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Speaker 1: Welcome to the Bloomberg Surveillance Podcast Downtown Keene. Along with

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Speaker 1: Jonathan Ferroll and Lisa A. Brownwitz jay Leie, we bring

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Speaker 1: you insight from the best and economics, finance, investment and

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Speaker 1: international relations. Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg

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Speaker 1: dot Com, and of course, on the Bloomberg terminal. Let

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Speaker 1: us talk to Andrew slim And, a senior portfolio manager

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Speaker 1: at Morgan Stanley Investment Management, about his outlook as we

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Speaker 1: head into twenty two, what strategy looks appropriate to him. Andrew,

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Speaker 1: very good to speak to you. I won't ask you

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Speaker 1: about the specifics around the Turkish liver, will leave that

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Speaker 1: for another day. But let me ask you about your

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Speaker 1: expectations for equity returns given what we're expecting now from

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Speaker 1: the Fed, Given how fast our expectations of the FED

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Speaker 1: are changing and shifting and the market is having to

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Speaker 1: price in higher interest rates a little bit sooner, what

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Speaker 1: does that do to your expectation is full equity reserves

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Speaker 1: returns and how do you position appropriately? Good morning, Yes,

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Speaker 1: so you know, look, I've been on the show a

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Speaker 1: lot and I've been pretty optimistic from from the lows.

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Speaker 1: Uh simply because I said was going to be ultra accommodative,

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Speaker 1: and as the central banks begin to move off that

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Speaker 1: accommodative pivot, it means that equity returns are still going

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Speaker 1: to be positive, but they're going to be lower. And

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Speaker 1: in that environment, I simply think that it requires a

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Speaker 1: little bit more of a balance between risk on stocks

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Speaker 1: and risk off stocks, i e. Controlling you know, kind

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Speaker 1: of debate of your portfolio. And so we've just had

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Speaker 1: this extreme risk off move he has to market is

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Speaker 1: only down three percent, but uh staples are up eight percent,

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Speaker 1: and you know, financials energies are down on the month,

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Speaker 1: and so you've had an extreme move and I think

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Speaker 1: that's going to be the story going forward, more so

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Speaker 1: than it's really been since the lows of March two

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Speaker 1: thousand twenty, which has really been a period of risk

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Speaker 1: on and so I think it's just simply going to

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Speaker 1: require a little bit more of a Bell's portfolio. But

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Speaker 1: what I wouldn't do right now is I would not

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Speaker 1: chase the defensive risk off socks. They've just had a

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Speaker 1: very big move on a relative basis, and I think

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Speaker 1: that's gonna be the story over the next year, which

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Speaker 1: is you're gonna have these periods of big risk off

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Speaker 1: and then the market is gonna come roaring back. So

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Speaker 1: I think you can take advantage of it. And in

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Speaker 1: this environment you have to start to scratch your heads

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Speaker 1: and ge maybe I should be looking around some of

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Speaker 1: these banks or energy socks or small caps are down

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Speaker 1: a lot, and then waiting for a better period to

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Speaker 1: add to defenses. If in fact you're under right there

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Speaker 1: and that's you know, that's really hurt you the last

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Speaker 1: last three weeks. But I wouldn't chase them here. Andrew,

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Speaker 1: you say, you're not getting em barished, You're just getting

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Speaker 1: less bullish. Can we dig into the nuances of that

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Speaker 1: and provide some definitions. What is the difference between a

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Speaker 1: barish outlook and a decreasingly fullish one. Sure, so what

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Speaker 1: you see is obviously the first year offlo like we

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Speaker 1: had in the last two thousand and twenty, you have

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Speaker 1: a very strong market because the Feds just pouring money in.

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Speaker 1: And the second year, which is this year, the market continues.

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Speaker 1: It happens every time because you have a combination of

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Speaker 1: big earnings recovered by corporate fundamental and the essential banks

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Speaker 1: pumping liquidity. It is typically in the third year that

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Speaker 1: we're going into where returns remain positive, but they're not

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Speaker 1: as strong because you have kind of a battle between

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Speaker 1: still good corporate fundamentals, and I think that's gonna be

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Speaker 1: the story next year. But you don't get the p expansion,

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Speaker 1: you don't get the liquidity pump from the FED. So

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Speaker 1: the result is a little bit more of a you know,

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Speaker 1: the fence tends to throw cold water on kind of

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Speaker 1: strong corporate funals. Look what's going on today. We've got

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Speaker 1: more companies reporting great earnings, but you don't have that

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Speaker 1: further injection coming from the FED. And the result is

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Speaker 1: is positive returns for equties in the third year, which

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Speaker 1: would be too down just not as good as you

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Speaker 1: see in the past. I think it's way too early

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Speaker 1: to get barished to think the market's going down because

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Speaker 1: corporate fundamentals are going to continue to come in strong.

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Speaker 1: It's just not as good as what we've seen off

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Speaker 1: the law. So, Andrew is essentially what you're saying that,

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Speaker 1: regardless of what happens with monetary policy, earnings growth can

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Speaker 1: carry equities higher. Yeah, it's not just earnings growth, clearly,

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Speaker 1: it's surprises, earnings revisions, and you know this year, uh,

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Speaker 1: this year, everyone thinks, oh, it's you know, the FED

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Speaker 1: pumped the market up. There's a lot of speculation. The

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Speaker 1: market is only up this year by the magnitude of

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Speaker 1: earnings revisions. So it's not the PEED that's gone up,

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Speaker 1: it's the E that has gone up, and the E

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Speaker 1: has repriced the P higher. So the key question is

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Speaker 1: as we go into next year, and the estmim it

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Speaker 1: for the consensus for the SMP earnings next year is

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Speaker 1: two seven. Is that going to be too high or

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Speaker 1: too low or just right? And if it's too high,

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Speaker 1: markets going down. And if it's just right, I think

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Speaker 1: the market also goes down because you have the FED

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Speaker 1: pulling piece, that probably weighing on piece. But I don't

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Speaker 1: think that's the case. I think it's going to be

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Speaker 1: yet again too low because classically, coming out of an

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Speaker 1: of a recession, Wall Street tends to be too cautious initially.

