Latest / Bloomberg Intelligence / The Latest On Bond Markets, Fed Strategy And Investment Outlook

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The Latest On Bond Markets, Fed Strategy And Investment Outlook · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
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Speaker 1: at Bloomberg dot com slash podcast. All right, I think
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Speaker 1: the topic of the day, slash week, slash month is inflation.
0:26
Speaker 1: I think the transitory arguments kind of halfway out the window,
0:30
Speaker 1: all the way out of the window, but the investors
0:32
Speaker 1: are still trying to get a handle on that. Let's
0:34
Speaker 1: check in with the professional, get his thoughts on Esta
0:37
Speaker 1: Ramo's Chief investment Officer b MO Global Asset Management in
0:41
Speaker 1: the US or now. So, thanks so much for joining
0:43
Speaker 1: us here. Let's start with inflation because it's everywhere and
0:46
Speaker 1: we we just got through a big earning season where
0:49
Speaker 1: it was certainly one of the most talked about topics
0:51
Speaker 1: on the conference calls. How do you think about the
0:54
Speaker 1: inflationary environment we're in today and how does that color
0:57
Speaker 1: your investment look? Thank you for having me um inflation
1:02
Speaker 1: we believe might actually not be as persistent as some
1:06
Speaker 1: people expect. There's a couple of reasons for that. Number One,
1:10
Speaker 1: you have strong base effects. In other words, once you
1:13
Speaker 1: have inflation ramping up as much as it has by now,
1:18
Speaker 1: but compares get easier, you can't have I mean you could,
1:22
Speaker 1: we saw it in the seventies. You can't at ten
1:24
Speaker 1: temper cent temper cent stacking up year over year unless
1:28
Speaker 1: something dramatic has changed the economy. We think a lot
1:32
Speaker 1: of the inflationary pressures we see right now are derived
1:35
Speaker 1: from COVID and COVID after effects, supply chain disruptions that
1:39
Speaker 1: are the result of COVID lockdowns, and other things like that,
1:43
Speaker 1: and all of those will be in the process or
1:46
Speaker 1: are already in the process of resolving themselves. So I
1:49
Speaker 1: wouldn't be surprised if we start to see inflation come
1:52
Speaker 1: off of these high levels and perhaps into two end
1:57
Speaker 1: up in the maybe two to four range, which is
2:01
Speaker 1: a lot lower than received right now. So it actually
2:04
Speaker 1: might turn out to be maybe the word is not transitory,
2:07
Speaker 1: but not a permanent six going forward for the next
2:11
Speaker 1: couple of years to speak, well, it was, I mean
2:14
Speaker 1: the seventies inflation was transitory. Was just that one decade
2:17
Speaker 1: pretty much. I'm curious. I'm curious um ernesto to hear
2:23
Speaker 1: what you think about transitory. I mean, you did UM
2:26
Speaker 1: your undergrad and something, Matthew, I think at M I T.
2:29
Speaker 1: And then you studied UM statistics for your PhD at Harvard.
2:33
Speaker 1: You get PhD in statistics. Well, I think that's pretty cool.
2:37
Speaker 1: You do well. I had one semester that in business.
2:39
Speaker 1: One was enough. I loved I loved it. But you don't.
2:42
Speaker 1: I'm assuming you don't really use words as vague as
2:45
Speaker 1: transitory or do they mean something different to you than
2:47
Speaker 1: they mean to the rest of us. What do you
2:49
Speaker 1: what do you think about? Well, the idea, I think
2:53
Speaker 1: positial people thought transitory was one or two months or
2:57
Speaker 1: maybe three months of high print. Uh. I think inflation
3:02
Speaker 1: as a as a compounding mechanism is not gonna last
3:06
Speaker 1: more than a few months. Uh. And that's that's basically
3:10
Speaker 1: our base case. And look, the important thing here is
3:13
Speaker 1: not so much that inflation is going to be here
3:16
Speaker 1: forever or not. Is the fact that nobody really knows.
3:20
Speaker 1: There's so many things right now that nobody really knows
3:22
Speaker 1: what it's going to look like, inflation being one of them.
