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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa A. Brahmowitz. Each day

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Speaker 1: we bring you the most important, noteworthy, and useful interviews

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Speaker 1: for you and your money, whether you're at the grocery

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Speaker 1: store or the trading floor. Find the Bloomberg p m

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Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.

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Speaker 1: With this earning season coming to a conclusion, what to

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Speaker 1: expect next for stocks? Typically stocks rally into and during

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Speaker 1: the earning season, depending force on the results of specific companies.

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Speaker 1: Here to tell us about earnings and market valuations is

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Speaker 1: Matt Forrester. He's the chief investment officer for b n

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Speaker 1: Y Melon Lockwood Advisers. He helps to oversee nearly eight

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Speaker 1: billion dollars. Is based in King of Prussia, Pennsylvania. Matt,

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Speaker 1: thanks very much for in with me. You know, one

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Speaker 1: of the one of the things that that always sort

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Speaker 1: of is interesting is if you take a look at

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Speaker 1: a chart of the SMP five hundred, let's just use

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Speaker 1: that as a as a proxy, you can kind of

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Speaker 1: tell when earning season takes place without even knowing what

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Speaker 1: the dates are, what the calendar is on the bottom

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Speaker 1: of the of the chart, because it seems that we

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Speaker 1: have this pattern that has almost been ingrained in investor behavior.

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Speaker 1: Have you noticed this as well? Absolutely, since since of

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Speaker 1: the stock market gains have occurred during this earning season,

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Speaker 1: and this one has been absolutely spectacular. Uh, course driven

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Speaker 1: by the tax cuts, but we've had a remarkable earning

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Speaker 1: season um and we've also seen analysts begin to pick

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Speaker 1: up their expectations for future quarters going into the next

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Speaker 1: you know, rest of and in the twenty nineteen. So

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Speaker 1: we've clearly had some some really remarkable corporate results. Uh. Interestingly,

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Speaker 1: the markets have not always in every visual case of

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Speaker 1: certain cases where they have looked at these earnings and

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Speaker 1: then looked at the guidance and look deeper. So I

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Speaker 1: think it's fair to say that a lot of the

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Speaker 1: good earnings number have been widely anticipated. But we've continued

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Speaker 1: to have gains in markets, and we've sort of powered

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Speaker 1: through this other levels of risks that we've seen every

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Speaker 1: markets or the last few a few months. All right,

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Speaker 1: we'll get to the risks in a second. But this

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Speaker 1: notion that we see these gains, as you said, of

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Speaker 1: the gains seemed to come in this in this specific

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Speaker 1: time period. If you're an investor and you're looking for

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Speaker 1: a time to get in, do you wait until the

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Speaker 1: earning season is over, see what people are doing in

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Speaker 1: terms of maybe taking some short term profits, and then

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Speaker 1: go and prospect for the stocks the companies that you

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Speaker 1: really want to own. Yeah, it could be. I suspect

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Speaker 1: that we're going to have a summer where some of

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Speaker 1: the issues that have recently cropped up UH and some

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Speaker 1: of the risks are probably gonna give us these periodics

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Speaker 1: buying opportunities. So if you're looking to make large new

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Speaker 1: allocations to perhaps the equity market, you may want to

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Speaker 1: see how that affects the overall macro picture. So clearly

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Speaker 1: you've had the Italian news, which you know had some

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Speaker 1: stuff just like it's right, but it gives you those

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Speaker 1: buying opportunities that are very short lived. I think those

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Speaker 1: are very hard for UH, for market players to adjust

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Speaker 1: to UM. But if you look at those lists we

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Speaker 1: ascaren February on average hourly earnings U, you know, it's

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Speaker 1: somewhat crazy for markets to respond to a three tents

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Speaker 1: of a of a increase from expected number and average

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Speaker 1: hourly earnings, but it got the markets worried about the

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Speaker 1: things that we might see in inflation, whether the FED

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Speaker 1: was behind a curve, you know, raise questions about whether

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Speaker 1: or not monetary policy was have to go even tighter, uh,

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Speaker 1: you know, for more quickly than what the markets have expected.

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Speaker 1: And when we see those types of fears work their

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Speaker 1: way through the markets, UM, that's going to give us

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Speaker 1: those periodic trade opportunities to the calendar there, you know,

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Speaker 1: from here to the mid terms is going to be

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Speaker 1: filled with these trade issues, which we're going to be ongoing. Uh,

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Speaker 1: We're going to be continue to dealing with some of

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Speaker 1: the European populism and what's what's arisen from the Italian crisis. H.

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Speaker 1: On the backdrop of that, that was gonna be a

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Speaker 1: lot of really good earnings numbers, you know, coming from

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Speaker 1: from American corporation. So we're hoping that that is going

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Speaker 1: to power us through these isolated events. Um. But there

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Speaker 1: are real structure of reasons why investors should be somewhat

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Speaker 1: concerned about Italy, the third largest bondasher on the planet,

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Speaker 1: eighth largest economy around the world, twelfth largest by purchasing

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Speaker 1: power parity concept. Uh. You know, if there are challenges

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Speaker 1: to European populism. H those things are going to have

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Speaker 1: an effect on on the Eurozone. Um, we're gonna have

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Speaker 1: to power through these trade issues. The structural um connections

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Speaker 1: between the U. S and China are really big. This

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Speaker 1: is a really big deal. Uh, they are you know,

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Speaker 1: we have more connections than any set of geopolitical or

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Speaker 1: business rivals and maybe in the twentieth century. So we

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Speaker 1: need to work through this. I think the structure probably

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Speaker 1: means that we will tread carefully. But in so many

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Speaker 1: of these things, markets are dealing with issues that are

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Speaker 1: largely opaque. They may not be able to have a visibility.

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Speaker 1: We don't know as market players what the Italian government,

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Speaker 1: new populistic Italian government really wants to do. I don't

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Speaker 1: think the new Italian necessarily. Maybe we've gotta We're limited

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Speaker 1: in time, and I want to give you about thirty

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Speaker 1: seconds here too. What do you specifically focused on in

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Speaker 1: terms of where you're putting money to work right now?

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Speaker 1: So I think because of these successes here as the risks,

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Speaker 1: you have to think about your portfolio as an overall whole.

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Speaker 1: You should have some pieces of your portfolio that may

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Speaker 1: act as ballast. Uh. You know to help help keep

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Speaker 1: the ship afloat when these periodic risk events continue to

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Speaker 1: hit us. And for me that means gold, it means

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Speaker 1: some amount of exposure to a long term high grade debt.

