WEBVTT - Surveillance: Global Hike Race With Abby Joseph Cohen 0:00:05.080 --> 0:00:09.200 Welcome to the Bloomberg surveillance podcast. I'm Tom Keene, along 0:00:09.200 --> 0:00:13.039 with Jonathan Ferrill and Lisa are Brawnowitz Jailey. We bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, finance, investment and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg surveillance and apple podcast soundcloud, Bloomberg 0:00:23.360 --> 0:00:29.280 Dot Com and, of course, on the Bloomberg terminal. Danny 0:00:29.320 --> 0:00:31.400 Blash flag joins US right now. Danny, it's fantastic to 0:00:31.440 --> 0:00:34.159 catch up and I think we should start there, at 0:00:34.200 --> 0:00:36.839 the heart of these decisions. What do these decisions mean 0:00:36.960 --> 0:00:40.360 for Everyday Brits, every day Americans, when city are basically 0:00:40.400 --> 0:00:42.400 saying millions are going to end up unemployed? And the 0:00:42.479 --> 0:00:44.440 question I've asked, and I think you're perfectly positioned to 0:00:44.479 --> 0:00:47.320 try and answer it, is higher unemployment of price worth 0:00:47.360 --> 0:00:50.600 paying to try and get inflation down? No? Well, we 0:00:50.640 --> 0:00:52.760 have a lot of evidence. I mean the central bankers 0:00:52.800 --> 0:00:55.160 forever have said how important inflation is and they just 0:00:55.240 --> 0:00:57.480 kind of guessed it. So there's a huge body of 0:00:57.520 --> 0:01:00.320 literature that I've contributed to and we look at what's 0:01:00.360 --> 0:01:02.760 the what's the impact on the country's well being, if 0:01:02.760 --> 0:01:04.840 you like, on the wealth of nations of a one 0:01:04.880 --> 0:01:08.440 percentage point rising unemployment compared to a one percentage point 0:01:08.560 --> 0:01:11.240 rise in inflation, and the answer is it's absolutely clear 0:01:11.680 --> 0:01:14.440 between five and ten times worse. So a new paper 0:01:14.480 --> 0:01:17.480 says that the rising unemployment that they're going to bring 0:01:17.480 --> 0:01:20.760 about is ten times worse than the problem they're trying 0:01:20.800 --> 0:01:23.040 to solve. And you started this thing out. We I've 0:01:23.040 --> 0:01:25.240 been talking a lot about the woman on the mile 0:01:25.280 --> 0:01:27.399 in road, omnibus, and what I mean by that is 0:01:27.880 --> 0:01:30.039 so so the Bank of England sits in the city 0:01:30.040 --> 0:01:32.800 of London. One mile away is the mile in road. 0:01:32.840 --> 0:01:34.440 It's called the mile in road because it's a mile 0:01:34.480 --> 0:01:37.319 from the city and it's where the two worlds collide. 0:01:37.640 --> 0:01:39.920 And the question is, what's going on that's going to 0:01:40.040 --> 0:01:42.919 help the bankers and the city folks that we talked 0:01:42.920 --> 0:01:46.120 to and the woman riding the bus on the mislen road. 0:01:46.160 --> 0:01:48.160 And the answer, it seems to me, is that is 0:01:48.200 --> 0:01:51.880 that we're we're seeing disaster coming. We're seeing rises in 0:01:52.000 --> 0:01:54.560 interest rates in the UK when the Bank of being 0:01:54.600 --> 0:01:58.880 there's agents today talk about slowing demands, slowing output. The 0:01:58.920 --> 0:02:01.480 Bank of being the four has before the rate rise 0:02:01.920 --> 0:02:05.720 that there's a high probability of deflation and that output 0:02:05.800 --> 0:02:08.040 is going to fall over the next three years. So 0:02:08.080 --> 0:02:10.200 what are they trying to do for a problem that's 0:02:10.240 --> 0:02:13.480 not about demand driven inflation? And the other thing, Johnathan 0:02:13.480 --> 0:02:17.240 and Tom I think we really should think about. In 0:02:17.280 --> 0:02:19.200 a sense, you guys talk about this all the time, 0:02:19.200 --> 0:02:22.480 but there's so little discent the story at the ECB, 0:02:22.680 --> 0:02:24.920 the story at the Bank of being the story at 0:02:24.919 --> 0:02:26.520 the Fed. We kind of do things a banning flesh. 0:02:26.560 --> 0:02:29.160 We've got to raise rates. Potentially this is going to 0:02:29.440 --> 0:02:32.160 crash the economies and it will all be much worried. 