3:25
Speaker 1: Do you have a huge, a very big distribution around
3:28
Speaker 1: the potential inflation outcomes, supply chain disruptions, fiscal policy and
3:34
Speaker 1: monetary policy, economic growth, earnings growth, all of these things
3:37
Speaker 1: that normally people understand or are able to forecast with
3:41
Speaker 1: some sense of accuracy. Right now, the outcomes are all
3:45
Speaker 1: over the place. So so what do we tell investors
3:47
Speaker 1: right now given all of the uncertainties around all of
3:50
Speaker 1: these potential UH disruptures or positive forces for the for
3:56
Speaker 1: the markets. The one thing you know is that stocks
4:00
Speaker 1: are the safest place to be, even though they're richly valued,
4:04
Speaker 1: because everywhere else you look things are even more expensively valued,
4:08
Speaker 1: especially bonds and let alone are more speculative assets like
4:12
Speaker 1: cryptos and so on. So so, at the end of
4:14
Speaker 1: the day, the one place where you can find refuges
4:17
Speaker 1: in stocks and within stocks, do you go growth, do
4:20
Speaker 1: you go value? To use go small cap, do you
4:23
Speaker 1: go large gap. We're thinking that right now the sweet
4:26
Speaker 1: spot is quality stocks, and by quality I mean low leverage,
4:30
Speaker 1: stable learning, profitable companies that are not necessarily your highest growers,
4:35
Speaker 1: not necessarily your your cyclical place, but companies that are
4:38
Speaker 1: relatively immune to the to the to the cyclical forces
4:42
Speaker 1: also relatively immune to interest rates, but will provide some
4:46
Speaker 1: decent return given all of the uncertainties that I just mentioned,
4:50
Speaker 1: because the world is really murky right now and we
4:53
Speaker 1: don't know how all of these forces will resolve themselves. Na,
4:57
Speaker 1: how do you feel about the valuation in this mark
5:00
Speaker 1: could place? A lot of people are raising that as
5:01
Speaker 1: a as a red flag. Yet we just had some
5:03
Speaker 1: really strong earning, So how do you think about that? Well? Also,
5:06
Speaker 1: if stocks are the only place to be, do you care?
5:09
Speaker 1: Do you care? Right? Well, that's the thing. I mean.
5:12
Speaker 1: Valuations for stocks are rich, but valuation for bonds are
5:16
Speaker 1: we been richer, So you have to put your money somewhere.
5:18
Speaker 1: You can't leave it in cash because of the because
5:21
Speaker 1: of inflation. You have to put it either in bonds
5:24
Speaker 1: or stocks. And right now stocks seem to be the
5:27
Speaker 1: least richly values of of these highly valued areas. But
5:33
Speaker 1: but yeah, that is the biggest risk to see in
5:35
Speaker 1: in in in the market, in the stock market, and
5:39
Speaker 1: in fact, I wouldn't be surprised to see some kind
5:41
Speaker 1: of a correction here of five to tem per said move,
5:44
Speaker 1: because we haven't had one for for quite a while.
5:47
Speaker 1: So but that is part of investing in the stock market.
5:49
Speaker 1: You have to put your money there, and and and
5:51
Speaker 1: put up with occasional correction. But over the next couple
5:55
Speaker 1: of years, we think you will be much more highly
5:58
Speaker 1: rewarded for being stocks that for being in bonds. At
6:02
Speaker 1: this point, what about Westchester? Real estate? Is that safe place? Well?
6:09
Speaker 1: Real estate, food and anything you talk about has been
6:13
Speaker 1: so inflated by by your very loose monetary conditions, which,
6:17
Speaker 1: by the way, we think will persist because whether you
6:20
Speaker 1: get power or or brainer, you're gonna have loose monetary policy.
6:25
Speaker 1: So so so that part of the question is good.
