WEBVTT - Surveillance: Bigger Picture with Calvasina 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best and economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.400 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.800 Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App. 0:00:29.880 --> 0:00:32.519 Laurie Cavasena joins us now at a US equity strategy 0:00:32.520 --> 0:00:35.040 at RBC Capital Markets. Lurie, wonderful to start the week with. 0:00:35.080 --> 0:00:37.360 You were just reading a note from Barclay's and they 0:00:37.440 --> 0:00:39.960 said this, we don't see the tech centric rally broadening 0:00:39.960 --> 0:00:42.159 to the rest of the s and P five hundred. 0:00:42.159 --> 0:00:44.280 We've got bank earnings on Friday. Do you see that 0:00:44.400 --> 0:00:45.400 rally broadening out? 0:00:47.080 --> 0:00:48.920 Well, thanks for having me as always, and look, I 0:00:48.920 --> 0:00:50.960 think this market wants to broaden out. We've seen the 0:00:51.000 --> 0:00:53.280 small cap part of the market make several attempts to 0:00:53.320 --> 0:00:53.960 fight back. 0:00:54.640 --> 0:00:55.640 We have looked at. 0:00:55.480 --> 0:00:58.200 Financials earning provisions as well, in particular, and we're seeing 0:00:58.240 --> 0:01:00.760 that they're generally negative. Carecord been getting a little bit 0:01:00.840 --> 0:01:02.800 less negative, same thing on energy. 0:01:03.040 --> 0:01:06.320 When we look across the S and P, most sectors. 0:01:05.840 --> 0:01:08.480 Are in recovery mode in terms of earning sentiment, which 0:01:08.520 --> 0:01:11.160 means their rate of upward revisions has either flipped from 0:01:11.200 --> 0:01:14.759 negative to positive or they are starting to get less negative. 0:01:14.920 --> 0:01:17.800 So I think this is a market that has really done. 0:01:17.680 --> 0:01:19.479 Well in the backs of the tech sector of kind 0:01:19.480 --> 0:01:21.959 of the broader timt face so far this year for 0:01:22.040 --> 0:01:24.319 good reasons. But I do think that, especially from the 0:01:24.319 --> 0:01:27.120 earning's perspective, there are some healthy undercurrents going on in 0:01:27.160 --> 0:01:28.760 other parts of the market as well. 0:01:28.840 --> 0:01:30.480 Laurie, I'm looking over the weekend. 0:01:30.480 --> 0:01:32.720 I thought there's a lot of really good equity zeitgeist 0:01:32.720 --> 0:01:35.240 as we get ready for the Roulette Wheels starting Friday 0:01:35.240 --> 0:01:38.200 with JP Morgan. And the answer I see is a 0:01:38.280 --> 0:01:43.840 massive strategy strategist bet that's pretty darn negative. Is that 0:01:43.920 --> 0:01:47.840 what you observe out there? There's a pretty gloomy strategist 0:01:47.920 --> 0:01:49.200 tone forward. 0:01:50.360 --> 0:01:52.880 I think so, And you know we've talked about this before. 0:01:53.200 --> 0:01:54.960 My target is forty two to fifty on the S 0:01:55.040 --> 0:01:57.400 and P. I've pointed to potential to upside the forty 0:01:57.400 --> 0:01:59.560 four hundred and forty six hundred three of our models 0:01:59.560 --> 0:02:01.440 are verret three of our models are bullets. The forty 0:02:01.520 --> 0:02:04.120 two to fifty is is splitting the difference. But even 0:02:04.160 --> 0:02:06.160 in that context, Tom and I tell people, you know, 0:02:06.320 --> 0:02:09.680 I personally feel pretty neutral. I don't feel like the 0:02:09.680 --> 0:02:12.440 market's been crazy. I do see the potential for someome upside, 0:02:12.440 --> 0:02:14.520 but this is a December thirty first game, so any 0:02:14.520 --> 0:02:15.919 incremental upside you might get some. 0:02:15.880 --> 0:02:17.560 Profit taking all of that. 0:02:17.760 --> 0:02:19.639 Tom, people keep telling me I'm one of the big 0:02:19.680 --> 0:02:21.520 bulls out there on the street, and I just kind 0:02:21.560 --> 0:02:25.280 of laugh. But I think the reality is that there's 0:02:25.320 --> 0:02:28.040 been this view that the earnings expectations are too. 0:02:27.919 --> 0:02:30.800 High, need to calm down the comble markets. I don't 0:02:30.840 --> 0:02:32.119 you know. We could walk through that later. 