WEBVTT - Surveillance: Wall Street Optimism With Slimmon 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa brown Witz Jailey. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:30.600 dot com, and of course, on the Bloomberg terminal. Right now, 0:00:30.600 --> 0:00:33.360 this is a really really important interview for those of 0:00:33.360 --> 0:00:35.760 you worried about the stock market. Andrew Slimmon is the 0:00:35.840 --> 0:00:41.320 Morgan Stanley, a senior portfolio manager among other duties. Is well, Andrew, 0:00:41.360 --> 0:00:43.159 I want to talk about the nuance here. As we 0:00:43.240 --> 0:00:46.239 went to air, you were talking about not raging but 0:00:46.360 --> 0:00:48.879 being a raving bull. You're not a raving bull, but 0:00:49.040 --> 0:00:52.560 you're in the market. How can you do that? Well, 0:00:52.600 --> 0:00:55.000 I mean, I'm trying to say, is lucky. I mean, 0:00:55.080 --> 0:00:58.440 let's keep it simple here. Stocks are the present value 0:00:58.640 --> 0:01:02.160 of future expectations. And what I see is companies are 0:01:02.200 --> 0:01:06.960 blowing out expectations. So I don't see how you can't 0:01:07.000 --> 0:01:10.039 take a step back and say, wow, you know, uh, 0:01:10.680 --> 0:01:13.840 something's going on. Companies are saying things are better than 0:01:13.880 --> 0:01:16.280 what Wall Street expects, and I think you have to 0:01:16.319 --> 0:01:20.480 respect that uh, and what the market saying. The term 0:01:20.520 --> 0:01:23.080 of your research note is you've got the usual bladder 0:01:23.080 --> 0:01:25.560 and then you've got a killer paragraph of data where 0:01:25.600 --> 0:01:28.600 you go, oh he and Morgan Stanley did your homework. 0:01:28.880 --> 0:01:34.560 You have the Street with an eleven percent miscalculation on earnings. 0:01:34.600 --> 0:01:37.280 They just they missed it by eleven percent. Put that 0:01:37.400 --> 0:01:41.760 in scope and scale, What does it mean forward? Well, 0:01:41.959 --> 0:01:46.560 you know that's why I've a hard time someone telling me, well, 0:01:46.920 --> 0:01:48.760 you know, we started the year with a hundred and 0:01:48.760 --> 0:01:51.920 sixty seven dollars of earning. That was what Wall Street expected. 0:01:51.960 --> 0:01:55.920 We're now. I guess I'm just not smart enough to 0:01:56.200 --> 0:01:58.840 for to listen to someone who says that's it. It's 0:01:58.880 --> 0:02:00.800 not going up. I mean I have a hard time 0:02:00.840 --> 0:02:03.440 believing that. And the market is only up by the 0:02:03.520 --> 0:02:06.960 magnitude of that earnings with so I don't think you 0:02:07.000 --> 0:02:09.240 can say the market has gotten frothier than it was 0:02:09.320 --> 0:02:12.000 earlier in the year. No, the markets just repriced based 0:02:12.040 --> 0:02:15.160 on that miss. And if we continue to move higher, 0:02:15.520 --> 0:02:17.800 which I think it's always very dangerous to draw the 0:02:17.919 --> 0:02:20.080 kind of the line that saying said this is it, 0:02:21.080 --> 0:02:23.480 then I think the market will continue to push higher. 0:02:23.480 --> 0:02:25.200 The other thing that I think it's really important. Here 0:02:25.200 --> 0:02:29.280 is the down Jones Industrial Transport, the old index that 0:02:29.360 --> 0:02:31.600 tells you how the market. It's kind of thirteen weeks 0:02:31.600 --> 0:02:34.840 in a row. That's you got to respect that something 0:02:35.000 --> 0:02:37.720 is going on here that I think Wall Street is 0:02:37.919 --> 0:02:42.919 not optimistic enough about the what companies are saying. And 0:02:43.200 --> 0:02:45.440 that's healthy though, isn't it. It's healthy. We're not getting 0:02:45.440 --> 0:02:47.120 carried away with this at the moment. We're looking at 0:02:47.160 --> 0:02:50.360 prices almost exclusively. At the moment, we're focused on execution risk, 0:02:50.720 --> 0:02:53.880 very little attention plate and what's actually happening with margins 0:02:54.320 --> 0:02:58.160 entry focus? It was actually happening with margins well, I 0:02:58.160 --> 0:03:03.520 mean there's certainly a reals of margins uh peeking or 0:03:03.560 --> 0:03:08.920 being constrained. I agree with that, but you know, could 0:03:09.000 --> 0:03:13.320 that be overcome by revenues being stronger than expected. That 0:03:13.440 --> 0:03:17.160 remains to be seen. But clearly I think there is 0:03:17.200 --> 0:03:22.919 a rotation into companies that will not be as margin squeeze. 