0:02:32.240 --> 0:02:34.720 Professor Blanche floor, I stood in the bottom of our 0:02:34.760 --> 0:02:38.440 building here in New York with Secretary Treasury Tim Geitner 0:02:39.000 --> 0:02:42.440 in the heart of the financial crisis and Geitner brilliantly 0:02:42.560 --> 0:02:46.520 laid out that they needed to extend the x axis 0:02:46.560 --> 0:02:50.000 and use time to heal the wounds. Are these central 0:02:50.000 --> 0:02:54.400 banks that are panicking because they refuse to send to 0:02:54.560 --> 0:02:59.360 extend time, to extend the x axis, to to diffuse 0:02:59.480 --> 0:03:03.840 inflash Canary Impulse? Well, that's absolutely right, Tom. I mean 0:03:04.040 --> 0:03:06.760 the thing that it strikes me as very interesting is 0:03:06.800 --> 0:03:09.880 these central bankers seem to want to respond to every 0:03:09.919 --> 0:03:13.480 piece of MINU Sha that comes in every day. Their 0:03:13.560 --> 0:03:15.960 job is to focus on the forecast, to rise at 0:03:16.000 --> 0:03:17.919 what inflation is going to be, let's say, in two 0:03:18.000 --> 0:03:21.200 years time. But if that causes all kinds of problems, 0:03:21.280 --> 0:03:23.840 there's no reason why you shouldn't say, okay, let's let 0:03:23.919 --> 0:03:27.160 inflation come back to target in three years or four years. 0:03:27.240 --> 0:03:30.720 I mean that's absolutely allowed and the sensible thing probably 0:03:30.800 --> 0:03:34.760 to do is to see if this temporary shock dissipates. 0:03:35.040 --> 0:03:37.600 So you could sit there and say a sensible path 0:03:37.960 --> 0:03:40.240 would be to sit and wait and watch. But again, 0:03:40.320 --> 0:03:42.960 where's the dissenting voices? They're all saying the same thing, 0:03:43.240 --> 0:03:46.280 based on zero data. They have no precedent to this 0:03:46.680 --> 0:03:49.720 and the danger is that the soft landings are not 0:03:49.760 --> 0:03:51.560 going to come. And in the forecast yesterday from the 0:03:51.560 --> 0:03:54.240 Fed said output is going to be fine, impost is 0:03:54.240 --> 0:03:56.520 gonna rise just a little bit and raising rates to 0:03:56.560 --> 0:03:59.000 four and a half percent, no worry, it will slowly 0:03:59.000 --> 0:04:01.880 bring inflation to and that's for Garga land. That's not 0:04:01.920 --> 0:04:05.600 gonna happen. Danny is there? Are there any circumstances under 0:04:05.600 --> 0:04:11.000 which you would argue for raising rates? Well, of course, obviously. 0:04:11.320 --> 0:04:14.440 I mean the re absolutely. So what? So? What what 0:04:14.480 --> 0:04:16.880 are the scenarios that would cause you to say it 0:04:16.960 --> 0:04:20.960 is important question? That's a stupid question in a way. 0:04:21.240 --> 0:04:23.679 I mean what we've seen since two thousand and eight 0:04:24.080 --> 0:04:26.279 is the mother of all shocks. We saw the mother 0:04:26.360 --> 0:04:30.000 of all shocks, negative shock to output in two thousand 0:04:30.120 --> 0:04:32.479 seven eight, which you had to counter. If you haven't 0:04:32.640 --> 0:04:35.480 counted it, Ben Banankei said unemployed would have been so 0:04:35.520 --> 0:04:38.839 I'd buy that. So now what we have a giant shocks, 0:04:38.880 --> 0:04:42.799 I mean giant shock from the covid and from the war. 0:04:42.960 --> 0:04:45.560 We don't know how it's going to recover. So why 0:04:45.600 --> 0:04:48.680 would I want to punch the labor market and punch 0:04:48.800 --> 0:04:51.440 demand before I really know what's coming? I mean it's 0:04:51.440 --> 0:04:53.599 as if they know what's coming, because they clearly don't. 0:04:53.800 --> 0:04:58.120 So under these circumstances, supplied driven shock that essentially is 0:04:58.120 --> 0:05:00.000 going to drop out. My guests in the United State 0:05:00.000 --> 0:05:03.760 Eights and in the UK will see very low inflation 0:05:03.920 --> 0:05:06.960 by June, as those big numbers, one off big numbers 0:05:06.960 --> 0:05:09.039 that we saw dropped up. So I would have not 0:05:09.120 --> 0:05:13.280 been rotive over rate rises because of the large negative shock. 