Speaker 1: Welcome to the Bloomberg Surveillance Podcast Downtown Keene. Along with
Speaker 1: Jonathan Ferroll and Lisa A. Brownwitz jay Leie, we bring
Speaker 1: you insight from the best and economics, finance, investment and
Speaker 1: international relations. Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. Let
Speaker 1: us talk to Andrew slim And, a senior portfolio manager
Speaker 1: at Morgan Stanley Investment Management, about his outlook as we
Speaker 1: head into twenty two, what strategy looks appropriate to him. Andrew,
Speaker 1: very good to speak to you. I won't ask you
Speaker 1: about the specifics around the Turkish liver, will leave that
Speaker 1: for another day. But let me ask you about your
Speaker 1: expectations for equity returns given what we're expecting now from
Speaker 1: the Fed, Given how fast our expectations of the FED
Speaker 1: are changing and shifting and the market is having to
Speaker 1: price in higher interest rates a little bit sooner, what
Speaker 1: does that do to your expectation is full equity reserves
Speaker 1: returns and how do you position appropriately? Good morning, Yes,
Speaker 1: so you know, look, I've been on the show a
Speaker 1: lot and I've been pretty optimistic from from the lows.
Speaker 1: Uh simply because I said was going to be ultra accommodative,
Speaker 1: and as the central banks begin to move off that
Speaker 1: accommodative pivot, it means that equity returns are still going
Speaker 1: to be positive, but they're going to be lower. And
Speaker 1: in that environment, I simply think that it requires a
Speaker 1: little bit more of a balance between risk on stocks
Speaker 1: and risk off stocks, i e. Controlling you know, kind
Speaker 1: of debate of your portfolio. And so we've just had
Speaker 1: this extreme risk off move he has to market is
Speaker 1: only down three percent, but uh staples are up eight percent,
Speaker 1: and you know, financials energies are down on the month,
Speaker 1: and so you've had an extreme move and I think
Speaker 1: that's going to be the story going forward, more so
Speaker 1: than it's really been since the lows of March two
Speaker 1: thousand twenty, which has really been a period of risk
Speaker 1: on and so I think it's just simply going to
Speaker 1: require a little bit more of a Bell's portfolio. But
Speaker 1: what I wouldn't do right now is I would not
Speaker 1: chase the defensive risk off socks. They've just had a
Speaker 1: very big move on a relative basis, and I think
Speaker 1: that's gonna be the story over the next year, which
Speaker 1: is you're gonna have these periods of big risk off
Speaker 1: and then the market is gonna come roaring back. So
Speaker 1: I think you can take advantage of it. And in
Speaker 1: this environment you have to start to scratch your heads
Speaker 1: and ge maybe I should be looking around some of
Speaker 1: these banks or energy socks or small caps are down
Speaker 1: a lot, and then waiting for a better period to
Speaker 1: add to defenses. If in fact you're under right there
Speaker 1: and that's you know, that's really hurt you the last
Speaker 1: last three weeks. But I wouldn't chase them here. Andrew,
Speaker 1: you say, you're not getting em barished, You're just getting
Speaker 1: less bullish. Can we dig into the nuances of that
Speaker 1: and provide some definitions. What is the difference between a
Speaker 1: barish outlook and a decreasingly fullish one. Sure, so what
Speaker 1: you see is obviously the first year offlo like we
Speaker 1: had in the last two thousand and twenty, you have
Speaker 1: a very strong market because the Feds just pouring money in.
Speaker 1: And the second year, which is this year, the market continues.
Speaker 1: It happens every time because you have a combination of
Speaker 1: big earnings recovered by corporate fundamental and the essential banks
Speaker 1: pumping liquidity. It is typically in the third year that
Speaker 1: we're going into where returns remain positive, but they're not
Speaker 1: as strong because you have kind of a battle between
Speaker 1: still good corporate fundamentals, and I think that's gonna be
Speaker 1: the story next year. But you don't get the p expansion,
Speaker 1: you don't get the liquidity pump from the FED. So
Speaker 1: the result is a little bit more of a you know,
Speaker 1: the fence tends to throw cold water on kind of
Speaker 1: strong corporate funals. Look what's going on today. We've got
Speaker 1: more companies reporting great earnings, but you don't have that
Speaker 1: further injection coming from the FED. And the result is
Speaker 1: is positive returns for equties in the third year, which
Speaker 1: would be too down just not as good as you
Speaker 1: see in the past. I think it's way too early
Speaker 1: to get barished to think the market's going down because
Speaker 1: corporate fundamentals are going to continue to come in strong.
