Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa A. Brahmowitz. Each day
Speaker 1: we bring you the most important, noteworthy, and useful interviews
Speaker 1: for you and your money, whether you're at the grocery
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Speaker 1: With this earning season coming to a conclusion, what to
Speaker 1: expect next for stocks? Typically stocks rally into and during
Speaker 1: the earning season, depending force on the results of specific companies.
Speaker 1: Here to tell us about earnings and market valuations is
Speaker 1: Matt Forrester. He's the chief investment officer for b n
Speaker 1: Y Melon Lockwood Advisers. He helps to oversee nearly eight
Speaker 1: billion dollars. Is based in King of Prussia, Pennsylvania. Matt,
Speaker 1: thanks very much for in with me. You know, one
Speaker 1: of the one of the things that that always sort
Speaker 1: of is interesting is if you take a look at
Speaker 1: a chart of the SMP five hundred, let's just use
Speaker 1: that as a as a proxy, you can kind of
Speaker 1: tell when earning season takes place without even knowing what
Speaker 1: the dates are, what the calendar is on the bottom
Speaker 1: of the of the chart, because it seems that we
Speaker 1: have this pattern that has almost been ingrained in investor behavior.
Speaker 1: Have you noticed this as well? Absolutely, since since of
Speaker 1: the stock market gains have occurred during this earning season,
Speaker 1: and this one has been absolutely spectacular. Uh, course driven
Speaker 1: by the tax cuts, but we've had a remarkable earning
Speaker 1: season um and we've also seen analysts begin to pick
Speaker 1: up their expectations for future quarters going into the next
Speaker 1: you know, rest of and in the twenty nineteen. So
Speaker 1: we've clearly had some some really remarkable corporate results. Uh. Interestingly,
Speaker 1: the markets have not always in every visual case of
Speaker 1: certain cases where they have looked at these earnings and
Speaker 1: then looked at the guidance and look deeper. So I
Speaker 1: think it's fair to say that a lot of the
Speaker 1: good earnings number have been widely anticipated. But we've continued
Speaker 1: to have gains in markets, and we've sort of powered
Speaker 1: through this other levels of risks that we've seen every
Speaker 1: markets or the last few a few months. All right,
Speaker 1: we'll get to the risks in a second. But this
Speaker 1: notion that we see these gains, as you said, of
Speaker 1: the gains seemed to come in this in this specific
Speaker 1: time period. If you're an investor and you're looking for
Speaker 1: a time to get in, do you wait until the
Speaker 1: earning season is over, see what people are doing in
Speaker 1: terms of maybe taking some short term profits, and then
Speaker 1: go and prospect for the stocks the companies that you
Speaker 1: really want to own. Yeah, it could be. I suspect
Speaker 1: that we're going to have a summer where some of
Speaker 1: the issues that have recently cropped up UH and some
Speaker 1: of the risks are probably gonna give us these periodics
Speaker 1: buying opportunities. So if you're looking to make large new
Speaker 1: allocations to perhaps the equity market, you may want to
Speaker 1: see how that affects the overall macro picture. So clearly
Speaker 1: you've had the Italian news, which you know had some
Speaker 1: stuff just like it's right, but it gives you those
Speaker 1: buying opportunities that are very short lived. I think those
Speaker 1: are very hard for UH, for market players to adjust
Speaker 1: to UM. But if you look at those lists we
Speaker 1: ascaren February on average hourly earnings U, you know, it's
Speaker 1: somewhat crazy for markets to respond to a three tents
Speaker 1: of a of a increase from expected number and average
Speaker 1: hourly earnings, but it got the markets worried about the
Speaker 1: things that we might see in inflation, whether the FED
Speaker 1: was behind a curve, you know, raise questions about whether
Speaker 1: or not monetary policy was have to go even tighter, uh,
Speaker 1: you know, for more quickly than what the markets have expected.
Speaker 1: And when we see those types of fears work their
Speaker 1: way through the markets, UM, that's going to give us
Speaker 1: those periodic trade opportunities to the calendar there, you know,
Speaker 1: from here to the mid terms is going to be
Speaker 1: filled with these trade issues, which we're going to be ongoing. Uh,
Speaker 1: We're going to be continue to dealing with some of
Speaker 1: the European populism and what's what's arisen from the Italian crisis. H.
Speaker 1: On the backdrop of that, that was gonna be a
Speaker 1: lot of really good earnings numbers, you know, coming from
Speaker 1: from American corporation. So we're hoping that that is going
Speaker 1: to power us through these isolated events. Um. But there
Speaker 1: are real structure of reasons why investors should be somewhat
Speaker 1: concerned about Italy, the third largest bondasher on the planet,
Speaker 1: eighth largest economy around the world, twelfth largest by purchasing
Speaker 1: power parity concept. Uh. You know, if there are challenges
Speaker 1: to European populism. H those things are going to have
Speaker 1: an effect on on the Eurozone. Um, we're gonna have
Speaker 1: to power through these trade issues. The structural um connections
Speaker 1: between the U. S and China are really big. This
Speaker 1: is a really big deal. Uh, they are you know,
Speaker 1: we have more connections than any set of geopolitical or
Speaker 1: business rivals and maybe in the twentieth century. So we
Speaker 1: need to work through this. I think the structure probably
Speaker 1: means that we will tread carefully. But in so many
Speaker 1: of these things, markets are dealing with issues that are
Speaker 1: largely opaque. They may not be able to have a visibility.