0:02:32.160 --> 0:02:36.040 But I think that you know interprets how stock prices, discounts, 0:02:36.040 --> 0:02:38.079 stuff like that in advance, and did it last year. 0:02:38.560 --> 0:02:41.359 But I also think that this is a unique moment 0:02:41.440 --> 0:02:44.440 in history, and so if we do have a recession, 0:02:44.880 --> 0:02:47.120 I think we were all talking about it last year. 0:02:47.160 --> 0:02:49.160 Is technical in nature. I do think the market has 0:02:49.160 --> 0:02:51.480 the ability to focus on the bigger picture and might 0:02:51.520 --> 0:02:54.120 not be as damaged by that as some assume. 0:02:54.320 --> 0:02:58.280 Give us two attributes when you screen for quality in 0:02:58.400 --> 0:03:01.480 mid cap small cap I get it. I can screen 0:03:01.560 --> 0:03:04.080 for quality in the world of Apple, But how do 0:03:04.120 --> 0:03:06.080 you screen for quality in mid caps? 0:03:07.840 --> 0:03:09.760 I think it gets supper when you get down into 0:03:09.800 --> 0:03:11.799 the small MidCap space. One thing we talked to a 0:03:11.840 --> 0:03:14.160 lot of clients about is healthcare and technology. 0:03:14.400 --> 0:03:15.480 That's where a lot of your. 0:03:15.360 --> 0:03:17.960 Loss makers are sitting in the rustle two thousands. So 0:03:18.280 --> 0:03:20.200 if you were to screen in small caps, say on 0:03:20.320 --> 0:03:23.239 positive negative earners, things like that, are we especially on 0:03:23.280 --> 0:03:25.320 about positive negative earners, You're going to come away with 0:03:25.360 --> 0:03:27.800 the idea that technology is a low quality sector, that 0:03:27.880 --> 0:03:31.320 healthcare is a low quality sector. Sometimes, you know, we 0:03:31.360 --> 0:03:33.920 see that. Investors are like, Okay, fine, that's just what 0:03:33.960 --> 0:03:37.000 the data is. We like these factors over time, let's 0:03:37.000 --> 0:03:39.080 just let that work in the filter. But right now, 0:03:39.080 --> 0:03:42.000 there's a more nuanced discussion happening in the small cap space, 0:03:42.040 --> 0:03:44.000 which is that if we're going to have sort of 0:03:44.000 --> 0:03:47.600 a subpar economic recovery next year, the DDP stats and 0:03:47.640 --> 0:03:50.480 even for twenty twenty five are both comfortably below two percent, 0:03:50.520 --> 0:03:53.520 which is the long term trend and a subpar economic backdrop, 0:03:53.600 --> 0:03:55.640 you want to buy growth stocks. So people are having 0:03:55.640 --> 0:03:58.400 to look at things like tech and biotech and healthcare 0:03:58.440 --> 0:04:01.720 and say, okay, our losses is that necessarily low quality? 0:04:02.560 --> 0:04:05.480 Not necessarily You really have to do it more from 0:04:05.520 --> 0:04:08.200 an art than science perspective, take into account the data, 0:04:08.240 --> 0:04:11.840 but also taken to the long term, long term growth dynamics, 0:04:11.960 --> 0:04:13.119 Lori out of management team. 0:04:13.160 --> 0:04:14.880 It's something else you have to look at in small 0:04:14.880 --> 0:04:15.800 cap as well. 0:04:15.640 --> 0:04:18.440 Laurie, how much do you push back against people who 0:04:18.440 --> 0:04:21.920 say that stocks are just ignoring this feeling in bonds 0:04:21.920 --> 0:04:24.320 that perhaps we're underpricing the risk. The fit has to 0:04:24.320 --> 0:04:27.080 go a lot further, that the real neutral rate is 0:04:27.120 --> 0:04:29.880 significantly higher, and as you can see the real yield 0:04:29.920 --> 0:04:32.920 go higher, you're not seeing that commensurate sell off even 0:04:32.960 --> 0:04:34.760 in small pats. How do you rebut that? 0:04:36.200 --> 0:04:38.880 So it's interesting, Lisa, and sort of my late June 0:04:38.960 --> 0:04:42.640 early July conversations with US based investors, they keep asking 0:04:42.640 --> 0:04:45.400 me about balance sheets, and I think that's really where 0:04:45.400 --> 0:04:49.159 the interest rate discussion intersects with the ability of companies. 