0:05:13.480 --> 0:05:16.280 And the debate over the last decade is about the 0:05:16.320 --> 0:05:19.599 scale of that negative shock. Danny. It may be a 0:05:19.640 --> 0:05:22.560 stupid question, and yet some people might be wondering that 0:05:22.600 --> 0:05:24.960 because they're taking a look at CPI where it is 0:05:25.080 --> 0:05:28.279 and saying why wouldn't you want to raise rates? So, 0:05:28.440 --> 0:05:32.239 and I mean I'm just saying so, from your first 0:05:33.360 --> 0:05:36.359 from your coat, what data point would you be watching 0:05:36.680 --> 0:05:40.080 to prove your point every week? Okay, so let's just 0:05:40.160 --> 0:05:42.200 go with the claims that the Fed has made and 0:05:42.240 --> 0:05:44.960 the claim that I make. So what you've got was 0:05:45.320 --> 0:05:48.640 a couple of once off events which are basically driving 0:05:48.680 --> 0:05:51.640 the base effects. You've had inflation of zero and zero 0:05:51.720 --> 0:05:54.360 point one in the last two months. If you just 0:05:54.440 --> 0:05:57.000 take two thousand twelve to two thousand ninety and you 0:05:57.120 --> 0:06:02.040 impose those inflation shocks over the next eight months, inflation 0:06:02.120 --> 0:06:04.960 gets to one by about you. If you go back 0:06:04.960 --> 0:06:07.320 to two thousand and eight, same date, July, two thousand 0:06:07.320 --> 0:06:09.880 and eight, inflation was five point six percent. It was 0:06:10.000 --> 0:06:14.359 minus two a year later. So the question is, everything's 0:06:14.400 --> 0:06:16.479 being driven by the base effects. So I would be 0:06:16.520 --> 0:06:30.719 watching and waiting to blanche. Thank you, sir. Our guest 0:06:30.839 --> 0:06:34.159 is so important on what to do with your assets, 0:06:34.279 --> 0:06:37.520 your money forward. Lisa, help me here with the data check. 0:06:37.600 --> 0:06:40.320 So much going on. Equities give me a mixed story. 0:06:40.400 --> 0:06:43.840 The vix went out above thirty and pulled right back 0:06:43.839 --> 0:06:47.240 into twenty. Seven, point six, eight, maybe a more quiescent 0:06:47.320 --> 0:06:50.560 response to Dow, just still above thirty thousand. Didn't get 0:06:50.600 --> 0:06:53.000 to the twenty nine thousand level. Lisa. What do you 0:06:53.040 --> 0:06:55.160 see in bonds this morning? Well, what you're seeing is 0:06:55.200 --> 0:06:58.159 a front end that just won't quit. Right four point 0:06:59.200 --> 0:07:02.360 on that two year old, and I think that's really important. Also, though, 0:07:02.400 --> 0:07:04.440 in the currency space, and this sort of goes to 0:07:04.480 --> 0:07:06.240 the scene that we've been talking about over the first 0:07:06.240 --> 0:07:09.120 two hours of the show. How does the other central 0:07:09.120 --> 0:07:12.920 banks respond to this? The Swiss National Bank rose, raised rates, 0:07:13.000 --> 0:07:18.480 baviusly left uh the negative yield regime, which had been 0:07:18.520 --> 0:07:21.280 an eight year regime, and their currency is weakening the 0:07:21.280 --> 0:07:24.119 most is two thousand and fifteen. What is the path 0:07:24.160 --> 0:07:27.880 ahead in this currency war to get a stronger currency 0:07:27.880 --> 0:07:30.080 at a time when nobody wants anything other than the dollar? 0:07:30.200 --> 0:07:32.480 For those keeping scored at home, let's be clear. The 0:07:32.640 --> 0:07:38.120 Swiss went one way, the Japanese went another way. Maybe 0:07:38.120 --> 0:07:41.520 that's called a currency war, Lisa. I mean, and a 0:07:41.600 --> 0:07:43.240 very different one than the ones that we're used to 0:07:43.320 --> 0:07:45.800 over the very different. It's really, really important, is Jeff. 0:07:45.840 --> 0:07:48.360 You said earlier with B and y melon. It's asymmetric, 0:07:48.960 --> 0:07:51.200 to say the least. We need to solve the Carnag 0:07:51.280 --> 0:07:54.760 in your portfolio, Lisa Shallott, with us, chief investment officer 0:07:54.880 --> 0:07:58.960 Morgan Stanley Wealth Management, and we readjust this morning. Are 0:07:59.000 --> 0:08:03.120 we rebalancing, Lisa? Are We readjusting? What are we doing 0:08:03.280 --> 0:08:07.640 amid the carnage? Well, look, our our advice to our 0:08:07.680 --> 