WEBVTT - Surveillance: Stocks Rally as Omicron Fears Ease 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:31.000 dot com, and of course on the Bloomberg terminal US. 0:00:31.040 --> 0:00:35.559 Now from Pimcoe, the author of the Strategic Bond invest Attorney. 0:00:35.840 --> 0:00:37.960 Let's start here the shape of this cycle, how fast 0:00:37.960 --> 0:00:39.280 it's going to move, and how easy it is to 0:00:39.360 --> 0:00:41.199 keep up or run the how difficult it is. Can 0:00:41.240 --> 0:00:44.720 you run me through that? Nat Tony, I'll think of 0:00:44.800 --> 0:00:47.440 last Well, first of all, thanks for having me here today. Um, 0:00:48.040 --> 0:00:49.720 think of the unemployment rate at least Friday in the 0:00:49.800 --> 0:00:52.840 United States four point two percent. What is full employment? 0:00:53.040 --> 0:00:55.440 It's there's a question mark about that. The Federal Reserve 0:00:55.480 --> 0:00:58.680 and it's summary of economic projections in September said the 0:00:58.760 --> 0:01:02.800 longer run full employment rate is four So it seems 0:01:02.800 --> 0:01:05.559 around the cost of reaching full environment. Perhaps we're there 0:01:05.640 --> 0:01:09.480 because of a large outflow of people are retiring, and 0:01:09.520 --> 0:01:12.800 this brings about a so called late cycle dynamic, which 0:01:12.840 --> 0:01:15.640 is what we're all talking about. Which is an acceleration 0:01:15.640 --> 0:01:20.400 and inflation of reduction in monetary accommodation through reduction in 0:01:21.040 --> 0:01:24.320 on purchases and of course potential for rate increases. This 0:01:24.360 --> 0:01:27.040 is what you get in the late cycle part of 0:01:27.080 --> 0:01:30.280 the cycle, the late portion of the cycle, and something 0:01:30.280 --> 0:01:32.520 that investors have a think about. Two. The final comment 0:01:32.640 --> 0:01:35.400 is that the job was rate. Next year most project 0:01:35.480 --> 0:01:37.480 will be somewhere in the threes, probably three and a 0:01:37.520 --> 0:01:41.040 half percent, matching the low pre prodemic, and so that's 0:01:41.080 --> 0:01:44.120 a different type of investment scenario. Tony, you're one of 0:01:44.160 --> 0:01:47.240 the most qualified people in the world for this question. 0:01:47.400 --> 0:01:53.240 Do you perceive smooth functions, smooth movements of yield, movements 0:01:53.240 --> 0:01:59.840 of price, or should we genuinely fear jump conditions? You 0:02:00.040 --> 0:02:02.840 probably should not fear jump conditions, in partly because the 0:02:02.920 --> 0:02:06.200 fettlers are over full years. Is built up an enormous 0:02:06.280 --> 0:02:09.920 amount of respect for its ability to reign in inflation. 0:02:10.919 --> 0:02:14.799 That hard one credibility is something it is not likely 0:02:14.880 --> 0:02:17.919 to give up, and it can use its words. Ben 0:02:17.960 --> 0:02:23.200 Bonanki famously said that monetary policies two percent action communication 0:02:23.280 --> 0:02:25.480 with a few words, and think of Mario Dravi in 0:02:25.520 --> 0:02:27.760 two thousand twelve with its so called butterfly speech, when 0:02:27.800 --> 0:02:31.120 he said whatever it takes that that set Europe off 0:02:31.160 --> 0:02:33.320 to the races, so to speak. It turned it around 0:02:33.720 --> 0:02:36.200 so with a few words, because of built up credibility, 0:02:36.240 --> 0:02:40.400 the idea of jump risks with worries about inflation is low, 0:02:40.560 --> 0:02:44.720 and we see finally, final comment is that inflation expectations 0:02:44.960 --> 0:02:50.000 broadly look for detame And final final comment is isn't 0:02:50.040 --> 0:02:53.320 this what the Federals are sought after the global financial 0:02:53.360 --> 0:02:58.760 prices to get rid of that disinflation deflationary mindset. It's 0:02:58.800 --> 0:03:03.040 a huge success, hasn't gone too far? Probably not, because 0:03:03.080 --> 0:03:06.320 again it has forty years of success to build on. Tony. 0:03:06.360 --> 0:03:10.360 There's a jump condition, indicated by rhetoric from the Federal Reserve. 