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Speaker 1: We can't do this in all of our portfolios, but

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Speaker 1: where we can, we try to isolate some places where

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Speaker 1: we can have some pieces of ballast. Uh US small

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Speaker 1: caps may be less exposed to some of the events

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Speaker 1: going on overseas. For all those things, those kinds of

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Speaker 1: things that we're for him to put into some for

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Speaker 1: portfolios today. Thank you very much for being with me.

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Speaker 1: You got Matt Forrester, Chief Investment Officer b n Y

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Speaker 1: Melon Lockwood Advisers, helping to manage nearly eight billion dollars

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Speaker 1: of customer assets. He says, look at gold, high grade

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Speaker 1: corporate debt, and small cap stocks. Hello everybody, and welcome.

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Speaker 1: I want to bring you in Dr David Kelly, he

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Speaker 1: really knows how to CHRISTI wait a minute. You have

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Speaker 1: to tell people you were hosting an amazing path at

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Speaker 1: all at the b n Y Melon inside and Dr

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Speaker 1: David Kelly was on it. And he always does a

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Speaker 1: wonderful job at crystallizing and sort of distilling complicated economic

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Speaker 1: issues into wonderful metaphors that actually ring home. He is

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Speaker 1: chief Global Strategist at Jpmorkan Asset Management. And one thing

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Speaker 1: that you said that really struck me was that you

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Speaker 1: think that investors are being too barished in the short

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Speaker 1: term and too bullish in a long term. Can you explain, Yeah,

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Speaker 1: I think, I think in terms of the short term,

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Speaker 1: we are seeing a real pickup at economic activity, and

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Speaker 1: we've I think economic growth in the second quarter cope

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Speaker 1: as much as four percent. Look at the lowest unemployment

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Speaker 1: rates since nineteen nine. Earnings this year are going to

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Speaker 1: be up about twenty six percent year over year. These

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Speaker 1: are these are really wonderful numbers. And when you think

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Speaker 1: about the stock market, I would invest in stocks today

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Speaker 1: just because of the money companies are earning right now.

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Speaker 1: Never mind about the future, because right now they're they're

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Speaker 1: generating a no fault of cash that can be paid

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Speaker 1: at in dividends that could be used to stock buybacks.

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Speaker 1: That's that's all positive. I think. In the long run, though,

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Speaker 1: we have to recognize that that. You know, there's a

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Speaker 1: lot of talking to these days about three percent growth.

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Speaker 1: I think we can do three percent growth for about

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Speaker 1: a year. But because we don't have any growth in

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Speaker 1: the number of our virtually no growth in the population

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Speaker 1: age sixty four, we're really out of available workers. And so,

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Speaker 1: you know, I think the employery can come down a

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Speaker 1: little bit more, but then it's going to stop and

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Speaker 1: growth has got to slow down to about two percent,

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Speaker 1: and I think, you know, for the long run, we

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Speaker 1: need to recognize that that's where we are. Unless we

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Speaker 1: change our policies with regard to immigration and legal immigration

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Speaker 1: to increase the number of skilled workers in the United States,

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Speaker 1: we will slow down. But there's also a lot of

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Speaker 1: opportunity overseas, and so I think that in the short

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Speaker 1: run people are being um a little too pessimistic and

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Speaker 1: not giving the market credit for the earnings that companies

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Speaker 1: are earning right now. But in the long run, I

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Speaker 1: think we're we're not recognizing the real structural problems the

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Speaker 1: US economy has, not just around this labor supply, I think,

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Speaker 1: but also around very big budget deficits which are growing.

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Speaker 1: If you want to find out about the health of

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Speaker 1: the US consumer, where do you go? I go to Costco.

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Speaker 1: It's you know, it's a it's a it's a wonderful

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Speaker 1: place here you I mean you see these mobs of people.

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Speaker 1: I mean they're piled back into the aisles, and then

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Speaker 1: you look at their their cards and they have to

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Speaker 1: push these big, oversized carts and then they pile everything

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Speaker 1: up to a peak. But what what you really should

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Speaker 1: do is look in the carts because people are buying

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Speaker 1: enough mustard for a generation. I mean, why hasn't got

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Speaker 1: the money? And and so if you want to see

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Speaker 1: mindless consumerism come to Costco, Okay what I asked. I

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Speaker 1: asked it for a reason because I want to get

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Speaker 1: to the point that it is one thing to sit

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Speaker 1: in front of a screen and watch a number. It

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Speaker 1: is another thing to go out into the real economy,

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Speaker 1: in the real world and find out what is new,

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Speaker 1: what is innovative, what people are spending their money on,

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Speaker 1: what they're not spending their money on. And I'm wondering

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Speaker 1: whether this is something that you in a sense advocate

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Speaker 1: combined with all of your higher level world absolutely, because

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Speaker 1: you look at big numbers and I don't believe in

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Speaker 1: in modeling based on anecdotes, but you can use anecdotal

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Speaker 1: information to really get what's going on. I mean, you

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Speaker 1: try and find a plumber in America today, you can't

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Speaker 1: find one. I mean, you just you know, if you've

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Speaker 1: got a problem right now, they're not going to come

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Speaker 1: out today. Maybe wait, wait a week, maybe wait two weeks.

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Speaker 1: But the but the problem is where there's a real

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Speaker 1: shortage of skilled workers and you can see that in

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Speaker 1: your day to day life if you actually try and

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Speaker 1: hire something to do a particular job. Um And equally,

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Speaker 1: you know, if if you want to see what's going

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Speaker 1: on with consumer spending, as I say, you can, there

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Speaker 1: are plenty of areas where you can see just how

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Speaker 1: mind to see people spend whatever money is in their pockets,

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Speaker 1: you know. But just to push back, if you look

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Speaker 1: at it from the other point of view, if you

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Speaker 1: want to just look at anecdotal evidence, there's still a

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Speaker 1: lot of I don't know, pessimism out there among a

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Speaker 1: lot of people. I mean, perhaps it's not captured by

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Speaker 1: some of the economic surveys, but you certainly see this

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Speaker 1: with the birth rate falling off from millennials, and you

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Speaker 1: certainly see this with you know the fact that we

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Speaker 1: aren't seeing wages increase more so, how do you reconcile that? Well,

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Speaker 1: I think that's true. I mean the gap between rich

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Speaker 1: and poor is growing, and I think it will continue

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Speaker 1: to grow. Uh And and a lot of people are

