasurers sobeign wealth fun 0:13:55.440 --> 0:13:57.360 get involved. And so you know when you when you 0:13:57.400 --> 0:13:59.800 put that all together, we think each of our themes 0:13:59.800 --> 0:14:03.560 had a reasonable probability about performing equities, but doing it 0:14:03.600 --> 0:14:06.360 with some correlation benefits, and so you know, we're we're 0:14:06.360 --> 0:14:10.560 super excited for for Q two, Troy, Let's dig into 0:14:10.600 --> 0:14:13.840 this bitcoin position. How big is a sizeable bitcoin position 0:14:14.080 --> 0:14:16.520 that you took in December? Have you adjusted it? Are 0:14:16.600 --> 0:14:18.800 you building? Are you going to reduce it? Is it 0:14:18.840 --> 0:14:21.600 active or is it a long term holding? Yes? So 0:14:21.720 --> 0:14:24.520 for us, we we it was rare. Most themes that 0:14:24.560 --> 0:14:27.360 we pursue, we we laid into and as we get 0:14:27.400 --> 0:14:30.640 more data relative to other opportunities, then we size it 0:14:30.720 --> 0:14:33.080 up over time. In this case, it was fairly clear 0:14:33.080 --> 0:14:35.160 to us that if we were there was going to 0:14:35.240 --> 0:14:37.000 be a big move, it would be somewhere in the 0:14:37.040 --> 0:14:39.440 near term, and so we needed to front load that, 0:14:39.640 --> 0:14:43.040 so we started nibbling in mid November. We bumped it 0:14:43.120 --> 0:14:45.520 up to five and a half percent at cost in December, 0:14:45.760 --> 0:14:48.000 and that's our full at cost side. So from here 0:14:48.000 --> 0:14:51.280 we're not adding any capital. We will manage the position 0:14:51.320 --> 0:14:53.760 over time. But we think we're in the sweet spot 0:14:53.760 --> 0:14:55.760 of all three of those factors in terms of money 0:14:55.760 --> 0:14:59.680 supply growth, in terms of UM near the adoption cycle, 0:14:59.800 --> 0:15:02.360 and and we're not even a year through the first having. 0:15:02.440 --> 0:15:04.720 You know, the pull markets tend to last eighteen months 0:15:04.760 --> 0:15:07.120 plus your minus during the having cycles. So for the 0:15:07.160 --> 0:15:09.600 next several months, we're gonna continue to let it appreciate. 0:15:10.000 --> 0:15:13.320 It's grown to about a thirteen percent position size to appreciation. 0:15:13.480 --> 0:15:15.880 Fortunately the rest of our it has done well to 0:15:16.040 --> 0:15:18.440 upset that. But we we look back at this, we 0:15:18.520 --> 0:15:20.920 think at the end of this year, people could potentially 0:15:20.960 --> 0:15:23.640 look back and say, um, if you had a meaningful 0:15:23.640 --> 0:15:26.160 Bitcoin position, you had a good, great year, and if 0:15:26.160 --> 0:15:28.640 you didn't, it could be much tougher to perform given 0:15:28.680 --> 0:15:31.320 all the phenomenon we were discussing in terms of chopping 0:15:31.360 --> 0:15:36.000 monetary policy raids valuations, which is very similar. Let the 0:15:36.040 --> 0:15:38.440 jump out of time, you can get that point in 0:15:38.480 --> 0:15:42.440 the second of the portfolio just how much volatility is 0:15:42.480 --> 0:15:45.680 in your portfolio right now? Yeah, So so look that 0:15:45.680 --> 0:15:47.800 that's one of the prices that you'll have to pay 0:15:48.240 --> 0:15:50.320 to have better performance in the year like this. So 0:15:50.600 --> 0:15:54.080 we typically target a forty eight percent standard deviation UM. 0:15:54.080 --> 0:15:55.960 We think this year will be somewhere between eight to 0:15:56.000 --> 0:15:58.600 twelve because of how much the bigcoin position has grown. 0:15:59.000 --> 0:16:02.120 But it's you nique opportunity where you're actually getting paid 0:16:02.160 --> 0:16:04.960 for that risk, where in many other strategies it's more 0:16:05.000 --> 0:16:08.520 difficult to get paid for taking market market altility risk. 0:16:08.720 --> 0:16:10.480 You wanted to get that final point in Troy, Oh, yeah, 0:16:10.640 --> 0:16:12.840 the final point was so it's very when when I 0:16:12.840 --> 0:16:15.120 think back over my career in the history of US 0:16:15.160 --> 0:16:18.480 managing our funds, Oh, it's very similar to oh seven, 0:16:18.680 --> 0:16:20.520 Or it could be where oh seven was a year 