0:03:10.360 --> 0:03:12.920 There's also a jump condition from liquidity, especially as if 0:03:12.919 --> 0:03:15.120 FED stopped soaking up as much of the off the 0:03:15.200 --> 0:03:16.919 run Treasury is not to get all geeky, but a 0:03:16.919 --> 0:03:19.080 lot of people have pointed to a lack of liquidity 0:03:19.120 --> 0:03:21.320 and some of the distortions that we're seeing. How much 0:03:21.520 --> 0:03:23.840 can we get a clear read on the yield curve, 0:03:23.880 --> 0:03:26.000 on some of the dynamics in a bond market beset 0:03:26.040 --> 0:03:29.600 by all of these liquidity issues. It's a great question, Lisa, 0:03:29.639 --> 0:03:32.200 and it's important question to be thinking about this decade 0:03:32.240 --> 0:03:34.840 because it's a lot different than other decades. The so 0:03:34.920 --> 0:03:38.680 called principal agent model is broken, which is to say 0:03:38.680 --> 0:03:42.520 that it's difficult in the bond markets finded into mediary 0:03:42.640 --> 0:03:46.160 to transfer risk, whether that be to to gain it 0:03:46.240 --> 0:03:48.440 or to to lose it. Here's one quick example of 0:03:48.800 --> 0:03:52.200 the primary dealers, those that are the in goo between 0:03:52.200 --> 0:03:56.440 the intermediaries, large investment firms. They held three billion of 0:03:56.480 --> 0:03:59.760 corporate bonds at two seven. Today they hold less than 0:04:00.120 --> 0:04:03.560 ten billion, despite that that corporate bondom market doubling in size. 0:04:03.560 --> 0:04:07.080 In other words, uh, the intermediaries aren't willing or able 0:04:07.120 --> 0:04:10.280 to hold inventories like a game of hot potato every day. 0:04:10.920 --> 0:04:13.000 And during periods of stress, it's even worse. And so 0:04:13.040 --> 0:04:16.839 this is an issue that that the Federal Reserve and 0:04:16.880 --> 0:04:21.600 others that that that constructs the architecture of the bondom 0:04:21.600 --> 0:04:24.599 market probably wants to think about should think about, because 0:04:24.600 --> 0:04:28.680 it's it makes things difficult again, especially in times of stress. 0:04:28.760 --> 0:04:31.600 It's any love catching on with you said this morning 0:04:31.600 --> 0:04:40.920 to thank you. We begin equity covers today with that 0:04:41.080 --> 0:04:43.680 yard Danny joining in a bit Lizien Saunders now with 0:04:43.760 --> 0:04:46.080 Charles Schwab. She's had the courage to be in the 0:04:46.120 --> 0:04:48.720 market and informs all of us every morning with her 0:04:48.760 --> 0:04:53.279 team with absolutely brilliant charts sometimes Bloomberg charts out on 0:04:53.320 --> 0:04:56.400 Twitter as well. Listen buy on the DIP. I guess 0:04:56.400 --> 0:05:00.479 it's once more in order. The cliche of Tina. What's 0:05:00.560 --> 0:05:05.200 the most dangerous cliche right now? I don't know if 0:05:05.240 --> 0:05:07.840 it's a cliche, but I think the notion that the 0:05:07.880 --> 0:05:11.159 market has been so resilient throughout the year and the 0:05:11.200 --> 0:05:13.360 face of all the risks that are very well known 0:05:14.240 --> 0:05:17.800 um simply suggests that you're not even peeling the first 0:05:17.839 --> 0:05:20.719 layer of the onion back on. You know. One of 0:05:20.760 --> 0:05:23.960 these off posted charts on on Twitter that I put 0:05:24.000 --> 0:05:28.120 as the draw down table looking at the index level declines, 0:05:28.200 --> 0:05:30.960 which whether it's the SMP, Nastac or Russell have been 0:05:31.000 --> 0:05:33.200 somewhat limited five percent in the case of the SMP, 0:05:33.320 --> 0:05:35.800 only ten percent in the case of the other two. 0:05:35.880 --> 0:05:39.479 But the average maximum draw down at some point this 0:05:39.600 --> 0:05:42.800 year across all stocks in the SMP is minus nineteen. 0:05:42.880 --> 0:05:45.360 It's minus forty two in the case of the Nazdac. 