0:04:48.680 --> 0:04:50.800 To manage through this higher rate environment. 0:04:51.120 --> 0:04:52.920 And we talk to people about how I think only 0:04:53.000 --> 0:04:56.159 two percent of SMP companies have an effected or have 0:04:56.320 --> 0:04:58.600 an average weighted maturity of under two years and the 0:04:58.680 --> 0:05:02.440 rustle two thousand even it's less than ten percent. So 0:05:02.960 --> 0:05:05.599 we have a lot of other metrics we take people through. Right, so, 0:05:05.680 --> 0:05:08.279 long term debt has risen, short term debt has come down. 0:05:08.279 --> 0:05:10.800 What does six versus variable look like? And what we 0:05:10.880 --> 0:05:13.839 come away with is the idea that a higher interest 0:05:13.880 --> 0:05:16.719 rate isn't as damaging to companies and their balance sheets 0:05:16.720 --> 0:05:18.920 and their ability to manage their cash flows now. 0:05:18.960 --> 0:05:20.119 As it was in the past. 0:05:20.120 --> 0:05:22.600 And I think that investors and portfolio managers who are 0:05:22.600 --> 0:05:24.880 really deep in the weed are trying to wrap their 0:05:24.960 --> 0:05:28.320 head around that issue. This seems to me, this higher 0:05:28.960 --> 0:05:31.200 straight environment like another one of these like five or 0:05:31.200 --> 0:05:34.040 six things since twenty eighteen, that's you know, a hurdle. 0:05:34.160 --> 0:05:36.520 It's a challenge, but it's something that companies seem like 0:05:36.560 --> 0:05:38.680 they're able to manage through so far. And that's giving 0:05:38.680 --> 0:05:40.880 at least some of the investors I speak with some comfort. 0:05:41.000 --> 0:05:43.640 Does that mean, Laurie that right now FED policy is 0:05:43.680 --> 0:05:46.320 not as restrictive as people think, and that in order 0:05:46.360 --> 0:05:49.039 to bring inflation lower to truly their goal, they have 0:05:49.080 --> 0:05:52.479 to go significantly higher because those higher rates aren't as 0:05:52.760 --> 0:05:54.320 damaging to some of these companies. 0:05:55.440 --> 0:05:58.360 I think that higher for longer is still what I hear. 0:05:58.480 --> 0:06:01.360 I will tell you pre SBB, I have evaluation model 0:06:01.680 --> 0:06:04.320 replug in interest rates GDP, tenure yields that sort of 0:06:04.360 --> 0:06:07.560 stuff inflation rates as well. Pre SVB, everyone wanted me 0:06:07.600 --> 0:06:10.159 to run that model at six and seven percent and 0:06:10.200 --> 0:06:12.400 see what kind of pestimate was spit out. I don't 0:06:12.400 --> 0:06:15.200 get those requests anymore. We've got I think five three 0:06:15.240 --> 0:06:17.800 five baked in the model right now, and people are 0:06:17.800 --> 0:06:20.360 pretty content to sort of use that as a general 0:06:20.480 --> 0:06:23.080 kind of rough bogie for the end of this year. 0:06:23.200 --> 0:06:24.760 We've got some cuts baked in for the end of 0:06:24.839 --> 0:06:27.960 next year. People seem pretty sanguine about that. I think 0:06:28.080 --> 0:06:32.239 in general, investors want the inflation fight. 0:06:32.120 --> 0:06:33.520 To be one and if you go back to the 0:06:33.560 --> 0:06:34.760 debt ceilingly sign Awa've it. 0:06:34.800 --> 0:06:36.400 Talked about this in quite a bit, but I think 0:06:36.400 --> 0:06:38.719 one of the reasons why the market didn't collapse around 0:06:38.720 --> 0:06:40.640 that is I do think the equity market was on 0:06:40.760 --> 0:06:43.880 McCarthy's side and wanted spending to be ranked in so 0:06:44.000 --> 0:06:46.920 ultimately infreation could be brought back down to more reasonable 0:06:47.000 --> 0:06:49.280 kind of levels. I think that calculus at least on 0:06:49.320 --> 0:06:51.360 the equity side of the business. I can't really speak 0:06:51.400 --> 0:06:53.160 so much for fixed income investors, but I think a 0:06:53.160 --> 0:06:55.760 lot of the equity pms I talked to they want 0:06:55.800 --> 0:06:58.000 that inflation fight to be one so they're willing to 0:06:58.000 --> 0:07:00.839 tolerate no another hiker two higher for longer. 