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Speaker 1: And what we hear from companies, and you know, I'm

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Speaker 1: not I'm not a strategist on portfolio management. I listened

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Speaker 1: companies all day long. I hear corporate balance sheets, strong

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Speaker 1: liquidity is there. I think it's going to be a

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Speaker 1: very active year for companies buybacks, M and A S.

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Speaker 1: I think it will be a good year, and I

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Speaker 1: think that number to seven for next year will come

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Speaker 1: in way too low. But again, the Fed's got a

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Speaker 1: cold throw a little cold water on too much enthusiasm. Andrew,

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Speaker 1: if you don't mind, I'd love to dig into sort

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Speaker 1: of your factor strategy and maybe your capitalization strategy and

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Speaker 1: that kind of environment. You mentioned that low volatility stocks

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Speaker 1: have really surged off of extremely oversold levels back in

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Speaker 1: October and that may not continue into the year ahead.

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Speaker 1: What factor do you like for two? And then further,

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Speaker 1: what do you do about small caps? And obviously the

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Speaker 1: large cap in next has held on significantly better than

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Speaker 1: small caps. Small caps now testing the bottom of a

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Speaker 1: pretty significant range. Trade. Is that an opportunity or a risk?

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Speaker 1: It's an opportunity at this juncture. Okay, So the key

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Speaker 1: thing is small caps, uh, like you know, value stocks,

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Speaker 1: cyclic coals, emerging markets, uh, cryptocurrencies you aim it. They're

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Speaker 1: all risk assets. So they've been hit over the last month,

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Speaker 1: and so if you want to tow in now the

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Speaker 1: opportunity to do it. But I think they will come

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Speaker 1: a time when they will have big bounces and that

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Speaker 1: then the point is don't chase them because in a

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Speaker 1: lower and return environment you're gonna have bigger swings in

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Speaker 1: risk on risk off. So what's our strategy. I'm a

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Speaker 1: core manager. We've been overweight value stocks, right and so

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Speaker 1: that worked great until you know, around Thanksgiving. But fortunately

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Speaker 1: what we've done starting this summer is we started to

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Speaker 1: layer in more of the risk off, low bated defensive

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Speaker 1: stocks to offset that valuating. So, Um, the reason we

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Speaker 1: like value is simply because those stocks have not repriced

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Speaker 1: back to where they should coming out of recession. And

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Speaker 1: I think the reason there's been this fits and starts

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Speaker 1: is simply because, unlike previous sessions, we keep having the

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Speaker 1: problem of the recession coming back and hitting us again.

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Speaker 1: It's called COVID, and when that happens, it seems to

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Speaker 1: derail the value trade. But I don't think it's over yet.

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Speaker 1: So again, in in a period like we've just seen

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Speaker 1: the last three weeks, now is the time to buy

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Speaker 1: value stocks. But I think you bounced that with this,

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Speaker 1: you know, staples, the utilities, reads, defenses, and uh, if

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Speaker 1: we have a risk back on period, which I think

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Speaker 1: is very possible starting today, Um, then I think those

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Speaker 1: socks will underperform, and we'll go back and say, what's

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Speaker 1: you know, what stocks should we look to add to?

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Speaker 1: And I when I run through my list of my portfolio,

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Speaker 1: I say, well, what stocks have been hammered recently? Well,

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Speaker 1: it's the banks, it's the energy, And what stocks have

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Speaker 1: really done well? Well? Staples and uh, you know a

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Speaker 1: couple of low risk insurance companies. You don't want to

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Speaker 1: buy those? Those are the wants to trip. So I

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Speaker 1: think there's gonna be a lot of opportunity to take

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Speaker 1: advantage of what the market offers, but you have to

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Speaker 1: be willing to go against the grain, and against the

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Speaker 1: grain means to take a little bit more risk. Right

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Speaker 1: here today, interesting stuff. Thank you so much for joining us, ANDREWS.

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Speaker 1: Lemon of Morgan Stanley, appreciate your time. Dr amish Adalgia,

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Speaker 1: Senior Scholar at the Johns Hopkins Center for How Security

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Speaker 1: is joining us now, Dr Adulgia, Clearly this is spreading

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Speaker 1: quite rapidly, and it is doing so even in people

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Speaker 1: who are fully vaccinated and boosted. If that is the case,

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Speaker 1: can we vaccinate our way out of the wave of

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Speaker 1: this variant? Or is the only answer here more restrictive measures.

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Speaker 1: It's sort of neither. We can't vaccinate our way out,

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Speaker 1: But I think we have to start to think about

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Speaker 1: what we're what are our goals with this pandemic. What

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Speaker 1: are our goals with COVID nineteen. And this is not

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Speaker 1: a disease that can be eradicated or eliminated. Our goal

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Speaker 1: is to decouple cases from hospit fitalizations. And when you

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Speaker 1: look at the cases that are occurring in vaccinated individuals

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Speaker 1: and boosted individuals, they are mild. They usually don't even

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Speaker 1: require a call to the doctor. That's a good thing,

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Speaker 1: that's a victory. So I think we have to emphasize

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Speaker 1: the severity of illness. So if vaccinated people have mild illnesses,

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Speaker 1: I think that's a victory for the vaccines and a

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Speaker 1: victory for us. What we're seeing in the hospitals, and

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Speaker 1: I last weekend I worked in the hospital of the

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Speaker 1: whole weekend. What you're seeing our unvaccinated individuals that are

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Speaker 1: occupying I see you beds occupying other beds and stressing,

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Speaker 1: stressing the staff. So I think we have to draw separation.