0:05:45.800 --> 0:05:47.760 Now that's a pretty benign way to go through a 0:05:47.800 --> 0:05:50.360 corrective phase via the process of rotation. I think we'd 0:05:50.360 --> 0:05:53.520 all prefer that over the bottom falling out all at once, 0:05:53.680 --> 0:05:56.920 but it does make for a more treacherous environment trying 0:05:56.960 --> 0:06:01.440 to trade around those rotational core actions. Luziens John Farrell 0:06:01.480 --> 0:06:04.760 hasn't treatment a coffee table book called draw Down Meditation, 0:06:04.920 --> 0:06:07.800 which is about the sleepiness of the market. Are we 0:06:07.920 --> 0:06:12.400 guilty right now, liz Enne Saunders of draw down Meditation, 0:06:12.640 --> 0:06:16.680 or we've just become benumbed by this great bull market? Well, 0:06:16.839 --> 0:06:20.640 I think there had been and notice emphasis on had 0:06:20.720 --> 0:06:24.040 a tremendous amount of complacency. We were seeing speculative fraud 0:06:24.480 --> 0:06:26.839 kicked back in even in some of the lower quality 0:06:26.920 --> 0:06:30.240 areas that had dominated trading in the early part of 0:06:30.279 --> 0:06:35.000 this year. But the volatility that started on you know, 0:06:35.080 --> 0:06:40.160 Bleak Friday with the Amicron news really brought a shift 0:06:40.400 --> 0:06:45.039 in behavioral measures of sentiment, and I think that has 0:06:45.160 --> 0:06:48.400 been a factor in why the market is finding a lift, 0:06:48.520 --> 0:06:52.960 because that complacency, that speculative fraud got rung out pretty quickly, 0:06:53.680 --> 0:06:57.200 both in attitudinal measures survey based out like AII, but 0:06:57.279 --> 0:07:01.440 also positioning with a Pook call ratio or other metrics 0:07:01.480 --> 0:07:04.920 that actually look at what certain cohorts of shorter term 0:07:04.960 --> 0:07:08.320 traders are doing, so that's not a bad set up. 0:07:08.720 --> 0:07:12.640 More recently, is that quick reversal in sentiment conditions, Lausanna, 0:07:12.960 --> 0:07:15.920 This is not a time for complacency, as you said, however, 0:07:15.960 --> 0:07:19.400 a very difficult time to hedge given the inflationary expectations 0:07:19.680 --> 0:07:23.120 given the FED. What's your top hedge for potential volatility 0:07:23.120 --> 0:07:25.560 at this point? I don't know that I would call 0:07:25.600 --> 0:07:28.400 it a hedge. I know that term often gets you 0:07:28.600 --> 0:07:34.480 somewhat generically, even when applied to disciplines like diversification. I mean, 0:07:34.520 --> 0:07:37.200 I think true hedging, a lot of that might be 0:07:37.240 --> 0:07:39.920 able to be done in the bixed futures market or 0:07:39.920 --> 0:07:42.640 the options market, but there's no blanket recommendation because it 0:07:42.640 --> 0:07:45.880 depends on what it is you're trying to hedge in 0:07:46.000 --> 0:07:49.160 terms of just trying to protect some downside. In addition 0:07:49.200 --> 0:07:52.880 to the disciplines of diversification, I think one of the 0:07:52.920 --> 0:07:58.840 strategies to consider employing, taking into consideration the increased turnover 0:07:59.160 --> 0:08:03.640 and thing like text implications, is maybe more periodic rebalancing, 0:08:03.760 --> 0:08:06.400 especially for investors that might have taken just a calendar 0:08:06.440 --> 0:08:09.120 based rebalancing approach. They might do it at you're in, 0:08:09.240 --> 0:08:12.280 they might do it at quarter end. Instead, take advantage 0:08:12.320 --> 0:08:15.520 of the swift rotations and maybe up the pace of 0:08:15.560 --> 0:08:20.400 rebalancing so you're more frequently trimming into strength taking profits 0:08:20.440 --> 0:08:23.440 where profits are given to you in some cases very 0:08:23.480 --> 0:08:26.600 significant profits and very condensed period of times, and dealing 0:08:26.600 --> 0:08:29.920 with that flip clop. You're also adding into positions maybe 0:08:29.960 --> 0:08:33.000 that have had short term underperformance. So that's probably the 0:08:33.040 --> 0:08:36.240 best strategy to approach a much more volatile period like now. 0:08:36.320 --> 0:08:38.280 What's interesting to me, Lausanne, is that you don't talk 0:08:38.400 --> 0:08:42.040 about compositional shifts on sort of a broader scale, whether 0:08:42.200 --> 0:08:45.959 it's increasing two bonds or increasing the duration or necessarily 0:08:46.040 --> 0:08:49.000 anything that's a typical hedge. And I wonder if that's 0:08:49.040 --> 0:08:51.559 new for you or if this has always been your recommendation. Basically, 0:08:51.600 --> 0:08:54.720 the idea that if inflation really is the main threat 0:08:55.080 --> 0:08:57.319 that's going to be a problem for a sixty portfolio, 0:08:57.600 --> 0:09:00.960 that's going to be a problem for traditional balancing. Well, 0:09:01.000 --> 0:09:03.680 the key there in terms of things like the sixty 0:09:04.080 --> 0:09:08.360 portfolio is watching the correlation between bond yields and stock prices. 