0:03:22.919 --> 0:03:27.280 Whether that's in some of the commodities, areas, energy, financials. 0:03:27.320 --> 0:03:31.320 I think those are the areas that are most intriguing 0:03:31.400 --> 0:03:34.720 in the market because there's probably the least margin squeeze 0:03:34.720 --> 0:03:38.400 out there and shooting. Emmanuel yesterday put it down another Andrew. 0:03:38.400 --> 0:03:42.600 They upgraded Staples price action, pricing power rather being the 0:03:42.640 --> 0:03:45.960 focus that did the Staples. They only right down right now, Andrew, 0:03:46.720 --> 0:03:50.200 no one like them because I think they will have 0:03:50.320 --> 0:03:53.600 margin squeeze. Number one. Number two is if I am 0:03:54.280 --> 0:03:57.600 if I'm right about the fact that the economy is 0:03:57.720 --> 0:04:01.760 stronger than what is priced in the stocks. I don't 0:04:01.800 --> 0:04:05.920 want defensive stocks. I want cyclical socks. I want value stocks. 0:04:06.000 --> 0:04:09.840 And I think as much as I hear people talk 0:04:09.920 --> 0:04:15.000 about owning uh, cyclical socks, the data suggests they really don't, 0:04:15.360 --> 0:04:18.800 they really don't. So I think gearing up your own 0:04:18.839 --> 0:04:22.080 consavele Staples. If the market's gonna fall, gearing up for 0:04:22.120 --> 0:04:25.320 a fall, well, that's not what the second quarter first 0:04:25.400 --> 0:04:28.480 quarter earnings reports has sold you. Andrew. Is there any 0:04:28.520 --> 0:04:31.839 logic behind the caution that we're seeing with stock investors 0:04:31.839 --> 0:04:34.919 and frankly with the analysts on Wall Street? Well, it 0:04:34.960 --> 0:04:40.080 sounds smarter, all it does. It all sounds smarter, Uh, 0:04:40.120 --> 0:04:42.000 But I I think you have to be a little 0:04:42.080 --> 0:04:44.960 humble here and think us the market's telling you something 0:04:45.800 --> 0:04:48.279 that leads you to be a little bit more optimistic 0:04:48.320 --> 0:04:50.520 than what you're hearing. Look, I there's no question in 0:04:50.520 --> 0:04:53.000 my mind we're gonna have a pull back at some point, 0:04:53.240 --> 0:04:55.040 but I don't think it's in the near future, not 0:04:55.120 --> 0:04:57.719 with what's coming out of these uh these earnings report. 0:04:57.760 --> 0:05:00.880 They're just too powerful. So if a company, you know, 0:05:00.920 --> 0:05:04.320 if if a Wall Street is forced to raise earning 0:05:04.560 --> 0:05:07.839 but the stock doesn't respond, don't get don't get pulled 0:05:07.880 --> 0:05:10.359 out of those stocks. Stocks don't go down for long. 0:05:10.880 --> 0:05:14.240 You know, when you know the future is better than 0:05:14.279 --> 0:05:16.800 what it's presently twice in this stock. And the reason 0:05:16.839 --> 0:05:18.800 why I ask this is because there is then an 0:05:18.800 --> 0:05:21.320 incoherence with respect to the bond market and what we're 0:05:21.360 --> 0:05:24.200 seeing in equities. Because if you're right and the balance 0:05:24.400 --> 0:05:28.080 is toward more gains and a further growth trajectory here, 0:05:28.320 --> 0:05:30.640 then the bond market is not making sense at a 0:05:30.680 --> 0:05:33.320 time when the US is increasing its deficit and you've 0:05:33.320 --> 0:05:36.560 got big nationals in the United States raising their dividends 0:05:36.760 --> 0:05:39.880 and offering way more income to investors just purely on 0:05:39.920 --> 0:05:43.160 an income basis, even let alone the potential returns. Can 0:05:43.200 --> 0:05:48.240 you square these realities exactly? That's maybe why the markets 0:05:48.320 --> 0:05:51.440 going up. Um. Look, I think rates are going to 