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Speaker 1: Their cases are always going to be there, especially with

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Speaker 1: a variant likeness it's all about making sure our hospitals

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Speaker 1: don't go over capacity. And they think you're going to

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Speaker 1: hear some of that in the President's speech today about

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Speaker 1: how they're going to to shore up those hospitals, and

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Speaker 1: I think that's how we move forward, this kind of

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Speaker 1: two track pandemic, one for the vaccinated and one for

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Speaker 1: the unvaccinated. Well, speaking of our hospital systems and the

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Speaker 1: possibility that they get overwhelmed, given the trajectory of cases already,

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Speaker 1: how quickly could we see that happen. It's likely going

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Speaker 1: to be in the next couple of weeks where we

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Speaker 1: see stress on hospitals, and some hospitals will be able

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Speaker 1: to absorb it, but others are going to have a

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Speaker 1: lot of difficulty because even though O Macron is the

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Speaker 1: cases sequence, Delta is probably the predominant version of the

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Speaker 1: virus that's hitting hospitals right now and has a lot

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Speaker 1: of patients with Delta inside them, So they're going to

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Speaker 1: be dealing with Delta and then O Macron on top

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Speaker 1: of it. Delta will eventually fade away, but if they

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Speaker 1: get too many patients at one time, it can be very,

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Speaker 1: very difficult. And they think this is going to be

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Speaker 1: a regional rather than a systemic problem, and we have

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Speaker 1: healthcare coalitions hospitals that work together. They have to really

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Speaker 1: do that for real. They can't just check a box

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Speaker 1: that they're part of a coalition. They have to load

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Speaker 1: balance and make sure that no hospital is going down.

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Speaker 1: And hopefully the coordination from the federal government with the

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Speaker 1: National Disaster Medical System, with the Department of Defense, they'll

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Speaker 1: be able to do that in a much more efficient way.

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Speaker 1: But this is not the same thing as December. We're

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Speaker 1: in a much better place, even though there are scary headlines,

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Speaker 1: even though we have this new variant, We've got a

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Speaker 1: lot more tools and a lot more knowledge. So Tosa

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Speaker 1: a good morning. So we have a lot more tools.

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Speaker 1: This isn't a December tweency twenty. It's not the same

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Speaker 1: situation at all. We're we're very vaccinated in wealthy countries

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Speaker 1: around the world. Of course, you did through a distinction

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Speaker 1: there between the load place on hospitals by the vaccinated

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Speaker 1: and the unvaccinated. Is that going to be evident you

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Speaker 1: think in the President's speech later on. Is it possible

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Speaker 1: to craft different policies for these different parts of society

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Speaker 1: that will be palatable to to U S citizens. I

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Speaker 1: do hope the President places the blame squarely where it is, because,

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Speaker 1: like I said, it's not people that lack of booster shot.

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Speaker 1: It's not people who who who are fully vaccinated that

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Speaker 1: are getting hospitalized. It's people who lack any shots. And

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Speaker 1: in the United States that's being done willfully. People are

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Speaker 1: choosing not to get vaccinated and then choosing to destroy

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Speaker 1: their community hospitals. And I do think that we should

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Speaker 1: draft policies different from the vaccinated and the unvaccinated, because

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Speaker 1: if you are vaccinated, the virus treats you very differently,

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Speaker 1: so other people should treat you very differently. That how

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Speaker 1: I think we have to move forward because what we

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Speaker 1: see is the vaccinated that have done everything they can

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Speaker 1: to preserve hospital capacity by getting vaccinated, by following the science.

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Speaker 1: But then you have this group of people and they're

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Speaker 1: concentrated in certain parts of the country, in certain regions,

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Speaker 1: they are not vaccinated by choice, and what they're doing

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Speaker 1: is crushing their own community hospitals. And I think we

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Speaker 1: have to call that out because this is being this

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Speaker 1: is something that didn't have to be. These are all

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Speaker 1: vaccine preventable hospitalizations. Vaccine preventable deaths, and these people are

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Speaker 1: choosing to do this, and I think that's something that

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Speaker 1: needs to be called out, even if it angers people.

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Speaker 1: I think it's the truth. Doctor. I'd like to talk

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Speaker 1: a little bit about the variant itself and what we've

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Speaker 1: learned so far from O Macron and about the virus

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Speaker 1: and it's various mutations. Um. Over the last couple of weeks,

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Speaker 1: some of the rumors have come out that potentially the

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Speaker 1: nature of Omicron itself suggests that this virus will die

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Speaker 1: out supposedly cloth faster than other viruses have in the past.

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Speaker 1: Is that true what we learned about O Macron itself,

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Speaker 1: and with respect to what to expect about future variants

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Speaker 1: and the longevity of the virus overallad overall, well, the

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Speaker 1: Stars Kobe Too virus is with us. It's not going

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Speaker 1: to magically go back into baths. And some of these

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Speaker 1: variants come and go as the virus is put under

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Speaker 1: Darwinian selection pressure to be able to transmit more efficiently

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Speaker 1: to get around immunity. And with O Macron, it's unclear

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Speaker 1: how long this surge of cases is going to last.

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Speaker 1: If you look at South Africa, if you look at

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Speaker 1: Denmark in the UK. It seems to be following in

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Speaker 1: different pattern than than Delta. For example, Delta went in

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Speaker 1: kind of two month waves. This seems to be shorter.

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Speaker 1: Hopefully that's the case, but I don't know that we

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Speaker 1: have enough information or understanding. What it might be is

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Speaker 1: that this virus variant is exploiting network effects. It's infecting

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Speaker 1: people that are out there doing things, and then it

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Speaker 1: basically runs out of those types of people and everybody

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Speaker 1: else is a little bit more careful, so it doesn't

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Speaker 1: have new people to infect. It's unclear if that's going

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Speaker 1: to be the case, but I think we have to

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Speaker 1: all be prepared for the fact that, oh, Macron and

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Speaker 1: other down the line are going to become part of

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Speaker 1: our daily lives, but they're going to be a less

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Speaker 1: a less severe version of COVID. As we get more

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Speaker 1: tools by being vaccinated, monocloni, l antibodies, anti virals, rapid test,

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Speaker 1: that's going to tame this virus and shift illness towards

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Speaker 1: the mild side of the spectrum. And that's exactly where

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Speaker 1: we where we wanted, and that's been the goal of

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Speaker 1: this whole public health endeavor from the beginning. All Right,

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Speaker 1: Thank you so much for your really valuable insight this morning.

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Speaker 1: Thank you so much for joining us. Dr amish adalgia

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Speaker 1: of Johns Hopkins and of course the Johns Hopkiness School

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Speaker 1: of Public Health is supported by Michael Are Bloomberg, who

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Speaker 1: is the foundering majority owner of Bloomberg LP. Sarah Hunt

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Speaker 1: poorfilio manager Alpine Woods Capital Investors, joining us now. Sarah,

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Speaker 1: great to see you. Um, I want to paraphrase Gina

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Speaker 1: from a little earlier on in the hour, we are

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Speaker 1: buying the dip. Once again, the mentality is still intact.