0:09:08.440 --> 0:09:11.400 We went for about thirty years from the mid sixties 0:09:11.840 --> 0:09:16.640 until the late nineties where that correlation was pretty persistently negative, 0:09:16.679 --> 0:09:19.920 and that's really when a sixty type strategy struggled a 0:09:19.960 --> 0:09:22.960 bit more. It was also an environment that had many 0:09:23.000 --> 0:09:25.840 more supply shocks. Then fast forward to the twenty years 0:09:25.880 --> 0:09:29.800 up until this year, it has been almost exclusively a 0:09:29.840 --> 0:09:33.600 positive correlation environment and an environment where inflation was quite 0:09:33.640 --> 0:09:36.400 low and we were more subjected to demand shocks and 0:09:36.480 --> 0:09:39.440 we were supply shocks. When we first saw the eruption 0:09:39.520 --> 0:09:42.240 inflation in the middle part of this year, that correlation 0:09:42.320 --> 0:09:45.680 dipped back into negative territory popped back out. But to me, 0:09:45.880 --> 0:09:49.200 that is a key to watch heading into two is 0:09:49.240 --> 0:09:52.760 if we move back into negative correlation on a sustained basis, 0:09:53.120 --> 0:09:56.319 I think that suggests we're shifting into a more secular 0:09:56.920 --> 0:10:00.640 inflationary backdrop. That doesn't mean perpetually rising in plation doesn't 0:10:00.640 --> 0:10:03.800 necessarily need stagflation, but to your point, leads a very 0:10:03.800 --> 0:10:08.240 different environment in terms of how to add that diversification 0:10:08.840 --> 0:10:12.200 and what to do on the fixed income side of portfolios, 0:10:12.240 --> 0:10:14.400 which of course is your friend and my friend and 0:10:14.520 --> 0:10:18.600 colleague Kathy Jones is Baileywick. I wonder though, at what 0:10:18.720 --> 0:10:20.600 point people take a look at the behavior of the 0:10:20.600 --> 0:10:22.959 bottom market over the past couple of weeks, they say, 0:10:22.960 --> 0:10:25.319 look at the tenure way back down one point for 0:10:25.520 --> 0:10:29.080 three percent, and that sell off, that negative correlation just 0:10:29.200 --> 0:10:31.480 isn't going to happen, because any kind of turmoil is 0:10:31.480 --> 0:10:33.960 going to lead people back into the long end of 0:10:34.000 --> 0:10:37.120 the treasury curve. Can we make that assumption or is 0:10:37.160 --> 0:10:40.760 it too premature? I think it's premature. We also know 0:10:41.040 --> 0:10:43.480 that throughout the course of the past year, both when 0:10:43.480 --> 0:10:45.640 we saw that ten years spike up too close to 0:10:45.679 --> 0:10:49.720 one in March and then they equally swift retreat back 0:10:49.760 --> 0:10:52.360 down into the one, A lot of that was was 0:10:52.480 --> 0:10:56.080 positioning and short covering, and I think you have to 0:10:56.120 --> 0:10:57.960 sort of take with a grain of salt to some 0:10:58.080 --> 0:11:01.200 degree the messaging back to the what the market in 0:11:01.280 --> 0:11:04.679 areas like that, that doesn't mean disregard what's happening in 0:11:04.720 --> 0:11:08.599 the tenure. I think really key will be elsewhere in 0:11:08.640 --> 0:11:11.400 the credit markets what we see happen out the risk 0:11:11.520 --> 0:11:14.480 spectrum in terms of spreads. I think that's going to 0:11:14.520 --> 0:11:17.880 be a more important tell if and when we ever 0:11:17.920 --> 0:11:20.480 get to a point where we're spreads are signaling a 0:11:20.520 --> 0:11:23.640 more dire message. I think that is the message for 0:11:23.800 --> 0:11:26.959 sure that equity investors want to heat. But I think 0:11:27.000 --> 0:11:29.959 you have to take that short term positioning into consideration 0:11:30.000 --> 0:11:34.640 when looking at moves really across the treasury curve all 0:11:34.679 --> 0:11:36.600 