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Speaker 1: getting left behind. But again we're talking about you know,

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Speaker 1: how do you how do you invest? And and you know,

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Speaker 1: in the in the first quarter, operating earnings are up

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Speaker 1: twenty six percent. In May, wages are up two point

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Speaker 1: eight percent. That's not good for workers, but it's great

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Speaker 1: for shareholders. So it's I think you have to recognize

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Speaker 1: the economy that that we actually have here. We're just

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Speaker 1: pretty good for corporations. One of the things that you

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Speaker 1: said in the panel that I thought was really interesting

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Speaker 1: was about how people in Sweden managed to equalize the

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Speaker 1: amount of espresso they drink with the amount of vodka

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Speaker 1: they drink in the evenings. Uh. And you're sort of

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Speaker 1: making analogy that we've got this incredible tax plan that's

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Speaker 1: boosting earnings and a really solid corporate backdrop, but we

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Speaker 1: also have all the uncertainty from trade top. Can you

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Speaker 1: just explain to well, yeah, I mean that's this is

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Speaker 1: this This was mainly a slurn some colleagues of mine

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Speaker 1: from Sweeten nothing not the entire Swedish nation. They appreciate it,

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Speaker 1: but no, I think I think we have a sort

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Speaker 1: of a mixture of Vodican expressing on the economy right now.

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Speaker 1: We've got you know, espresso is clearly a stimulative and

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Speaker 1: we've got all the stimulus from fiscal stiments, which is

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Speaker 1: very unusual this lations cycle. But we've got this big

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Speaker 1: tax cut, a lot of money in people's pockets, a

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Speaker 1: lot of money in corporate pockets. That's helping the account

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Speaker 1: of me grow. And if it was just for that,

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Speaker 1: the economy probably be overheating. We'd be really worried about inflation.

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Speaker 1: But at the same time, we've got the the the

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Speaker 1: sedative or the vodica if you like, of um, tariff worries,

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Speaker 1: Washington worries, political divide um, and all of that is

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Speaker 1: creating uncertainty. The problem with uncertainty is the business is

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Speaker 1: you know, when you've got uncertainty, what what? What do

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Speaker 1: people say? Well, let's wait and see. The problems are

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Speaker 1: three most dangerous words and economics I wait and see.

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Speaker 1: If everybody decides to wait and see, what what, this

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Speaker 1: is not good. And so we've actually got this drag

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Speaker 1: from uncertainty which who are a particular round trade policy

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Speaker 1: which is negating some of the stimulus from the fiscal

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Speaker 1: from the fiscal package. Well, you know, caffeine and alcohol.

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Speaker 1: There are two things that can lead to addiction, right,

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Speaker 1: I mean, you know, if you have a lot of caffeine,

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Speaker 1: you need more and you need to keep it consistent, right,

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Speaker 1: I mean, that's right, And they both have they both

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Speaker 1: have bad long term and that really gets back from

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Speaker 1: near term. People should be more bullish long term, they

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Speaker 1: should maybe be more bearish because on the fiscal side,

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Speaker 1: we're gonna have, you know, starting in Octobe, where we're

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Speaker 1: gonna have federal defence of over trillion dollars for as

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Speaker 1: far as I can see, that is going to impoverish

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Speaker 1: US in the long run. Um And equally with trade,

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Speaker 1: you know, you want to trade negotiations to result in

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Speaker 1: trade agreements quickly, because uncertainly about trade just means that

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Speaker 1: I don't know as a corporation. Should should I build

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Speaker 1: a plant in Prioria? Should I build a plant in Poland?

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Speaker 1: I don't know? And if I don't know, I'm not

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Speaker 1: gonna do either. And so so I think both both

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Speaker 1: extra uncertainty from Washington and unwarranted but budget deficits are

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Speaker 1: those are both negatives in the long run to investors

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Speaker 1: make investing too complicated for themselves, and absolutely they do.

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Speaker 1: I think I think I think people need to think about,

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Speaker 1: you know, for example, emerging markets. I think emerging markets

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Speaker 1: is a great is a people should have in a

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Speaker 1: portfolio right now. But people think, oh, it's too complicated.

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Speaker 1: I have to know about all these things. No, you don't,

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Speaker 1: I mean you don't. You need to have a good

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Speaker 1: manager and let them invest in the forest. I'm not

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Speaker 1: gonna I'm not going to to testify and behalf any

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Speaker 1: individual tree in emerging markets. But the forest will grow,

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Speaker 1: Emerging markets will grow fast, and the rest of the

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Speaker 1: than to help markets for years to come along. Term

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Speaker 1: investor should have position in emerging markets and just feel

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Speaker 1: comfortable about that rather than trying to nitpick each individual country.

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Speaker 1: He also said that you thought the theme most overvalued

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Speaker 1: asset right now is bitcoin. Yeah, but the problem by

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Speaker 1: bitcoin is I mean, I know, I know a lot

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Speaker 1: of people unfortunately do this, but I want to invest

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Speaker 1: in bitcoin. The problem with bitcoin or any cryptocurrency is

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Speaker 1: there's no real barrier to entry. Now. I think blockchain

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Speaker 1: technology is obviously a good technology. It's obviously gonna be

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Speaker 1: useful in a a lot of ways, but right now it's

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Speaker 1: you know, Bitcoin is is like the leader, but it's

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Speaker 1: got nothing that's going to maintain its lead. It's got

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Speaker 1: no barrier to entry. It's like you build a new

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Speaker 1: Olympics Olympic stadium and you've got this weekend jog are

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Speaker 1: running around, running around the path, and they look really

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Speaker 1: good in the stadium. The problem is the varsity teams

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Speaker 1: on a bus headed for the stadium, and when they

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Speaker 1: get there, you know, the weekend jog is not gonna

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Speaker 1: look so good. I think with the problem with something

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Speaker 1: a cryptocurrency is it's not a store of value, it's

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Speaker 1: not a unit of account, it's not a medium of exchange.

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Speaker 1: In the long run, I think blockchain dollars, blockchain the end,

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Speaker 1: blockchain euros will be much better. Best. Thank you very

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Speaker 1: much for being with us. Dr David Kelly, chief Global Strategist,

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Speaker 1: head of a global market insights strategy team at a

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Speaker 1: JP Morgan Asset Management. I am very pleased to bring

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Speaker 1: in Phil Orlando, chief equity market striate just at Federated

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Speaker 1: joining us here in Orlando, Florida. Do you feel a

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Speaker 1: particular affinity to Orlando is in Orlando, Yeah, do you

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Speaker 1: feel like the city firth to you to answer that question.