Speaker 1: We don't know as market players what the Italian government,
Speaker 1: new populistic Italian government really wants to do. I don't
Speaker 1: think the new Italian necessarily. Maybe we've gotta We're limited
Speaker 1: in time, and I want to give you about thirty
Speaker 1: seconds here too. What do you specifically focused on in
Speaker 1: terms of where you're putting money to work right now?
Speaker 1: So I think because of these successes here as the risks,
Speaker 1: you have to think about your portfolio as an overall whole.
Speaker 1: You should have some pieces of your portfolio that may
Speaker 1: act as ballast. Uh. You know to help help keep
Speaker 1: the ship afloat when these periodic risk events continue to
Speaker 1: hit us. And for me that means gold, it means
Speaker 1: some amount of exposure to a long term high grade debt.
Speaker 1: We can't do this in all of our portfolios, but
Speaker 1: where we can, we try to isolate some places where
Speaker 1: we can have some pieces of ballast. Uh US small
Speaker 1: caps may be less exposed to some of the events
Speaker 1: going on overseas. For all those things, those kinds of
Speaker 1: things that we're for him to put into some for
Speaker 1: portfolios today. Thank you very much for being with me.
Speaker 1: You got Matt Forrester, Chief Investment Officer b n Y
Speaker 1: Melon Lockwood Advisers, helping to manage nearly eight billion dollars
Speaker 1: of customer assets. He says, look at gold, high grade
Speaker 1: corporate debt, and small cap stocks. Hello everybody, and welcome.
Speaker 1: I want to bring you in Dr David Kelly, he
Speaker 1: really knows how to CHRISTI wait a minute. You have
Speaker 1: to tell people you were hosting an amazing path at
Speaker 1: all at the b n Y Melon inside and Dr
Speaker 1: David Kelly was on it. And he always does a
Speaker 1: wonderful job at crystallizing and sort of distilling complicated economic
Speaker 1: issues into wonderful metaphors that actually ring home. He is
Speaker 1: chief Global Strategist at Jpmorkan Asset Management. And one thing
Speaker 1: that you said that really struck me was that you
Speaker 1: think that investors are being too barished in the short
Speaker 1: term and too bullish in a long term. Can you explain, Yeah,
Speaker 1: I think, I think in terms of the short term,
Speaker 1: we are seeing a real pickup at economic activity, and
Speaker 1: we've I think economic growth in the second quarter cope
Speaker 1: as much as four percent. Look at the lowest unemployment
Speaker 1: rates since nineteen nine. Earnings this year are going to
Speaker 1: be up about twenty six percent year over year. These
Speaker 1: are these are really wonderful numbers. And when you think
Speaker 1: about the stock market, I would invest in stocks today
Speaker 1: just because of the money companies are earning right now.
Speaker 1: Never mind about the future, because right now they're they're
Speaker 1: generating a no fault of cash that can be paid
Speaker 1: at in dividends that could be used to stock buybacks.
Speaker 1: That's that's all positive. I think. In the long run, though,
Speaker 1: we have to recognize that that. You know, there's a
Speaker 1: lot of talking to these days about three percent growth.
Speaker 1: I think we can do three percent growth for about
Speaker 1: a year. But because we don't have any growth in
Speaker 1: the number of our virtually no growth in the population
Speaker 1: age sixty four, we're really out of available workers. And so,
Speaker 1: you know, I think the employery can come down a
Speaker 1: little bit more, but then it's going to stop and
Speaker 1: growth has got to slow down to about two percent,
Speaker 1: and I think, you know, for the long run, we
Speaker 1: need to recognize that that's where we are. Unless we
Speaker 1: change our policies with regard to immigration and legal immigration
Speaker 1: to increase the number of skilled workers in the United States,
Speaker 1: we will slow down. But there's also a lot of
Speaker 1: opportunity overseas, and so I think that in the short
Speaker 1: run people are being um a little too pessimistic and
Speaker 1: not giving the market credit for the earnings that companies
Speaker 1: are earning right now. But in the long run, I
Speaker 1: think we're we're not recognizing the real structural problems the
Speaker 1: US economy has, not just around this labor supply, I think,
Speaker 1: but also around very big budget deficits which are growing.
Speaker 1: If you want to find out about the health of
Speaker 1: the US consumer, where do you go? I go to Costco.
Speaker 1: It's you know, it's a it's a it's a wonderful
Speaker 1: place here you I mean you see these mobs of people.