0:07:01.000 --> 0:07:03.120 Lorie, just the thirty second tis if you can. I've 0:07:03.160 --> 0:07:05.200 got an article set to one side for reading later 0:07:05.240 --> 0:07:07.440 this evening. It's Embarren's over the weekend. I saw the 0:07:07.480 --> 0:07:10.240 headlines your name, and it said something like, it's kind 0:07:10.240 --> 0:07:12.720 of like the nineteen forties. What's the takeaway? 0:07:14.000 --> 0:07:16.200 So, in nineteen forty five we had a recession that 0:07:16.280 --> 0:07:19.320 the stock market completely ignored. It was a technical recession 0:07:19.360 --> 0:07:22.400 that occurred because of a transition from a wartime economy 0:07:22.600 --> 0:07:25.880 to a peacetime economy. Underline economy was still okay, but 0:07:25.920 --> 0:07:28.640 you had a massive withdrawal of government support back then 0:07:28.840 --> 0:07:31.720 in terms of fiscal very very analogous for what we're 0:07:31.760 --> 0:07:34.000 going through today, and a lot of the rhetoric we've 0:07:34.040 --> 0:07:36.200 heard about recession over the past year. I think that's 0:07:36.200 --> 0:07:39.120 one of the reasons why equity markets have been so resilient. 0:07:39.360 --> 0:07:41.640 This underlying economy is still in pretty good shape and 0:07:41.640 --> 0:07:43.120 people really understand. 0:07:42.720 --> 0:07:43.480 What's happening here. 0:07:43.680 --> 0:07:45.920 Looking forward to wadding the article a little bit later, Laurie, 0:07:45.920 --> 0:07:47.840 thanks for famin us to kick off the training week. 0:07:47.880 --> 0:07:50.720 LORI canvasiting there of RBC on the week ahead. 0:08:01.400 --> 0:08:05.040 Bruce Casman, first in his class on reflation at Columbia 0:08:05.040 --> 0:08:08.240 a few years ago, joins us. Right now, Bruce, is 0:08:08.280 --> 0:08:10.400 a question out of the time of green Span, but 0:08:10.560 --> 0:08:15.360 here we are. People will go OMG China deflation. Can 0:08:15.400 --> 0:08:21.760 we import deflation? Can we import deflation from China? Or 0:08:21.800 --> 0:08:23.600 on a global slowdown basis? 0:08:25.040 --> 0:08:28.320 I think we can definitely import deflation and goods pricing, 0:08:28.440 --> 0:08:31.360 and I think there is definitely a force at work 0:08:31.880 --> 0:08:36.480 which is related to China downshifting the wand going down 0:08:37.760 --> 0:08:42.760 and perhaps more powerfully simply the unwind of goods price 0:08:42.800 --> 0:08:45.480 pressures in a world in which manufacturing has been contracting. 0:08:45.520 --> 0:08:48.520 So I think goods pricing is not going to deflate, 0:08:48.600 --> 0:08:52.080 but there's a deflationary impulse. I think the problem is 0:08:52.120 --> 0:08:55.760 that other things are going to be blunting that downward 0:08:55.800 --> 0:09:00.000 movement and keeping core inflation on an underlying basis probably 0:09:00.160 --> 0:09:02.559 around three percent, perhaps a little higher in the US 0:09:02.720 --> 0:09:03.920 and globally as well. 0:09:04.320 --> 0:09:06.280 Are we beyond the pandemic. 0:09:09.160 --> 0:09:11.880 I think we are hopefully by on the pandemic from 0:09:11.920 --> 0:09:15.240 the point of view of its impact on behavior, But 0:09:15.400 --> 0:09:18.880 there is reverberations from this which are powerful and profound. 