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Speaker 1: It creates a lot of confusion with T s A

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Speaker 1: and hotel check in clerks and all sorts of So

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Speaker 1: I want to start with a question, a kind of

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Speaker 1: existential question it's been plaguing in the market, which is

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Speaker 1: is this as good as it gets? With earnings? First

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Speaker 1: of all, I want to say, you did a superb

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Speaker 1: job moderating the panel this morning with with Rinehart and

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Speaker 1: David Kelly. Uh, really good job. And and this was

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Speaker 1: a topic that you touched on, uh with with your

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Speaker 1: panelists this morning. Uh you talk about is your question

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Speaker 1: is this as good as it gets? I would actually

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Speaker 1: take the other side of the argument that I don't

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Speaker 1: think the market believes a lot of what they see.

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Speaker 1: We think that the stronger economic growth, stronger earnings growth,

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Speaker 1: all of that in fact is sustainable, and the market's

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Speaker 1: not as as a bulliant as it should be because

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Speaker 1: they don't think that any of this is gonna last

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Speaker 1: and it's all ephemeral and it's just gonna disappear. Um.

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Speaker 1: So I I you know our view. We've got a

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Speaker 1: thirty one forecast for the SMP five by the end

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Speaker 1: of this year. We think there's gonna be a strong

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Speaker 1: fourth quarter rally once we get through the summer period

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Speaker 1: where there's gonna be a lot of concern about the

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Speaker 1: midterm elections and uh, what's the Fed doing? Are they

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Speaker 1: eventually going to overshoot? What's their policy going to be? Uh?

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Speaker 1: This pop and first quarter earnings is that sustainable? This

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Speaker 1: pop that we think we're going to see in second

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Speaker 1: quarter g d P is that sustainable. Everyone's assuming that

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Speaker 1: that all of this is just a flash in the pan.

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Speaker 1: It ends badly. Um, we think that that that we're

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Speaker 1: putting in place a foundation that's gonna get us back

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Speaker 1: to trend line or better economic growth. We're looking at

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Speaker 1: at corporate earnings growth that hasn't been this good in

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Speaker 1: seven or eight years, and and the market needs to

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Speaker 1: be more excited about this, and I think eventually they will.

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Speaker 1: Today's not that day. So you think we're gonna get

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Speaker 1: another six points on the uh? So we're sitting in

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Speaker 1: about okay points so so, and we think that the

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Speaker 1: back of that is going to be a very strong

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Speaker 1: fourth quarter. Ralty that that when you study the history

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Speaker 1: that this year calendaren there's a very unusual confluence of

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Speaker 1: three seasonal events. The selling man go away thing happens

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Speaker 1: every year. We know about that um but this is

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Speaker 1: also the second year of the four year presidential election cycle,

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Speaker 1: tends to be very volatile of stocks. And we've had

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Speaker 1: a leadership transition at the Federal Reserve. Now the Fed's

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Speaker 1: been around a hundred years, has only been sixteen chairman.

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Speaker 1: But the market has a very distinct trading pattern whenever

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Speaker 1: we change horses, and and when when these three things

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Speaker 1: come together, they've only come together six times in the

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Speaker 1: last eighty five years or so, and and the previous

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Speaker 1: five times you've had this sort of barbell shaped year

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Speaker 1: where we started the year in good shape, there's a

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Speaker 1: lot of volatility and instability in the middle of the year,

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Speaker 1: and then we ended the year in really great shape.

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Speaker 1: I think we're going through that that instability period right

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Speaker 1: now in terms of what's gonna happen with the midterm elections,

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Speaker 1: what's gonna happen with the Fed. We've got another f

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Speaker 1: MC meeting coming up next week. All right, we think

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Speaker 1: there's gonna be a quarter point hike. I think that's

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Speaker 1: a fairly consensus view. But the question from then is

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Speaker 1: what do the dots look like. What's the FEDS policy

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Speaker 1: prescription gonna be over the course of the next eighteen

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Speaker 1: months or so? Will they overtight? We don't know the

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Speaker 1: answers to that. Well, it's just about a minute to

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Speaker 1: go here. I'm wondering what your perspective is, given the

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Speaker 1: fact that you expect a strong fourth quarter rally. Does

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Speaker 1: the FED matter for that considering the fact that people

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Speaker 1: are pricing in or are talking about certainly four rate

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Speaker 1: hips is here, Well, it absolutely matters because our forecast

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Speaker 1: is only three rate hikes. Uh So, so if we're

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Speaker 1: wrong and and the Fed is gonna give us four

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Speaker 1: or more, um, you know, there's been a rumor that, uh,

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Speaker 1: you know j Powell one of the things he's thinking

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Speaker 1: about is is sort of scrapping Janny Yellen's idea of

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Speaker 1: only four press conferences, going to eight press conferences. And uh.

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Speaker 1: The reason why that's significant is that the market has

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Speaker 1: gotten into their head that only a press conference, only

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Speaker 1: a pressor only a meeting with the presser's a live meeting,

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Speaker 1: and that we're not going to do anything and the

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Speaker 1: other meeting. Now that's not necessarily right, but Powell wants

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Speaker 1: to strip that thought process away from the market and say, okay,

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Speaker 1: every time we meet every six weeks for an f

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Speaker 1: MC meeting, we might do something. And and the reason

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Speaker 1: that Yelling apparently didn't want to do press there's every

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Speaker 1: time is that it's a lot of work to prepare

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Speaker 1: for them. We are broadcasting from b n Y Melon

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Speaker 1: Inside in Orlando, and joining us, of course, is Phil Orlando,

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Speaker 1: chief equity market strategist at Federated UH. Phil, let's talk

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Speaker 1: about small and mid cap stocks for just a second.

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Speaker 1: I was looking at the Russell two thousands up eight

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Speaker 1: and a half percent so far this year. UH. Is

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Speaker 1: it because they are more domestically focused or is it

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Speaker 1: because they just didn't get any love previously? Combination of

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Speaker 1: the two. This has been one of our biggest calls.