0:05:51.520 --> 0:05:54.520 go up because I think basically the economy is stronger 0:05:54.560 --> 0:05:57.000 than we realize. But I don't think it's going to 0:05:57.040 --> 0:05:58.960 go up at a very rapid right because there's this 0:05:59.080 --> 0:06:01.040 you know that the different menial to the rest of 0:06:01.080 --> 0:06:03.680 the world is great enough that creates a bid for 0:06:03.839 --> 0:06:06.200 our for our bond prices. But I'm a I'm an 0:06:06.200 --> 0:06:09.560 equity guy, and I think it's saying to you that 0:06:10.520 --> 0:06:14.279 remain in the cyclical. I think there's a long way 0:06:14.320 --> 0:06:16.919 to go. I think people are you know, energy stocked. 0:06:17.240 --> 0:06:19.320 They were the best performing sector in the first quarter. 0:06:19.360 --> 0:06:22.880 They get no love because there's this expectation that the 0:06:22.960 --> 0:06:26.120 economy is peaking. I think the best of it how 0:06:26.160 --> 0:06:30.480 many times again, yesterday, Tom, the M the p M, 0:06:30.520 --> 0:06:32.640 I was seen the best of it, peak growth, Tom 0:06:32.680 --> 0:06:34.920 again and again on the peak. I love the doing 0:06:34.960 --> 0:06:37.360 me a favorite, Jonathan. When someone says to you, we've 0:06:37.360 --> 0:06:40.680 seen the best of it, say, were your estimates eleven 0:06:41.279 --> 0:06:43.760 eleven percent too low at the beginning of the year. 0:06:43.880 --> 0:06:46.040 I mean, that's what you have to come to challenge them. 0:06:46.279 --> 0:06:48.800 The fact is, Andrew, you and I are watching the 0:06:48.839 --> 0:06:51.880 internet gloom. The peak is Friday evening. Everybody's got a 0:06:51.880 --> 0:06:54.200 Martini in their hand right, and I'm the gloom and 0:06:54.240 --> 0:06:56.520 the doom, And the answer is it's a long ticket. 0:06:56.640 --> 0:06:58.880 I mean, the fact of the matter is you can't 0:06:58.920 --> 0:07:02.560 go up on Pharaoh to those kind of levels you're 0:07:02.600 --> 0:07:06.240 hearing from Costin and Lori, Kelvinsina and the rest John Gollub. 0:07:06.320 --> 0:07:09.600 You can't get there unless you've got the gloom. Well, 0:07:09.600 --> 0:07:11.880 I think the problem I have with the peak growth concept, 0:07:11.920 --> 0:07:14.080 and Andrew, I'd love your opinion on this as well, 0:07:14.520 --> 0:07:16.160 is that the peak right of growth was always going 0:07:16.200 --> 0:07:19.360 to become at the beginning of this particular cycle because 0:07:19.400 --> 0:07:22.160 of the nature of the slowdown. It was a mandated recession, 0:07:22.240 --> 0:07:25.880 reopen spring, coiled, bang, you jump high. For me, I'm 0:07:25.920 --> 0:07:28.240 not sure that's any indication of where the cycle goes though, Andrew, 0:07:28.280 --> 0:07:31.320 what's your take on it. I think the cycle is 0:07:31.520 --> 0:07:35.960 going to last longer. This concept of peak. I'm just 0:07:36.400 --> 0:07:40.120 I have a hard time with this peak concept given 0:07:40.160 --> 0:07:43.720 the magnitude of the earnings revisions and the blowout so far. 0:07:44.040 --> 0:07:46.680 So I'm just not sure we're there yet. And so 0:07:46.920 --> 0:07:50.320 calling the end they're calling the peak, I think it's premature. 0:07:50.600 --> 0:07:52.840 So let's talk about the potential returns. Let's go to 0:07:52.840 --> 0:07:58.800 the Jonathan Gollup call for returns. Can we get what 0:07:58.800 --> 0:08:02.800 are you looking for here? Well, I think that next 0:08:02.880 --> 0:08:06.040 year's earnings are already up to about two d eight 0:08:06.080 --> 0:08:09.000 dollars from the low one nineties at the beginning of year, 0:08:09.040 --> 0:08:11.160 So that was the s to be getting low, you know, 0:08:11.480 --> 0:08:14.440 around one night, and we're up to two hundred eight dollars. 