0:09:19.400 --> 0:09:22.000 I think what you're seeing in the US, for example, 0:09:22.080 --> 0:09:25.360 right now, is in the employment report a moderation in 0:09:25.400 --> 0:09:29.360 some of the post pandemic recovery sectors, leisure and hospitality 0:09:29.360 --> 0:09:32.360 perhaps being the most notable. But I don't think that 0:09:32.480 --> 0:09:36.000 transition and that decline and growth of jobs is a 0:09:36.000 --> 0:09:38.360 sign of shifting from strength to weakness. I think it's 0:09:38.360 --> 0:09:41.360 a sign of shifting from strength to more normalization. I 0:09:41.400 --> 0:09:43.760 think it'd be a mistake to use the normal business 0:09:43.800 --> 0:09:47.880 cycle dynamics in try to attribute that to the move 0:09:47.960 --> 0:09:50.360 towards an early start of a US recession. 0:09:50.600 --> 0:09:53.559 One consistent aspect of both the ADP and the Jobs 0:09:53.559 --> 0:09:56.360 report was the strength in the wage figure that was 0:09:56.400 --> 0:09:58.720 far beyond what the FED would like to see. And 0:09:58.800 --> 0:10:00.920 this comes in the heels of people worried not about 0:10:00.920 --> 0:10:02.800 the year over year comps so to do see coming 0:10:02.840 --> 0:10:04.959 down because of rents and because of used cars and 0:10:05.000 --> 0:10:07.680 things of that nature, but because there is this wage 0:10:07.720 --> 0:10:10.360 pressure underlying some of this strength and some of this 0:10:10.480 --> 0:10:14.360 ongoing inflation. How much are you factoring that into how 0:10:14.440 --> 0:10:17.280 high real rates neutral rates truly are. 0:10:18.640 --> 0:10:21.040 So I would be a little bit hesitant to put 0:10:21.080 --> 0:10:23.959 a lot of weight on the swings at average hourly earnings, 0:10:24.000 --> 0:10:26.560 which went down sharply earlier this year and have bounced 0:10:26.600 --> 0:10:29.240 back up. But I do think wage inflation in the 0:10:29.320 --> 0:10:33.000 US is running above four percent on an annualized basis. 0:10:33.600 --> 0:10:36.440 That's too high to be consistent with getting inflation down 0:10:36.480 --> 0:10:39.160 into the mid twies. I would not argue that wage 0:10:39.160 --> 0:10:42.920 inflation is the primary driver of US inflation, though I 0:10:42.960 --> 0:10:46.040 think there's an issue here of tight labor markets. There's 0:10:46.040 --> 0:10:49.760 an issue here of psychology having shifted, and I think 0:10:49.800 --> 0:10:52.640 the interaction of those things, in the absence of a 0:10:52.679 --> 0:10:55.280 slide into recession or something like that, is just going 0:10:55.320 --> 0:10:57.839 to blunt some of these unwines that are happening here, 0:10:57.880 --> 0:11:01.679 and we shouldn't ignore that as well. Running inflation at 0:11:01.679 --> 0:11:03.760 the core five percent this year, I think we're going 0:11:03.800 --> 0:11:06.320 to slide below four, but I don't think we're going 0:11:06.320 --> 0:11:08.440 to slide on a sustained basis below three. 0:11:08.679 --> 0:11:10.160 How long is it going to take to get there? 0:11:10.280 --> 0:11:11.080 Below three. 0:11:11.679 --> 0:11:13.600 I think it's going to take a recession to get there. 0:11:13.960 --> 0:11:17.319 I think you have to hit pricing power pretty hard. 0:11:17.360 --> 0:11:19.480 I think it's a mistake to think that the primary 0:11:19.480 --> 0:11:21.320 thing you need to do is create unemployment. What you 0:11:21.360 --> 0:11:24.200 need to do is hit pricing power. Unfortunately, when you 0:11:24.320 --> 0:11:27.960 do that, you change labor market behavior and the unemployment 0:11:28.040 --> 0:11:29.400 rate will go up alongside it. 0:11:29.960 --> 0:11:32.840 A rates restrictive enough right now where they are to 0:11:32.960 --> 0:11:34.080 induce some sort of recession. 0:11:35.360 --> 0:11:37.440 I don't know, it might be. I don't think the 0:11:37.480 --> 0:11:39.679 Fed's going to wait around, though, and I think in 0:11:39.720 --> 0:11:42.680 our forecast of the Fed boiling the frog, they don't wait. 0:11:43.280 --> 0:11:46.079 They continue leaning against this. They tighten again in July 0:11:46.200 --> 0:11:50.000 and possibly more later this year, and by time they're done, 0:11:50.280 --> 0:11:52.840 rates will be high enough with a lag to create 0:11:52.880 --> 0:11:55.120 a recession, probably sometime in twenty four. 0:11:55.440 --> 0:11:59.000 Is your study, doctor Casmin that the modern FED will 0:11:59.080 --> 0:12:01.680 react to higher interest rates? 