Speaker 1: I mean they're piled back into the aisles, and then
Speaker 1: you look at their their cards and they have to
Speaker 1: push these big, oversized carts and then they pile everything
Speaker 1: up to a peak. But what what you really should
Speaker 1: do is look in the carts because people are buying
Speaker 1: enough mustard for a generation. I mean, why hasn't got
Speaker 1: the money? And and so if you want to see
Speaker 1: mindless consumerism come to Costco, Okay what I asked. I
Speaker 1: asked it for a reason because I want to get
Speaker 1: to the point that it is one thing to sit
Speaker 1: in front of a screen and watch a number. It
Speaker 1: is another thing to go out into the real economy,
Speaker 1: in the real world and find out what is new,
Speaker 1: what is innovative, what people are spending their money on,
Speaker 1: what they're not spending their money on. And I'm wondering
Speaker 1: whether this is something that you in a sense advocate
Speaker 1: combined with all of your higher level world absolutely, because
Speaker 1: you look at big numbers and I don't believe in
Speaker 1: in modeling based on anecdotes, but you can use anecdotal
Speaker 1: information to really get what's going on. I mean, you
Speaker 1: try and find a plumber in America today, you can't
Speaker 1: find one. I mean, you just you know, if you've
Speaker 1: got a problem right now, they're not going to come
Speaker 1: out today. Maybe wait, wait a week, maybe wait two weeks.
Speaker 1: But the but the problem is where there's a real
Speaker 1: shortage of skilled workers and you can see that in
Speaker 1: your day to day life if you actually try and
Speaker 1: hire something to do a particular job. Um And equally,
Speaker 1: you know, if if you want to see what's going
Speaker 1: on with consumer spending, as I say, you can, there
Speaker 1: are plenty of areas where you can see just how
Speaker 1: mind to see people spend whatever money is in their pockets,
Speaker 1: you know. But just to push back, if you look
Speaker 1: at it from the other point of view, if you
Speaker 1: want to just look at anecdotal evidence, there's still a
Speaker 1: lot of I don't know, pessimism out there among a
Speaker 1: lot of people. I mean, perhaps it's not captured by
Speaker 1: some of the economic surveys, but you certainly see this
Speaker 1: with the birth rate falling off from millennials, and you
Speaker 1: certainly see this with you know the fact that we
Speaker 1: aren't seeing wages increase more so, how do you reconcile that? Well,
Speaker 1: I think that's true. I mean the gap between rich
Speaker 1: and poor is growing, and I think it will continue
Speaker 1: to grow. Uh And and a lot of people are
Speaker 1: getting left behind. But again we're talking about you know,
Speaker 1: how do you how do you invest? And and you know,
Speaker 1: in the in the first quarter, operating earnings are up
Speaker 1: twenty six percent. In May, wages are up two point
Speaker 1: eight percent. That's not good for workers, but it's great
Speaker 1: for shareholders. So it's I think you have to recognize
Speaker 1: the economy that that we actually have here. We're just
Speaker 1: pretty good for corporations. One of the things that you
Speaker 1: said in the panel that I thought was really interesting
Speaker 1: was about how people in Sweden managed to equalize the
Speaker 1: amount of espresso they drink with the amount of vodka
Speaker 1: they drink in the evenings. Uh. And you're sort of
Speaker 1: making analogy that we've got this incredible tax plan that's
Speaker 1: boosting earnings and a really solid corporate backdrop, but we
Speaker 1: also have all the uncertainty from trade top. Can you
Speaker 1: just explain to well, yeah, I mean that's this is
Speaker 1: this This was mainly a slurn some colleagues of mine
Speaker 1: from Sweeten nothing not the entire Swedish nation. They appreciate it,
Speaker 1: but no, I think I think we have a sort
Speaker 1: of a mixture of Vodican expressing on the economy right now.
Speaker 1: We've got you know, espresso is clearly a stimulative and
Speaker 1: we've got all the stimulus from fiscal stiments, which is
Speaker 1: very unusual this lations cycle. But we've got this big
Speaker 1: tax cut, a lot of money in people's pockets, a
Speaker 1: lot of money in corporate pockets. That's helping the account
Speaker 1: of me grow. And if it was just for that,
Speaker 1: the economy probably be overheating. We'd be really worried about inflation.
Speaker 1: But at the same time, we've got the the the
Speaker 1: sedative or the vodica if you like, of um, tariff worries,
Speaker 1: Washington worries, political divide um, and all of that is
Speaker 1: creating uncertainty. The problem with uncertainty is the business is
Speaker 1: you know, when you've got uncertainty, what what? What do
Speaker 1: people say? Well, let's wait and see. The problems are
Speaker 1: three most dangerous words and economics I wait and see.
Speaker 1: If everybody decides to wait and see, what what, this
Speaker 1: is not good. And so we've actually got this drag
Speaker 1: from uncertainty which who are a particular round trade policy
Speaker 1: which is negating some of the stimulus from the fiscal
Speaker 1: from the fiscal package. Well, you know, caffeine and alcohol.