6:28
Speaker 1: But real estate is up through the roof. Alright, thank
6:32
Speaker 1: you so much. We really appreciate our rama's chief investment officer,
6:35
Speaker 1: BEMO Global Asset Management. Let's bring she's gonna talk rates
6:43
Speaker 1: with his managing director and global head of rate strategy
6:45
Speaker 1: at TV Securities. We had Bill Dudley, former New York
6:50
Speaker 1: Fed President in current Bloomberg opinion columns. He was on
6:52
Speaker 1: Bloomberg Television this morning kind of suggesting that maybe the
6:56
Speaker 1: Fed is falling behind the market. Here's that really late
7:00
Speaker 1: to rates? How do you think about that? So I
7:04
Speaker 1: think it all comes down to the expectation of will
7:07
Speaker 1: inflation slow down or is a being a new normal
7:10
Speaker 1: of high inflation and labor markets lack going the way
7:13
Speaker 1: I think Dudley's comments suggests that inflation his expectation as
7:18
Speaker 1: inflation states high, and so the FED will have to
7:20
Speaker 1: play catch up because they would start hiking in his
7:24
Speaker 1: view late. We're actually taking the other side of the
7:27
Speaker 1: argument that inflation is likely to decelerate, that there's still
7:31
Speaker 1: plenty of labor market slack. We're dealing with the frictions
7:34
Speaker 1: of the labor market where people have left and they
7:36
Speaker 1: have to come back, and and so our views of
7:38
Speaker 1: the FED hikes only in two thousand twenty three. So
7:42
Speaker 1: the market is pretty split. I think we have a
7:44
Speaker 1: bimodal distribution in terms of you know what what what
7:48
Speaker 1: are the inflation dynamics the labor market dynamics, And so
7:51
Speaker 1: you've got views of those who say that the FED
7:54
Speaker 1: is too slow, which is Dudley's argument. We actually think
7:57
Speaker 1: the markets pricing into early of a FED high first
8:00
Speaker 1: hike is being priced for July twenty two, right after
8:03
Speaker 1: tapering in. But we think by then the fiscal drag
8:07
Speaker 1: will actually start to show up. Both with decelerating inflation
8:10
Speaker 1: as well as growth, and think that the FED won't
8:12
Speaker 1: be able to hike next year. So well, it's a
8:15
Speaker 1: pretty split market right now. I mean, because the economy
8:19
Speaker 1: doesn't look that strong enough, doesn't look strong enough to
8:21
Speaker 1: hike into Is that what you're saying. I mean, if
8:23
Speaker 1: they hike just to stop inflation, that's not great. They
8:26
Speaker 1: need to have a healthy enough economy in which into
8:29
Speaker 1: which to do it exactly, And if it's just inflation written, um,
8:33
Speaker 1: it's not even clear that inflation will decelerate based on
8:37
Speaker 1: Fed hikes. I mean, the way it would have to work,
8:39
Speaker 1: if the FED would have to hike, tighten financial conditions,
8:42
Speaker 1: slow the cormy down, and then bring inflation so through
8:45
Speaker 1: the demand channel. But there's a lot of evidence that
8:48
Speaker 1: this is not a demand lead inflation, this is supply lead.
8:50
Speaker 1: So it's not even clear that FED hikes help. And
8:53
Speaker 1: to your point, yes, if growth is starting to slow
8:55
Speaker 1: and we think the market is underestimating the extent of
8:58
Speaker 1: fiscal drag, go to have been so strong this year
9:01
Speaker 1: because of massive fiscal stimulus, and even though we expect
9:04
Speaker 1: the one and three quarters TRILLI and build back better
9:06
Speaker 1: plan to go through. That's not a next year stimulus,
9:09
Speaker 1: that's over the next ten years, and so there's going
9:12
Speaker 1: to be a drag from the fiscal side, which will
9:14
Speaker 1: start to decelerate GDP. We've got GDP decelerating to two
9:17
Speaker 1: percent by the end of next year. So it's a
9:19
Speaker 1: very hard environment for the FED to hike as growth
9:23
Speaker 1: is slowing and if there's evidence that inflation seems to
9:26
Speaker 1: have beat. So as we think about inflation, a lot
9:29
Speaker 1: of folks are saying, you're not going to really see
9:31
Speaker 1: long term inflation until you get wage inflation. Is wage
9:36
Speaker 1: inflation something that we need to be on the lookout for, absolutely,
9:40
Speaker 1: But I think we have to really dig into the
9:43
Speaker 1: details of the wage inflation numbers. They're high right now.