0:08:11.280 clients is certainly that we should be rebalancing here. You know, 0:08:11.360 --> 0:08:13.920 what we have said is this is a time for 0:08:15.120 --> 0:08:19.360 active risk management, and what we mean by that is 0:08:19.400 --> 0:08:25.440 taking Um a maximum level of diversification. That means diversification 0:08:25.560 --> 0:08:31.800 by sectors, diversification by technical factors, diversification, uh, you know, 0:08:31.920 --> 0:08:35.760 by region, uh and UH. You know, I know it's 0:08:35.760 --> 0:08:40.320 not popular right now, you know, to speak about uh, 0:08:40.520 --> 0:08:44.400 you know, American investors owning uh, non US stocks, given 0:08:44.520 --> 0:08:48.320 relative out performance of the last decade. But you know, 0:08:48.400 --> 0:08:51.240 we think that what's going on in the currency markets 0:08:51.320 --> 0:08:57.040 is material, i. and that this, this divergence, ultimately will 0:08:57.080 --> 0:08:59.960 mean revert and and that there is going to be 0:09:00.080 --> 0:09:03.440 some catch up. So we're recommending, uh, you know, maximum 0:09:03.559 --> 0:09:07.640 active management, diversification and things of that nature. I really 0:09:07.640 --> 0:09:10.000 look forward to speaking to you because I want to 0:09:10.000 --> 0:09:13.160 talk about the strange words scale and I'M gonna go 0:09:13.200 --> 0:09:16.040 back to the Great Peter Lynch at Fidelity, who got 0:09:16.080 --> 0:09:18.200 angry one day and he said, look, I care about 0:09:18.200 --> 0:09:21.920 your forty seven stock pick, knock your number one stock pick. 0:09:22.320 --> 0:09:26.360 There seems to be so little to choose from. Lisa Ala, 0:09:26.480 --> 0:09:30.560 Mike Wilson. How do you get scale or diversification within 0:09:30.760 --> 0:09:36.400 US equities now if you've only got so many good ideas? Well, 0:09:36.960 --> 0:09:39.560 I actually Um I might push back on that. I 0:09:39.600 --> 0:09:42.839 think that, you know, underneath the surface of the S 0:09:42.920 --> 0:09:46.840 and p five index and even the Nastack in disease, Um, 0:09:46.880 --> 0:09:50.800 you know, we're finding real opportunities. There has been carnage 0:09:50.800 --> 0:09:53.720 in this market. We know that in small and midcap 0:09:53.840 --> 0:09:56.800 land there's been carnage. We know that there's a host 0:09:56.920 --> 0:10:00.280 of uh, sectors that that have sold off across sably, 0:10:00.400 --> 0:10:05.559 including things like home builders, uh, you know, again, contrarian perhaps, 0:10:06.320 --> 0:10:09.200 but where, you know, a lot of the bad news 0:10:09.320 --> 0:10:13.280 or likely news is discounted, uh, and so we do 0:10:13.440 --> 0:10:16.760 think that there, you know, are our things to accumulate 0:10:16.840 --> 0:10:21.280 out there if you are willing to do the fundamental work. 0:10:21.360 --> 0:10:24.360 I mean, I think one of the UH, you know, 0:10:24.679 --> 0:10:27.079 one of the challenges for a lot of investors is 0:10:27.120 --> 0:10:31.079 the last thirteen years have been dominated by a handful 0:10:31.120 --> 0:10:34.960 of stocks in the US with a growth orientation in 0:10:35.000 --> 0:10:38.360 the tech and and and communication sector, and people didn't 0:10:38.400 --> 0:10:40.840 have to do much work because they could just buy 0:10:40.880 --> 0:10:44.560 the index and get the job done. Uh, this is 0:10:44.559 --> 0:10:49.120 going to require homework navigating in these markets. Um, and 0:10:49.160 --> 0:10:52.800 this is when active managers actually, you know, uh, for 0:10:52.880 --> 0:10:56.360 good or for bad, earn their fees and, Um, you know, we, 0:10:56.360 --> 0:10:58.600 we think that that is the place to be. Does 0:10:58.640 --> 0:11:00.120 that mean Le so that you think the headline in 0:11:00.200 --> 0:11:03.880 figure for the SMP, for example, could trade sideways for years? 