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Speaker 1: What does it take to change that mentality? And does

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Speaker 1: that happen next year? Okay, while I was watching Bloomberg

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Speaker 1: before I came on this morning, so I'm going to

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Speaker 1: have to agree with James Affy and say that it

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Speaker 1: has to be that the market continues to go down

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Speaker 1: after you've what that dip, and it starts to have

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Speaker 1: and it starts to be a pain trade. It has

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Speaker 1: not yet been a pain trade. And every time that

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Speaker 1: the market has had some weakness and people start looking

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Speaker 1: for protection, they also end up earning money on that

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Speaker 1: protection as well. And that has become such a it's

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Speaker 1: become such a pattern that I think it's difficult for

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Speaker 1: people to remember what it's like when markets don't just

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Speaker 1: have a recovery every time there's a down draft. So Sarah,

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Speaker 1: talk to us a little bit about your ELOK for two.

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Speaker 1: I know you see things changing a little bit as

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Speaker 1: financial conditions become slightly more rational as the FED starts

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Speaker 1: to scale back on their on their input. Where do

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Speaker 1: you see equities headed in the year ahead and how

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Speaker 1: will things be different next year relative to the last two. Well,

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Speaker 1: I think that there is going to be more of

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Speaker 1: a focus on cash generation and earnings instead of some

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Speaker 1: of the loftier price of sales kind of ratios that

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Speaker 1: you've seen in some of the areas where that sort

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Speaker 1: of FED backstop has really helped companies that don't yet

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Speaker 1: have earnings or don't yet have really a good balance sheet.

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Speaker 1: I think that that's going to start to make a difference. Um.

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Speaker 1: I also don't disagree with the fact that macro factors

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Speaker 1: drive a lot of investing, and so it's not going

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Speaker 1: to be the only thing. I would also love a

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Speaker 1: world where we could count on valuations and we could

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Speaker 1: do that kind of fundamental work that we all started

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Speaker 1: out doing, but that's just not the world that we

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Speaker 1: live in. I do, however, think that growth is going

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Speaker 1: to continue to be important, but it has to be

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Speaker 1: profitable growth, and I think that's where you're going to

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Speaker 1: have a bifurcation in some of the tech sectors, Whereas

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Speaker 1: the stocks that are able to make money and grow

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Speaker 1: and actually put up earnings and have a decent balance

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Speaker 1: sheet are going to be able to withstand the pressures

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Speaker 1: of the concerns about technology versus some of the stocks

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Speaker 1: that don't quite have the earnings or anything else yet

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Speaker 1: they are. I think that's going to be a little

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Speaker 1: bit different going into two. This strong balance sheet story

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Speaker 1: has been such a big part of the US outperformance

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Speaker 1: relative to the rest of the world for years. Now,

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Speaker 1: are you seeing opportunities emerge elsewhere into as the fails,

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Speaker 1: as the FED scales back, as we see valuations come

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Speaker 1: under some degree of pressure in the US naturally, Where

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Speaker 1: are you looking for the opportunities globally? Well? I think,

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Speaker 1: I mean a lot of US companies have a huge

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Speaker 1: global presence, so you can be we tend to have

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Speaker 1: mostly domestic based companies in our portfolios, but there are

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Speaker 1: a lot of them with the big international presence, so

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Speaker 1: you start to look with the places where you think

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Speaker 1: you might get a benefit from what's going to happen

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Speaker 1: in two Unfortunately, a lot of the rest of the

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Speaker 1: world is suffering, not just from COVID, but you know,

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Speaker 1: Europe still is having some problems with economic growth. The

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Speaker 1: US is still a reasonably good growth space, and I

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Speaker 1: think that part of China's problem with growth and what

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Speaker 1: they're trying to do to fix it with dropping the

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Speaker 1: reserve ratio and everything else, makes other parts of the

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Speaker 1: world a little riskier at the moment. So, you know,

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Speaker 1: we still think the United States is a good market,

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Speaker 1: and we think that companies within it that have international

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Speaker 1: reach can perform fairly well going into well Sarah I,

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Speaker 1: I continue to talk about how the year has shaken

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Speaker 1: out far from what consensus thought it would. Part of

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Speaker 1: the call was international versus us, part of it was

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Speaker 1: shifted value over grow, small caps over large None of

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Speaker 1: those trades really worked out as we were expecting. And

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Speaker 1: that also applies to the yield curve. While we saw

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Speaker 1: that steeper curve in the beginning of the year, what

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Speaker 1: we have gotten since March really is just a persistently

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Speaker 1: flatter curve. Do you expect that is going to continue

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Speaker 1: to be the case and can you be a buyer

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Speaker 1: financials in that kind of environment. Well, you know, some

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Speaker 1: of the financials were doing fairly well in a in

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Speaker 1: the yield curve environment before it's steepened. I think the problem,

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Speaker 1: the knee jerk reaction to a flatter yield curve for

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Speaker 1: financials is that it's going to be much harder for

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Speaker 1: them to make money. But I think that in the

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Speaker 1: last you know, since the financial crisis, they've all been

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Speaker 1: fairly clever about ways to make money that are not

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Speaker 1: only yield curve dependent. So I think I think that

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Speaker 1: they can end up performing better. But I think that

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Speaker 1: the playbook says the old curve is flattening, then sell

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Speaker 1: the financials. And I'm not sure that that actually is

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Speaker 1: something that's going to be helpful in terms of, you know,

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Speaker 1: whether or not those stocks can actually perform. But it's

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Speaker 1: going to take the market a while to realize that

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Speaker 1: they can perform even with a flatter yield curve. Okay,

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Speaker 1: so Sarah, can we get some specific picks? I mean,

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Speaker 1: what what are your favorite stocks in your portfolio right now?

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Speaker 1: What would you be looking to add positions to well.