0:08:14.480 --> 0:08:16.600 Well on hams. If we get to two hundred twenty 0:08:16.720 --> 0:08:20.680 dollars to begin next year, I mean, I think that 0:08:22.280 --> 0:08:26.400 hundred is very doable as a forward p. The point 0:08:26.400 --> 0:08:28.560 of this is, I think that what's the most important 0:08:28.560 --> 0:08:31.240 here is we all look at pease and we based 0:08:31.280 --> 0:08:36.079 them off forward estimates, and the flaw of four peas 0:08:36.320 --> 0:08:40.040 is what happens if that E is very wrong. And 0:08:40.080 --> 0:08:42.920 that's what we're seeing this year. The Ford p has 0:08:42.960 --> 0:08:47.319 been way too pessimistic. So I think that's very possible 0:08:47.720 --> 0:08:51.640 we'll see mid for four thousands by year end. Because 0:08:51.720 --> 0:08:54.800 I'm just looking at the trajectory of the entry. It's 0:08:54.840 --> 0:08:58.160 gonna catch up. As always, Entry slimming that with a 0:08:58.160 --> 0:08:59.920 little bit of media training for me as well as 0:09:00.080 --> 0:09:01.360 tell I think it's trying to tell me what to 0:09:01.440 --> 0:09:11.880 last next time someone talks about PETE growth. Right now, 0:09:11.880 --> 0:09:13.720 we've got the perfect guest to get us started in 0:09:13.760 --> 0:09:17.720 this our Semasha joins from Principal Global Investments and Seema 0:09:17.800 --> 0:09:20.520 Within your note, what I really loved was the linkage, 0:09:20.600 --> 0:09:24.720 the study of the linkage rather between equity and debt, 0:09:25.040 --> 0:09:27.079 the idea of what the stock market is going to 0:09:27.240 --> 0:09:30.480 do versus what fixed income is gonna do. Describe that 0:09:30.679 --> 0:09:34.600 linkage right now. Yeah, I mean we've been talking about 0:09:34.640 --> 0:09:36.839 it earlier today that the acting market is looking so 0:09:36.920 --> 0:09:39.240 strong at the moment, you know, of course, or concerns 0:09:40.000 --> 0:09:42.680 that we're not going to get the continued economic surprises 0:09:42.720 --> 0:09:45.040 which may keep pushing the market as as much as 0:09:45.040 --> 0:09:47.640 we've seen recently. But it's looking really strong out there. 0:09:47.640 --> 0:09:49.559 Whereas the bond market, you've got bond deals around the 0:09:49.600 --> 0:09:52.400 one sixty level. It just doesn't seem to be lining 0:09:52.480 --> 0:09:55.240 up to me. The main factor which is holding bond 0:09:55.240 --> 0:09:58.360 deals down is still there's expectation that the fan is 0:09:58.400 --> 0:10:00.640 going to stay on hold. But some point, I think 0:10:00.679 --> 0:10:03.480 we're all in agreement here that bond deals are on 0:10:03.520 --> 0:10:05.840 their way up this year. It's just the speed at 0:10:05.840 --> 0:10:08.360 which they're going to move and that's what's gonna be um, 0:10:08.800 --> 0:10:11.280 the major impact for markets. I think one thing that 0:10:11.320 --> 0:10:13.400 people are struggling with at the moment in the bond market, 0:10:13.440 --> 0:10:15.959 if this data doesn't get it done, if this data 0:10:16.000 --> 0:10:21.640 does not translate into higher yields, what data will yeah 0:10:21.800 --> 0:10:23.719 to me? It's the inflation data. You know, we need 0:10:23.760 --> 0:10:25.720 to keep watching that. And the thing is is that 0:10:25.760 --> 0:10:28.400 we're all expecting inflation to move up over the next 0:10:28.440 --> 0:10:31.360 couple of months, so there's no surprise there. It's really 0:10:31.360 --> 0:10:34.120 when you start getting into autumn winter and if you're 0:10:34.160 --> 0:10:37.760 still seeing inflation moving up at that pace, that's and 0:10:37.840 --> 0:10:39.560 I think when the bond market is really going to 0:10:39.600 --> 0:10:42.160 freak out. Um. And that's I think when the acting 0:10:42.240 --> 0:10:45.360 market becomes increasingly invulnerable. And the thing is that, look, 0:10:45.440 --> 0:10:48.280 you know, the market is very very divided on what 0:10:48.400 --> 0:10:50.400 the path for inflation is. But I think that even 0:10:50.440 --> 0:10:52.920 the ones and I'm going to put ourselves in there included, 0:10:53.000 --> 0:10:55.160 we do think it's transitory. But we also have to 0:10:55.200 --> 0:10:57.600 admit that there is a very fair chance that inflation 0:10:57.640 --> 0:11:00.319 will turn out to be sticky. And that's all the 0:11:00.400 --> 0:11:02.760 