Speaker 1: There are two things that can lead to addiction, right,
Speaker 1: I mean, you know, if you have a lot of caffeine,
Speaker 1: you need more and you need to keep it consistent, right,
Speaker 1: I mean, that's right, And they both have they both
Speaker 1: have bad long term and that really gets back from
Speaker 1: near term. People should be more bullish long term, they
Speaker 1: should maybe be more bearish because on the fiscal side,
Speaker 1: we're gonna have, you know, starting in Octobe, where we're
Speaker 1: gonna have federal defence of over trillion dollars for as
Speaker 1: far as I can see, that is going to impoverish
Speaker 1: US in the long run. Um And equally with trade,
Speaker 1: you know, you want to trade negotiations to result in
Speaker 1: trade agreements quickly, because uncertainly about trade just means that
Speaker 1: I don't know as a corporation. Should should I build
Speaker 1: a plant in Prioria? Should I build a plant in Poland?
Speaker 1: I don't know? And if I don't know, I'm not
Speaker 1: gonna do either. And so so I think both both
Speaker 1: extra uncertainty from Washington and unwarranted but budget deficits are
Speaker 1: those are both negatives in the long run to investors
Speaker 1: make investing too complicated for themselves, and absolutely they do.
Speaker 1: I think I think I think people need to think about,
Speaker 1: you know, for example, emerging markets. I think emerging markets
Speaker 1: is a great is a people should have in a
Speaker 1: portfolio right now. But people think, oh, it's too complicated.
Speaker 1: I have to know about all these things. No, you don't,
Speaker 1: I mean you don't. You need to have a good
Speaker 1: manager and let them invest in the forest. I'm not
Speaker 1: gonna I'm not going to to testify and behalf any
Speaker 1: individual tree in emerging markets. But the forest will grow,
Speaker 1: Emerging markets will grow fast, and the rest of the
Speaker 1: than to help markets for years to come along. Term
Speaker 1: investor should have position in emerging markets and just feel
Speaker 1: comfortable about that rather than trying to nitpick each individual country.
Speaker 1: He also said that you thought the theme most overvalued
Speaker 1: asset right now is bitcoin. Yeah, but the problem by
Speaker 1: bitcoin is I mean, I know, I know a lot
Speaker 1: of people unfortunately do this, but I want to invest
Speaker 1: in bitcoin. The problem with bitcoin or any cryptocurrency is
Speaker 1: there's no real barrier to entry. Now. I think blockchain
Speaker 1: technology is obviously a good technology. It's obviously gonna be
Speaker 1: useful in a a lot of ways, but right now it's
Speaker 1: you know, Bitcoin is is like the leader, but it's
Speaker 1: got nothing that's going to maintain its lead. It's got
Speaker 1: no barrier to entry. It's like you build a new
Speaker 1: Olympics Olympic stadium and you've got this weekend jog are
Speaker 1: running around, running around the path, and they look really
Speaker 1: good in the stadium. The problem is the varsity teams
Speaker 1: on a bus headed for the stadium, and when they
Speaker 1: get there, you know, the weekend jog is not gonna
Speaker 1: look so good. I think with the problem with something
Speaker 1: a cryptocurrency is it's not a store of value, it's
Speaker 1: not a unit of account, it's not a medium of exchange.
Speaker 1: In the long run, I think blockchain dollars, blockchain the end,
Speaker 1: blockchain euros will be much better. Best. Thank you very
Speaker 1: much for being with us. Dr David Kelly, chief Global Strategist,
Speaker 1: head of a global market insights strategy team at a
Speaker 1: JP Morgan Asset Management. I am very pleased to bring
Speaker 1: in Phil Orlando, chief equity market striate just at Federated
Speaker 1: joining us here in Orlando, Florida. Do you feel a
Speaker 1: particular affinity to Orlando is in Orlando, Yeah, do you
Speaker 1: feel like the city firth to you to answer that question.
Speaker 1: It creates a lot of confusion with T s A
Speaker 1: and hotel check in clerks and all sorts of So
Speaker 1: I want to start with a question, a kind of
Speaker 1: existential question it's been plaguing in the market, which is
Speaker 1: is this as good as it gets? With earnings? First
Speaker 1: of all, I want to say, you did a superb
Speaker 1: job moderating the panel this morning with with Rinehart and
Speaker 1: David Kelly. Uh, really good job. And and this was
Speaker 1: a topic that you touched on, uh with with your
Speaker 1: panelists this morning. Uh you talk about is your question
Speaker 1: is this as good as it gets? I would actually
Speaker 1: take the other side of the argument that I don't
Speaker 1: think the market believes a lot of what they see.
Speaker 1: We think that the stronger economic growth, stronger earnings growth,
Speaker 1: all of that in fact is sustainable, and the market's
Speaker 1: not as as a bulliant as it should be because
Speaker 1: they don't think that any of this is gonna last
Speaker 1: and it's all ephemeral and it's just gonna disappear. Um.