0:16:20.560 --> 0:16:23.160 that if you had the subprime short on you had 0:16:23.200 --> 0:16:26.000 a good, great year, and if you you didn't, it 0:16:26.080 --> 0:16:28.479 was much harder to make money as we were transitioning 0:16:28.840 --> 0:16:31.640 from you know, a housing bubble into what ultimately turned 0:16:31.640 --> 0:16:33.960 into a bear market. UM. And so that's how the 0:16:34.080 --> 0:16:37.520 years played out so far. We're not saying that definitively 0:16:37.720 --> 0:16:39.720 at the end of two thousands twenty one that that's 0:16:39.720 --> 0:16:41.400 gonna be how it plays out. But we think there's 0:16:41.400 --> 0:16:44.920 a reasonable chance that most active managers look back and say, hey, 0:16:45.240 --> 0:16:47.240 if I had a decent Bitcoin position, I had an 0:16:47.320 --> 0:16:49.880 odd year, and if I didn't, it was much more challenging. 0:16:50.160 --> 0:16:52.520 Troy unbelaivable, You've gotta come back saying, so we could 0:16:52.520 --> 0:17:01.400 tell more about this as that we had a curb 0:17:01.760 --> 0:17:04.680 Aby Bernstein, co head of investment strategist, We had a 0:17:04.680 --> 0:17:06.399 great t have you with us on the program. I 0:17:06.440 --> 0:17:09.120 want to start right here. These stories are so obvious, 0:17:09.400 --> 0:17:11.000 We've been talking about them for three months, but for 0:17:11.040 --> 0:17:12.800 some reason, it takes a while to see them play 0:17:12.800 --> 0:17:17.399 through markets cleanly. Why do you think that is? The 0:17:17.440 --> 0:17:20.440 story is under vaccines and reopening and Europe versus the 0:17:20.480 --> 0:17:23.239 United States, specifically the discussion that Lisa and I were 0:17:23.280 --> 0:17:25.600 just having Europe the news incrementally bad, the news out 0:17:25.640 --> 0:17:28.280 the United States incrementally good, and yet europe dollar held 0:17:28.320 --> 0:17:30.120 in there through much of the last couple of weeks. 0:17:30.160 --> 0:17:33.480 Until the last couple of days. Financials in Europe performed nicely. 0:17:33.560 --> 0:17:36.560 Traveling and leisure stocks have performed nicely despite what we've 0:17:36.600 --> 0:17:39.679 seen stories were all aware of. Yet we keep asking 0:17:39.680 --> 0:17:43.160 it's well known, is it well priced? Yeah, I hear 0:17:43.200 --> 0:17:44.720 you on that, But I think we have to be 0:17:44.800 --> 0:17:48.359 conscious of the fact that the vaccine alone and the 0:17:48.440 --> 0:17:51.320 COVID story alone does not tell the whole story. You know, 0:17:51.320 --> 0:17:54.320 what we think about it, Bernstein, as global investors is 0:17:54.320 --> 0:17:57.040 what are the companies that are headquartered in this region 0:17:57.240 --> 0:18:01.280 and how are those companies affected? But their slow rollout 0:18:01.280 --> 0:18:04.159 of the vaccine, and while the domestic consumer and the 0:18:04.240 --> 0:18:08.880 domestic implications are negative, many of these companies are actually exporters. 0:18:09.200 --> 0:18:11.880 Many of them are their cyclicals. And when you see 0:18:11.920 --> 0:18:15.000 the US and what we would call a great reopening, 0:18:15.280 --> 0:18:19.080 their opportunity for export is actually high. And so I 0:18:19.119 --> 0:18:21.080 think you have to look at the whole big picture 0:18:21.119 --> 0:18:24.240 in terms of the earning story. And then there's the valuation. 0:18:24.520 --> 0:18:27.920 Right as fundamental investors, when we think about the stock 0:18:28.000 --> 0:18:31.960 opportunity abroad compared to the stock opportunity in the US, 0:18:32.080 --> 0:18:35.960 the spreads have been enormous between the valuation of the 0:18:36.080 --> 0:18:40.439 US and other countries. Obviously, US growth versus US value. 0:18:40.560 --> 0:18:44.480 There's a real opportunity building for selection and whether that 0:18:44.600 --> 0:18:48.960 selection is an asset allocation in sector selection or security selection. 