Speaker 1: It's just not as good as what we've seen off
Speaker 1: the law. So, Andrew is essentially what you're saying that,
Speaker 1: regardless of what happens with monetary policy, earnings growth can
Speaker 1: carry equities higher. Yeah, it's not just earnings growth, clearly,
Speaker 1: it's surprises, earnings revisions, and you know this year, uh,
Speaker 1: this year, everyone thinks, oh, it's you know, the FED
Speaker 1: pumped the market up. There's a lot of speculation. The
Speaker 1: market is only up this year by the magnitude of
Speaker 1: earnings revisions. So it's not the PEED that's gone up,
Speaker 1: it's the E that has gone up, and the E
Speaker 1: has repriced the P higher. So the key question is
Speaker 1: as we go into next year, and the estmim it
Speaker 1: for the consensus for the SMP earnings next year is
Speaker 1: two seven. Is that going to be too high or
Speaker 1: too low or just right? And if it's too high,
Speaker 1: markets going down. And if it's just right, I think
Speaker 1: the market also goes down because you have the FED
Speaker 1: pulling piece, that probably weighing on piece. But I don't
Speaker 1: think that's the case. I think it's going to be
Speaker 1: yet again too low because classically, coming out of an
Speaker 1: of a recession, Wall Street tends to be too cautious initially.
Speaker 1: And what we hear from companies, and you know, I'm
Speaker 1: not I'm not a strategist on portfolio management. I listened
Speaker 1: companies all day long. I hear corporate balance sheets, strong
Speaker 1: liquidity is there. I think it's going to be a
Speaker 1: very active year for companies buybacks, M and A S.
Speaker 1: I think it will be a good year, and I
Speaker 1: think that number to seven for next year will come
Speaker 1: in way too low. But again, the Fed's got a
Speaker 1: cold throw a little cold water on too much enthusiasm. Andrew,
Speaker 1: if you don't mind, I'd love to dig into sort
Speaker 1: of your factor strategy and maybe your capitalization strategy and
Speaker 1: that kind of environment. You mentioned that low volatility stocks
Speaker 1: have really surged off of extremely oversold levels back in
Speaker 1: October and that may not continue into the year ahead.
Speaker 1: What factor do you like for two? And then further,
Speaker 1: what do you do about small caps? And obviously the
Speaker 1: large cap in next has held on significantly better than
Speaker 1: small caps. Small caps now testing the bottom of a
Speaker 1: pretty significant range. Trade. Is that an opportunity or a risk?
Speaker 1: It's an opportunity at this juncture. Okay, So the key
Speaker 1: thing is small caps, uh, like you know, value stocks,
Speaker 1: cyclic coals, emerging markets, uh, cryptocurrencies you aim it. They're
Speaker 1: all risk assets. So they've been hit over the last month,
Speaker 1: and so if you want to tow in now the
Speaker 1: opportunity to do it. But I think they will come
Speaker 1: a time when they will have big bounces and that
Speaker 1: then the point is don't chase them because in a
Speaker 1: lower and return environment you're gonna have bigger swings in
Speaker 1: risk on risk off. So what's our strategy. I'm a
Speaker 1: core manager. We've been overweight value stocks, right and so
Speaker 1: that worked great until you know, around Thanksgiving. But fortunately
Speaker 1: what we've done starting this summer is we started to
Speaker 1: layer in more of the risk off, low bated defensive
Speaker 1: stocks to offset that valuating. So, Um, the reason we
Speaker 1: like value is simply because those stocks have not repriced
Speaker 1: back to where they should coming out of recession. And
Speaker 1: I think the reason there's been this fits and starts
Speaker 1: is simply because, unlike previous sessions, we keep having the
Speaker 1: problem of the recession coming back and hitting us again.
Speaker 1: It's called COVID, and when that happens, it seems to
Speaker 1: derail the value trade. But I don't think it's over yet.
Speaker 1: So again, in in a period like we've just seen
Speaker 1: the last three weeks, now is the time to buy
Speaker 1: value stocks. But I think you bounced that with this,
Speaker 1: you know, staples, the utilities, reads, defenses, and uh, if
Speaker 1: we have a risk back on period, which I think
Speaker 1: is very possible starting today, Um, then I think those
Speaker 1: socks will underperform, and we'll go back and say, what's
Speaker 1: you know, what stocks should we look to add to?
Speaker 1: And I when I run through my list of my portfolio,
Speaker 1: I say, well, what stocks have been hammered recently? Well,
Speaker 1: it's the banks, it's the energy, And what stocks have
Speaker 1: really done well? Well? Staples and uh, you know a
Speaker 1: couple of low risk insurance companies. You don't want to
Speaker 1: buy those? Those are the wants to trip. So I
Speaker 1: think there's gonna be a lot of opportunity to take
Speaker 1: advantage of what the market offers, but you have to
Speaker 1: be willing to go against the grain, and against the
Speaker 1: grain means to take a little bit more risk. Right
Speaker 1: here today, interesting stuff. Thank you so much for joining us, ANDREWS.