the way out to the long end. Just an awesome 0:11:36.679 --> 0:11:40.000 saying I've schwab Kathy Jones over unfixed income, Liz An 0:11:40.040 --> 0:11:42.319 Saunders on equities Liz, and thank you for being with 0:11:42.400 --> 0:11:50.640 us today, list and Saunders that swab. I've got eight 0:11:50.679 --> 0:11:52.880 ways to go here, John. We had did this earlier 0:11:52.880 --> 0:11:55.240 with Liz and Saunders of Charles Schwab, and we're now 0:11:55.280 --> 0:11:58.200 thrilled to extend the conversation to give you global Wall 0:11:58.200 --> 0:12:01.839 Street perspective with wear Your Denny. He's founder and chief 0:12:01.840 --> 0:12:05.720 investment strategists at Your Denny Research. Long ago high above 0:12:05.800 --> 0:12:09.320 Cayuga's waters, he knew double digit inflation and then on 0:12:09.400 --> 0:12:13.080 department at Yale University, and I thought, there we go. 0:12:13.240 --> 0:12:17.240 Thank you, good morning Cornell on radio. And I want 0:12:17.240 --> 0:12:21.840 to go to the Krugman essay last week where he 0:12:21.960 --> 0:12:25.640 destroyed monitorism and said simply it was a theory, then 0:12:25.840 --> 0:12:30.120 it's not. Now what should we do with our collective 0:12:30.200 --> 0:12:34.200 memory of the ghosts of the seventies the theories of 0:12:34.280 --> 0:12:38.600 Milton Friedman. Well, I think he was right. Up until 0:12:38.600 --> 0:12:42.720 the pandemic. We did see a tremendous amount of quantitative easing, 0:12:43.679 --> 0:12:48.400 zero interest rates, central banks provided a tremendous amount of liquidity, 0:12:48.480 --> 0:12:50.960 and yet there were some very powerful forces that kept 0:12:50.960 --> 0:12:54.920 inflation down. This inflation was the law of the land 0:12:55.000 --> 0:12:58.560 for many, many years following the Great Inflation of the 0:12:58.640 --> 0:13:05.440 nineteen seventies. UM it was things like globalization and technological innovation, aging, demography, 0:13:05.480 --> 0:13:09.080 and too much debt that all were fundamentally disinflationary. But 0:13:09.120 --> 0:13:12.719 the pandemic changed all that because it really put monitorism 0:13:12.760 --> 0:13:16.640 on steroids and speed in the form of modern monetary theory. 0:13:16.720 --> 0:13:22.239 We just had this unprecedented increase in government debt deficits, 0:13:22.480 --> 0:13:25.480 and all of that was to a lot extent financed 0:13:25.520 --> 0:13:28.440 by the central banks. Help us with the distance here 0:13:28.520 --> 0:13:32.199 from Dartmouth College and David Blanche Flower Hanover, New Hampshire 0:13:32.760 --> 0:13:36.559 in the University of Cambridge and Dr l Arian they 0:13:36.559 --> 0:13:40.560 are power opposites on the inflation Guess where do you 0:13:40.640 --> 0:13:45.440 stand on that? Well? I think inflation is persistent obviously 0:13:45.480 --> 0:13:49.760 the word transitory is no longer allowed in our conversation. 0:13:49.800 --> 0:13:53.400 According to J. Powell, so persistent. I think it's going 0:13:53.440 --> 0:13:56.239 to be four to five percent for the consumption deflator 0:13:56.640 --> 0:13:59.560 until the middle of next year, and then I think 0:13:59.559 --> 0:14:02.920 it does he's back down to three to four percent. 0:14:03.360 --> 0:14:04.920 I don't think it's going to go back to two 0:14:04.920 --> 0:14:08.480 percent anytime soon, and I will not be surprised at 0:14:08.480 --> 0:14:12.839 the Fed deals with that by raising the Fed funds 0:14:12.920 --> 0:14:15.600 rate by maybe two maybe three times. But I think 0:14:15.640 --> 0:14:19.680 they might also seriously consider raising the inflation target, moving 0:14:19.760 --> 0:14:23.360 the goal from two percent to three percent. And a 0:14:23.440 --> 0:14:25.560 lot of people are looking at a federal reserve that 0:14:25.760 --> 0:14:29.040 is so responsive to market turmoil that basically, if they 0:14:29.080 --> 0:14:31.400 do signal that they're going to raise rates next year 0:14:31.440 --> 0:14:34.120 and there is some sort of tantrum, they'll step in 0:14:34.320 --> 0:14:37.360 and ease some of the conditions. How much is that 0:14:37.440 --> 0:14:41.720 anachronism at this point, given that there's a very different paradigm. 