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Speaker 1: We went to a table pounding burn yourself at the

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Speaker 1: stake by on small caps last fall and there were

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Speaker 1: probably a half a dozen key reasons. At the top

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Speaker 1: of the list was the fact that the U. S economy,

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Speaker 1: corporate earnings economic growth was starting to really perk up,

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Speaker 1: and a small cap company typically does eighty percent or

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Speaker 1: so of their business here, so theoretically that was going

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Speaker 1: to benefit them Uh, if we were right that the

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Speaker 1: economy and the corporate earnings we're gonna get stronger, that

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Speaker 1: meant that the Fed was probably going to accelerate its

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Speaker 1: tightening policy. That's happened, which meant that the dollar was

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Speaker 1: going to finally catch a bit. Now. Remember dollar euro

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Speaker 1: had gone from one oh three to one twenty five

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Speaker 1: or so over the course of last year. We thought

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Speaker 1: that was overdone and that we should have seen a

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Speaker 1: rally back to about the one fifteen level or so.

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Speaker 1: So we're sitting in about one see eighteen or so

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Speaker 1: right now. The strength in the dollar should benefit small

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Speaker 1: cap companies, just as the weaker dollar tends to benefit

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Speaker 1: large cap companies. It makes their goods and services cheaper

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Speaker 1: as they're exporting them overseas. Half or more of a

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Speaker 1: large cap company stuff is done overseas. So the stronger dollar,

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Speaker 1: based upon those other things was going to benefit small caps.

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Speaker 1: So I'm just wondering before we move on to some

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Speaker 1: of the other sectors, I'm just wondering a lot of

430
00:21:52,119 --> 00:21:55,040
Speaker 1: people think that the dollar is gonna weaken again, probably

431
00:21:55,440 --> 00:21:58,040
Speaker 1: in six months, maybe a year, as people start to

432
00:21:58,040 --> 00:22:01,080
Speaker 1: realize how deep the deficits really are. Do you agree,

433
00:22:01,200 --> 00:22:03,600
Speaker 1: and when would you consider start taking starting to take

434
00:22:03,640 --> 00:22:06,600
Speaker 1: some risk out of small caps. So I'm not sure

435
00:22:06,640 --> 00:22:09,679
Speaker 1: that I fully agree with that assessment. I am concerned

436
00:22:09,720 --> 00:22:13,119
Speaker 1: about the debt and the deficit levels, no question. But

437
00:22:13,359 --> 00:22:17,679
Speaker 1: Dan Clifton over at Strategos put out a note a

438
00:22:17,680 --> 00:22:20,280
Speaker 1: week or so ago saying that when we start to

439
00:22:20,359 --> 00:22:23,479
Speaker 1: get some of the data out of the government this

440
00:22:23,560 --> 00:22:28,400
Speaker 1: year in terms of how much the federal tax revenue

441
00:22:28,400 --> 00:22:31,560
Speaker 1: has increased because economic growth is better, capital gains taxes

442
00:22:31,600 --> 00:22:34,719
Speaker 1: are better, etcetera, and and how much some of that

443
00:22:34,800 --> 00:22:36,760
Speaker 1: has been applied to the debt and the depth said

444
00:22:36,880 --> 00:22:40,360
Speaker 1: the numbers, he said, will look better. We as an

445
00:22:40,359 --> 00:22:43,320
Speaker 1: investment community don't really have an appreciation of that because

446
00:22:43,400 --> 00:22:45,760
Speaker 1: right now we're just speculating. So you think that the

447
00:22:45,840 --> 00:22:48,360
Speaker 1: small caps have have a pretty long run ahead of them,

448
00:22:48,400 --> 00:22:51,000
Speaker 1: It sounds like absolutely what about tech stocks because they

449
00:22:51,040 --> 00:22:53,880
Speaker 1: have been reaching record highs and I'm just wondering how

450
00:22:53,920 --> 00:22:57,320
Speaker 1: you're thinking about that. So we we love tech through

451
00:22:57,440 --> 00:22:59,720
Speaker 1: last year into the first quarter of this year, and

452
00:22:59,720 --> 00:23:02,760
Speaker 1: then sort of went neutral. I guess as the market

453
00:23:02,880 --> 00:23:06,240
Speaker 1: was sort of peaking in that late January early February standpoint.

454
00:23:06,320 --> 00:23:09,679
Speaker 1: The reason for that valuation appeared to us to be

455
00:23:09,720 --> 00:23:13,120
Speaker 1: a little ahead of itself, and large cap world generally

456
00:23:13,160 --> 00:23:16,760
Speaker 1: had outperformed large cap value by about twenty five percentage

457
00:23:16,800 --> 00:23:20,080
Speaker 1: points over the course of seventeen in the first part

458
00:23:20,119 --> 00:23:23,480
Speaker 1: of eighteen. Now, that's a one standard deviation event that

459
00:23:23,560 --> 00:23:27,080
Speaker 1: has only occurred five times in the last forty years

460
00:23:27,160 --> 00:23:29,359
Speaker 1: or so, So it appeared to us that growth was

461
00:23:29,440 --> 00:23:33,160
Speaker 1: ahead of itself. Now, in those other four instances, when

462
00:23:33,200 --> 00:23:36,800
Speaker 1: that inflection point came and money were starting to rotate

463
00:23:36,840 --> 00:23:40,400
Speaker 1: back into value, the value had a phenomenal run. And

464
00:23:40,400 --> 00:23:42,640
Speaker 1: and so we think we're at one of those inflection

465
00:23:42,720 --> 00:23:46,879
Speaker 1: points now. And so we've been overweight energy stocks, financial

466
00:23:46,920 --> 00:23:50,720
Speaker 1: service stocks, and industrial stocks in the domestic market as

467
00:23:50,720 --> 00:23:53,399
Speaker 1: a result of that. I'm gonna throw a little bit

468
00:23:53,400 --> 00:23:56,560
Speaker 1: of a curveball here, because, uh, we're talking about all

469
00:23:56,560 --> 00:23:59,160
Speaker 1: of this in the context of this conference and people

470
00:23:59,200 --> 00:24:02,800
Speaker 1: planning for their financial future and trying to uh in

471
00:24:02,880 --> 00:24:06,119
Speaker 1: some way, not to simplify it, but make it applicable

472
00:24:06,160 --> 00:24:11,520
Speaker 1: to their personal situation. Social security, right is a big

473
00:24:11,600 --> 00:24:14,360
Speaker 1: part of people's retirement plan. Whether you have a lot

474
00:24:14,400 --> 00:24:16,320
Speaker 1: of money or a little money, you're kind of in

475
00:24:16,320 --> 00:24:18,640
Speaker 1: your mind have this notion you're going to get your

476
00:24:18,680 --> 00:24:21,600
Speaker 1: social Security check. This is the first time since n