Speaker 1: Lemon of Morgan Stanley, appreciate your time. Dr amish Adalgia,
Speaker 1: Senior Scholar at the Johns Hopkins Center for How Security
Speaker 1: is joining us now, Dr Adulgia, Clearly this is spreading
Speaker 1: quite rapidly, and it is doing so even in people
Speaker 1: who are fully vaccinated and boosted. If that is the case,
Speaker 1: can we vaccinate our way out of the wave of
Speaker 1: this variant? Or is the only answer here more restrictive measures.
Speaker 1: It's sort of neither. We can't vaccinate our way out,
Speaker 1: But I think we have to start to think about
Speaker 1: what we're what are our goals with this pandemic. What
Speaker 1: are our goals with COVID nineteen. And this is not
Speaker 1: a disease that can be eradicated or eliminated. Our goal
Speaker 1: is to decouple cases from hospit fitalizations. And when you
Speaker 1: look at the cases that are occurring in vaccinated individuals
Speaker 1: and boosted individuals, they are mild. They usually don't even
Speaker 1: require a call to the doctor. That's a good thing,
Speaker 1: that's a victory. So I think we have to emphasize
Speaker 1: the severity of illness. So if vaccinated people have mild illnesses,
Speaker 1: I think that's a victory for the vaccines and a
Speaker 1: victory for us. What we're seeing in the hospitals, and
Speaker 1: I last weekend I worked in the hospital of the
Speaker 1: whole weekend. What you're seeing our unvaccinated individuals that are
Speaker 1: occupying I see you beds occupying other beds and stressing,
Speaker 1: stressing the staff. So I think we have to draw separation.
Speaker 1: Their cases are always going to be there, especially with
Speaker 1: a variant likeness it's all about making sure our hospitals
Speaker 1: don't go over capacity. And they think you're going to
Speaker 1: hear some of that in the President's speech today about
Speaker 1: how they're going to to shore up those hospitals, and
Speaker 1: I think that's how we move forward, this kind of
Speaker 1: two track pandemic, one for the vaccinated and one for
Speaker 1: the unvaccinated. Well, speaking of our hospital systems and the
Speaker 1: possibility that they get overwhelmed, given the trajectory of cases already,
Speaker 1: how quickly could we see that happen. It's likely going
Speaker 1: to be in the next couple of weeks where we
Speaker 1: see stress on hospitals, and some hospitals will be able
Speaker 1: to absorb it, but others are going to have a
Speaker 1: lot of difficulty because even though O Macron is the
Speaker 1: cases sequence, Delta is probably the predominant version of the
Speaker 1: virus that's hitting hospitals right now and has a lot
Speaker 1: of patients with Delta inside them, So they're going to
Speaker 1: be dealing with Delta and then O Macron on top
Speaker 1: of it. Delta will eventually fade away, but if they
Speaker 1: get too many patients at one time, it can be very,
Speaker 1: very difficult. And they think this is going to be
Speaker 1: a regional rather than a systemic problem, and we have
Speaker 1: healthcare coalitions hospitals that work together. They have to really
Speaker 1: do that for real. They can't just check a box
Speaker 1: that they're part of a coalition. They have to load
Speaker 1: balance and make sure that no hospital is going down.
Speaker 1: And hopefully the coordination from the federal government with the
Speaker 1: National Disaster Medical System, with the Department of Defense, they'll
Speaker 1: be able to do that in a much more efficient way.
Speaker 1: But this is not the same thing as December. We're
Speaker 1: in a much better place, even though there are scary headlines,
Speaker 1: even though we have this new variant, We've got a
Speaker 1: lot more tools and a lot more knowledge. So Tosa
Speaker 1: a good morning. So we have a lot more tools.
Speaker 1: This isn't a December tweency twenty. It's not the same
Speaker 1: situation at all. We're we're very vaccinated in wealthy countries
Speaker 1: around the world. Of course, you did through a distinction
Speaker 1: there between the load place on hospitals by the vaccinated
Speaker 1: and the unvaccinated. Is that going to be evident you
Speaker 1: think in the President's speech later on. Is it possible
Speaker 1: to craft different policies for these different parts of society
Speaker 1: that will be palatable to to U S citizens. I
Speaker 1: do hope the President places the blame squarely where it is, because,
Speaker 1: like I said, it's not people that lack of booster shot.
Speaker 1: It's not people who who who are fully vaccinated that
Speaker 1: are getting hospitalized. It's people who lack any shots. And
Speaker 1: in the United States that's being done willfully. People are
Speaker 1: choosing not to get vaccinated and then choosing to destroy
Speaker 1: their community hospitals. And I do think that we should
Speaker 1: draft policies different from the vaccinated and the unvaccinated, because
Speaker 1: if you are vaccinated, the virus treats you very differently,
Speaker 1: so other people should treat you very differently. That how
Speaker 1: I think we have to move forward because what we
Speaker 1: see is the vaccinated that have done everything they can
Speaker 1: to preserve hospital capacity by getting vaccinated, by following the science.