0:11:05.640 --> 0:11:08.560 I do. I am, uh, you know, more in that camp. 0:11:08.679 --> 0:11:10.400 I mean, I think that one of the things that 0:11:10.440 --> 0:11:14.080 has continued to surprise me is the extent to which 0:11:14.160 --> 0:11:18.800 equity investors have been willing to hold the levels of 0:11:18.840 --> 0:11:23.760 forward multiples that we're holding in the face of decade 0:11:23.880 --> 0:11:29.600 high interest rates. We know mathematically and fundamentally that the 0:11:29.679 --> 0:11:34.160 movement and interest rates higher should equate to lower price 0:11:34.200 --> 0:11:38.320 earnings ratios. Um, and you know, yes, have we pressed 0:11:38.400 --> 0:11:41.360 down a bit from where we are in January, as 0:11:41.400 --> 0:11:44.960 the Fed funds has gone, you know, from zero to uh, 0:11:45.000 --> 0:11:49.080 you know, three. Yes, we have some. But you know, 0:11:49.320 --> 0:11:51.280 you know that we're also in the camp that the 0:11:51.320 --> 0:11:56.160 current figures in terms of estimates for forward consensus earnings 0:11:56.280 --> 0:12:01.960 estimates for two full year and then probably remain too high, 0:12:02.160 --> 0:12:06.040 especially if we're in this debate about, you know, recession, no, 0:12:06.200 --> 0:12:09.840 recession Um. And so while you know the current pricing 0:12:09.840 --> 0:12:13.479 and markets at at thirty eight hundred and change may suggest, 0:12:14.120 --> 0:12:18.240 you know, a sub seventeen times forward multiple, uh, if 0:12:18.320 --> 0:12:20.959 you adjust those earnings down, we might be back at 0:12:21.040 --> 0:12:23.679 seventeen and a half, eighteen times forward. And so this 0:12:23.800 --> 0:12:27.280 market has more work to do in terms of quote unquote, 0:12:27.280 --> 0:12:30.560 getting real. So who is going to be the leadership? 0:12:30.760 --> 0:12:33.200 And I asked this because it sounds like in your scenario, 0:12:33.320 --> 0:12:37.720 big tech cannot be it anymore correct. I think big 0:12:37.760 --> 0:12:39.719 tech is going to have to consolidate and I think 0:12:39.720 --> 0:12:41.640 those valuations are going to have to come in and 0:12:41.679 --> 0:12:44.040 I think that they're going to have the come to 0:12:44.160 --> 0:12:48.040 Jesus moment which says, yes, these are great companies, but 0:12:48.280 --> 0:12:50.920 they are no longer great stocks, because everyone knows the 0:12:50.960 --> 0:12:55.400 stories and expectations are extraordinarily hot. Um, you know, the 0:12:55.480 --> 0:12:57.920 reality is that they do operate in the whole big 0:12:57.960 --> 0:13:01.160 wide world, global world. The Global World is slowing, the 0:13:01.280 --> 0:13:05.200 US dollar is a material headwind and inflation and cost 0:13:05.280 --> 0:13:10.520 pressures are realities for them as well. So new leadership, 0:13:10.679 --> 0:13:13.680 you know from where we sit, is likely to come 0:13:13.800 --> 0:13:20.160 from different areas, areas like healthcare, areas like energy, industrials 0:13:20.200 --> 0:13:24.320 that may benefit Um from some of the infrastructure and 0:13:24.320 --> 0:13:26.480 capital spending that we think is gonna occur over the 0:13:26.520 --> 0:13:28.600 next couple of years. Lisa, we at a point, and 0:13:28.640 --> 0:13:33.200 I'm thinking of Andrew Mellon the nineties, on transactions and combinations. 0:13:33.840 --> 0:13:36.120 Are we at a point where the zombies roll up? 0:13:36.320 --> 0:13:38.720 I mean we finally at a point where the real 0:13:38.960 --> 0:13:42.080 interst rate market, which was a gift of zombies head 0:13:42.120 --> 0:13:44.760 for seventeen years, whatever the number is. Is this the 0:13:44.800 --> 0:13:48.760 point where the zombies end? I I love what you're saying, 0:13:48.800 --> 0:13:51.400 Tom Because I do think that that that is going 0:13:51.440 --> 0:13:56.000 to be the next phase here where the cost of 0:13:56.080 --> 0:13:59.880 capital does start to pinch. I do think that those 0:14:00.000 --> 0:14:04.240 who have, uh, you know, strategic capital to deploy uh, 0:14:04.320 --> 0:14:07.160 you know, are going to be able to to, Um, 0:14:07.200 --> 0:14:10.960 go out and and acquire some capabilities. At the same time, 0:14:11.240 --> 0:14:13.200 I think some of those zombies are going to go 0:14:13.280 --> 0:14:18.040 by the wayside. Um and, uh, you know, start from 0:14:18.080 --> 0:14:21.560 not being able to get financing. Yeah, I gotta leave 0:14:21.600 --> 0:14:24.120 it there. Lisa shallow, thank you so much, Turvic. Brief there. 