477
00:24:22,240 --> 00:24:24,280
Speaker 1: two that the government's having to dip into the trust

478
00:24:24,320 --> 00:24:28,040
Speaker 1: fund in order to fund social security payments. Right, what

479
00:24:28,080 --> 00:24:31,720
Speaker 1: do you say to people who are using social security

480
00:24:31,760 --> 00:24:35,240
Speaker 1: as the first piece of the bigger puzzle of a

481
00:24:35,359 --> 00:24:40,280
Speaker 1: retirement plan. Well, if it's the only piece, um, I

482
00:24:40,720 --> 00:24:43,359
Speaker 1: would be a little nervous. I think it's part of

483
00:24:43,359 --> 00:24:46,920
Speaker 1: a mosaic that you've got your your four oh one

484
00:24:47,040 --> 00:24:50,360
Speaker 1: k uh, You've got your I rara, you've got your

485
00:24:50,359 --> 00:24:54,360
Speaker 1: Social Security, You've you've got some some some savings, you've

486
00:24:54,400 --> 00:24:57,120
Speaker 1: got the equity in your house. All of that together,

487
00:24:57,240 --> 00:25:00,760
Speaker 1: people should be fine if if you've done thing other

488
00:25:00,840 --> 00:25:03,920
Speaker 1: than continue to hope and pray and light candles that

489
00:25:04,000 --> 00:25:06,760
Speaker 1: the government will continue to, you know, be able to

490
00:25:06,800 --> 00:25:09,560
Speaker 1: support you with your social Security checks. I think that's

491
00:25:09,560 --> 00:25:13,240
Speaker 1: a risky strategy because we've got to address, in my opinion,

492
00:25:13,760 --> 00:25:18,640
Speaker 1: the unsustainable trajectory of entitlements at some point in the future.

493
00:25:18,840 --> 00:25:20,679
Speaker 1: I don't know that today is that day, because I

494
00:25:20,680 --> 00:25:23,760
Speaker 1: don't think we have the right mix of government officials

495
00:25:23,800 --> 00:25:26,000
Speaker 1: with the backbone and the vision to be able to

496
00:25:26,000 --> 00:25:29,200
Speaker 1: fix the problem. But but this problem is getting progressively

497
00:25:29,320 --> 00:25:32,760
Speaker 1: worse every day. Uh. And and if I were sitting

498
00:25:32,800 --> 00:25:34,960
Speaker 1: in the White House right now, I'd be trying to

499
00:25:34,960 --> 00:25:38,639
Speaker 1: put together a plan that that brings the best thinking

500
00:25:38,680 --> 00:25:41,600
Speaker 1: of both sides to compromise on the issue that that

501
00:25:41,680 --> 00:25:46,520
Speaker 1: we've got to do some things to recognize better health UH,

502
00:25:46,560 --> 00:25:52,679
Speaker 1: longer UH retirement ages UH means testing of benefits for

503
00:25:53,040 --> 00:25:56,080
Speaker 1: the super wealthy, increasing the tax base. There's a bunch

504
00:25:56,119 --> 00:25:58,480
Speaker 1: of different things that we need to do in order

505
00:25:58,520 --> 00:26:01,640
Speaker 1: to get Social Security on a more sustainable footage. Thank

506
00:26:01,680 --> 00:26:03,959
Speaker 1: you so much for being with us, Phil Orlando. Always

507
00:26:03,960 --> 00:26:07,280
Speaker 1: wonderful to get your insights, especially in the town that

508
00:26:07,359 --> 00:26:10,200
Speaker 1: was named after you. Phil Orlando, chief equity market strategist

509
00:26:10,480 --> 00:26:14,880
Speaker 1: at Federated ruling over his roost here at the Insight

510
00:26:15,280 --> 00:26:18,679
Speaker 1: Conference in Orland. So thank you so much for having me.

511
00:26:18,880 --> 00:26:20,960
Speaker 1: This was this was a thrill to be with you, guys.

512
00:26:35,240 --> 00:26:38,479
Speaker 1: Our next guest spent more than two decades at the

513
00:26:38,480 --> 00:26:41,800
Speaker 1: Federal Reserve in a variety of capacities. He now serves

514
00:26:42,119 --> 00:26:45,520
Speaker 1: as the chief economist at Standish, which is part of

515
00:26:45,560 --> 00:26:48,680
Speaker 1: b n Y Melan Asset Management. I want to bring

516
00:26:48,680 --> 00:26:51,040
Speaker 1: in vincent Reinhardt thank you so much for joining us.

517
00:26:51,080 --> 00:26:53,720
Speaker 1: Really a pleasure having you for having me. I want

518
00:26:53,720 --> 00:26:57,200
Speaker 1: to start with a lot of some of the handwringing

519
00:26:57,280 --> 00:27:01,320
Speaker 1: in the economics profession right now. Is the Phillips curve dead? Uh?

520
00:27:01,440 --> 00:27:04,160
Speaker 1: Can we throw away the yield curve as it flattens

521
00:27:04,160 --> 00:27:06,080
Speaker 1: and disregarded even though in the past it's been a

522
00:27:06,119 --> 00:27:09,360
Speaker 1: telling indicator of recessions. What do you think the biggest

523
00:27:09,480 --> 00:27:13,040
Speaker 1: thing is right now that the economics professional economists are

524
00:27:13,040 --> 00:27:17,359
Speaker 1: getting wrong? First thing they remember is all that handwringing.

525
00:27:17,480 --> 00:27:19,679
Speaker 1: Notwithstanding at the end you have to go back to

526
00:27:19,720 --> 00:27:24,280
Speaker 1: certain mechanisms because that's what keeps your understanding and the

527
00:27:23,840 --> 00:27:27,399
Speaker 1: U of the world in motion. Uh. To me, I

528
00:27:27,440 --> 00:27:32,000
Speaker 1: think the biggest thing the brethren get wrong is that

529
00:27:32,160 --> 00:27:34,600
Speaker 1: the rest of the world is bigger and it doesn't

530
00:27:34,640 --> 00:27:39,400
Speaker 1: act exactly like us. That a lot of macroeconomists are

531
00:27:39,560 --> 00:27:43,440
Speaker 1: used to a closed form representation of the US economy

532
00:27:43,440 --> 00:27:46,119
Speaker 1: and much more comfortable of that. But the plain fact

533
00:27:46,280 --> 00:27:51,720
Speaker 1: is we went from something like um emerging markets being

534
00:27:51,760 --> 00:27:57,080
Speaker 1: a third of the UH Federal Reserved Exchange Rate Index

535
00:27:57,160 --> 00:28:00,399
Speaker 1: to being more like seventy of the of the Federal

536
00:28:00,400 --> 00:28:03,879
Speaker 1: Reserves Exchange Rate Index. So what's the practical implication of that?