Speaker 1: But then you have this group of people and they're
Speaker 1: concentrated in certain parts of the country, in certain regions,
Speaker 1: they are not vaccinated by choice, and what they're doing
Speaker 1: is crushing their own community hospitals. And I think we
Speaker 1: have to call that out because this is being this
Speaker 1: is something that didn't have to be. These are all
Speaker 1: vaccine preventable hospitalizations. Vaccine preventable deaths, and these people are
Speaker 1: choosing to do this, and I think that's something that
Speaker 1: needs to be called out, even if it angers people.
Speaker 1: I think it's the truth. Doctor. I'd like to talk
Speaker 1: a little bit about the variant itself and what we've
Speaker 1: learned so far from O Macron and about the virus
Speaker 1: and it's various mutations. Um. Over the last couple of weeks,
Speaker 1: some of the rumors have come out that potentially the
Speaker 1: nature of Omicron itself suggests that this virus will die
Speaker 1: out supposedly cloth faster than other viruses have in the past.
Speaker 1: Is that true what we learned about O Macron itself,
Speaker 1: and with respect to what to expect about future variants
Speaker 1: and the longevity of the virus overallad overall, well, the
Speaker 1: Stars Kobe Too virus is with us. It's not going
Speaker 1: to magically go back into baths. And some of these
Speaker 1: variants come and go as the virus is put under
Speaker 1: Darwinian selection pressure to be able to transmit more efficiently
Speaker 1: to get around immunity. And with O Macron, it's unclear
Speaker 1: how long this surge of cases is going to last.
Speaker 1: If you look at South Africa, if you look at
Speaker 1: Denmark in the UK. It seems to be following in
Speaker 1: different pattern than than Delta. For example, Delta went in
Speaker 1: kind of two month waves. This seems to be shorter.
Speaker 1: Hopefully that's the case, but I don't know that we
Speaker 1: have enough information or understanding. What it might be is
Speaker 1: that this virus variant is exploiting network effects. It's infecting
Speaker 1: people that are out there doing things, and then it
Speaker 1: basically runs out of those types of people and everybody
Speaker 1: else is a little bit more careful, so it doesn't
Speaker 1: have new people to infect. It's unclear if that's going
Speaker 1: to be the case, but I think we have to
Speaker 1: all be prepared for the fact that, oh, Macron and
Speaker 1: other down the line are going to become part of
Speaker 1: our daily lives, but they're going to be a less
Speaker 1: a less severe version of COVID. As we get more
Speaker 1: tools by being vaccinated, monocloni, l antibodies, anti virals, rapid test,
Speaker 1: that's going to tame this virus and shift illness towards
Speaker 1: the mild side of the spectrum. And that's exactly where
Speaker 1: we where we wanted, and that's been the goal of
Speaker 1: this whole public health endeavor from the beginning. All Right,
Speaker 1: Thank you so much for your really valuable insight this morning.
Speaker 1: Thank you so much for joining us. Dr amish adalgia
Speaker 1: of Johns Hopkins and of course the Johns Hopkiness School
Speaker 1: of Public Health is supported by Michael Are Bloomberg, who
Speaker 1: is the foundering majority owner of Bloomberg LP. Sarah Hunt
Speaker 1: poorfilio manager Alpine Woods Capital Investors, joining us now. Sarah,
Speaker 1: great to see you. Um, I want to paraphrase Gina
Speaker 1: from a little earlier on in the hour, we are
Speaker 1: buying the dip. Once again, the mentality is still intact.
Speaker 1: What does it take to change that mentality? And does
Speaker 1: that happen next year? Okay, while I was watching Bloomberg
Speaker 1: before I came on this morning, so I'm going to
Speaker 1: have to agree with James Affy and say that it
Speaker 1: has to be that the market continues to go down
Speaker 1: after you've what that dip, and it starts to have
Speaker 1: and it starts to be a pain trade. It has
Speaker 1: not yet been a pain trade. And every time that
Speaker 1: the market has had some weakness and people start looking
Speaker 1: for protection, they also end up earning money on that
Speaker 1: protection as well. And that has become such a it's
Speaker 1: become such a pattern that I think it's difficult for
Speaker 1: people to remember what it's like when markets don't just
Speaker 1: have a recovery every time there's a down draft. So Sarah,
Speaker 1: talk to us a little bit about your ELOK for two.