risks a lying At the moment, there's a big debate 0:11:02.800 --> 0:11:05.800 among stock investors of when higher yields is good or 0:11:05.840 --> 0:11:08.520 when higher yields is bad. Up to a point it's good. 0:11:08.559 --> 0:11:11.600 It indicates that people are upgrading their expectations for the 0:11:11.640 --> 0:11:15.319 economy at a point that's too high. It reassesses perhaps 0:11:15.320 --> 0:11:18.640 some of the valuations currently baked into markets. What is 0:11:18.720 --> 0:11:25.040 that tipping point? Sema, I think rather than the tipping point, 0:11:25.080 --> 0:11:27.680 I think it's really that speed, right, what is driving 0:11:27.800 --> 0:11:29.160 markets high? And you can look at it, but just 0:11:29.240 --> 0:11:32.560 even just looking at financial conditions, a financial condition still 0:11:32.640 --> 0:11:34.680 really really loose, and thech case the ACTI market is 0:11:34.720 --> 0:11:37.440 really fine. It's when you start to see a really 0:11:37.480 --> 0:11:40.439 turbulent and unsettling move in bond deals that's when I 0:11:40.440 --> 0:11:43.559 think markets really start to struggle to digest this. So 0:11:43.600 --> 0:11:45.960 in terms of a level, it's probably higher than what 0:11:46.000 --> 0:11:49.200 most people are thinking. It's probably above the two level. 0:11:49.559 --> 0:11:51.480 It's but if you start to get to yields at 0:11:51.480 --> 0:11:54.000 about two pc within the next month, of course that's 0:11:54.000 --> 0:11:56.079 going to freak out markets. So it's all the drivers. 0:11:56.200 --> 0:11:59.400 Is the speed which is really the key point here, Well, 0:11:59.400 --> 0:12:00.880 the speed it is gonna be out of the first 0:12:00.920 --> 0:12:03.079 and second derivative I was talking, you should seem into 0:12:03.080 --> 0:12:06.040 our Keiley lines about this, I mean just the rates 0:12:06.080 --> 0:12:09.000 of change out there. Do you expect stability or do 0:12:09.080 --> 0:12:12.559 we need to be really really aware of potential convexity 0:12:12.640 --> 0:12:18.040 not only in bonds, but the equivalent convexity inequities. I 0:12:18.040 --> 0:12:19.839 think there are risks out there that we and that 0:12:19.960 --> 0:12:22.400 is obviously a risk, but I think a lot of 0:12:22.400 --> 0:12:23.880 it is going to be down now, at least for 0:12:23.880 --> 0:12:26.679 the next few months. To the FEDS communication, where are 0:12:26.679 --> 0:12:30.480 they telling us that they feel rates are where they 0:12:30.520 --> 0:12:33.600 feel about inflation. They have the ability to keep the 0:12:33.640 --> 0:12:36.640 market calm. But if that starts to unwind, then of 0:12:36.679 --> 0:12:40.240 course you know that that speed the second derivative becomes 0:12:40.280 --> 0:12:43.080 a very very key risk up our Our view at 0:12:43.080 --> 0:12:45.439 the moment, though, is that markets are really on a 0:12:45.600 --> 0:12:48.800 steady upper path. There may be points of pullbacks, but 0:12:48.880 --> 0:12:52.360 it's really an upward movement from here seement. Do you 0:12:52.400 --> 0:12:55.480 have a regional bias right now outside of the United States? 0:12:55.480 --> 0:12:59.400 Where is it? It's an interesting one actually, because look, 0:12:59.400 --> 0:13:02.080 we have really favored the US over the last few months. 0:13:02.320 --> 0:13:06.480 We have pulled back some of our kind of preference 0:13:06.520 --> 0:13:09.920 for emerging markets because of all the reasons with COVID writing, 0:13:09.960 --> 0:13:14.679 inflation concerns around China. Now Europe is increasingly becoming more attractive, 0:13:14.720 --> 0:13:15.920 but I have to say that would be a very 0:13:15.920 --> 0:13:19.400 tactical trade because further up, beyond the kind of the 0:13:20.040 --> 0:13:23.400 joy of reopenings, we still think that Europe is very 0:13:23.520 --> 0:13:26.800 very much under pressure from a long term growth prospect. 