Stage is Set for Powell’s Hawkish Message

Street are headed for another face off this week. This is the US Central Bank seeks to slow its inflation fighting campaign without signaling a readiness to stop f O m C policy and reading the Fed tea leaves both and are not easy. With more on his most read We've got Bloomberg News Economics reporter Steve Matthews. He's in

our Atlanta Bureau. Steve, financial conditions very important thing for the Federal Reserve, obviously with the Fed raising rates so much and FED policy started to make its way throughout this system off I conditions are just really tight right now, right not at all surprisingly, the financial conditions if you look at the Bloomberg Financial Conditions index. They are the easiest since last February. They're easier than before the Fed started raising rates. And the Fed is not gonna be

happy about this. Uh. Monetary policy works through financial conditions, meaning you know what's happening to mortgage rates, what's happening to corporate lending rates, what's happening stock and bond prices, that what's happening with the dollar. And when you have easier conditions, that supports growth. The FED is trying to achieve below trend growth, which is going to ease, in their view, ease pressures on the labor market and therefore

ease and inflationary pressures. They are not getting it. And so while they have pretty well signaled that you're gonna get a twenty five basis point hike on Wednesday, UH, the tone of Chair Palell's comments and potentially of the statement are going to be hawkish. Yeah, it ain't tricky, or it isn't easy being the Fed. We know that, or maybe it is because you're saying the same thing

over and over again. It's not easy being an investor who thinks that you know financial conditions, you know, markets doing what the FED wants It to do. No, it's a good point. And I do wonder though, right Steve, if the FED is going to have to be harder either in the press conference J Powell to kind of really make sure investors don't get to ahead of themselves.

This is the managing it has to do. Right. It doesn't want too much enthusiasm to come back um and think about you know, financial conditions staying easy because they want things to slow down. They don't want them to pick up again. That is exactly right. And and in fact, you know, if you go back and look at the last several meetings, this will be the first basis point hike, and I think you know after six six hikes of

of larger than that. And what they're afraid of is if you go back to meetings, we had seventy basis points last meeting, we had fifty basis points. This meeting, we're gonna have a quarter point. And you know, if you just kind of do a straight line, that would suggest to the next meeting we pause. And that is

not the message they want to send. They want to send the message that they're going to be continuing to raise rates and that they're going to be more important than that that they're going to keep rights high for longer. And so you know that will be the message. You know, they go into all these press conferences with talking points, and you can be sure that that's going to be one of the talking points that chere Paw comes out with.

Why is this so unclear to Wall Street? Well, Street's like, we got it, Jake, Joe, you know, I mean, well, the tricky thing is that Wall Street is reacting to legitimately good news. We have had good news on inflation, and you know, Chair Powell is going to have to acknowledge there has been some good news, as much as

he may not want to highlight it. Uh So, you know they're gonna have to hit the right balance that, yes, inflation, the outlook looks better than they thought, you know, the last meeting which is in December, but still it's not headed to two percent and the goal is to get inflation down to two percent, and they believe there's not enough tightness and Wall Street legitimately just has trouble understanding

what the Fed is saying. I mean, you saw this in July when Powell made some comments and everybody said, pivot, We're on a pivot. Well, there was no pivot, and uh so, you know, the Fed can be a little bit mysterious to understand, and Wall Street sometimes gets it wrong. I mean, the tricky point is if the Fed continues steve to stick to getting inflation down to two percent, then it's got to ways to go. Folks wake up

and smell the coffee, right. But if the Street and everybody says NAT's more like four or five percent and we're just gonna settle there, then the Feed is done. So that's a big part of the disconnect. Yeah, I think that's that is a big part of the disconnect. But also part of it is that the FED believes that the economy is resilient. I mean, we had three percent growth in the fourth quarter. Uh, you know, we're likely to have some significant growth in the first quarter.

The much of Wall Street, two thirds of Wall Street maybe more than that, is predicting a recession this year. The Feed is not predicting a recession this year. If the economy holds up better than expected, that implies that rates are going to be higher than the Wall Street expects. So it's like, if your forecast is we're headed to recession sometime soon, you know that's not how the Fed is looking at the world. Hey, one thing I want to ask you. We've got some new Fed mint members

right actually voting this year. Does that potentially change how it all plays out? Yeah, it is a slightly more dubbish Fed this year. You'll you'll have googlesby the new Chicago Fed president voting. Bullard was voting last year, who's kind of a notable hawk and he's gone. Esther George, who's largely regarded as being hawkish, is gone. You had a couple of new appointees from the Biden administration who

are who are viewed to be kind of centrist. So you know, incrementally you're going to have a slightly more dovish voting rotation. Although the interesting thing is, if you go back to the December dot plot, seventeen of the nineteen f o MC participants, we're predicting rates over five percent, which is more than what Wall Street is predicting right now. Fifteen of the seventeen seven, I think, seventeen of nineteen. Okay, that's pretty hawkish, right, that is hawkish. That is not

where Wall Street is. Okay, Steve, give us your best prediction for a we hear from j Powell on Wednesday. Uh, I think we're going to hear that rights are going to be higher for longer. That he said in December that there would be no cuts this year. I think he will repeat that in the statement. I think the key question is ongoing. They've been saying, we're in the statement we're going to see ongoing increases, And there's a

big debate on Wall Street. Does that change to say further tightening, which would at least open the door for the possibility of a pause and you know, later this spring and if they keep on going, that says they're going to do at least two more hikes. I love when we obsess about one word ongoing, hashtag ongoing. Steve Matthews,

we will be looking for your coverage. I know you'll be part of our our live blog and looking forward to your analysis after Steve Matthews, Economics reporter at Bloomberg News. You're listening to the Bloomberg Business Week podcast. Catch us live weekdays from two to five pm East here on

Bloomberg Radio, the Bloomberg Business Avan. You do. You can also listen live to our flagship New York station Just say Alexa Play Bloomberg E Love and Dirty with three D seventy five billion dollars give or take a little bit in assets. It is the biggest exchange traded fund on the planet. We are talking about State Streets, Spider s and P five fund that has changed the game of investing. And you know what, now it's facing a lot of competition. It's not the only game in town.