Speaker 1: I know you see things changing a little bit as
Speaker 1: financial conditions become slightly more rational as the FED starts
Speaker 1: to scale back on their on their input. Where do
Speaker 1: you see equities headed in the year ahead and how
Speaker 1: will things be different next year relative to the last two. Well,
Speaker 1: I think that there is going to be more of
Speaker 1: a focus on cash generation and earnings instead of some
Speaker 1: of the loftier price of sales kind of ratios that
Speaker 1: you've seen in some of the areas where that sort
Speaker 1: of FED backstop has really helped companies that don't yet
Speaker 1: have earnings or don't yet have really a good balance sheet.
Speaker 1: I think that that's going to start to make a difference. Um.
Speaker 1: I also don't disagree with the fact that macro factors
Speaker 1: drive a lot of investing, and so it's not going
Speaker 1: to be the only thing. I would also love a
Speaker 1: world where we could count on valuations and we could
Speaker 1: do that kind of fundamental work that we all started
Speaker 1: out doing, but that's just not the world that we
Speaker 1: live in. I do, however, think that growth is going
Speaker 1: to continue to be important, but it has to be
Speaker 1: profitable growth, and I think that's where you're going to
Speaker 1: have a bifurcation in some of the tech sectors, Whereas
Speaker 1: the stocks that are able to make money and grow
Speaker 1: and actually put up earnings and have a decent balance
Speaker 1: sheet are going to be able to withstand the pressures
Speaker 1: of the concerns about technology versus some of the stocks
Speaker 1: that don't quite have the earnings or anything else yet
Speaker 1: they are. I think that's going to be a little
Speaker 1: bit different going into two. This strong balance sheet story
Speaker 1: has been such a big part of the US outperformance
Speaker 1: relative to the rest of the world for years. Now,
Speaker 1: are you seeing opportunities emerge elsewhere into as the fails,
Speaker 1: as the FED scales back, as we see valuations come
Speaker 1: under some degree of pressure in the US naturally, Where
Speaker 1: are you looking for the opportunities globally? Well? I think,
Speaker 1: I mean a lot of US companies have a huge
Speaker 1: global presence, so you can be we tend to have
Speaker 1: mostly domestic based companies in our portfolios, but there are
Speaker 1: a lot of them with the big international presence, so
Speaker 1: you start to look with the places where you think
Speaker 1: you might get a benefit from what's going to happen
Speaker 1: in two Unfortunately, a lot of the rest of the
Speaker 1: world is suffering, not just from COVID, but you know,
Speaker 1: Europe still is having some problems with economic growth. The
Speaker 1: US is still a reasonably good growth space, and I
Speaker 1: think that part of China's problem with growth and what
Speaker 1: they're trying to do to fix it with dropping the
Speaker 1: reserve ratio and everything else, makes other parts of the
Speaker 1: world a little riskier at the moment. So, you know,
Speaker 1: we still think the United States is a good market,
Speaker 1: and we think that companies within it that have international
Speaker 1: reach can perform fairly well going into well Sarah I,
Speaker 1: I continue to talk about how the year has shaken
Speaker 1: out far from what consensus thought it would. Part of
Speaker 1: the call was international versus us, part of it was
Speaker 1: shifted value over grow, small caps over large None of
Speaker 1: those trades really worked out as we were expecting. And
Speaker 1: that also applies to the yield curve. While we saw
Speaker 1: that steeper curve in the beginning of the year, what
Speaker 1: we have gotten since March really is just a persistently
Speaker 1: flatter curve. Do you expect that is going to continue
Speaker 1: to be the case and can you be a buyer
Speaker 1: financials in that kind of environment. Well, you know, some
Speaker 1: of the financials were doing fairly well in a in
Speaker 1: the yield curve environment before it's steepened. I think the problem,
Speaker 1: the knee jerk reaction to a flatter yield curve for
Speaker 1: financials is that it's going to be much harder for
Speaker 1: them to make money. But I think that in the
Speaker 1: last you know, since the financial crisis, they've all been
Speaker 1: fairly clever about ways to make money that are not
Speaker 1: only yield curve dependent. So I think I think that
Speaker 1: they can end up performing better. But I think that
Speaker 1: the playbook says the old curve is flattening, then sell
Speaker 1: the financials. And I'm not sure that that actually is
Speaker 1: something that's going to be helpful in terms of, you know,
Speaker 1: whether or not those stocks can actually perform. But it's
Speaker 1: going to take the market a while to realize that
Speaker 1: they can perform even with a flatter yield curve. Okay,
Speaker 1: so Sarah, can we get some specific picks? I mean,
Speaker 1: what what are your favorite stocks in your portfolio right now?
Speaker 1: What would you be looking to add positions to well.