Speaker 1: So I I you know our view. We've got a
Speaker 1: thirty one forecast for the SMP five by the end
Speaker 1: of this year. We think there's gonna be a strong
Speaker 1: fourth quarter rally once we get through the summer period
Speaker 1: where there's gonna be a lot of concern about the
Speaker 1: midterm elections and uh, what's the Fed doing? Are they
Speaker 1: eventually going to overshoot? What's their policy going to be? Uh?
Speaker 1: This pop and first quarter earnings is that sustainable? This
Speaker 1: pop that we think we're going to see in second
Speaker 1: quarter g d P is that sustainable. Everyone's assuming that
Speaker 1: that all of this is just a flash in the pan.
Speaker 1: It ends badly. Um, we think that that that we're
Speaker 1: putting in place a foundation that's gonna get us back
Speaker 1: to trend line or better economic growth. We're looking at
Speaker 1: at corporate earnings growth that hasn't been this good in
Speaker 1: seven or eight years, and and the market needs to
Speaker 1: be more excited about this, and I think eventually they will.
Speaker 1: Today's not that day. So you think we're gonna get
Speaker 1: another six points on the uh? So we're sitting in
Speaker 1: about okay points so so, and we think that the
Speaker 1: back of that is going to be a very strong
Speaker 1: fourth quarter. Ralty that that when you study the history
Speaker 1: that this year calendaren there's a very unusual confluence of
Speaker 1: three seasonal events. The selling man go away thing happens
Speaker 1: every year. We know about that um but this is
Speaker 1: also the second year of the four year presidential election cycle,
Speaker 1: tends to be very volatile of stocks. And we've had
Speaker 1: a leadership transition at the Federal Reserve. Now the Fed's
Speaker 1: been around a hundred years, has only been sixteen chairman.
Speaker 1: But the market has a very distinct trading pattern whenever
Speaker 1: we change horses, and and when when these three things
Speaker 1: come together, they've only come together six times in the
Speaker 1: last eighty five years or so, and and the previous
Speaker 1: five times you've had this sort of barbell shaped year
Speaker 1: where we started the year in good shape, there's a
Speaker 1: lot of volatility and instability in the middle of the year,
Speaker 1: and then we ended the year in really great shape.
Speaker 1: I think we're going through that that instability period right
Speaker 1: now in terms of what's gonna happen with the midterm elections,
Speaker 1: what's gonna happen with the Fed. We've got another f
Speaker 1: MC meeting coming up next week. All right, we think
Speaker 1: there's gonna be a quarter point hike. I think that's
Speaker 1: a fairly consensus view. But the question from then is
Speaker 1: what do the dots look like. What's the FEDS policy
Speaker 1: prescription gonna be over the course of the next eighteen
Speaker 1: months or so? Will they overtight? We don't know the
Speaker 1: answers to that. Well, it's just about a minute to
Speaker 1: go here. I'm wondering what your perspective is, given the
Speaker 1: fact that you expect a strong fourth quarter rally. Does
Speaker 1: the FED matter for that considering the fact that people
Speaker 1: are pricing in or are talking about certainly four rate
Speaker 1: hips is here, Well, it absolutely matters because our forecast
Speaker 1: is only three rate hikes. Uh So, so if we're
Speaker 1: wrong and and the Fed is gonna give us four
Speaker 1: or more, um, you know, there's been a rumor that, uh,
Speaker 1: you know j Powell one of the things he's thinking
Speaker 1: about is is sort of scrapping Janny Yellen's idea of
Speaker 1: only four press conferences, going to eight press conferences. And uh.
Speaker 1: The reason why that's significant is that the market has
Speaker 1: gotten into their head that only a press conference, only
Speaker 1: a pressor only a meeting with the presser's a live meeting,
Speaker 1: and that we're not going to do anything and the
Speaker 1: other meeting. Now that's not necessarily right, but Powell wants
Speaker 1: to strip that thought process away from the market and say, okay,
Speaker 1: every time we meet every six weeks for an f
Speaker 1: MC meeting, we might do something. And and the reason
Speaker 1: that Yelling apparently didn't want to do press there's every
Speaker 1: time is that it's a lot of work to prepare
Speaker 1: for them. We are broadcasting from b n Y Melon
Speaker 1: Inside in Orlando, and joining us, of course, is Phil Orlando,
Speaker 1: chief equity market strategist at Federated UH. Phil, let's talk
Speaker 1: about small and mid cap stocks for just a second.
Speaker 1: I was looking at the Russell two thousands up eight
Speaker 1: and a half percent so far this year. UH. Is
Speaker 1: it because they are more domestically focused or is it
Speaker 1: because they just didn't get any love previously? Combination of
Speaker 1: the two. This has been one of our biggest calls.