0:14:24.160 --> 0:14:26.160 And actually what to do with your capital with Morgan 0:14:26.240 --> 0:14:33.680 Stanley wealth management. Is this joy? And how do we know? 0:14:33.720 --> 0:14:38.040 It's an historic day of Japanese intervention, Bank of England action. 0:14:38.280 --> 0:14:41.560 To Abbe Joseph Cohen with his Professor at Columbia Business School, 0:14:41.920 --> 0:14:44.640 a modest career at Goldman Sachs as well. Abby, thank 0:14:44.680 --> 0:14:47.200 you so much for joining us here. How to keep 0:14:47.280 --> 0:14:53.200 us informed on the underlying finance and equations, the mathematics 0:14:53.240 --> 0:14:57.600 of these equity markets? Abbe Joseph Cohen. Suddenly the sharp 0:14:57.760 --> 0:15:01.880 ratio matters. I guess Beta man otters again, but outside 0:15:01.880 --> 0:15:04.800 of Beta we've got the risk free rate and it 0:15:04.920 --> 0:15:10.080 is returned with a vengeance. Are we revisiting the sharp ratio? 0:15:10.160 --> 0:15:12.400 Are we back to the articles you wrote for the 0:15:12.440 --> 0:15:18.360 CFA years ago? Tom Wonderful question and I'm going to 0:15:19.000 --> 0:15:22.560 respond by giving a bit of a prologue, which is 0:15:22.600 --> 0:15:26.920 that many models are broken have been broken during this 0:15:27.000 --> 0:15:31.840 period of time, because they typically respond to cyclical phenomenon. 0:15:32.160 --> 0:15:36.280 For example, your question to Michael before about the Phillips Curve, 0:15:36.640 --> 0:15:39.640 and the reality is that there are so many structural 0:15:39.720 --> 0:15:43.040 changes in the economy and the markets as well that 0:15:43.120 --> 0:15:46.440 a lot of those models simply have not applied. Some 0:15:46.600 --> 0:15:49.960 of them are coming back and force uh, the Phillips Curve, 0:15:50.040 --> 0:15:53.800 for example, had no way in this model to reflect 0:15:53.840 --> 0:15:56.800 the fact that there was a pandemic uh, that we 0:15:56.840 --> 0:16:01.400 have had this generational shift in La reforce participation, by 0:16:01.400 --> 0:16:04.120 which I mean the baby boomers are now stepping out 0:16:04.120 --> 0:16:06.520 of the labor force. And the other thing, of course, 0:16:06.600 --> 0:16:11.240 is that we have had a four year uh deceleration, 0:16:11.320 --> 0:16:13.960 if you will, in terms of immigrants coming into the 0:16:14.040 --> 0:16:18.120 United States, and over the prior decade immigrants filled sixty 0:16:18.120 --> 0:16:22.560 to sixty of the increase in employment in the United States. 0:16:22.560 --> 0:16:24.320 So there are a lot of things that are different. 0:16:24.400 --> 0:16:27.400 Within the market itself, a lot of the models haven't 0:16:27.400 --> 0:16:30.800 applied for a while. Keep in mind this weird twenty 0:16:30.880 --> 0:16:33.920 to thirty year period in which interest rates and inflation 0:16:33.920 --> 0:16:38.680 were extraordinarily low and, to your point, real rates reached 0:16:38.840 --> 0:16:42.760 negative levels Um, something we had never seen before. I 0:16:42.960 --> 0:16:46.360 for one, now I'm answering your question. I'm happy to 0:16:46.400 --> 0:16:49.800 see that the Fed is now focused on making sure 0:16:49.920 --> 0:16:54.240 that real rates, really yields, are in fact positive. And 0:16:54.720 --> 0:16:58.920 does the market believe them? And the reality is that 0:16:59.000 --> 0:17:02.520 we now have a too inverted yield curve, which suggests 0:17:02.560 --> 0:17:06.120 to me that bond investors and least, are giving the 0:17:06.119 --> 0:17:09.800 Fed credence, in credibility in terms of believing that the 0:17:09.800 --> 0:17:14.240 Fed policy will have efficacy. Abby, are you saying that 0:17:14.359 --> 0:17:18.240 stock markets are not accurately reflecting the fact that inflation 0:17:18.359 --> 0:17:21.520 would be higher and would remain higher even after this 0:17:21.920 --> 0:17:25.160 cycle collapse, if the Fed were not to keep rates 0:17:25.200 --> 0:17:28.560 at a much higher level than they had been um? 0:17:28.600 --> 