Speaker 1: I think the pull back and the financials gives you
Speaker 1: an opportunity in some of the stocks we like, like
Speaker 1: JP Morgan, UM, We like City because they've got a
Speaker 1: real self help story. The stock is not performed well
Speaker 1: this year, but we think it's got some real ability
Speaker 1: to improve its own underlying performance without so much of
Speaker 1: a market help. So I think that those are some
Speaker 1: interesting places that we like. There's some places in the
Speaker 1: technology space that we like. I mean, we've owned Oracle
Speaker 1: for some time UM, and I think that there are
Speaker 1: some other areas where you've got real earnings, You've got
Speaker 1: some earnings growth, You've got acam I, You've got some
Speaker 1: other companies where there's going to be some growth there
Speaker 1: and they're overcoming some older legacy businesses. And I think
Speaker 1: that that's a story that we like going into two,
Speaker 1: because again, you want to see some valuation underpinning, even
Speaker 1: if it's not the entire market that's looking at valuations.
Speaker 1: For us, we would like to see evaluation underpinning that
Speaker 1: we can live with. Sarah, what's your degree of confidence
Speaker 1: that the U S consumer is going to continue to
Speaker 1: power through two? If I take a look at the
Speaker 1: savings ratio. Certainly as a percentage disposed of income, it's
Speaker 1: coming down fairly sharply. Gas prices are up, rents coming up.
Speaker 1: Where does that leave the consumers ability to spend? Well,
Speaker 1: you know, unfortunately, because we are still back in this,
Speaker 1: you know, we have a new variant iteration coming through.
Speaker 1: I think that there's still a lot of pent up
Speaker 1: demand for travel and for experiences, and that keeps getting
Speaker 1: pushed out, even with the vaccines, where we thought that
Speaker 1: was going to make a huge difference. I mean, I
Speaker 1: think that was part of the optimism of early one,
Speaker 1: is that those vaccines we're going to allow things to reopen,
Speaker 1: and we weren't going to be back in a situation
Speaker 1: where getting on a plane is difficult to do, Traveling
Speaker 1: internationally is difficult to do, Traveling even internally is more challenging.
Speaker 1: So I think that there is room for demand for that,
Speaker 1: But I do not disagree that the a lot of
Speaker 1: the prices are coming up that will eat away at
Speaker 1: some of the ability to do that when it starts
Speaker 1: to become more available. On the other hand, you know
Speaker 1: that a lot of the spending happens at you know,
Speaker 1: where people for whom it is not as big of
Speaker 1: a problem as it is um for people where you
Speaker 1: don't have as much chushion from inflation. Yeah, all right,
Speaker 1: Sarah Hann of Alpine Woods, thank you so much for
Speaker 1: joining this, and I'm wishing a happy and healthy holiday.
Speaker 1: Let's talk about whether or not we can characterize the
Speaker 1: FED as hawkish. Neil Data US Economic Research had at
Speaker 1: Renaissance Macro Research has a bit of an opinion on this.
Speaker 1: Neil track this for me. You think that the FED
Speaker 1: could actually move potentially four times next year, and at
Speaker 1: the same time you say, don't call them hawkish? Why, well,
Speaker 1: because I think they're following the data. I mean, you know,
Speaker 1: one of the interesting things about the the December fom
Speaker 1: C meeting is that, you know, they revised up their
Speaker 1: expectations for growth, they revised down their expectations for unemployment,
Speaker 1: and they revised up their expectations for inflation. So what
Speaker 1: do you expect them to do. Obviously they're gonna they're
Speaker 1: gonna signal more interest rate increases. So um, if you
Speaker 1: sort of plug all their revision into a sort of
Speaker 1: standard or standard kind of tailor rule type model, um,
Speaker 1: they're not indicating they'd hike any more than that. So
Speaker 1: I don't really think what happened in December was about
Speaker 1: their so called reaction function. That's what we got at
Speaker 1: the June meeting, not December, and I think that's one
Speaker 1: of the reasons why at the you know, on the
Speaker 1: day itself, the market sort of took the news and stride. UM.
Speaker 1: So I wouldn't characterize this is this is a hawk
Speaker 1: ish FED. I think this is a FED that's had
Speaker 1: they not signaled what they were what they did, um,
Speaker 1: they would look increasingly offsides relative to the data as
Speaker 1: it's coming in. Um. All right, Well, this is a
Speaker 1: FED that already has accelerated the pace of taping, tapering
Speaker 1: that looks set to end in March. Are we looking
Speaker 1: realistically at March liftoff? I mean, I certainly think it's
Speaker 1: a live meeting. One of the reasons why they're accelerating
Speaker 1: the tapering is to make it a live meeting. And
Speaker 1: you know, then just think about what's going to happen
Speaker 1: between now and then. I think it's highly likely that
Speaker 1: we're gonna come back in the new year and we're
Speaker 1: gonna get a strong December jobs number point number one
Speaker 1: point number two. Um, what's going to change on the
Speaker 1: inflation picture between now and then. Uh. You know, we're
Speaker 1: being told by the usual suspects to keep waiting for
Speaker 1: this moderation in goods prices. It's like waiting for godot.