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Speaker 1: I think the pull back and the financials gives you

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Speaker 1: an opportunity in some of the stocks we like, like

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Speaker 1: JP Morgan, UM, We like City because they've got a

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Speaker 1: real self help story. The stock is not performed well

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Speaker 1: this year, but we think it's got some real ability

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Speaker 1: to improve its own underlying performance without so much of

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Speaker 1: a market help. So I think that those are some

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Speaker 1: interesting places that we like. There's some places in the

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Speaker 1: technology space that we like. I mean, we've owned Oracle

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Speaker 1: for some time UM, and I think that there are

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Speaker 1: some other areas where you've got real earnings, You've got

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Speaker 1: some earnings growth, You've got acam I, You've got some

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Speaker 1: other companies where there's going to be some growth there

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Speaker 1: and they're overcoming some older legacy businesses. And I think

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Speaker 1: that that's a story that we like going into two,

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Speaker 1: because again, you want to see some valuation underpinning, even

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Speaker 1: if it's not the entire market that's looking at valuations.

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Speaker 1: For us, we would like to see evaluation underpinning that

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Speaker 1: we can live with. Sarah, what's your degree of confidence

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Speaker 1: that the U S consumer is going to continue to

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Speaker 1: power through two? If I take a look at the

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Speaker 1: savings ratio. Certainly as a percentage disposed of income, it's

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Speaker 1: coming down fairly sharply. Gas prices are up, rents coming up.

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Speaker 1: Where does that leave the consumers ability to spend? Well,

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Speaker 1: you know, unfortunately, because we are still back in this,

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Speaker 1: you know, we have a new variant iteration coming through.

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Speaker 1: I think that there's still a lot of pent up

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Speaker 1: demand for travel and for experiences, and that keeps getting

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Speaker 1: pushed out, even with the vaccines, where we thought that

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Speaker 1: was going to make a huge difference. I mean, I

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Speaker 1: think that was part of the optimism of early one,

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Speaker 1: is that those vaccines we're going to allow things to reopen,

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Speaker 1: and we weren't going to be back in a situation

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Speaker 1: where getting on a plane is difficult to do, Traveling

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Speaker 1: internationally is difficult to do, Traveling even internally is more challenging.

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Speaker 1: So I think that there is room for demand for that,

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Speaker 1: But I do not disagree that the a lot of

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Speaker 1: the prices are coming up that will eat away at

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Speaker 1: some of the ability to do that when it starts

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Speaker 1: to become more available. On the other hand, you know

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Speaker 1: that a lot of the spending happens at you know,

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Speaker 1: where people for whom it is not as big of

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Speaker 1: a problem as it is um for people where you

431
00:22:04,080 --> 00:22:07,639
Speaker 1: don't have as much chushion from inflation. Yeah, all right,

432
00:22:07,640 --> 00:22:09,520
Speaker 1: Sarah Hann of Alpine Woods, thank you so much for

433
00:22:09,600 --> 00:22:15,639
Speaker 1: joining this, and I'm wishing a happy and healthy holiday.

434
00:22:17,000 --> 00:22:19,240
Speaker 1: Let's talk about whether or not we can characterize the

435
00:22:19,280 --> 00:22:21,679
Speaker 1: FED as hawkish. Neil Data US Economic Research had at

436
00:22:22,040 --> 00:22:24,520
Speaker 1: Renaissance Macro Research has a bit of an opinion on this.

437
00:22:25,080 --> 00:22:27,160
Speaker 1: Neil track this for me. You think that the FED

438
00:22:27,200 --> 00:22:30,160
Speaker 1: could actually move potentially four times next year, and at

439
00:22:30,160 --> 00:22:35,280
Speaker 1: the same time you say, don't call them hawkish? Why, well,

440
00:22:35,280 --> 00:22:38,320
Speaker 1: because I think they're following the data. I mean, you know,

441
00:22:38,359 --> 00:22:42,200
Speaker 1: one of the interesting things about the the December fom

442
00:22:42,240 --> 00:22:44,800
Speaker 1: C meeting is that, you know, they revised up their

443
00:22:44,840 --> 00:22:48,719
Speaker 1: expectations for growth, they revised down their expectations for unemployment,

444
00:22:48,720 --> 00:22:52,000
Speaker 1: and they revised up their expectations for inflation. So what

445
00:22:52,040 --> 00:22:54,880
Speaker 1: do you expect them to do. Obviously they're gonna they're

446
00:22:54,880 --> 00:22:58,560
Speaker 1: gonna signal more interest rate increases. So um, if you

447
00:22:58,600 --> 00:23:00,679
Speaker 1: sort of plug all their revision into a sort of

448
00:23:00,720 --> 00:23:04,440
Speaker 1: standard or standard kind of tailor rule type model, um,

449
00:23:04,480 --> 00:23:06,560
Speaker 1: they're not indicating they'd hike any more than that. So

450
00:23:06,600 --> 00:23:09,240
Speaker 1: I don't really think what happened in December was about

451
00:23:09,320 --> 00:23:11,879
Speaker 1: their so called reaction function. That's what we got at

452
00:23:11,920 --> 00:23:14,119
Speaker 1: the June meeting, not December, and I think that's one

453
00:23:14,160 --> 00:23:16,320
Speaker 1: of the reasons why at the you know, on the

454
00:23:16,359 --> 00:23:20,800
Speaker 1: day itself, the market sort of took the news and stride. UM.

455
00:23:20,840 --> 00:23:23,440
Speaker 1: So I wouldn't characterize this is this is a hawk

456
00:23:23,480 --> 00:23:26,400
Speaker 1: ish FED. I think this is a FED that's had

457
00:23:26,440 --> 00:23:28,960
Speaker 1: they not signaled what they were what they did, um,

458
00:23:29,000 --> 00:23:32,000
Speaker 1: they would look increasingly offsides relative to the data as

459
00:23:32,040 --> 00:23:35,520
Speaker 1: it's coming in. Um. All right, Well, this is a

460
00:23:35,560 --> 00:23:38,120
Speaker 1: FED that already has accelerated the pace of taping, tapering

461
00:23:38,160 --> 00:23:41,160
Speaker 1: that looks set to end in March. Are we looking

462
00:23:41,240 --> 00:23:45,360
Speaker 1: realistically at March liftoff? I mean, I certainly think it's

463
00:23:45,359 --> 00:23:47,760
Speaker 1: a live meeting. One of the reasons why they're accelerating