Speaker 1: We went to a table pounding burn yourself at the
Speaker 1: stake by on small caps last fall and there were
Speaker 1: probably a half a dozen key reasons. At the top
Speaker 1: of the list was the fact that the U. S economy,
Speaker 1: corporate earnings economic growth was starting to really perk up,
Speaker 1: and a small cap company typically does eighty percent or
Speaker 1: so of their business here, so theoretically that was going
Speaker 1: to benefit them Uh, if we were right that the
Speaker 1: economy and the corporate earnings we're gonna get stronger, that
Speaker 1: meant that the Fed was probably going to accelerate its
Speaker 1: tightening policy. That's happened, which meant that the dollar was
Speaker 1: going to finally catch a bit. Now. Remember dollar euro
Speaker 1: had gone from one oh three to one twenty five
Speaker 1: or so over the course of last year. We thought
Speaker 1: that was overdone and that we should have seen a
Speaker 1: rally back to about the one fifteen level or so.
Speaker 1: So we're sitting in about one see eighteen or so
Speaker 1: right now. The strength in the dollar should benefit small
Speaker 1: cap companies, just as the weaker dollar tends to benefit
Speaker 1: large cap companies. It makes their goods and services cheaper
Speaker 1: as they're exporting them overseas. Half or more of a
Speaker 1: large cap company stuff is done overseas. So the stronger dollar,
Speaker 1: based upon those other things was going to benefit small caps.
Speaker 1: So I'm just wondering before we move on to some
Speaker 1: of the other sectors, I'm just wondering a lot of
Speaker 1: people think that the dollar is gonna weaken again, probably
Speaker 1: in six months, maybe a year, as people start to
Speaker 1: realize how deep the deficits really are. Do you agree,
Speaker 1: and when would you consider start taking starting to take
Speaker 1: some risk out of small caps. So I'm not sure
Speaker 1: that I fully agree with that assessment. I am concerned
Speaker 1: about the debt and the deficit levels, no question. But
Speaker 1: Dan Clifton over at Strategos put out a note a
Speaker 1: week or so ago saying that when we start to
Speaker 1: get some of the data out of the government this
Speaker 1: year in terms of how much the federal tax revenue
Speaker 1: has increased because economic growth is better, capital gains taxes
Speaker 1: are better, etcetera, and and how much some of that
Speaker 1: has been applied to the debt and the depth said
Speaker 1: the numbers, he said, will look better. We as an
Speaker 1: investment community don't really have an appreciation of that because
Speaker 1: right now we're just speculating. So you think that the
Speaker 1: small caps have have a pretty long run ahead of them,
Speaker 1: It sounds like absolutely what about tech stocks because they
Speaker 1: have been reaching record highs and I'm just wondering how
Speaker 1: you're thinking about that. So we we love tech through
Speaker 1: last year into the first quarter of this year, and
Speaker 1: then sort of went neutral. I guess as the market
Speaker 1: was sort of peaking in that late January early February standpoint.
Speaker 1: The reason for that valuation appeared to us to be
Speaker 1: a little ahead of itself, and large cap world generally
Speaker 1: had outperformed large cap value by about twenty five percentage
Speaker 1: points over the course of seventeen in the first part
Speaker 1: of eighteen. Now, that's a one standard deviation event that
Speaker 1: has only occurred five times in the last forty years
Speaker 1: or so, So it appeared to us that growth was
Speaker 1: ahead of itself. Now, in those other four instances, when
Speaker 1: that inflection point came and money were starting to rotate
Speaker 1: back into value, the value had a phenomenal run. And
Speaker 1: and so we think we're at one of those inflection
Speaker 1: points now. And so we've been overweight energy stocks, financial
Speaker 1: service stocks, and industrial stocks in the domestic market as
Speaker 1: a result of that. I'm gonna throw a little bit
Speaker 1: of a curveball here, because, uh, we're talking about all
Speaker 1: of this in the context of this conference and people
Speaker 1: planning for their financial future and trying to uh in
Speaker 1: some way, not to simplify it, but make it applicable
Speaker 1: to their personal situation. Social security, right is a big
Speaker 1: part of people's retirement plan. Whether you have a lot
Speaker 1: of money or a little money, you're kind of in
Speaker 1: your mind have this notion you're going to get your
Speaker 1: social Security check. This is the first time since n
Speaker 1: two that the government's having to dip into the trust
Speaker 1: fund in order to fund social security payments. Right, what
Speaker 1: do you say to people who are using social security
Speaker 1: as the first piece of the bigger puzzle of a
Speaker 1: retirement plan. Well, if it's the only piece, um, I
Speaker 1: would be a little nervous. I think it's part of
Speaker 1: a mosaic that you've got your your four oh one
Speaker 1: k uh, You've got your I rara, you've got your
Speaker 1: Social Security, You've you've got some some some savings, you've
Speaker 1: got the equity in your house. All of that together,
Speaker 1: people should be fine if if you've done thing other
Speaker 1: than continue to hope and pray and light candles that
Speaker 1: the government will continue to, you know, be able to
Speaker 1: support you with your social Security checks. I think that's
Speaker 1: a risky strategy because we've got to address, in my opinion,
Speaker 1: the unsustainable trajectory of entitlements at some point in the future.