0:13:27.280 --> 0:13:29.320 Until they can get their fiscal policy really moving at 0:13:29.320 --> 0:13:30.800 the same pace as what we're seeing in the US, 0:13:30.960 --> 0:13:34.040 which really doesn't look likely, Europe will continue to be 0:13:34.320 --> 0:13:36.840 the under performer. So you know, a few months of 0:13:37.000 --> 0:13:39.400 baby maybe good performance from Europe, but then it goes 0:13:39.440 --> 0:13:43.360 back against Actually overall we still prefer the US seema. 0:13:43.559 --> 0:13:46.559 I want to just wrap up with dovetailing the conversation 0:13:46.559 --> 0:13:49.640 that we had earlier this morning with Andrew slimming into 0:13:50.080 --> 0:13:54.679 this dialogue a question of this eleven percent miss when 0:13:54.720 --> 0:13:57.400 it comes to Wall Street estimates for earning so far 0:13:57.480 --> 0:13:59.559 in the S and P five hundred, you're getting a 0:13:59.600 --> 0:14:01.680 little bit more cautious than some of the large cap 0:14:01.760 --> 0:14:04.440 stocks are reducing certain allocations. I believe if I have 0:14:04.520 --> 0:14:06.840 this right, what do you say to people who say 0:14:06.880 --> 0:14:09.160 earnings have been blowing it out of the water. Does 0:14:09.200 --> 0:14:13.600 that make you reassess, why do you dismiss it? No, Look, look, 0:14:13.600 --> 0:14:17.000 there have been a continued upward movement in earnings expectations. 0:14:17.040 --> 0:14:20.320 Actually we would anticipate that as a year progresses. You 0:14:20.360 --> 0:14:22.280 have to be very careful though at this point, and 0:14:22.320 --> 0:14:24.960 this is again active management really will do well at 0:14:25.000 --> 0:14:26.760 this point because you need to look under the surface, 0:14:26.800 --> 0:14:29.720 start to start thinking about which sector is going to outperform, 0:14:29.800 --> 0:14:32.000 which ones are going to do badly. You know, you 0:14:32.000 --> 0:14:34.840 you refer to our reduced allocation to large cap tech. 0:14:35.200 --> 0:14:37.920 We still like mega cap tech, but we just don't 0:14:38.000 --> 0:14:39.720 think that you're going to see the same kind of 0:14:39.720 --> 0:14:42.240 retense that we saw last year. But if you're looking 0:14:42.240 --> 0:14:45.240 at earnings potential, if you're looking at cash flow, those 0:14:45.280 --> 0:14:47.320 are the companies which are really going to provide stability, 0:14:47.360 --> 0:14:49.480 not just over the next few months, but actually a 0:14:49.480 --> 0:14:51.840 longer term. So there is still a place for secular 0:14:51.880 --> 0:14:55.520 trades within your portfolios, as well as the allocation to cyclicals. 0:14:56.160 --> 0:14:59.119 We've got to leave it there. SMA Principal Global Investors 0:14:59.600 --> 0:15:08.920 Chief Strategist Ethan Harris with US writing her Bank of 0:15:08.960 --> 0:15:12.640 America Securities their global economist, Dr Harris, thank you so 0:15:12.720 --> 0:15:14.680 much for joining us. I want to go to Michelle 0:15:14.680 --> 0:15:18.960 Myers spectacular two charts on the makeup of our pain, 0:15:19.080 --> 0:15:22.320 our jobs pain out of this pandemic, and what she does, 0:15:22.680 --> 0:15:26.040 and she looks at the area underneath the former labor 0:15:26.120 --> 0:15:30.080 participation rate and it is an ugly integral as the 0:15:30.160 --> 0:15:33.360 math people call it, that space that we've got to 0:15:33.400 --> 0:15:36.400 get back to to get back to normal. When do 0:15:36.440 --> 0:15:40.400 we do that? Um? I don't think we quite recover 0:15:40.520 --> 0:15:43.200 that whole gap. I think that in the later this 0:15:43.280 --> 0:15:45.600 year we'll recover a lot of it. Um. I mean 0:15:45.760 --> 0:15:48.640 what's causing the gap, of course, is the COVID crisis 0:15:48.680 --> 0:15:51.880 is making people reluctant to work. People need to take 0:15:51.880 --> 0:15:55.240 care of their kids at home. Unemployment benefits are very generous, 0:15:55.880 --> 0:15:58.920 and there's been very high retirements going on as people 0:15:59.000 --> 0:16:02.560 kind of rethink their life in a way in this crisis. 