464
00:23:47,760 --> 00:23:49,880
Speaker 1: the tapering is to make it a live meeting. And

465
00:23:50,280 --> 00:23:52,040
Speaker 1: you know, then just think about what's going to happen

466
00:23:52,080 --> 00:23:54,879
Speaker 1: between now and then. I think it's highly likely that

467
00:23:54,920 --> 00:23:57,000
Speaker 1: we're gonna come back in the new year and we're

468
00:23:57,000 --> 00:24:00,760
Speaker 1: gonna get a strong December jobs number point number one

469
00:24:01,000 --> 00:24:04,919
Speaker 1: point number two. Um, what's going to change on the

470
00:24:04,920 --> 00:24:08,800
Speaker 1: inflation picture between now and then. Uh. You know, we're

471
00:24:08,840 --> 00:24:11,560
Speaker 1: being told by the usual suspects to keep waiting for

472
00:24:11,600 --> 00:24:15,040
Speaker 1: this moderation in goods prices. It's like waiting for godot.

473
00:24:15,240 --> 00:24:18,680
Speaker 1: I mean, if you look at wholesale prices for use cars,

474
00:24:19,000 --> 00:24:23,119
Speaker 1: they're still rising at a meaningful rate. Uh. And so

475
00:24:23,440 --> 00:24:26,400
Speaker 1: we're not going to see a moderation in goods prices. Meanwhile,

476
00:24:27,000 --> 00:24:29,480
Speaker 1: housing inventories have been paired back to the bone. I

477
00:24:29,480 --> 00:24:31,560
Speaker 1: mean you think when you think they can't go any lower,

478
00:24:31,600 --> 00:24:38,160
Speaker 1: they do. Um. People are buying homes at strong prices. Um.

479
00:24:38,200 --> 00:24:40,760
Speaker 1: That's gonna continue to keep the pressure on rental inflation.

480
00:24:41,320 --> 00:24:44,000
Speaker 1: So you know, I think when you put these things together,

481
00:24:44,080 --> 00:24:47,159
Speaker 1: you have strong jobs. We know that initial jobless claims

482
00:24:47,160 --> 00:24:50,359
Speaker 1: are declining, We know that job openings are strong. To me,

483
00:24:50,480 --> 00:24:55,440
Speaker 1: that sort of is presaging another decline in the jobless rate. Um.

484
00:24:55,560 --> 00:24:57,639
Speaker 1: So I think we're gonna be back in March and

485
00:24:57,720 --> 00:25:02,560
Speaker 1: the Fed's gonna be revising down there at spectation for unemployment,

486
00:25:02,640 --> 00:25:07,160
Speaker 1: potentially revising up growth and maybe even taking their inflation

487
00:25:07,240 --> 00:25:10,320
Speaker 1: estimate up a little bit. Um. But I think you

488
00:25:10,359 --> 00:25:11,840
Speaker 1: know the data as it's going to come in over

489
00:25:11,880 --> 00:25:14,160
Speaker 1: the first quarter will probably lead them to hike, and

490
00:25:14,320 --> 00:25:17,160
Speaker 1: Powell was pretty clear he doesn't seem that he doesn't.

491
00:25:17,240 --> 00:25:20,560
Speaker 1: He's not signaling much discomfort with the limited space between

492
00:25:20,600 --> 00:25:23,440
Speaker 1: the end of the tapering program and the first hype. UM.

493
00:25:23,480 --> 00:25:27,000
Speaker 1: I think markets will be okay with it because it's

494
00:25:27,080 --> 00:25:29,160
Speaker 1: not the data, right. I mean, if you're if you're

495
00:25:29,160 --> 00:25:31,960
Speaker 1: if you're in a in an accelerating nominal growth environment

496
00:25:32,040 --> 00:25:35,000
Speaker 1: or a strong nominal growth environment, that's an environment where

497
00:25:35,040 --> 00:25:37,800
Speaker 1: companies that trade on the SMP five can make profits.

498
00:25:37,800 --> 00:25:42,400
Speaker 1: And that's ultimately what happens. There's very strong demand full

499
00:25:42,440 --> 00:25:49,480
Speaker 1: stuff toysles are big built in a fairly significant way. Absolutely,

500
00:25:49,920 --> 00:25:54,879
Speaker 1: I mean between p J Mass this year is the

501
00:25:55,520 --> 00:25:57,960
Speaker 1: and for the benefit of our radio audience, Neil has

502
00:25:58,320 --> 00:26:00,720
Speaker 1: canceled the bookshelf for it from how Shot. Instead, he

503
00:26:00,760 --> 00:26:03,159
Speaker 1: is surrounded by a pile of stepped animals, including what

504
00:26:03,200 --> 00:26:06,439
Speaker 1: looks like a rather large minion from Despicable Me Guy. Someone,

505
00:26:06,720 --> 00:26:10,240
Speaker 1: someone on Wall Street had to take a stand against

506
00:26:11,440 --> 00:26:16,320
Speaker 1: standard bookshelf background, where you're a littered with books that,

507
00:26:16,560 --> 00:26:20,080
Speaker 1: let's be honest of us have ever actually read. So no,

508
00:26:21,640 --> 00:26:26,840
Speaker 1: I'm just normally normal Neil. Normally I work my way

509
00:26:26,880 --> 00:26:29,520
Speaker 1: across people's bookshelves and try and read into kind of

510
00:26:29,560 --> 00:26:31,560
Speaker 1: what they think is behind them. Like I'm trying to

511
00:26:31,680 --> 00:26:33,399
Speaker 1: I'm trying to do the same here. I got a

512
00:26:33,440 --> 00:26:35,399
Speaker 1: mini mouse, I got a I got a pretty big minion.

513
00:26:35,640 --> 00:26:38,560
Speaker 1: I think there's a troll in there somewhere as well. Um,

514
00:26:39,240 --> 00:26:42,200
Speaker 1: it's it's a good, good, good selection you got going on, Neil.

515
00:26:42,280 --> 00:26:44,639
Speaker 1: You talk about the sequencing and what the markets afraid of.

516
00:26:44,680 --> 00:26:47,240
Speaker 1: At the moment, the market is apparently unafraid of a

517
00:26:47,280 --> 00:26:52,040
Speaker 1: faster taper, it is unafraid of rate hikes. What about

518
00:26:52,359 --> 00:26:54,560
Speaker 1: a roll in the battle rolling off with the balance sheet?