0:18:49.440 --> 0:18:51.840 I think it's bigger than the headlines. Jonathan, picking up 0:18:51.880 --> 0:18:53.440 on something you've just said. I think was in the 0:18:53.520 --> 0:18:56.080 data this morning, Bonast. We saw that in the e 0:18:56.160 --> 0:18:59.960 FO data. Business confidence in Germany despite what we've say, 0:19:00.080 --> 0:19:02.320 and has been picking up. The outlooks brighter. Why is 0:19:02.320 --> 0:19:04.359 the outlook brighter because what's happening to get a swear 0:19:04.720 --> 0:19:06.600 is looking better. It's not just about what you see 0:19:06.600 --> 0:19:11.160 plan out in Europe, it's the international story that's right. 0:19:11.760 --> 0:19:15.560 De carry on. I was just gonna say, that's why 0:19:15.560 --> 0:19:18.880 we're remaining committed to being a global investor. I think 0:19:18.880 --> 0:19:21.919 it totally depends on your perspective. I heard the conversation 0:19:21.960 --> 0:19:24.399 on bitcoin an hour ago and all your follow up. 0:19:24.720 --> 0:19:27.639 You know, at Bernstein we're investing for our clients for decades, 0:19:27.840 --> 0:19:30.240 not days, and we think about all the trade offs 0:19:30.280 --> 0:19:32.879 and the decisions we make. We think it's a mistake 0:19:32.960 --> 0:19:36.200 to be a US only investor, right and the geography, 0:19:36.240 --> 0:19:39.840 you're gonna have trade offs within the individual countries and 0:19:39.920 --> 0:19:42.840 their growth potential. And there's no doubt about it. Europe 0:19:42.960 --> 0:19:46.000 is really behind the US in terms of COVID today, 0:19:46.840 --> 0:19:49.119 but you have to think more long term. To your point, 0:19:49.520 --> 0:19:53.199 global businesses or headquartered there. The great reopening in the 0:19:53.320 --> 0:19:57.919 US is going to drive outcomes there materially. Alright, So 0:19:57.960 --> 0:20:00.080 what's the biggest bet right now that you see is 0:20:00.119 --> 0:20:02.720 being perhaps undervalued in a world that seems for the 0:20:02.760 --> 0:20:07.320 most part completely overvalued. Well, I'm gonna argue that active 0:20:07.359 --> 0:20:10.440 investing maybe the biggest bet that we're making. The idea 0:20:10.560 --> 0:20:12.879 that you can't just on the index. We know a 0:20:12.880 --> 0:20:17.359 look at the sp last year, SMP incredibly concentrated the 0:20:17.400 --> 0:20:21.720 top seven stocks, representing really the highest concentration we've seen 0:20:21.720 --> 0:20:24.720 in the index ever. We know what those companies are. 0:20:24.760 --> 0:20:28.000 They're all in tech. There the work from home beneficiaries, 0:20:28.440 --> 0:20:32.120 and with this great reopening, work from work is going 0:20:32.160 --> 0:20:35.320 to start to matter more. And that means cyplicals matter, 0:20:35.480 --> 0:20:39.440 That means industrials matter, that means small matters and utilities 0:20:39.440 --> 0:20:45.120 and consumer stables and value. These sectors so underperformed last year, 0:20:45.600 --> 0:20:49.359 and our theme with our clients was really balanced, Let's 0:20:49.359 --> 0:20:53.000 not get whipside trying to pivot from growth to value, 0:20:53.080 --> 0:20:57.240 value to growth. Let's maintain exposure over time, but let's 0:20:57.280 --> 0:21:01.159 be active let's make sure that security, election and focus 0:21:01.240 --> 0:21:05.320 on fundamentals is our guiding light, and that remains the 0:21:05.359 --> 0:21:08.800 case today. Well, perhaps this will be the year of 0:21:08.800 --> 0:21:10.920 active management. People have been saying this for a long time, 0:21:11.160 --> 0:21:13.639 but people are saying this time really is different based 0:21:13.640 --> 0:21:17.639 on the index construction, because we're talking active management and portfolios. 0:21:17.760 --> 0:21:19.800 Let's go back to where we started this hour. John 0:21:19.840 --> 0:21:21.800 was talking about that interview that we had with Troy 0:21:21.840 --> 0:21:25.040 Gayski of sky Bridge where he said that the key 0:21:25.119 --> 0:21:27.679 aspect of a portfolio which will be the big winner 0:21:28.080 --> 0:21:32.000 or not for one is bitcoin. Are you investing in bitcoin? 0:21:33.320 --> 0:21:36.280 We are not investing in bitcoin on behalf of our clients. 0:21:36.280 --> 0:21:38.920 When we think about outcomes for our clients, we think 0:21:38.920 --> 0:21:41.919 about number one, what is the fundamental case for the 0:21:41.960 --> 0:21:45.720