Speaker 1: I mean, if you look at wholesale prices for use cars,
Speaker 1: they're still rising at a meaningful rate. Uh. And so
Speaker 1: we're not going to see a moderation in goods prices. Meanwhile,
Speaker 1: housing inventories have been paired back to the bone. I
Speaker 1: mean you think when you think they can't go any lower,
Speaker 1: they do. Um. People are buying homes at strong prices. Um.
Speaker 1: That's gonna continue to keep the pressure on rental inflation.
Speaker 1: So you know, I think when you put these things together,
Speaker 1: you have strong jobs. We know that initial jobless claims
Speaker 1: are declining, We know that job openings are strong. To me,
Speaker 1: that sort of is presaging another decline in the jobless rate. Um.
Speaker 1: So I think we're gonna be back in March and
Speaker 1: the Fed's gonna be revising down there at spectation for unemployment,
Speaker 1: potentially revising up growth and maybe even taking their inflation
Speaker 1: estimate up a little bit. Um. But I think you
Speaker 1: know the data as it's going to come in over
Speaker 1: the first quarter will probably lead them to hike, and
Speaker 1: Powell was pretty clear he doesn't seem that he doesn't.
Speaker 1: He's not signaling much discomfort with the limited space between
Speaker 1: the end of the tapering program and the first hype. UM.
Speaker 1: I think markets will be okay with it because it's
Speaker 1: not the data, right. I mean, if you're if you're
Speaker 1: if you're in a in an accelerating nominal growth environment
Speaker 1: or a strong nominal growth environment, that's an environment where
Speaker 1: companies that trade on the SMP five can make profits.
Speaker 1: And that's ultimately what happens. There's very strong demand full
Speaker 1: stuff toysles are big built in a fairly significant way. Absolutely,
Speaker 1: I mean between p J Mass this year is the
Speaker 1: and for the benefit of our radio audience, Neil has
Speaker 1: canceled the bookshelf for it from how Shot. Instead, he
Speaker 1: is surrounded by a pile of stepped animals, including what
Speaker 1: looks like a rather large minion from Despicable Me Guy. Someone,
Speaker 1: someone on Wall Street had to take a stand against
Speaker 1: standard bookshelf background, where you're a littered with books that,
Speaker 1: let's be honest of us have ever actually read. So no,
Speaker 1: I'm just normally normal Neil. Normally I work my way
Speaker 1: across people's bookshelves and try and read into kind of
Speaker 1: what they think is behind them. Like I'm trying to
Speaker 1: I'm trying to do the same here. I got a
Speaker 1: mini mouse, I got a I got a pretty big minion.
Speaker 1: I think there's a troll in there somewhere as well. Um,
Speaker 1: it's it's a good, good, good selection you got going on, Neil.
Speaker 1: You talk about the sequencing and what the markets afraid of.
Speaker 1: At the moment, the market is apparently unafraid of a
Speaker 1: faster taper, it is unafraid of rate hikes. What about
Speaker 1: a roll in the battle rolling off with the balance sheet?
Speaker 1: What about QT? Where does that come? And is that
Speaker 1: what you think will really spook investors? I think that's
Speaker 1: a great question. And if you go back to the
Speaker 1: most recent historical analog, Guy, Um, it's right. I mean
Speaker 1: the FED was hiking and the balance sheet was contracting
Speaker 1: and team the that year, I believe. I mean, Gena
Speaker 1: can correct me if I'm wrong. I think the SMP
Speaker 1: five hundred fell I think about six to seven percent
Speaker 1: over the year. Um. But if you go back to
Speaker 1: that period, what was really the driver of that weakness
Speaker 1: and equities. Was it the FED or was it the
Speaker 1: fact that um, the former president was prosecuting a trade war. UM.
Speaker 1: You know, most of the big declines in the equity
Speaker 1: markets in ten didn't happen on days of interest of
Speaker 1: new FED information. It happened on days of trade tweets, UM,
Speaker 1: you know, pressing the you know, pressing the heat on
Speaker 1: on the Chinese. UM. The broader economy was fine, So
Speaker 1: you had a tail one from the economy and earnings
Speaker 1: that year. You had a slight headwind from the FED.
Speaker 1: But really the weakness and equities that year I think
Speaker 1: was driven by the trade war. So unless President Biden
Speaker 1: wants to prosecute uh, you know, increasing trade tensions, which
Speaker 1: with China, I think the markets will will deal with it.