0:14:41.960 --> 0:14:44.560 I think it is. You're absolutely right, it's a different paradigm. 0:14:44.640 --> 0:14:50.280 And we've had four taper tantrums since two thousand and thirteen. 0:14:50.720 --> 0:14:52.840 We had one in May two thousand thirteen, and then 0:14:52.840 --> 0:14:55.920 we had another one in early two thousand sixteen one, 0:14:55.960 --> 0:14:59.160 and right before Christmas on two thousand and eighteen, and 0:14:59.200 --> 0:15:01.680 then this one. This one is a work in progress. 0:15:01.760 --> 0:15:04.280 It's it's not clear just how it's gonna play out. 0:15:04.960 --> 0:15:07.720 But I think that the big difference is this time around, 0:15:07.720 --> 0:15:10.560 the FED can't give the market what it wants, which 0:15:10.560 --> 0:15:13.200 would be okay, back off, back off, don't, don't, don't 0:15:13.240 --> 0:15:16.680 taper so much, uh, simply because the inflation problem is 0:15:16.760 --> 0:15:19.280 real and the FED has made it very clear that 0:15:19.640 --> 0:15:22.040 they are now concerned about it, so it's going to 0:15:22.120 --> 0:15:24.600 be pretty hard for them to back off. Although I 0:15:24.640 --> 0:15:27.640 do notice in the data there's been a real shift 0:15:27.680 --> 0:15:30.240 over the past few weeks that people are bringing down 0:15:30.320 --> 0:15:33.840 their longer term expectations once again for inflation. It seems 0:15:33.840 --> 0:15:36.960 as if people are convinced that a federal reserve hiking 0:15:37.080 --> 0:15:39.720 rates in the near term will allow growth to revert 0:15:39.880 --> 0:15:42.720 something similar to what we've seen in the past, albeit 0:15:43.000 --> 0:15:45.960 possibly even lower based on the demographics you're talking about. 0:15:46.280 --> 0:15:48.400 Is that a reality in your perspective? Does this give 0:15:48.440 --> 0:15:50.720 them leeway to hike a couple of times, let it 0:15:50.760 --> 0:15:53.960 go and actually have a smooth exit. I hope so. 0:15:54.040 --> 0:15:57.000 I think that's the consensus view. Maybe it's wishful thinking. 0:15:57.080 --> 0:16:00.840 Maybe you know, the pessimism about the near term is 0:16:00.880 --> 0:16:04.840 being upset by the perception that the pain now will 0:16:04.880 --> 0:16:08.160 lead to gain later. Uh. Look, first and foremost, I 0:16:08.200 --> 0:16:09.600 don't think this is gonna wind up to be like 0:16:09.600 --> 0:16:12.480 the nineteen seventies. There's some aspects of that going on 0:16:12.600 --> 0:16:15.400 right now, like a wage price firal, which is of concern, 0:16:15.800 --> 0:16:18.520 and we're already seeing some cost of living adjustments being 0:16:18.520 --> 0:16:22.080 put into contracts. But I'm a big believer that productivity 0:16:22.120 --> 0:16:24.720 is making a huge comeback. And the reason for that 0:16:24.840 --> 0:16:26.880 is one of the huge differences between now and the 0:16:26.920 --> 0:16:29.600 seventies is there's no growth in the labor force, so 0:16:29.720 --> 0:16:32.960 that's related to demography, and the companies are just going 0:16:33.000 --> 0:16:35.760 to have to increase productivity to upset the fact that 0:16:35.840 --> 0:16:39.960 the labor shortages are not temporary, their chronic and your journy. 0:16:40.000 --> 0:16:41.560 I want to go to your book and I want 0:16:41.600 --> 0:16:43.960 to say it is a triumph to megan decide the 0:16:43.960 --> 0:16:47.480 London School of Economics where ed Yard Danny Folks writes 0:16:47.560 --> 0:16:49.840 in Praise of Profits, and you begin with a great 0:16:49.920 --> 0:16:54.520 David Ricardo who changed how we think and this underestimation 0:16:54.560 --> 0:16:58.560 of profits. Is the profits now for technology different than 0:16:58.600 --> 0:17:03.480 the profits of just December of two thousand, absolutely, I 0:17:03.480 --> 0:17:08.280 mean in in in two thousand, a lot of the 0:17:08.359 --> 0:17:12.680 profits and technology were based on dot com companies who 0:17:12.720 --> 0:17:17.119 had really no serious business plan, ordering technology and paying 0:17:17.160 --> 0:17:22.600 for it with credit. The big situation back then was 0:17:22.640 --> 0:17:27.000 that you had telecom companies seller financing their their customers. 