9:46
Speaker 1: But we don't think this is indicative of the labor
9:50
Speaker 1: market slack having gone away. We think this is the
9:53
Speaker 1: function of the fact that a lot of people left
9:55
Speaker 1: the labor market because of COVID, because of child care reasons,
9:59
Speaker 1: summer time ins in there as well immigration. There's a
10:02
Speaker 1: bunch of factors that are responsible for a small labor market,
10:07
Speaker 1: smaller labor market than it would have been. But as
10:10
Speaker 1: the economy recovered, as we moved towards the from goods
10:13
Speaker 1: consumption to service consumption. We think people return, and so
10:17
Speaker 1: wage inflation numbers we actually think are going to decelerate
10:19
Speaker 1: as more people enter the labor force, and that's what
10:23
Speaker 1: prevents the wage price spiders. So there's a key assumption
10:26
Speaker 1: to our call that the FED won't be able to
10:28
Speaker 1: hight next year is that we just start to decelerate
10:31
Speaker 1: because people return. Now that's making an assumption that there's
10:33
Speaker 1: no further COVID spike or another variant. But yeah, so
10:38
Speaker 1: you're right, the wage component cannot be underestimated here well,
10:43
Speaker 1: and the wage growth that we've seen of late hasn't
10:45
Speaker 1: kept up with the inflation that we've seen of late.
10:48
Speaker 1: Of course, there is a time when wage growth was
10:50
Speaker 1: far ahead of inflation, and it needs to be even
10:54
Speaker 1: out of bit. What do you think the overall picture
10:56
Speaker 1: is when we get to the end of this thing
10:58
Speaker 1: pre two, people make enough more to keep up with
11:00
Speaker 1: the games and prices. I think in the near term, um,
11:05
Speaker 1: the real wage growth is negative and and low, but
11:09
Speaker 1: they've got a buffer through savings. The savings rate has
11:12
Speaker 1: gone up significantly as well. Now there's a question of
11:15
Speaker 1: do people really run down their savings. We think there
11:17
Speaker 1: will be some component of that next year, and so
11:20
Speaker 1: consumption might hold up okay, even though we just will
11:23
Speaker 1: not be able to keep up with prices. But once
11:26
Speaker 1: the savings rate comes back down to a more normal level,
11:29
Speaker 1: then I think we'll have to settle down into you know,
11:32
Speaker 1: real wages having to go up. Otherwise consumption is going
11:35
Speaker 1: to get hit, which might be a twenty three stories
11:38
Speaker 1: PREA thank you so much for joining us. We always
11:39
Speaker 1: appreciate getting your thoughts here. Pre A Misra, Managing Director
11:43
Speaker 1: and global head of Rates Strategy for TV Securities. Taking
11:47
Speaker 1: more the transitory call as it relates to inflation, and
11:50
Speaker 1: that is becoming I think a little bit out of
11:52
Speaker 1: consensus the farther we get into this. Alright, man, I
11:58
Speaker 1: went away for vacation and the ten years trading right
12:01
Speaker 1: around one point six percent, and come back a week
12:03
Speaker 1: later and it's still trading around one point six percent.
12:07
Speaker 1: But I've got a FED that's tapering its bond purchases.
12:10
Speaker 1: I've got a FED that's talking about raising rates maybe
12:13
Speaker 1: next year, Yet not much movement here in the bond market.
12:16
Speaker 1: Let's check in with somebody who does this for a living.
12:19
Speaker 1: R J. Gallows, senior portfolio manager for Federator Hermes. R J.
12:22
Speaker 1: Give us a sense of kind of how you think
12:25
Speaker 1: the FED is kind of going about its business these
12:28
Speaker 1: days in terms of tapering, in terms of disclosing, maybe
12:32
Speaker 1: how it views the in strate structure maybe mid next year,
12:35
Speaker 1: how do you view their performance? I think they probably
12:42
Speaker 1: wanted to try to find a way to rewrite the
12:44
Speaker 1: dictionary definitions of transitory. Right, there's almost no other way
12:48
Speaker 1: to put it. Um. You know, to the point of
12:52
Speaker 1: the tenure being at one sixty probably should be higher. Um.
12:55
Speaker 1: We when it comes to duration, we like to look
12:58
Speaker 1: at the average yield on market way to average yield
13:00
Speaker 1: on the Bloomberg US Treasury Index. Now that started the
13:04
Speaker 1: year at started this calendar year at fifty seven basis points.