Speaker 1: I don't know that today is that day, because I
Speaker 1: don't think we have the right mix of government officials
Speaker 1: with the backbone and the vision to be able to
Speaker 1: fix the problem. But but this problem is getting progressively
Speaker 1: worse every day. Uh. And and if I were sitting
Speaker 1: in the White House right now, I'd be trying to
Speaker 1: put together a plan that that brings the best thinking
Speaker 1: of both sides to compromise on the issue that that
Speaker 1: we've got to do some things to recognize better health UH,
Speaker 1: longer UH retirement ages UH means testing of benefits for
Speaker 1: the super wealthy, increasing the tax base. There's a bunch
Speaker 1: of different things that we need to do in order
Speaker 1: to get Social Security on a more sustainable footage. Thank
Speaker 1: you so much for being with us, Phil Orlando. Always
Speaker 1: wonderful to get your insights, especially in the town that
Speaker 1: was named after you. Phil Orlando, chief equity market strategist
Speaker 1: at Federated ruling over his roost here at the Insight
Speaker 1: Conference in Orland. So thank you so much for having me.
Speaker 1: This was this was a thrill to be with you, guys.
Speaker 1: Our next guest spent more than two decades at the
Speaker 1: Federal Reserve in a variety of capacities. He now serves
Speaker 1: as the chief economist at Standish, which is part of
Speaker 1: b n Y Melan Asset Management. I want to bring
Speaker 1: in vincent Reinhardt thank you so much for joining us.
Speaker 1: Really a pleasure having you for having me. I want
Speaker 1: to start with a lot of some of the handwringing
Speaker 1: in the economics profession right now. Is the Phillips curve dead? Uh?
Speaker 1: Can we throw away the yield curve as it flattens
Speaker 1: and disregarded even though in the past it's been a
Speaker 1: telling indicator of recessions. What do you think the biggest
Speaker 1: thing is right now that the economics professional economists are
Speaker 1: getting wrong? First thing they remember is all that handwringing.
Speaker 1: Notwithstanding at the end you have to go back to
Speaker 1: certain mechanisms because that's what keeps your understanding and the
Speaker 1: U of the world in motion. Uh. To me, I
Speaker 1: think the biggest thing the brethren get wrong is that
Speaker 1: the rest of the world is bigger and it doesn't
Speaker 1: act exactly like us. That a lot of macroeconomists are
Speaker 1: used to a closed form representation of the US economy
Speaker 1: and much more comfortable of that. But the plain fact
Speaker 1: is we went from something like um emerging markets being
Speaker 1: a third of the UH Federal Reserved Exchange Rate Index
Speaker 1: to being more like seventy of the of the Federal
Speaker 1: Reserves Exchange Rate Index. So what's the practical implication of that?
Speaker 1: I mean, how does that factor into sort of the
Speaker 1: everyday existence of Americans. So it's a couple things. One is,
Speaker 1: it's probably why they're so uh so much pressure keeping
Speaker 1: inflation from going up even though there's evident resource pressure,
Speaker 1: because the rest of the world is there meets somewhere
Speaker 1: our demand. Because the rest of world also doesn't act
Speaker 1: like us. Uh. Emerging markets in particular try to limit
Speaker 1: their fluctuations of their exchange rate piece of FISA dollar.
Speaker 1: That implies that major currencies aren't as important as they
Speaker 1: used to be. Have we become more isolated in our thinking?
Speaker 1: I think we didn't change and therefore are relatively more
Speaker 1: isolated than we should should have. I e. If you
Speaker 1: missed the fact that China is the largest economy in
Speaker 1: terms of international purchasing power, you're you're gonna you're you're
Speaker 1: gonna be missing out on on on the explanation. Great example.
Speaker 1: We know from the minutes that back in January, the
Speaker 1: f m C had a long discussion about inflation determination.
Speaker 1: They put a page and a half in the FLM
Speaker 1: scene in its I used to sign those for six
Speaker 1: or seven years. That's a lot. That's a big footprint.
Speaker 1: Over those page and a half you will find nowhere
Speaker 1: global supply chain, rest of the world, exchange value of
Speaker 1: the dollar. It was all domestic center. So uh, you know,
Speaker 1: we spoke about this earlier, but scottman Ard of Googgenheim
Speaker 1: came out and today said that the flattening yield curve
Speaker 1: now at the flattester about since two thousand seven, is
Speaker 1: an indicator that we're getting closer to the end of
Speaker 1: this cycle, that we're probably within two years of a recession.