0:12:02.000 --> 0:12:02.360 Do they? 0:12:02.440 --> 0:12:03.000 Actually? 0:12:03.400 --> 0:12:05.760 You know, if we breach through and we start talking 0:12:05.760 --> 0:12:09.400 a six percent level for early ages, whatever it is, 0:12:09.440 --> 0:12:12.599 if we get a higher interrast rate structure, does a 0:12:12.679 --> 0:12:16.439 central bank respond well? 0:12:16.480 --> 0:12:18.080 I think when you look at the move up in 0:12:18.440 --> 0:12:21.319 ten year olds we've been seeing in the last month 0:12:21.800 --> 0:12:24.880 or eight weeks. I think some of that is a 0:12:24.960 --> 0:12:28.080 tightening in financial conditions as we reprice the FED, but 0:12:28.160 --> 0:12:30.839 some of it is also taking out recession risk, and 0:12:30.880 --> 0:12:33.960 you can see more broadly financial conditions moving up, and 0:12:34.040 --> 0:12:36.000 I think in that environment it's very hard for the 0:12:36.000 --> 0:12:38.200 FED to look at that and say, Okay, this is 0:12:38.280 --> 0:12:40.840 lags in the monetary transmission mechanism and we can be 0:12:41.600 --> 0:12:44.240 patient against that backdrop. So I think the FED is, 0:12:44.720 --> 0:12:47.720 as you can see, struggling to figure out where is 0:12:47.920 --> 0:12:51.440 the right degree of restrictiveness in this economy. It's probably 0:12:51.480 --> 0:12:54.920 going to be moving too much, at least in the 0:12:54.920 --> 0:12:57.640 context of trying to preserve an expansion because of the 0:12:57.640 --> 0:13:00.400 inflation news, and that's eventually going to take us down. 0:13:00.400 --> 0:13:02.360 I think it's just really hard right now to get 0:13:02.400 --> 0:13:05.480 the timing and to be too cute about the level 0:13:05.520 --> 0:13:08.760 of race that's going to end this cycle that's dead on. 0:13:08.920 --> 0:13:11.200 And I thought about this over the weekend, Bruce, Are 0:13:11.280 --> 0:13:15.960 we asking too much of our central banks? By definition 0:13:16.200 --> 0:13:19.240 they don't get the timing right. I think this is 0:13:18.880 --> 0:13:22.280 this absurdity that they're going to nail. Plus our mind 0:13:22.320 --> 0:13:27.360 has fourteen days a turn in the macro climate is absurd. 0:13:28.440 --> 0:13:31.640 Well, I think we're in a really difficult macro environment 0:13:31.679 --> 0:13:34.920 in terms of getting right the inflation dynamics, the appropriate 0:13:35.000 --> 0:13:38.600 level of what rates are. But I think the fundamentals 0:13:38.640 --> 0:13:42.360 here are relatively straightforward. This economy is resilient, it has 0:13:42.400 --> 0:13:46.200 elevated inflation, and I think the chances of delivering a 0:13:46.240 --> 0:13:49.840 soft landing here are pretty small. So there's every reason 0:13:49.920 --> 0:13:52.000 for the FED to try to calibrate and try to 0:13:52.040 --> 0:13:55.160 deliver that kind of outcome. But ultimately I don't think 0:13:55.240 --> 0:13:57.480 it's going to be successful, And ultimately I do think 0:13:57.480 --> 0:13:59.640 we're going to need a recession. It's a question of 0:13:59.679 --> 0:14:02.520 getting the timing right, getting the rate path right, which 0:14:02.600 --> 0:14:05.960 I think everybody should realize is hard. People are put 0:14:06.000 --> 0:14:09.600 forecasting recessions starting this quarter. People have been very confident 0:14:09.600 --> 0:14:13.400 about forecasting recession. Forecasting a break in the economy like 0:14:13.400 --> 0:14:15.680 that is just not that easy to do. There's also 0:14:15.720 --> 0:14:16.640 a question to understand that. 0:14:16.880 --> 0:14:19.560 There's also a question, Bruce, about what the trigger could 0:14:19.600 --> 0:14:21.600 be of some sort of recession. And I was thinking 0:14:21.640 --> 0:14:24.800 a lot about geopolitics over the weekend with Yellen in China. 