537
00:28:03,920 --> 00:28:05,600
Speaker 1: I mean, how does that factor into sort of the

538
00:28:05,640 --> 00:28:09,359
Speaker 1: everyday existence of Americans. So it's a couple things. One is,

539
00:28:09,359 --> 00:28:13,200
Speaker 1: it's probably why they're so uh so much pressure keeping

540
00:28:13,240 --> 00:28:16,440
Speaker 1: inflation from going up even though there's evident resource pressure,

541
00:28:16,600 --> 00:28:19,000
Speaker 1: because the rest of the world is there meets somewhere

542
00:28:19,000 --> 00:28:22,840
Speaker 1: our demand. Because the rest of world also doesn't act

543
00:28:23,080 --> 00:28:27,320
Speaker 1: like us. Uh. Emerging markets in particular try to limit

544
00:28:27,359 --> 00:28:30,600
Speaker 1: their fluctuations of their exchange rate piece of FISA dollar.

545
00:28:31,119 --> 00:28:34,679
Speaker 1: That implies that major currencies aren't as important as they

546
00:28:34,720 --> 00:28:38,960
Speaker 1: used to be. Have we become more isolated in our thinking?

547
00:28:40,280 --> 00:28:44,320
Speaker 1: I think we didn't change and therefore are relatively more

548
00:28:44,360 --> 00:28:47,280
Speaker 1: isolated than we should should have. I e. If you

549
00:28:47,400 --> 00:28:51,440
Speaker 1: missed the fact that China is the largest economy in

550
00:28:51,560 --> 00:28:55,760
Speaker 1: terms of international purchasing power, you're you're gonna you're you're

551
00:28:55,800 --> 00:28:59,880
Speaker 1: gonna be missing out on on on the explanation. Great example.

552
00:29:00,320 --> 00:29:02,680
Speaker 1: We know from the minutes that back in January, the

553
00:29:02,760 --> 00:29:05,880
Speaker 1: f m C had a long discussion about inflation determination.

554
00:29:06,280 --> 00:29:08,400
Speaker 1: They put a page and a half in the FLM

555
00:29:08,480 --> 00:29:10,360
Speaker 1: scene in its I used to sign those for six

556
00:29:10,440 --> 00:29:13,280
Speaker 1: or seven years. That's a lot. That's a big footprint.

557
00:29:13,880 --> 00:29:17,240
Speaker 1: Over those page and a half you will find nowhere

558
00:29:17,640 --> 00:29:21,760
Speaker 1: global supply chain, rest of the world, exchange value of

559
00:29:21,800 --> 00:29:26,000
Speaker 1: the dollar. It was all domestic center. So uh, you know,

560
00:29:26,040 --> 00:29:28,960
Speaker 1: we spoke about this earlier, but scottman Ard of Googgenheim

561
00:29:29,080 --> 00:29:33,000
Speaker 1: came out and today said that the flattening yield curve

562
00:29:33,040 --> 00:29:36,440
Speaker 1: now at the flattester about since two thousand seven, is

563
00:29:36,480 --> 00:29:38,800
Speaker 1: an indicator that we're getting closer to the end of

564
00:29:38,840 --> 00:29:41,640
Speaker 1: this cycle, that we're probably within two years of a recession.

565
00:29:42,040 --> 00:29:45,320
Speaker 1: Do you agree? So I can say the easy thing,

566
00:29:45,720 --> 00:29:48,640
Speaker 1: and that is the U S economy is dynamic. In

567
00:29:48,680 --> 00:29:51,360
Speaker 1: the post war period, about fifteen percent of the years

568
00:29:51,400 --> 00:29:54,240
Speaker 1: had recessions in them. So if you're asking me for

569
00:29:54,240 --> 00:29:57,200
Speaker 1: a multi year forecast, there's gotta be a probability of

570
00:29:57,240 --> 00:29:59,840
Speaker 1: recession in there. Now does the yield? Is the yield

571
00:30:00,040 --> 00:30:02,640
Speaker 1: nerve as scary as it used to be? And I

572
00:30:02,680 --> 00:30:06,440
Speaker 1: think the answers know. And the reason is yield curve

573
00:30:06,600 --> 00:30:10,280
Speaker 1: used to be very scary because if short rates were

574
00:30:10,360 --> 00:30:14,560
Speaker 1: below long rates, it meant that long rates incorporated the

575
00:30:14,600 --> 00:30:18,320
Speaker 1: expectation of the FED easy. If short rates were real high,

576
00:30:18,360 --> 00:30:20,760
Speaker 1: it meant the FED had a tight policy. So what

577
00:30:20,840 --> 00:30:25,320
Speaker 1: gets the FED from tight too easy a recession and

578
00:30:25,400 --> 00:30:28,280
Speaker 1: so therefore it was good at predicting a recession. What's

579
00:30:28,320 --> 00:30:32,360
Speaker 1: the difference now, and that is long rates always incorporated

580
00:30:32,480 --> 00:30:37,160
Speaker 1: term premium, the scarcity you know, uh value associated with

581
00:30:37,240 --> 00:30:42,000
Speaker 1: holding treasury securities. Well, treasuries are really really scarce because

582
00:30:42,520 --> 00:30:45,640
Speaker 1: the feder reserve and foreign official accounts hold them. In

583
00:30:45,680 --> 00:30:48,960
Speaker 1: that environment, estimates of the term premium are actually negative,

584
00:30:49,440 --> 00:30:52,000
Speaker 1: so it's not as big as signal about a future

585
00:30:52,080 --> 00:30:55,440
Speaker 1: FED mistake when long rates are low relative to short rates.

586
00:30:56,600 --> 00:30:59,040
Speaker 1: You've heard the phrase the generals fight the last war?

587
00:30:59,760 --> 00:31:02,960
Speaker 1: Have economists and politicians are they fighting the last war?