519
00:26:54,640 --> 00:26:57,760
Speaker 1: What about QT? Where does that come? And is that

520
00:26:57,840 --> 00:27:00,960
Speaker 1: what you think will really spook investors? I think that's

521
00:27:01,000 --> 00:27:02,840
Speaker 1: a great question. And if you go back to the

522
00:27:02,840 --> 00:27:07,520
Speaker 1: most recent historical analog, Guy, Um, it's right. I mean

523
00:27:07,520 --> 00:27:11,240
Speaker 1: the FED was hiking and the balance sheet was contracting

524
00:27:11,600 --> 00:27:15,120
Speaker 1: and team the that year, I believe. I mean, Gena

525
00:27:15,160 --> 00:27:17,200
Speaker 1: can correct me if I'm wrong. I think the SMP

526
00:27:17,320 --> 00:27:20,320
Speaker 1: five hundred fell I think about six to seven percent

527
00:27:20,359 --> 00:27:22,960
Speaker 1: over the year. Um. But if you go back to

528
00:27:23,000 --> 00:27:26,200
Speaker 1: that period, what was really the driver of that weakness

529
00:27:26,240 --> 00:27:29,679
Speaker 1: and equities. Was it the FED or was it the

530
00:27:29,720 --> 00:27:35,320
Speaker 1: fact that um, the former president was prosecuting a trade war. UM.

531
00:27:35,359 --> 00:27:37,080
Speaker 1: You know, most of the big declines in the equity

532
00:27:37,119 --> 00:27:40,280
Speaker 1: markets in ten didn't happen on days of interest of

533
00:27:40,359 --> 00:27:44,760
Speaker 1: new FED information. It happened on days of trade tweets, UM,

534
00:27:44,800 --> 00:27:48,080
Speaker 1: you know, pressing the you know, pressing the heat on

535
00:27:48,080 --> 00:27:51,959
Speaker 1: on the Chinese. UM. The broader economy was fine, So

536
00:27:52,000 --> 00:27:54,160
Speaker 1: you had a tail one from the economy and earnings

537
00:27:54,160 --> 00:27:56,760
Speaker 1: that year. You had a slight headwind from the FED.

538
00:27:56,840 --> 00:27:58,920
Speaker 1: But really the weakness and equities that year I think

539
00:27:59,000 --> 00:28:02,560
Speaker 1: was driven by the trade war. So unless President Biden

540
00:28:03,000 --> 00:28:07,320
Speaker 1: wants to prosecute uh, you know, increasing trade tensions, which

541
00:28:07,480 --> 00:28:09,760
Speaker 1: with China, I think the markets will will deal with it.

542
00:28:09,840 --> 00:28:14,080
Speaker 1: And also two is probably going to be a year

543
00:28:14,119 --> 00:28:17,200
Speaker 1: of synchronized global economic activity as we all end exit

544
00:28:17,240 --> 00:28:20,160
Speaker 1: the pandemic together. UM. One of the interesting data points

545
00:28:20,160 --> 00:28:23,240
Speaker 1: that I've noticed UM lately, and you can take a

546
00:28:23,280 --> 00:28:27,080
Speaker 1: look at our Twitter, is that mobility out of Emerging Asia,

547
00:28:27,320 --> 00:28:31,280
Speaker 1: you know, Korea, Thailand, Indonesia, India, it's up into the right,

548
00:28:31,640 --> 00:28:34,119
Speaker 1: which suggests that you know, they're getting on with it

549
00:28:34,160 --> 00:28:35,879
Speaker 1: and that that to me suggests that we're going to

550
00:28:35,960 --> 00:28:38,880
Speaker 1: turn the corner on the supply chain issue. Neil, I'm

551
00:28:38,880 --> 00:28:41,840
Speaker 1: glad you gave me the window to talk about because

552
00:28:41,880 --> 00:28:44,040
Speaker 1: I think the one part of that's really missing from

553
00:28:44,080 --> 00:28:45,840
Speaker 1: the discussion is the fact that that was a year

554
00:28:45,960 --> 00:28:49,200
Speaker 1: of margin compression on the SMP five, perpetuated not only

555
00:28:49,240 --> 00:28:52,560
Speaker 1: by the trade war, but also by a necessity for

556
00:28:52,720 --> 00:28:54,720
Speaker 1: spending by some of the big cap tech docks in

557
00:28:54,760 --> 00:28:57,720
Speaker 1: the name of Facebook and Google really starting to spend

558
00:28:57,800 --> 00:29:01,400
Speaker 1: more on Internet security software and the like, compressing margins

559
00:29:01,400 --> 00:29:03,520
Speaker 1: for the index at large with then which then led

560
00:29:03,560 --> 00:29:06,200
Speaker 1: to the correction. In my view, So when you talk

561
00:29:06,200 --> 00:29:08,920
Speaker 1: about two and you talk about maybe some of this

562
00:29:09,120 --> 00:29:12,680
Speaker 1: margin risk clearing in two, what's the mechanism by which

563
00:29:12,680 --> 00:29:14,760
Speaker 1: you expect that margin risk to clear, Because I think

564
00:29:14,760 --> 00:29:18,240
Speaker 1: we're starting to see the sort of the reality come

565
00:29:18,280 --> 00:29:21,000
Speaker 1: to the forefront that supply chains are still somewhat constrained,

566
00:29:21,000 --> 00:29:22,960
Speaker 1: and many people are saying that's not going to clear

567
00:29:23,040 --> 00:29:26,520
Speaker 1: until three at the earliest. Is there something else that

568
00:29:26,560 --> 00:29:29,480
Speaker 1: you can see that that creates a pathway from margin

569
00:29:29,560 --> 00:29:33,040
Speaker 1: expansion to resume into the year ahead, which will really

570
00:29:33,040 --> 00:29:36,440
Speaker 1: certainly power a much more optimistic outlook for the index. Well,

571
00:29:36,480 --> 00:29:39,840
Speaker 1: I think for the industrial sector, it's hard to argue

572
00:29:39,880 --> 00:29:42,520
Speaker 1: that the supply chain issue want to improve, right, so

573
00:29:42,720 --> 00:29:46,640
Speaker 1: at some level that will probably boost at least industrial

574
00:29:46,680 --> 00:29:48,360
Speaker 1: sector margins. I mean, I don't think they're going to

575
00:29:48,440 --> 00:29:51,480
Speaker 1: be passing that onto consumers. UM. So I think that's

576
00:29:51,520 --> 00:29:53,760
Speaker 1: the first point. And then secondly, I mean I think

577
00:29:54,360 --> 00:29:57,160
Speaker 1: UM productivity is like to pick up somewhat as well.