13:08
Speaker 1: It's now a hundred and nineteen hundred nineteen is the
13:13
Speaker 1: highest it's been since pre covid um. And that's because
13:17
Speaker 1: the most FED sensitive parts of the YOK curb are
13:21
Speaker 1: very heavily weighted. If you look at the overall treasury
13:23
Speaker 1: market to three five, your securities a lot of focus
13:27
Speaker 1: on the tenure, but they may have actually obscure what's
13:29
Speaker 1: going on here the Fed has had to inflect because
13:32
Speaker 1: transitory proved to be an inapt inappropriate description of the
13:35
Speaker 1: inflation problem. Uh, They're gonna have to tighten more. Uh,
13:39
Speaker 1: So the short ends moved up quite a bit intermediate
13:42
Speaker 1: to hang on, do you think they're gonna have to tighten?
13:46
Speaker 1: Do you think they're gonna have to raise rates? Or
13:49
Speaker 1: are you saying they're gonna have to um speed up
13:52
Speaker 1: their UM taper? I think that the probably both To
13:59
Speaker 1: me eightening tapering may not be tightening, no, but it's
14:02
Speaker 1: pulling your foot off the gas. Uh. It's a precondition
14:05
Speaker 1: to getting to the more traditional method of tightening, which
14:08
Speaker 1: would be raising interest rates. And the market has come
14:12
Speaker 1: to the realization fairly quickly recently that the inflation problem
14:16
Speaker 1: isn't transitory. It's it's it's at least problematic if it
14:20
Speaker 1: may be temporary, but it's not short lived. Um. And
14:24
Speaker 1: as a result, the Fed will be doing both. The
14:27
Speaker 1: taper may in fact need to speed up. I don't
14:29
Speaker 1: think it would be too difficult for them to do
14:31
Speaker 1: to do that, Uh. And then the liftoff will will
14:34
Speaker 1: certainly come in two and maybe in multiple steps. Is
14:38
Speaker 1: there we had pre a miserable on from TV Securities
14:40
Speaker 1: on earlier r J, and she was kind of suggesting
14:42
Speaker 1: that a rate increases is not event that it can
14:46
Speaker 1: be can effect be pushed out there, but you're suggesting
14:49
Speaker 1: something sooner. I don't think that's very likely. I think
14:53
Speaker 1: that the Feds, uh, you know, we we have we
14:55
Speaker 1: now have real interest rates at record lows and economy
14:58
Speaker 1: that's apt to continue to expand. Um. Yes, there are
15:02
Speaker 1: problems that are apt to be temporary in terms of
15:05
Speaker 1: supply chain that are helping to fuel the inflation story.
15:08
Speaker 1: But the problem for the central bank uh becomes more
15:12
Speaker 1: complicated if they allow those those temporary inflation bottlenecks to
15:18
Speaker 1: be reinforced in wage, salary and price expectations. And that's
15:23
Speaker 1: where we're getting. You're seeing break even north of three. Uh.
15:27
Speaker 1: The there are wage and salary increases all over the newspapers. Uh.
15:32
Speaker 1: You can you feel it. The inflation story is starting
15:35
Speaker 1: to heat up. I don't think this is seventy six,
15:38
Speaker 1: you know, we're going on our way to nineteen seventy nine. UM.
15:41
Speaker 1: I do think the Fed, though, has to inflect back,
15:44
Speaker 1: you know, in a traditional method, which is they have
15:47
Speaker 1: to raise interest rates they're probably gonna have to get
15:50
Speaker 1: the FED funds rate, you know, materially above one and
15:53
Speaker 1: a half, maybe two, maybe even more, they say, to fifty.
15:56
Speaker 1: The market seems to doubt that the flattening of the
15:59
Speaker 1: curve is the confusion in the market. Does the Fed
16:02
Speaker 1: really have to go that much higher in order to
16:05
Speaker 1: restrain the inflation problem? If they do, then they run
16:09
Speaker 1: setting off a recession and you get that sort of
16:11
Speaker 1: twist flattening of the curve. Hence the tenure isn't rising
16:14
Speaker 1: as much in basis points as we've seen on other
16:17
Speaker 1: parts of the curve. Yeah, but we do see real
16:19
Speaker 1: yields down at one negative one twenty right, um, And
16:23
Speaker 1: that's basically the lowest they've been, right exactly. And and
16:27
Speaker 1: I don't think real yields would behave would be behaving
16:30
Speaker 1: that way if people felt that greater Fed restraint to
16:34
Speaker 1: come in the in the in the future. Here tapering tightening,
16:37
Speaker 1: um uh comes without risk. It does come with risk.