Speaker 1: Do you agree? So I can say the easy thing,
Speaker 1: and that is the U S economy is dynamic. In
Speaker 1: the post war period, about fifteen percent of the years
Speaker 1: had recessions in them. So if you're asking me for
Speaker 1: a multi year forecast, there's gotta be a probability of
Speaker 1: recession in there. Now does the yield? Is the yield
Speaker 1: nerve as scary as it used to be? And I
Speaker 1: think the answers know. And the reason is yield curve
Speaker 1: used to be very scary because if short rates were
Speaker 1: below long rates, it meant that long rates incorporated the
Speaker 1: expectation of the FED easy. If short rates were real high,
Speaker 1: it meant the FED had a tight policy. So what
Speaker 1: gets the FED from tight too easy a recession and
Speaker 1: so therefore it was good at predicting a recession. What's
Speaker 1: the difference now, and that is long rates always incorporated
Speaker 1: term premium, the scarcity you know, uh value associated with
Speaker 1: holding treasury securities. Well, treasuries are really really scarce because
Speaker 1: the feder reserve and foreign official accounts hold them. In
Speaker 1: that environment, estimates of the term premium are actually negative,
Speaker 1: so it's not as big as signal about a future
Speaker 1: FED mistake when long rates are low relative to short rates.
Speaker 1: You've heard the phrase the generals fight the last war?
Speaker 1: Have economists and politicians are they fighting the last war?
Speaker 1: Particularly on trade? Rather than figuring out how to live
Speaker 1: in a world where China is, as you described as
Speaker 1: dominant our we seem to be fighting skirmishes at the
Speaker 1: edges to try to satisfy some nostalgic version of what
Speaker 1: we think the world ought to look like. I think
Speaker 1: a good way to frame it is we're still thinking
Speaker 1: about the accomplishment of bringing China into the global trading
Speaker 1: order with their accession to the World Trading Organization, and
Speaker 1: we're all backslapped and saying that's a real accomplishment. What
Speaker 1: we aren't thinking about was exactly who we brought into
Speaker 1: that world trading organization, that global system. It's somebody. It's
Speaker 1: a country that has a much more longer term focused
Speaker 1: than us, that has a desire to um get market
Speaker 1: share and get the technology that we've gotten. It's not
Speaker 1: the same kind of trading partner that that that you
Speaker 1: write down in most economic bombs. You know. We also
Speaker 1: we hit on our emerging markets earlier in Turkey's central
Speaker 1: bank earlier today's surprise the market by raising interest rates,
Speaker 1: the main interest rate to nearly eighteen percent. They just
Speaker 1: had a near record amount of inflation over the past year.
Speaker 1: How are you thinking about emerging markets right now? Well,
Speaker 1: and by the way, the Argentine Central Bank went up.
Speaker 1: And those two examples are just great to teach in
Speaker 1: a classroom on financial crisis because it tells you about
Speaker 1: the impossibility of an interest rate defense. You're trying to
Speaker 1: hold your exchange rate and you're going to do it
Speaker 1: by raised raising your domestic rate. Well, the problem is
Speaker 1: that's not real credible because the more and more you
Speaker 1: jack up your your policy rate to lessen the pressures
Speaker 1: on the exchange rate, the more likely you're killing your
Speaker 1: own economy, the more likely you're gonna get replaced, the
Speaker 1: more likely it's not going to be sustained. So in fact,
Speaker 1: the need to do something that dramatic is read by
Speaker 1: investors is saying there's something dramatic underneath. Well, and certainly
Speaker 1: there is, but I'm just wondering, you know, given the
Speaker 1: fact that we're seeing Argentina, Turkey, Brazil kind of suffering
Speaker 1: with their currency falling out of bed a bit, you know,
Speaker 1: is this sort of indicating a bigger issue at this point.
Speaker 1: So Brazil is a good example where it wasn't an
Speaker 1: interest rate defense. They didn't lower rates when they had
Speaker 1: the opportunity, and and an opportunity they took that Argentina
Speaker 1: didn't take was they built up more reserves. So they're
Speaker 1: a little distinct. But guess what they've got political risk
Speaker 1: to They're also going to be a source of uncertain
Speaker 1: The scary thing about this is it wasn't much of
Speaker 1: a backup and interest rates that exposed the pressure US
Speaker 1: interest rates that exposed pressure on e M and who
Speaker 1: did markets focus on. It focused on the economies that
Speaker 1: had ongoing budget deficits, and current account deficits. Market participants
Speaker 1: are not your friend when they're worried about funding your
Speaker 1: ongoing obligations. And that's something officials forgot over the prior
Speaker 1: couple of years when it was so easy to sell
Speaker 1: long term securities. Ten seconds. What is Vincent Reinhart reading
Speaker 1: at the beach this summer reading at the beach. I'm
Speaker 1: catching up on a bunch of old his Mark Twain books.
Speaker 1: Thanks very much for being with us, Thanks for having
Speaker 1: always a pleasure. Vincent Reinhardt is the chief economist of
Speaker 1: what He's got a quadruple mandate Standish Melon Capital, the
Speaker 1: Boston Company Asset Management, and b n Y Melon Asset
Speaker 1: Management North America. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa abramowits one before the podcast. You
Speaker 1: can always hatch us worldwide on Bloomberg radioh