0:16:02.640 --> 0:16:04.960 So a lot of that will come back in the 0:16:05.040 --> 0:16:07.640 fall and into next year, but there'll be a chunk 0:16:07.680 --> 0:16:11.720 of lost workers that never come back. She has a 0:16:11.760 --> 0:16:15.400 mismatch seven hundred thousand mispatch. Taking this in view of 0:16:15.480 --> 0:16:19.800 labor statistics and CPS date. Okay, fine, do we get 0:16:19.840 --> 0:16:24.640 back to a fully employed America? Is that a feasible 0:16:24.640 --> 0:16:29.600 reach for anything, But politicians were supposed to say that, Yeah, 0:16:29.640 --> 0:16:31.800 I mean, we're we'll get back to full employment, but 0:16:31.840 --> 0:16:34.360 full employment may not be as low as it was 0:16:34.480 --> 0:16:39.200 before because you've got these structural problems of job mismatch. 0:16:39.240 --> 0:16:42.040 I mean, we've seen in other cycles where you'll have 0:16:42.080 --> 0:16:45.920 a big shock to the economy, some sectors grow, others don't. 0:16:46.560 --> 0:16:49.280 Workers get kind of displaced along the way, and you 0:16:49.400 --> 0:16:52.800 end up with a higher unemployment rate on a chronic basis. 0:16:52.840 --> 0:16:56.280 So I think we'll get back to very low unemployment. 0:16:56.320 --> 0:16:59.520 We probably can get below four percent, but there's gonna 0:16:59.520 --> 0:17:02.480 be a little bit to that structural unemployment that that 0:17:02.640 --> 0:17:05.880 hangs over well into the recovery. Just want to touch 0:17:05.880 --> 0:17:07.679 on this data eighthean just give me a second, the 0:17:07.720 --> 0:17:10.000 trite deficit, the trite balance, come and get a seventy 0:17:10.000 --> 0:17:14.119 four point four billion dollars negative in line with the survey. 0:17:14.160 --> 0:17:17.679 Mike McKay straightaway pointing out that is the widest monthly 0:17:17.680 --> 0:17:21.119 gap in history of data going all the way back. 0:17:21.680 --> 0:17:25.840 Tom k too, that's as wide as it's been for 0:17:25.880 --> 0:17:28.760 a long long time. Negative seventy four point four billion, 0:17:28.800 --> 0:17:30.600 And I'm glad to bring it up, John, I missed out. 0:17:30.600 --> 0:17:32.280 I'm sorry for it's a little bit of a blurrier. 0:17:32.400 --> 0:17:35.320 Dr Harris comment on that on the trade deficit to 0:17:35.440 --> 0:17:41.720 GDP another record we didn't want to make. So, I mean, 0:17:41.760 --> 0:17:44.480 it's obviously the case that the US is coming out 0:17:44.480 --> 0:17:47.879 of this recession very fast compared to our trading partners. 0:17:47.880 --> 0:17:52.120 So and the growth is initially is in goods demand, 0:17:52.240 --> 0:17:55.840 which of course is traded, uh, not in services tend 0:17:55.880 --> 0:18:00.560 to be domestically delivered. So you've had a massive sucking 0:18:00.560 --> 0:18:04.040 in of imports. Uh. You folks talked about this. You know, 0:18:04.200 --> 0:18:08.480 China in particular, big beneficiary of this. Uh, And we're not. 0:18:09.200 --> 0:18:12.960 Our exports aren't growing quite as as gangbusters. So you're 0:18:12.960 --> 0:18:15.240 gonna have a record trade deficit and it's going to 0:18:15.359 --> 0:18:19.240 get bigger going forward. It's it's the it's because the 0:18:19.320 --> 0:18:22.880 US is so exceptional from the amount of stimulus, it's 0:18:22.920 --> 0:18:24.800 doing well. It kind of thinness the story, isn't. It's 0:18:24.800 --> 0:18:27.760 a reflection of this massive demand shock that we're experiencing 0:18:27.760 --> 0:18:31.000 in this country right now that other countries, other nations, 0:18:31.040 --> 0:18:35.119 other exporters I'm going through. So we're getting all of 0:18:35.160 --> 0:18:37.520 their exports and we're getting none of them, getting none 0:18:37.520 --> 0:18:39.480 of us right now because that demands are not their. 