16:42
Speaker 1: People aren't sure how high the FED can go without
16:45
Speaker 1: suppressing growth, and that's why really yields are not coming
16:48
Speaker 1: off the floor. Um. I think if people had more
16:50
Speaker 1: confidence about longer term growth trajectories than really yields would
16:54
Speaker 1: be going up with nominally yields, and that's really not happening. R. J.
16:58
Speaker 1: Morgan Stanley is out with a piece today saying steer
17:00
Speaker 1: clear of US stocks and bonds. Is that something you
17:04
Speaker 1: ascribed to? Um? Well, the chief investment officer of fixed
17:09
Speaker 1: income of my company, and I have talked about this
17:11
Speaker 1: for a long time. When inflation finally comes, it's going
17:14
Speaker 1: to be tough for all financial assets. It's been striking
17:17
Speaker 1: how the stock market has bucked the inflation concerns. I
17:21
Speaker 1: think because transitory, temporary, whatever would you want to pick um?
17:24
Speaker 1: You know, people have bought into that to some degree.
17:26
Speaker 1: As that becomes more questionable, you wonder when does the
17:30
Speaker 1: stock markets start to struggle to Right now, there's a
17:32
Speaker 1: great front page story in the Wall Street Journal about
17:34
Speaker 1: companies are benefiting from the inflation sturge. They're doing this
17:37
Speaker 1: like once in a generation price increases. That's all great,
17:40
Speaker 1: but you can't keep doing that. So a lot depends
17:43
Speaker 1: in both markets, stocks and bonds on the timing of
17:46
Speaker 1: inflations return to some more tolerable level. And since that's
17:50
Speaker 1: yet unknown, I would think risk premiums need to be
17:52
Speaker 1: installed in bond yields and they should keep going up
17:55
Speaker 1: the stock market. You know, it seems to be bullethrough
17:58
Speaker 1: right now. Of surprising, all right, r J, thank you
18:01
Speaker 1: so much for joining us. We always appreciate getting your
18:04
Speaker 1: thoughts and perspective. R J. Gallos, Senior portfolio manager manager
18:07
Speaker 1: for a federator whom he's giving us his thoughts on
18:10
Speaker 1: these markets. He thinks we're going to get, in fact,
18:13
Speaker 1: a rate increase from the subtle reserve in two when
18:20
Speaker 1: Matt Miller can't fill up his Ford F one fifty
18:23
Speaker 1: truck with a hundred and fifty dollar prepaid card, that inflation,
18:28
Speaker 1: uh questions is that transitory is not going to be
18:30
Speaker 1: around for a while. Does he have to think about
18:31
Speaker 1: going electric? Let's bring in Steve Wyatt, chief investment strategist
18:35
Speaker 1: for b Okay Financial. Steve, let's start with the inflation question.
18:38
Speaker 1: It is topic to you're here, uh, in the market
18:41
Speaker 1: places here today? How do you think about inflation and
18:44
Speaker 1: how does that impact how do you put money to
18:46
Speaker 1: work these days? Yeah, thank you, good morning. I appreciate
18:49
Speaker 1: the opportunity to be back on your show today. It's
18:52
Speaker 1: the it's the sixty four dollar question for all of us,
18:55
Speaker 1: and even as we think about the markets and we're investing,
18:58
Speaker 1: if we're we're going to shift our thoughts on inflation,
19:01
Speaker 1: which we would say that in the beginning we felt
19:05
Speaker 1: like the cyclical inflationary pressures would be subsiding a little
19:08
Speaker 1: bit more quickly than they are now. Uh. But as
19:12
Speaker 1: we think about if that becomes longer term and the
19:15
Speaker 1: implications in the capital markets around the bond market, what
19:18
Speaker 1: that means from a pricing and a yield standpoint there
19:23
Speaker 1: really make it when you think about managing risk a
19:26
Speaker 1: little bit difficult, the downside risk and longer term bonds.