0:17:27.040 --> 0:17:30.520 So those profits were kind of phony and uh, it 0:17:30.640 --> 0:17:33.160 was a period where there was a lot of manipulation 0:17:33.160 --> 0:17:36.120 of profits. This time around, these are very real profits. 0:17:36.119 --> 0:17:39.840 They're based on very real businesses. And I think technology is, 0:17:40.119 --> 0:17:43.480 uh is the way of the future. It's it always is, 0:17:43.520 --> 0:17:45.919 but it's more so than ever. How do you respond 0:17:46.160 --> 0:17:49.600 to the cry of fifteen years that the profits are 0:17:49.640 --> 0:17:53.520 all going to a few? Well, there there is this 0:17:53.640 --> 0:17:57.359 kind of Marxist view out there that, uh, if if 0:17:57.400 --> 0:18:00.359 a company is profitable, it might must be exploiting somebuddy, 0:18:00.680 --> 0:18:04.200 and it's probably exploiting workers and maybe exploiting consumers by 0:18:04.200 --> 0:18:06.600 not giving them the very best. But I make a 0:18:06.640 --> 0:18:09.480 distinction between two kinds of capitalism and my book, and 0:18:09.480 --> 0:18:13.720 that's entrepreneurial capitalism and chrony capitalism. I actually am and 0:18:13.800 --> 0:18:17.040 in the same camp as a progressive socialists. When I 0:18:17.080 --> 0:18:21.159 when I say that I'm against chrony capitalism, chrony capitalism 0:18:21.200 --> 0:18:24.439 isn't capitalism. It's all about using the political system to 0:18:24.480 --> 0:18:27.800 gain the system. I'm I'm an entrepreneur myself, and I 0:18:28.359 --> 0:18:31.480 can't afford lobbyists. So I think that's really the definite 0:18:31.680 --> 0:18:35.119 distinction between an entrepreneur and a chrony is whether you 0:18:35.119 --> 0:18:37.720 can afford lobbyists or not. I can't, and I've got 0:18:37.720 --> 0:18:40.639 to compete. I've got to get customers the very best. 0:18:40.640 --> 0:18:43.240 So in my book, I also argue that Adam Smith 0:18:43.280 --> 0:18:47.600 did a terrible job of marketing capitalism by telling us 0:18:47.640 --> 0:18:51.560 that it's all about selfishness. It's not selfishness, it's insecurity. 0:18:51.680 --> 0:18:53.680 I'm going to go out of business if I don't 0:18:53.720 --> 0:18:55.720 give my customers the very best of what I have. 0:18:56.440 --> 0:18:58.960 I'm sure that that's a harder sell that capitalism. Go 0:18:59.040 --> 0:19:01.680 for it, because it's based but insecurity. I do wonder though, 0:19:02.160 --> 0:19:04.600 just going into the realm of trading, going into the 0:19:04.600 --> 0:19:07.640 realm of how you position in such a tenuous period, 0:19:07.680 --> 0:19:11.760 given that you do feel overly overall optimistic about productivity 0:19:11.800 --> 0:19:14.280 but a little bit concerned about the FED and how 0:19:14.320 --> 0:19:17.760 that all shakes out. Have we already priced in the 0:19:17.880 --> 0:19:21.639 dynamism and technology the productivity gains that you're expecting, or 0:19:21.680 --> 0:19:24.639 do you think that that will fuel further gains in 0:19:24.680 --> 0:19:27.800 the headline indexes next year? Well, look, I think the 0:19:27.840 --> 0:19:30.960 best is yet to come for us in terms of prosperity, 0:19:31.040 --> 0:19:34.320 in terms of standard of living. I think technology is 0:19:34.320 --> 0:19:36.080 going to solve a lot of our problems. It is 0:19:36.080 --> 0:19:39.280 solving a lot of our problems. But yeah, I mean 0:19:39.359 --> 0:19:43.800 it's We're not going to get double digit increases in 0:19:43.840 --> 0:19:47.000 the stock market anytime soon. Earnings peaked on a year 0:19:47.040 --> 0:19:49.760 over your basis in the second quarter, and that that 0:19:49.800 --> 0:19:51.560 doesn't mean they go down, they just grow at a 0:19:51.640 --> 0:19:54.880 slower pace. So I'm predicting that we go from forty 0:19:54.920 --> 0:19:58.639 eight hundred by year end, So I'm I'm We're getting close, 0:19:58.680 --> 0:20:02.480 but no cigar, just it and then something like dred 0:20:02.920 --> 0:20:05.800 by the end of next year and by the end 0:20:05.840 --> 0:20:09.080 of two thousand and thirty. And those are not spectacular increases, 0:20:09.359 --> 0:20:13.040 their single digits, consistent with single digit increases and earnings 0:20:13.760 --> 0:20:15.560 at looking forward to giving the book and read it's 0:20:15.560 --> 0:20:17.359 on my desk. Thanks for paying with us this morning, buddy. 