0:14:25.000 --> 0:14:29.520 How closely are you watching the price of rare metals 0:14:29.920 --> 0:14:32.800 of some of these sort of tit for tat focused 0:14:32.840 --> 0:14:37.040 areas of chips and the instruments the commodity is required 0:14:37.400 --> 0:14:38.640 to supply said chips. 0:14:39.600 --> 0:14:43.000 I think it's very unlikely that that dynamics specifically will 0:14:43.040 --> 0:14:45.520 be the catalyst for recession. But I think your point 0:14:45.560 --> 0:14:48.120 is really important, which is, recessions are about the FED. 0:14:48.560 --> 0:14:51.520 Recessions are about the vulnerabilities of the US private sector, 0:14:51.760 --> 0:14:54.960 and recessions are about shocks. Oftentimes those shocks are in 0:14:55.000 --> 0:14:58.240 the commodity space and energy specifically, And I think it's 0:14:58.280 --> 0:15:00.600 quite reasonable to say that the next session will not 0:15:00.640 --> 0:15:03.320 only be about the FED hiking rates, but it'll be 0:15:03.320 --> 0:15:06.320 about some shock that hits us Again. Shocks are not 0:15:06.400 --> 0:15:09.400 easy to anticipate, both in terms of when they hit 0:15:09.440 --> 0:15:10.720 and exactly where they hit. 0:15:11.040 --> 0:15:13.080 How do you measure the vulnerability then of a financial 0:15:13.120 --> 0:15:16.000 system to a potential shock, because that really is the 0:15:16.080 --> 0:15:17.760 key to how deep the recession may be. 0:15:18.400 --> 0:15:21.320 So I think vulnerability is broad. It's vulnerability in the 0:15:21.360 --> 0:15:24.240 financial sector, and as we well know, we've got banking 0:15:24.280 --> 0:15:27.600 sector stress and credit tightening that's going on. We're not 0:15:27.720 --> 0:15:30.280 seeing that spill over to the broader financial space and 0:15:30.320 --> 0:15:33.280 I think that's important. But vulnerability is also about where 0:15:33.320 --> 0:15:35.320 the private sector is, and this is one of the 0:15:35.360 --> 0:15:38.880 reverberations of the pandemic is how healthy the US and 0:15:38.960 --> 0:15:41.520 global private sector is, both on the household and business 0:15:41.520 --> 0:15:43.840 sector side. That doesn't mean they're going to be a 0:15:43.840 --> 0:15:46.040 strong engine for growth, but I think they're going to 0:15:46.040 --> 0:15:48.920 be our buffers against the potential for a break, at 0:15:49.000 --> 0:15:50.160 least for the near term. 0:15:50.320 --> 0:15:52.400 Bruce Love catching up with you, sir. Good to hear 0:15:52.440 --> 0:16:00.560 from you as always, Broce Casman of JP Morgan now 0:16:00.600 --> 0:16:04.280 Alifia Dorojuana the manage director Rock Creek Groof and if 0:16:04.280 --> 0:16:06.840 you're wonderful to catch up with you. Big rally year. Today, 0:16:06.840 --> 0:16:08.480 we've talked to a couple of people about whether they 0:16:08.520 --> 0:16:10.880 think it continues, can it broaden out? I was looking 0:16:10.920 --> 0:16:13.920 at your notes and you are saying remain overweight US, 0:16:14.000 --> 0:16:17.280 underweight em short term positive view on Europe. Let's start 0:16:17.280 --> 0:16:19.240 with the US and break it down that way. Why 0:16:19.280 --> 0:16:21.920 remain overweight the US after big games already this year? 0:16:23.000 --> 0:16:25.600 Yeah, Look, I think investors have been investing, as you mentioned, 0:16:25.600 --> 0:16:28.520 in a new regime from the last ten years. Right, 0:16:28.560 --> 0:16:30.960 we're in the higher rates, higher inflation, for longer. But 0:16:31.000 --> 0:16:33.120 if you look at equity markets, while we're cautious on 0:16:33.120 --> 0:16:36.760 equities in general after a very strong first half, what's 0:16:36.800 --> 0:16:38.720 going to break the equity markets? You know? I think 0:16:38.760 --> 0:16:41.400 consumer spending is something that we're looking at very closely 0:16:41.440 --> 0:16:44.120 to see if that's what break equity breaks equity markets. 