19:29
Speaker 1: If Rache, you're going to move up to any material
19:32
Speaker 1: amount or almost equity alike at the present time, I will,
19:37
Speaker 1: first of all, I'll tell you, Paul that I want
19:40
Speaker 1: an electric truck. But if I put an order in
19:43
Speaker 1: now for the F one fifty Lightning, or if I
19:45
Speaker 1: put it in order now for the Rivan or the
19:48
Speaker 1: cyber truck from Tesla, no matter what, I'll be waiting
19:51
Speaker 1: years before I get one of those. Your player, I'm
19:54
Speaker 1: treating which get to the front of the line. So now,
19:56
Speaker 1: which which kind of which kind of um? I think
20:00
Speaker 1: reinforces the point that inflation is going to be here
20:02
Speaker 1: for a while because I'm not going to get my
20:05
Speaker 1: lightning that I ordered today until three, so I have
20:09
Speaker 1: to buy you know, uh six point two leaders supercharged
20:14
Speaker 1: ram t r X. Now UM when you when you
20:18
Speaker 1: said Steve that it's um. It looks different compared with
20:23
Speaker 1: the with the fixed income versus the equity market. I
20:26
Speaker 1: wonder we were talking earlier with PhD from Harvard who
20:29
Speaker 1: said the equity market is the only game in town
20:31
Speaker 1: right now. Do you see it the same way? Well,
20:34
Speaker 1: I would say this look a longer term if sharply,
20:37
Speaker 1: higher interest rates or inflation are not necessarily good for equities.
20:42
Speaker 1: But if you're looking for the asset class that at
20:44
Speaker 1: least has the ability to respond to inflationary pressure and
20:48
Speaker 1: protect investors capital at least in the short run, that's
20:51
Speaker 1: that's the equity markets. If you're looking at cash or
20:55
Speaker 1: fixed income, we just think the downside risk there is
20:59
Speaker 1: even higher. Now within the equity markets, maybe there's some
21:02
Speaker 1: parts of the market that certainly do better than others,
21:04
Speaker 1: the cyclicals, energy materials. The problem is is that after
21:10
Speaker 1: twenty years a plus of disinflation, they become such a
21:14
Speaker 1: smaller part of the SMP five hundred that it's a
21:18
Speaker 1: very narrow beat, to be honest with you, because those
21:21
Speaker 1: those sectors that benefit from lower inflation have become so
21:24
Speaker 1: much larger, but they can act as an inflation hedge.
21:27
Speaker 1: Um is your point. I bought two thousand, fourteen f
21:32
Speaker 1: one fifty raptor then for fifty eight thousand dollars fully loaded.
21:37
Speaker 1: I'm ordering a new one now for eight five thousand
21:40
Speaker 1: dollars fully loaded, and it's only been it's a seven years.
21:45
Speaker 1: I'm just telling you the same product basically, um, although
21:49
Speaker 1: frankly not as good because the old one had a
21:51
Speaker 1: six point two leader narse aspected V eight and the
21:54
Speaker 1: new one has a three and a half. The same
21:56
Speaker 1: product costs more a lot more seven years later. So
22:00
Speaker 1: we do see that inflation, Paul, We do, And so Steve,
22:03
Speaker 1: if I'm if I'm an investor here, I mean, should
22:06
Speaker 1: I be surprised that the ten years still at one
22:08
Speaker 1: point six percent? I thought I would have seen it
22:11
Speaker 1: much higher, given the taper, given the fact that we're
22:14
Speaker 1: talking about rate increases next year. Yeah, So here's kind
22:18
Speaker 1: of how we view this, And I've got to tell
22:20
Speaker 1: you guys, the fact that the tenure note is remaining
22:23
Speaker 1: as low as it is from Marlins is really kind
22:27
Speaker 1: of a really negative message from the standpoint that we
22:31
Speaker 1: entered this year thinking longer term rates could float higher
22:34
Speaker 1: as we saw better economic activity and be we're able
22:37
Speaker 1: to move to a scenario where the economy can operate
22:41
Speaker 1: without this extraordinary amount of monetary accommodation. Be a quantitative
22:45
Speaker 1: eas in which I'm glad to see the Fed get
22:46
Speaker 1: out of that. The concept of throwing liquidity at a
22:49
Speaker 1: supply constrained economy makes less and less sense over time.