588
00:31:03,040 --> 00:31:05,880
Speaker 1: Particularly on trade? Rather than figuring out how to live

589
00:31:05,880 --> 00:31:08,560
Speaker 1: in a world where China is, as you described as

590
00:31:08,680 --> 00:31:13,000
Speaker 1: dominant our we seem to be fighting skirmishes at the

591
00:31:13,240 --> 00:31:17,440
Speaker 1: edges to try to satisfy some nostalgic version of what

592
00:31:17,480 --> 00:31:19,640
Speaker 1: we think the world ought to look like. I think

593
00:31:19,640 --> 00:31:22,160
Speaker 1: a good way to frame it is we're still thinking

594
00:31:22,200 --> 00:31:27,560
Speaker 1: about the accomplishment of bringing China into the global trading

595
00:31:27,720 --> 00:31:31,560
Speaker 1: order with their accession to the World Trading Organization, and

596
00:31:31,600 --> 00:31:35,480
Speaker 1: we're all backslapped and saying that's a real accomplishment. What

597
00:31:35,560 --> 00:31:39,400
Speaker 1: we aren't thinking about was exactly who we brought into

598
00:31:39,440 --> 00:31:44,000
Speaker 1: that world trading organization, that global system. It's somebody. It's

599
00:31:44,040 --> 00:31:47,240
Speaker 1: a country that has a much more longer term focused

600
00:31:47,240 --> 00:31:53,160
Speaker 1: than us, that has a desire to um get market

601
00:31:53,160 --> 00:31:56,640
Speaker 1: share and get the technology that we've gotten. It's not

602
00:31:56,720 --> 00:31:59,200
Speaker 1: the same kind of trading partner that that that you

603
00:31:59,280 --> 00:32:02,160
Speaker 1: write down in most economic bombs. You know. We also

604
00:32:02,240 --> 00:32:05,160
Speaker 1: we hit on our emerging markets earlier in Turkey's central

605
00:32:05,200 --> 00:32:08,040
Speaker 1: bank earlier today's surprise the market by raising interest rates,

606
00:32:08,680 --> 00:32:12,360
Speaker 1: the main interest rate to nearly eighteen percent. They just

607
00:32:12,440 --> 00:32:16,720
Speaker 1: had a near record amount of inflation over the past year.

608
00:32:17,040 --> 00:32:19,520
Speaker 1: How are you thinking about emerging markets right now? Well,

609
00:32:19,560 --> 00:32:22,920
Speaker 1: and by the way, the Argentine Central Bank went up.

610
00:32:24,280 --> 00:32:27,560
Speaker 1: And those two examples are just great to teach in

611
00:32:27,600 --> 00:32:31,320
Speaker 1: a classroom on financial crisis because it tells you about

612
00:32:31,400 --> 00:32:35,360
Speaker 1: the impossibility of an interest rate defense. You're trying to

613
00:32:35,400 --> 00:32:37,719
Speaker 1: hold your exchange rate and you're going to do it

614
00:32:37,760 --> 00:32:41,320
Speaker 1: by raised raising your domestic rate. Well, the problem is

615
00:32:41,400 --> 00:32:44,160
Speaker 1: that's not real credible because the more and more you

616
00:32:44,280 --> 00:32:48,480
Speaker 1: jack up your your policy rate to lessen the pressures

617
00:32:48,480 --> 00:32:50,760
Speaker 1: on the exchange rate, the more likely you're killing your

618
00:32:50,760 --> 00:32:54,400
Speaker 1: own economy, the more likely you're gonna get replaced, the

619
00:32:54,480 --> 00:32:57,680
Speaker 1: more likely it's not going to be sustained. So in fact,

620
00:32:57,880 --> 00:33:01,880
Speaker 1: the need to do something that dramatic is read by

621
00:33:01,920 --> 00:33:05,760
Speaker 1: investors is saying there's something dramatic underneath. Well, and certainly

622
00:33:05,800 --> 00:33:07,600
Speaker 1: there is, but I'm just wondering, you know, given the

623
00:33:07,640 --> 00:33:12,400
Speaker 1: fact that we're seeing Argentina, Turkey, Brazil kind of suffering

624
00:33:12,440 --> 00:33:15,040
Speaker 1: with their currency falling out of bed a bit, you know,

625
00:33:15,320 --> 00:33:18,000
Speaker 1: is this sort of indicating a bigger issue at this point.

626
00:33:18,320 --> 00:33:20,479
Speaker 1: So Brazil is a good example where it wasn't an

627
00:33:20,520 --> 00:33:23,320
Speaker 1: interest rate defense. They didn't lower rates when they had

628
00:33:23,360 --> 00:33:27,760
Speaker 1: the opportunity, and and an opportunity they took that Argentina

629
00:33:28,040 --> 00:33:30,400
Speaker 1: didn't take was they built up more reserves. So they're

630
00:33:30,400 --> 00:33:33,240
Speaker 1: a little distinct. But guess what they've got political risk

631
00:33:33,320 --> 00:33:35,920
Speaker 1: to They're also going to be a source of uncertain

632
00:33:36,560 --> 00:33:40,440
Speaker 1: The scary thing about this is it wasn't much of

633
00:33:40,480 --> 00:33:45,560
Speaker 1: a backup and interest rates that exposed the pressure US

634
00:33:45,600 --> 00:33:49,600
Speaker 1: interest rates that exposed pressure on e M and who

635
00:33:49,640 --> 00:33:53,440
Speaker 1: did markets focus on. It focused on the economies that

636
00:33:53,600 --> 00:33:58,440
Speaker 1: had ongoing budget deficits, and current account deficits. Market participants

637
00:33:58,480 --> 00:34:02,520
Speaker 1: are not your friend when they're worried about funding your

638
00:34:02,520 --> 00:34:07,720
Speaker 1: ongoing obligations. And that's something officials forgot over the prior

639
00:34:07,800 --> 00:34:11,759
Speaker 1: couple of years when it was so easy to sell

640
00:34:11,920 --> 00:34:16,480
Speaker 1: long term securities. Ten seconds. What is Vincent Reinhart reading

641
00:34:16,480 --> 00:34:19,480
Speaker 1: at the beach this summer reading at the beach. I'm

642
00:34:19,560 --> 00:34:24,120
Speaker 1: catching up on a bunch of old his Mark Twain books.

643
00:34:24,840 --> 00:34:26,799
Speaker 1: Thanks very much for being with us, Thanks for having

644
00:34:26,840 --> 00:34:30,520
Speaker 1: always a pleasure. Vincent Reinhardt is the chief economist of

645
00:34:30,600 --> 00:34:34,480
Speaker 1: what He's got a quadruple mandate Standish Melon Capital, the

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