Speaker 1: And also two is probably going to be a year
Speaker 1: of synchronized global economic activity as we all end exit
Speaker 1: the pandemic together. UM. One of the interesting data points
Speaker 1: that I've noticed UM lately, and you can take a
Speaker 1: look at our Twitter, is that mobility out of Emerging Asia,
Speaker 1: you know, Korea, Thailand, Indonesia, India, it's up into the right,
Speaker 1: which suggests that you know, they're getting on with it
Speaker 1: and that that to me suggests that we're going to
Speaker 1: turn the corner on the supply chain issue. Neil, I'm
Speaker 1: glad you gave me the window to talk about because
Speaker 1: I think the one part of that's really missing from
Speaker 1: the discussion is the fact that that was a year
Speaker 1: of margin compression on the SMP five, perpetuated not only
Speaker 1: by the trade war, but also by a necessity for
Speaker 1: spending by some of the big cap tech docks in
Speaker 1: the name of Facebook and Google really starting to spend
Speaker 1: more on Internet security software and the like, compressing margins
Speaker 1: for the index at large with then which then led
Speaker 1: to the correction. In my view, So when you talk
Speaker 1: about two and you talk about maybe some of this
Speaker 1: margin risk clearing in two, what's the mechanism by which
Speaker 1: you expect that margin risk to clear, Because I think
Speaker 1: we're starting to see the sort of the reality come
Speaker 1: to the forefront that supply chains are still somewhat constrained,
Speaker 1: and many people are saying that's not going to clear
Speaker 1: until three at the earliest. Is there something else that
Speaker 1: you can see that that creates a pathway from margin
Speaker 1: expansion to resume into the year ahead, which will really
Speaker 1: certainly power a much more optimistic outlook for the index. Well,
Speaker 1: I think for the industrial sector, it's hard to argue
Speaker 1: that the supply chain issue want to improve, right, so
Speaker 1: at some level that will probably boost at least industrial
Speaker 1: sector margins. I mean, I don't think they're going to
Speaker 1: be passing that onto consumers. UM. So I think that's
Speaker 1: the first point. And then secondly, I mean I think
Speaker 1: UM productivity is like to pick up somewhat as well.
Speaker 1: I mean, you know, remember we've been in besting a
Speaker 1: lot as it is, UM. You know, we're getting used
Speaker 1: to these new working arrangements. UM, so we'll probably see
Speaker 1: some rebound and productivity over the next year as well.
Speaker 1: And talking speaking to that productivity rebound, how do you
Speaker 1: see labor costs playing into the overall environment. There is
Speaker 1: some concern that maybe labor costs will become more deeply embedded,
Speaker 1: resulting in upward inflation pressure at large over the course
Speaker 1: of this cycle. Is that not something that you see
Speaker 1: as a risk to the outlook. I mean, I think
Speaker 1: it's absolutely a risk, UM. But I guess the issue
Speaker 1: is what's going to happen with UM. You know, so
Speaker 1: right now, obviously you have a lot of people quitting
Speaker 1: their jobs. Um, they're chasing wages higher, particularly in certain
Speaker 1: industries like leisure and hospitality and retail. It's certainly not
Speaker 1: economy wide. Um. But I do think that as we
Speaker 1: exit the pandemic, you should begin to see more labor
Speaker 1: supply being freed up, and that may reduce the appetite
Speaker 1: for those that are currently quitting their jobs to keep
Speaker 1: doing so, right, and so as that happens, that should
Speaker 1: mitigate some of the pressure in wages, which in turn
Speaker 1: should mitigate some of the pressure unit labor costs that
Speaker 1: certain companies are seeing. Certainly, I would argue it's not
Speaker 1: economy wide. I mean, um, but you are seeing it's
Speaker 1: you know, it's hard to deny what we see in
Speaker 1: you know, at the restaurant, in the restaurant industry, at
Speaker 1: the retail industry. But but I do think as labor
Speaker 1: supply gets released, those that are tempted to currently quit
Speaker 1: their jobs in search of a new new one will
Speaker 1: be less tempted to do so. Hey, Neil, this might
Speaker 1: be unfair. We have thirty seconds left and a viewer
Speaker 1: question coming through on IB Why are not why are
Speaker 1: not longer interest rates higher due to higher inflation? No,
Speaker 1: that's a great question. I mean, I think the long
Speaker 1: end of the of the treasury market. I mean it's
Speaker 1: sort of a we need to see it to believe it.
Speaker 1: So you know, remember back in the we're dealing with
Speaker 1: a lot of these questions. But as the Fed was hiking,
Speaker 1: you saw the long end ultimately back up again in
Speaker 1: an environment of strengthening US and global economic growth. Um.
Speaker 1: But I also think, um, you know, part of this
Speaker 1: is also a function of what's going on across commercial
Speaker 1: banks who have been gobbling up um treasury securities at
Speaker 1: a appreciable pace. All Right, have to leave it there.
Speaker 1: Thank you so much to Neil Data of Renaissance Macrow.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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