578
00:29:57,200 --> 00:30:00,440
Speaker 1: I mean, you know, remember we've been in besting a

579
00:30:00,480 --> 00:30:03,000
Speaker 1: lot as it is, UM. You know, we're getting used

580
00:30:03,000 --> 00:30:06,280
Speaker 1: to these new working arrangements. UM, so we'll probably see

581
00:30:06,280 --> 00:30:09,080
Speaker 1: some rebound and productivity over the next year as well.

582
00:30:10,000 --> 00:30:12,640
Speaker 1: And talking speaking to that productivity rebound, how do you

583
00:30:12,680 --> 00:30:15,600
Speaker 1: see labor costs playing into the overall environment. There is

584
00:30:15,640 --> 00:30:18,680
Speaker 1: some concern that maybe labor costs will become more deeply embedded,

585
00:30:19,000 --> 00:30:21,920
Speaker 1: resulting in upward inflation pressure at large over the course

586
00:30:21,920 --> 00:30:24,520
Speaker 1: of this cycle. Is that not something that you see

587
00:30:24,560 --> 00:30:26,680
Speaker 1: as a risk to the outlook. I mean, I think

588
00:30:26,680 --> 00:30:30,440
Speaker 1: it's absolutely a risk, UM. But I guess the issue

589
00:30:30,560 --> 00:30:34,640
Speaker 1: is what's going to happen with UM. You know, so

590
00:30:34,760 --> 00:30:37,120
Speaker 1: right now, obviously you have a lot of people quitting

591
00:30:37,160 --> 00:30:42,040
Speaker 1: their jobs. Um, they're chasing wages higher, particularly in certain

592
00:30:42,040 --> 00:30:45,800
Speaker 1: industries like leisure and hospitality and retail. It's certainly not

593
00:30:45,880 --> 00:30:48,880
Speaker 1: economy wide. Um. But I do think that as we

594
00:30:48,960 --> 00:30:52,240
Speaker 1: exit the pandemic, you should begin to see more labor

595
00:30:52,280 --> 00:30:55,400
Speaker 1: supply being freed up, and that may reduce the appetite

596
00:30:55,480 --> 00:30:58,680
Speaker 1: for those that are currently quitting their jobs to keep

597
00:30:58,680 --> 00:31:01,680
Speaker 1: doing so, right, and so as that happens, that should

598
00:31:01,800 --> 00:31:04,880
Speaker 1: mitigate some of the pressure in wages, which in turn

599
00:31:04,880 --> 00:31:07,280
Speaker 1: should mitigate some of the pressure unit labor costs that

600
00:31:07,600 --> 00:31:09,880
Speaker 1: certain companies are seeing. Certainly, I would argue it's not

601
00:31:09,920 --> 00:31:12,920
Speaker 1: economy wide. I mean, um, but you are seeing it's

602
00:31:12,960 --> 00:31:14,440
Speaker 1: you know, it's hard to deny what we see in

603
00:31:14,720 --> 00:31:17,160
Speaker 1: you know, at the restaurant, in the restaurant industry, at

604
00:31:17,160 --> 00:31:20,400
Speaker 1: the retail industry. But but I do think as labor

605
00:31:20,400 --> 00:31:23,240
Speaker 1: supply gets released, those that are tempted to currently quit

606
00:31:23,280 --> 00:31:25,080
Speaker 1: their jobs in search of a new new one will

607
00:31:25,120 --> 00:31:27,320
Speaker 1: be less tempted to do so. Hey, Neil, this might

608
00:31:27,360 --> 00:31:29,360
Speaker 1: be unfair. We have thirty seconds left and a viewer

609
00:31:29,440 --> 00:31:32,280
Speaker 1: question coming through on IB Why are not why are

610
00:31:32,520 --> 00:31:37,560
Speaker 1: not longer interest rates higher due to higher inflation? No,

611
00:31:37,720 --> 00:31:40,920
Speaker 1: that's a great question. I mean, I think the long

612
00:31:41,040 --> 00:31:43,680
Speaker 1: end of the of the treasury market. I mean it's

613
00:31:43,680 --> 00:31:45,560
Speaker 1: sort of a we need to see it to believe it.

614
00:31:45,680 --> 00:31:49,560
Speaker 1: So you know, remember back in the we're dealing with

615
00:31:49,600 --> 00:31:52,600
Speaker 1: a lot of these questions. But as the Fed was hiking,

616
00:31:52,640 --> 00:31:55,640
Speaker 1: you saw the long end ultimately back up again in

617
00:31:55,680 --> 00:32:00,600
Speaker 1: an environment of strengthening US and global economic growth. Um.

618
00:32:00,640 --> 00:32:03,239
Speaker 1: But I also think, um, you know, part of this

619
00:32:03,320 --> 00:32:05,880
Speaker 1: is also a function of what's going on across commercial

620
00:32:05,920 --> 00:32:10,160
Speaker 1: banks who have been gobbling up um treasury securities at

621
00:32:10,200 --> 00:32:12,840
Speaker 1: a appreciable pace. All Right, have to leave it there.

622
00:32:12,880 --> 00:32:15,040
Speaker 1: Thank you so much to Neil Data of Renaissance Macrow.

623
00:32:15,200 --> 00:32:18,880
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

624
00:32:19,000 --> 00:32:22,320
Speaker 1: us live weekdays from seven to ten am Eastern on

625
00:32:22,440 --> 00:32:26,680
Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six

626
00:32:26,800 --> 00:32:31,640
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627
00:32:31,800 --> 00:32:36,800
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628
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629
00:32:40,840 --> 00:32:44,960
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