0:18:39.560 --> 0:18:43.040 Europe a case study for us all to look at. Yeah, 0:18:43.080 --> 0:18:45.760 I mean, if you compare or contrast to US and Europe, 0:18:45.760 --> 0:18:48.159 I mean, the amount of fiscal stimulus in the US 0:18:48.359 --> 0:18:51.920 is three times bigger than what they're doing in Europe. Um. 0:18:52.000 --> 0:18:57.879 Europe as a pretty small next generation stimulus coming, it's 0:18:57.880 --> 0:19:01.119 spread out over many years. The U US is poured 0:19:01.400 --> 0:19:03.720 massive money in and continues to do it. I think 0:19:03.760 --> 0:19:05.520 a lot of the stuff that's on the table now 0:19:05.560 --> 0:19:09.760 will pass. So it's gonna you know, when you weigh 0:19:09.760 --> 0:19:12.600 out grow your trading partners, um, you're gonna your own 0:19:12.600 --> 0:19:15.200 economy is gonna look very good. But you're gonna pull 0:19:15.240 --> 0:19:17.760 them along with you. And that's what the US is doing. 0:19:17.840 --> 0:19:20.199 It's the global engine of growth. You're gonna pull them 0:19:20.200 --> 0:19:22.040 along with you, or they're gonna Perhaps why you doubt 0:19:22.080 --> 0:19:24.439 a little bit as you try to get into a 0:19:24.440 --> 0:19:27.240 new economic cycle, there has been a huge question about 0:19:27.280 --> 0:19:31.200 where we are in this economic cycle. There's an idea 0:19:31.400 --> 0:19:34.600 of burn hotter and shorter. There's an idea perhaps that 0:19:34.680 --> 0:19:37.040 we never left the old cycle. Where do you fall 0:19:37.119 --> 0:19:40.680 in in this issue. Well, I think in the we're 0:19:40.680 --> 0:19:43.680 gonna recover extremely fast. This is gonna be, we think, 0:19:43.840 --> 0:19:47.639 the fastest recovery in history. So we think by uh, 0:19:47.680 --> 0:19:49.840 you know, early next year, we're going to be back 0:19:49.840 --> 0:19:52.639 where we we started from. So in a sense, it's 0:19:52.680 --> 0:19:55.560 almost like this was this kind of bad nightmare to 0:19:55.760 --> 0:19:58.399 your period and how we're out of it. Um. But 0:19:58.720 --> 0:20:02.800 there's a danger in this and that Right now high 0:20:02.880 --> 0:20:06.360 growth is fantastic. Let's get back to normal fest possible. 0:20:06.760 --> 0:20:09.600 But at some point we need to slow down. We're 0:20:09.640 --> 0:20:12.399 going to go through the stop signs next year, I think, 0:20:13.200 --> 0:20:15.880 and at some point the Fed needs to change gears. 0:20:15.920 --> 0:20:18.639 They need to say, Okay, yeah, we are going to 0:20:18.760 --> 0:20:21.760 hike uh and we're gonna hike a little bit more 0:20:21.800 --> 0:20:25.640 than we're telling you, and we need to slow things down. 0:20:26.119 --> 0:20:30.520 So it's it is. It's a remarkably fast recovery. We're moving. 0:20:30.680 --> 0:20:35.760 We're jumping from deepercession to full recovery in record time. Ethan, 0:20:35.840 --> 0:20:38.760 do you ascribe to the Robert Kaplan idea here that 0:20:38.840 --> 0:20:43.000 markets themselves, given how exuberant they have gotten, could pose 0:20:43.119 --> 0:20:45.960 a material risk to the economy in a year or 0:20:46.040 --> 0:20:48.440 two years. If the Fed does have to hike more 0:20:48.480 --> 0:20:51.119 than people are currently pricing in and there is a 0:20:51.240 --> 0:20:55.480 quick end to this recovery. I think there's a risk 0:20:55.520 --> 0:20:58.240 of that. I think it's a very good point. I mean, 0:20:59.200 --> 0:21:04.280 right now, the markets are being fed an incredible mix 0:21:04.320 --> 0:21:07.880 of positive news. You've got Fed not hiking anytime soon, 0:21:07.960 --> 0:21:11.840 You've got big fiscal standards, got great growth numbers, um, 0:21:11.960 --> 0:21:15.520 the great very good news on vaccines and the COVID crisis. 0:21:15.960 --> 0:21:20.280 So you're gonna have a red hot risk acid market 0:21:20.359 --> 0:21:26.160 from whether it's home prices or equity valuations. But that's 0:21:26.160 --> 0:21:29.879 an environment where you tend to overshoot, and you know, 0:21:30.000 --> 0:21:32.240 we could be in an environment where the FED has 0:21:32.280 --> 0:21:34.600 to take away the punch bowls. So the rest of 0:21:34.640 --> 0:21:38.479 the economy in two and twenty four is pretty high. 0:21:38.760 --> 0:21:41.760 I think of a of an accident here Ethan with 0:21:42.080 --> 0:21:44.320 the ties of Bank of America has coast to coast. 0:21:44.320 --> 0:21:47.480