0:17:31.600 Another very good question. Let me just talk about what 0:17:31.680 --> 0:17:35.880 happened yesterday in response, uh, and that is the equity 0:17:35.920 --> 0:17:39.520 market didn't know what to do. Um, first it was up, 0:17:39.560 --> 0:17:41.480 then it was down, then it was up, then it 0:17:41.560 --> 0:17:45.280 was down big time. There was really erratic behavior because, 0:17:45.280 --> 0:17:49.440 to your point, Lisa, equity investors are really confused because 0:17:49.720 --> 0:17:53.840 there is this Yin Yang between inflation and higher yields 0:17:54.560 --> 0:17:58.800 versus will the economy and earnings continue to grow, and 0:17:58.880 --> 0:18:01.800 I think we're now at a point where, given the 0:18:01.960 --> 0:18:06.240 significant rises in Um interest rates and yields across the 0:18:06.320 --> 0:18:09.320 yield curve since the beginning of the year, the equity 0:18:09.359 --> 0:18:12.960 market is now focused much less on inflation and yields 0:18:13.200 --> 0:18:15.640 than it is on earnings, and there there's a lot 0:18:15.680 --> 0:18:19.679 of confusion. Um Investors are not sure how this is 0:18:19.680 --> 0:18:22.960 going to play out Um for the rest of the year, 0:18:23.119 --> 0:18:27.120 let alone for three we see, for example, that they're 0:18:27.200 --> 0:18:30.960 ongoing adjustments to the consensus earnings forecast. But let me 0:18:31.000 --> 0:18:35.960 point out we're starting at record profit margins Um. It's 0:18:36.000 --> 0:18:38.159 not as if profit profit margins and R O e 0:18:38.280 --> 0:18:40.879 were low. R O e for the SMP five is 0:18:40.920 --> 0:18:44.159 an excessive Um, you know. So if there is in 0:18:44.200 --> 0:18:49.280 fact ongoing profit margins squeezed, I think the impact overall 0:18:49.440 --> 0:18:53.840 is not dramatic. The impact, however, in individual sectors may 0:18:53.880 --> 0:18:56.919 be significant. Do you see the possibility of a lost decade? 0:18:56.920 --> 0:18:59.439 I've given the fact that we're trying to readjust and 0:18:59.560 --> 0:19:04.560 renormal realized rates, renormalize some of the financialization of the economy. 0:19:06.240 --> 0:19:09.199 You mean a lost decade in the offense in G 0:19:09.320 --> 0:19:12.040 D P and a lot of things that people hearken 0:19:12.119 --> 0:19:15.360 back to the seventies. About sure. I mean if if 0:19:15.400 --> 0:19:19.040 you look at the valuation of the US Equity Market 0:19:19.040 --> 0:19:21.920 and some of the markets as well, at the end 0:19:22.000 --> 0:19:26.560 of one they were at record high levels in terms 0:19:26.680 --> 0:19:30.719 of where we were on percentiles, almost every valuation model 0:19:31.080 --> 0:19:36.920 was between the ninety nine percentile, indicating, in my view, overvaluation, 0:19:37.680 --> 0:19:41.360 unless you believe that the dream scenario of extremely low 0:19:41.440 --> 0:19:46.280 interest rates and strong profit growth would continue uninterrupted. So 0:19:46.320 --> 0:19:50.920 where are we now? The valuations are roughly at average 0:19:51.000 --> 0:19:56.520 levels Um. SMPI PE, for example, is about sixteen times 0:19:56.560 --> 0:20:00.520 earnings Um and given where we are, even with a 0:20:00.640 --> 0:20:04.560 rise in interest rates, that's not a bad place to be. 0:20:05.040 --> 0:20:08.080 So when we talk about the lost decade, let's talk 0:20:08.119 --> 0:20:11.399 about two different phases. Number One, we've now had a 0:20:12.200 --> 0:20:15.919 correction and share prices from record high levels and record 0:20:15.960 --> 0:20:20.760 high valuations. Can we get back that? I don't think 0:20:20.800 --> 0:20:24.159 that happens over the next several months, UM, over the 0:20:24.600 --> 0:20:28.600 next few quarters. I think the economy will slow, earnings 0:20:28.640 --> 0:20:32.240 growth will slow, but I think it's possible that we 0:20:32.280 --> 0:20:35.280 could see higher equity prices. I kind of peg that 0:20:35.400 --> 0:20:37.920 along the same lines of the growth and earnings, which 0:20:38.000 --> 0:20:41.440 is probably, uh, what do we call it, five over 0:20:41.440 --> 0:20:43.240 the next few months. I mean a few years ago 0:20:43.280 --> 0:20:45.959 you wrote an iconic paper for the CFA institute. You 0:20:46.000 --> 0:20:49.160 mentioned an old strategist I used to talk to named Aristotle. 