0:20:17.359 --> 0:20:20.800 I appreciate it. At Johnny of any Research and author 0:20:21.240 --> 0:20:29.320 of the Praise of Profit. He's out of Notre Dame 0:20:29.320 --> 0:20:32.080 in Michigan, and you know, it's a typical structure that 0:20:32.119 --> 0:20:35.480 you would see for an airline executive in the modern era. 0:20:35.600 --> 0:20:38.000 Can we talk about customer service? Tump in the sky 0:20:38.160 --> 0:20:42.480 right now? That relationship has just broken down between the 0:20:42.520 --> 0:20:44.080 people that work for the allies and the people to 0:20:44.160 --> 0:20:47.280 fly right now. It is broken. Our personal soap opera 0:20:47.320 --> 0:20:48.959 here that Lisa and I are living as well as 0:20:48.960 --> 0:20:51.440 we're catching up with John Farrell. John, you've been living 0:20:51.480 --> 0:20:54.679 this for eighteen months, I'll say, and I've got a 0:20:54.720 --> 0:20:58.240 renewed respect for what you and many others flying on 0:20:58.359 --> 0:21:00.080 a heath throw of had to put up with this 0:21:00.200 --> 0:21:02.560 attention right now between the people who work for the 0:21:02.560 --> 0:21:06.240 airlines and the people who fly on the airlines. Obviously 0:21:06.240 --> 0:21:09.760 away from the extreme stories which are absolutely ridiculous where 0:21:09.760 --> 0:21:12.960 there's been violence on the planes and the absolutely zero 0:21:13.040 --> 0:21:15.960 support from anyone for any of that, but anyone flying 0:21:16.040 --> 0:21:18.840 right now, Tom has fount that tension between the people 0:21:18.840 --> 0:21:21.560 who work on the airlines and with me personally, have 0:21:21.560 --> 0:21:24.800 found it too over the Mastertop very very aggressive over 0:21:24.840 --> 0:21:27.480 themasking and they've been putting a very unfortunate position where 0:21:27.480 --> 0:21:30.480 clearly they feel at risk on the airline themselves, and 0:21:30.520 --> 0:21:33.600 they feel like they also have to enforce these policies too, 0:21:33.600 --> 0:21:37.120 and it just creates this natural tension. Tom fit is there. 0:21:37.160 --> 0:21:38.840 It's kind of the elephant in the room when you 0:21:38.880 --> 0:21:41.480 fly right now. It's just how delicate things seem to 0:21:41.520 --> 0:21:44.680 be between the passenger and the airline stuff the pandemic. 0:21:44.720 --> 0:21:46.440 But I'm going to say, John, this is a real 0:21:46.560 --> 0:21:50.760 leadership exercise, and everybody's got their own anecdotes. I'll give 0:21:50.800 --> 0:21:53.800 a plus plus the delta that happens to be my experience. 0:21:53.840 --> 0:21:57.280 But we were talking about jet Blue earlier, you know, John, 0:21:57.280 --> 0:21:59.639 you and I got in at at least it was 0:21:59.640 --> 0:22:01.960 already cock ob jet Blue because she was in a 0:22:02.040 --> 0:22:04.080 three am. Well, i'll tell you the biggest misconception about 0:22:04.119 --> 0:22:06.119 Jet Blue when he decided the Atlantic and as they 0:22:06.119 --> 0:22:08.800 started that new entry into that corridor, Tom over the 0:22:08.840 --> 0:22:11.439 last few months, the misconception that they aren't like the 0:22:11.560 --> 0:22:15.640 ryanair of American airlines. And I don't think that's Ryan. 0:22:15.680 --> 0:22:18.280 I think that misconception also exists to some degree in 0:22:18.320 --> 0:22:20.600 the United States. Tom, I don't see them as a 0:22:20.640 --> 0:22:23.040 bunch of airline per se. I think they're mint offering 0:22:23.040 --> 0:22:26.280 the mint camping. It's been absolutely fantastic value off of 0:22:26.280 --> 0:22:28.880 Bloomberg surveillance. Hoolene Becker with us a few days ago 0:22:28.960 --> 0:22:33.520 from Cowen with a real great interest in United airlines. 0:22:33.520 --> 0:22:36.440 We are united in the value and I'm a Sodalgio 0:22:36.480 --> 0:22:39.240