22:54
Speaker 1: But even as we think about the Fed trying to
22:56
Speaker 1: raise interest rates off of zero percent, uh, we would
23:01
Speaker 1: have hoped that the market could move to that, to
23:03
Speaker 1: that type of an outlook. But as we've seen inflationary
23:07
Speaker 1: pressures increase as we've as the Fed talks about tapering,
23:10
Speaker 1: now the long end of the market, the flattening of
23:13
Speaker 1: the yield curve, it's almost like the long end is
23:15
Speaker 1: saying the worst inflation is now the lower it's going
23:19
Speaker 1: to be longer term, because it's going to destroy so
23:22
Speaker 1: much demand and make growth harder to come by as
23:25
Speaker 1: we move a longer term. To me, it's just a
23:27
Speaker 1: really negative message out of the bond market and something
23:30
Speaker 1: we are kind of worried about. Why, uh do we
23:35
Speaker 1: see consumer confidence hit so hard? Last week we saw
23:39
Speaker 1: the U mission numbers at a low ten. You're low,
23:42
Speaker 1: I think, so good time to buy a car, all
23:46
Speaker 1: time lows, good time to buy a house, all time low.
23:48
Speaker 1: It's all price driven. And look, I think you can
23:51
Speaker 1: come back to kind of the old saw in the
23:53
Speaker 1: commodities markets over time is the cure for high prices
23:56
Speaker 1: as high prices. But the downside of that is is
23:59
Speaker 1: it's becas of that demand destruction that uh that it's
24:03
Speaker 1: not necessarily good from an economic growth standpoint. Look, we're
24:06
Speaker 1: still optimistic on economic growth going into next year. We
24:11
Speaker 1: think the labor market holds a huge key to how
24:14
Speaker 1: this unfolds. The ability to get labor back into the
24:18
Speaker 1: labor market one two, increase the productive capacity of the
24:23
Speaker 1: economy to meet some of this demand that's there, uh,
24:26
Speaker 1: to help untangle some of the supply change and get
24:30
Speaker 1: some of the goods that are trapped in transit to
24:33
Speaker 1: be distributed. But in a in an almost counterintuitive way
24:38
Speaker 1: that's going to help cap if you will, the amount
24:41
Speaker 1: of inflationary pressure that we're seeing from kind of what
24:44
Speaker 1: you were talking about in your comments, and that is
24:46
Speaker 1: demand that cannot be met. So prices just keep going higher, UH,
24:51
Speaker 1: and look like they're gonna go higher. It looks like
24:53
Speaker 1: it's gonna get a little worse before it gets better.
24:56
Speaker 1: But if the labor market will untangle a little bit,
24:59
Speaker 1: we start seeing UH people coming back into the labor
25:02
Speaker 1: force right now, there is no fear of missing out.
25:05
Speaker 1: You look at the number of quits and the jolts data.
25:08
Speaker 1: It's almost unbelievable, isn't it so? But when you've got
25:11
Speaker 1: help wanted signs everywhere you look, if you feel like
25:14
Speaker 1: the job, Durana, I don't like this. I don't like
25:16
Speaker 1: this job. Today you quit knowing that you can get
25:19
Speaker 1: another job somewhere else. But we hope the labor market
25:24
Speaker 1: unfolds from here in a way that it helps us
25:26
Speaker 1: UH improve capacity for output and also help cap inflationary
25:32
Speaker 1: pressure a little bit. All right, Steve, thanks so much
25:35
Speaker 1: for joining us. We appreciate getting your thoughts here on
25:37
Speaker 1: this economy rates UH in this market. Steve Why a
25:40
Speaker 1: chief investment strategist for b o K Financial, and I
25:44
Speaker 1: guess again, uh as Steve was mentioning, the job market
25:47
Speaker 1: is certainly fascinating. We look at the jobs claims every Thursday.
25:50
Speaker 1: We look at the jobs number on a monthly basis,
25:52
Speaker 1: very very closely here, and the question is will we
25:55
Speaker 1: get some of those five or six million people back
25:58
Speaker 1: into the workforce. Thanks for listening to the Bloomberg Markets podcast.
26:03
Speaker 1: You can subscribe and listen to interviews of Apple Podcasts
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Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
26:10
Speaker 1: on Twitter at Matt Miller nineteen seventy three. Pet On
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