0:20:49.800 --> 0:20:53.679 Aristotle never saw a bond market with yield up, price 0:20:53.800 --> 0:20:56.800 down and the losses that we've seen over the last 0:20:56.880 --> 0:21:00.240 year and a half. How do bond investors re ever, 0:21:00.760 --> 0:21:05.920 given this historic carnage? The damage clearly has been much 0:21:05.960 --> 0:21:08.800 more dramatic in the bond market and in some ways 0:21:08.800 --> 0:21:13.120 the overvaluation and bonds was much more extreme. We had 0:21:13.280 --> 0:21:17.000 central banks around the world who kept interest rates nominally 0:21:17.359 --> 0:21:21.320 extremely low levels and real yields were low in many countries. 0:21:21.359 --> 0:21:24.400 You know, two thirds of major economies, not the US, 0:21:24.480 --> 0:21:28.120 but two thirds of major economies, had negative real yields. 0:21:28.400 --> 0:21:31.440 So the damage that we've seen in the bond market, Um, 0:21:32.640 --> 0:21:36.000 I think it was expected. When we look at government bonds, 0:21:36.080 --> 0:21:39.360 it's one thing. The damage and the credit markets, Um, 0:21:39.520 --> 0:21:42.240 is something that we've not yet seen fully rolled forward 0:21:42.720 --> 0:21:45.520 because a lot of those are ill liquid securities and 0:21:45.560 --> 0:21:48.439 I think we're going to see more damage ahead. But 0:21:48.600 --> 0:21:53.560 for the average investor, who is willing to buy, for example, 0:21:53.600 --> 0:21:57.480 an individual bond um and now can get a three 0:21:57.680 --> 0:22:01.960 or four percent yield, depending upon the maturity they're willing 0:22:02.000 --> 0:22:05.400 to take on. Uh, that is something that is one 0:22:05.400 --> 0:22:08.280 of the best opportunities in twenty years. Very good. Are 0:22:08.320 --> 0:22:10.080 you like in teaching, Abby? I mean this is a 0:22:10.080 --> 0:22:12.960 whole different act for you. You you you're surviving Colombia. 0:22:13.000 --> 0:22:16.280 Do you throw chalk at people? I do not throw 0:22:16.400 --> 0:22:22.080 chalk because we use white boards. So anything. Um, so 0:22:22.200 --> 0:22:24.879 I'm I'm I'm loving it, tom it's it's a great 0:22:24.880 --> 0:22:29.040 opportunity for me to be involved in the next generation. Wonderful, 0:22:29.080 --> 0:22:31.800 you look Tannon rested. Thank you so much, Abby. Joseph Cohen, 0:22:32.080 --> 0:22:46.399 Professor at Columbia Business School. This is a week of well, 0:22:46.440 --> 0:22:49.720 at least a traffic at midtown Manhattan. How about that 0:22:49.880 --> 0:22:53.879 traffic that we all see, with thousands descending for the 0:22:54.000 --> 0:22:59.920 United Nations General Assembly meetings? And much more, far more important, 0:23:00.160 --> 0:23:03.040 there's a migration in October to the meetings of the 0:23:03.080 --> 0:23:07.120 International Monetary Fund in Washington. Someone who knows the schedule 0:23:07.560 --> 0:23:11.600 is Sergey Nikolacheck, deputy governor of the National Bank of Ukraine, 0:23:11.640 --> 0:23:15.760 and we're honored if you join us today amid a terrible, 0:23:15.920 --> 0:23:19.720 terrible war. I need to go first of all to 0:23:19.840 --> 0:23:23.720 a simple anecdote of your Kiev. You're educated in Kiev. 0:23:23.880 --> 0:23:28.639 You've seen the transformation over twenty years. How does Kiev 0:23:28.800 --> 0:23:31.879 recover back to what you knew when you were younger? 0:23:32.119 --> 0:23:36.320 How do how do you see that happening? Actually, kieve 0:23:36.440 --> 0:23:40.760 changed dramatically for the last twenty years before the war. 0:23:40.880 --> 0:23:46.280 It looked like normal European city, capital of the European country, 0:23:46.359 --> 0:23:50.960 so you may he you was able to enjoy the restaurants, clubs, 0:23:51.200 --> 0:23:56.680 uh shopping malls and so on. Definitely a change, changed 0:23:56.760 --> 0:23:59.720 to real sizeable since the beginning of the war. So 0:24:00.040 --> 0:24:05.280