0:16:44.320 --> 0:16:46.240 But I think we also have to remember that within 0:16:46.280 --> 0:16:48.720 the equity markets, the bull market this year has been 0:16:48.800 --> 0:16:51.480 driven by eight mega cap stocks. It's more than seventy 0:16:51.520 --> 0:16:55.080 percent greater cumulative return in the top eight stocks versus 0:16:55.120 --> 0:16:57.640 the rest of the Russell two thousand year to date 0:16:58.120 --> 0:16:59.600 seems immune to that action. 0:17:00.080 --> 0:17:01.320 When does the party stop? 0:17:01.920 --> 0:17:04.919 Alifia, I want you to take a long term view. 0:17:05.040 --> 0:17:05.919 Let's be honest. 0:17:06.040 --> 0:17:09.520 If your leader, Miss Beschloss went to Marrakesh in the 0:17:09.560 --> 0:17:13.080 IMF meeting, people would just simply stop to know her 0:17:13.160 --> 0:17:17.080 opinion on the linkage of the global economy and hydrocarbons. 0:17:17.400 --> 0:17:19.400 When you guys look out to a three to five 0:17:19.480 --> 0:17:22.320 year look, do you have the gloom of the IMF? 0:17:22.440 --> 0:17:25.840 Do you share their view of tepid global growth? 0:17:27.200 --> 0:17:30.720 I think growth is going to happen in particular niche 0:17:30.720 --> 0:17:33.640 sectors and areas, So we are investing quite a bit 0:17:33.720 --> 0:17:36.639 right now. In alternatives, it continues to be very interesting. 0:17:36.960 --> 0:17:39.840 Investors can take advantage of those secular long term trends 0:17:40.640 --> 0:17:44.200 US Europe emerging markets. You see tailwinds from the IRA 0:17:44.359 --> 0:17:48.480 and climate infrastructure projects. You see huge innovation in AI. 0:17:48.760 --> 0:17:53.600 You see things happening in agriculture, technology, healthcare, data centers, 0:17:53.880 --> 0:17:58.919 as you mentioned, companies producing renewable fuels for rails, terminals, livestock. 0:17:59.200 --> 0:18:02.239 There are so many interesting investment opportunities today, but they 0:18:02.280 --> 0:18:04.159 are not going to necessarily make you money in the 0:18:04.160 --> 0:18:04.959 next three months. 0:18:05.080 --> 0:18:07.879 How do you sort of navigate the idea of being 0:18:08.160 --> 0:18:11.360 less positive over the next three months, but very positive, 0:18:11.400 --> 0:18:14.000 particularly about the US over the longer term. How do 0:18:14.040 --> 0:18:17.080 you tell and communicate that message to investors who are 0:18:17.160 --> 0:18:18.320 not looking to day trade. 0:18:18.920 --> 0:18:23.240 You know, we manage very institutional portfolios for endowments and foundations, 0:18:23.280 --> 0:18:26.200 and they are long term investors. They want their endowment 0:18:26.240 --> 0:18:28.320 to be there for the next fifty hundred years so 0:18:28.320 --> 0:18:30.480 they can continue doing the good work that they do, 0:18:30.800 --> 0:18:35.160 and so diversification in an institutional portfolio is key, especially 0:18:35.160 --> 0:18:37.720 in this type of uncertain environment. Think about it, just 0:18:37.760 --> 0:18:41.240 in the public equities market. If you had taken a 0:18:41.359 --> 0:18:44.000 very singular view of small cap stocks, you would be 0:18:44.000 --> 0:18:46.679 missing out entirely on the first half of this year's rally. 0:18:46.800 --> 0:18:49.119 So you have to be diversified, we think, but you 0:18:49.160 --> 0:18:51.320 also have to look long term and start to plant 0:18:51.320 --> 0:18:53.679 the seeds now for those areas that are going to 0:18:53.720 --> 0:18:56.480 really be your biggest return drivers in ten years. 0:18:56.720 --> 0:18:59.919 It feels like diversification is changing the meaning of it, 0:19:00.040 --> 0:19:01.879 and the people who we talk to used to be 0:19:01.920 --> 0:19:04.520 in stocks and bonds, and now it means private credit, 0:19:04.640 --> 0:19:09.600 private debt, some other private equity, other aspects real estate 0:19:09.760 --> 0:19:13.680 that really are coming to the fore becoming more mainstream 0:19:13.720 --> 0:19:15.639