This story in the upcoming new issue of Bloomberg Business Week. It's out on news stands later this week on the Bloomberg and online at Bloomberg dot com. Let's get to it with Katie Greifeld, Bloomberg New Senior Market supporter here in our Bloomberg Interactive Broker Studio, along with the editor of Business Week, Joel Weber. Joel, Happy birthday. Why yeah,

thirty years old. It's the biggest E t F I know more about this than I, uh is probably would make sense, But because I co pilot the podcast Trillions, which is all about E t f s, and I've gotten a long on the history of et F so I know I know a lot um But but Kate Raifeld wrote this story, and um, Katie, what I really want to know is how many birthdays can one em because yes, we're talking about it right now, but lots of people we are talking about it on the twenty second,

So like, how many birthdays can spy half? It's a great question. Actually, Bloomberg Intelligence wrote about this recently in a research piece that you're probably not going to see many other thirtieth birthdays for E t F. Spy in so many ways stands alone. Obviously, it is the oldest E t F out there. This is a much more saturated market. The boom and bus cycles of new products has shortened a lot, but Spy obviously has stood the

test of time. So this industry that it helped create um is coming for it also, right so why could it potentially lose this lead that it's had since it since the very beginning. So that's the thing I mean when you're talking about Spy, it has so many accolades that you need to mention. But you also have to mention the fact that what we have three hundred eight

billion dollars in assets that's currently the biggest. But if you look at products from I shares, you look at Vanguard, and those are the industry leaders in terms of overall assets, their SMP five hundred funds are within a hundred billion dollars of spy, and that, honestly in the scheme of E T F S is not and the other thing that they have going for it if you look at the cheaper yes, exactly, so spy it costs what ten

basis points. If you round up I, V V and VOO they cost three basis points and talk initials to me, you know, if there's a lot of leathers. But it's not just all about the expense ratio. It's not just about fees, which I was surprised to learn in this story, Katie. It's it's also you know, that might be what long term buy and hold investors care about and that's why they might choose one over another. But if you're looking to get it in out quickly, spy is what you do.

That's right. So I mean, if you are a buy and hold investor, you know, someone investing their retirement money, you're going to be there for a few decades. Do you really care about six spaces points that six basis points difference. But the big advantage that SPY has is for institutions because it has such this liquid market built up around it. You think about the lending, you think about the options market built up around Spy. They don't

care about the annual expense ratio. They don't ever touch that. What they care about is how easy it is to trade this thing, how cheap it is. That obviously feeds in upon itself. So the fact that Spy is liquid means that Spy is going to continue to be liquid. So why can't Spy match its competitors with in press. It's it's like one of those things that from the outside you're like, well, just lower the basis points, make it cheaper. State Street like, why can't they do that?

So I don't think they want to, is the thing. They're not the correct answer, but they don't mean they don't need to because they're earning a ton of money charging ten basis points versus three basis points from investor is that don't super care. And again the Wall Street traders who have really it's become this existentially important product, they don't need it to be cheaper. So there's not really a lot of fee pressure on State Street here.

I feel like it's a trust right, so that the structure that created the E T F. This trust thing, uh was basically cast aside at some point, and the trust structure is not predominant anymore in e t s, but it was basically as a proof of concept that was what was used. But that's also what inhibits its ability to get any lower. So the Vanguard product, the black Rock products, those aren't trusts right, so there they can shave away a couple of basis points that that

spy can't get any lower. I do want to put something on your calendar right now. You're talking about trust. Reminded me that if you look at the queues, that's a trust as well that was born in So I guess we're going to have to gear up for that profile best go QQQ. Yeah, it's I mean it's also huge also has a really deep market built around it

as well. Do we have to be worried as we talk increasingly about actively managed DTF versus the passive form of investing such as this one, I don't feel worried. I think that if you are a new entrant to the e t F market, a new issuer, and you're trying to launch a product, you're maybe a little bit worried because you look at the sort of passive index part of the market, and there's no white space. I mean, at this point, thirty years into the game, everything under

the sun exists. So that might force you to become a little bit more active if you're talking about a market structure perspective. I mean sometimes Eric Felt hates this, but people will say that, you know, e t f s are distorting the market. They're all buying the same thing, the rise of passes and investor. Isn't he right when you think about these massive ones don't ever as a component of the trade. Well, I think, Look, I think the thing that when we've written this as Bloomberg News

a lot is you know what is passive? What is active? At this point? I mean you put five hundred stocks in an index, that's a choice that's been made. That's an active decision. Like sure it's five hundred, but like it's still it was an active decision about how to Why Tesla wasn't included in that for a long time, right, Like so that there is inherent decision making that goes into this. And didn't we interview David Blitzer together? He was he was part of that committee. But I will

also say he did. It was on trillions. I would add, though, that a lot of these passive ETFs are being used for very active purposes. People will use them as building blocks in their actively managed portfolios, just as a way to get exposure in a cheap, tax efficient way. So Trivia, uh the other birthday that I would excited, I just know more than his normal I think. So we're talking

about the thirtieth anniversary. There was an event that preceded the birth of the E t F. Anybody, anybody, anybody know? It was an event. You're going, okay, black Monday. Black Monday happened, and that in response to that, the SEC did this white paper and effectively there's a paragraph tucked

inside that paper. In this paper is like massive phone book, multiple phone books, and they basically said, black Monday may not have happened if we if we had a product that could do X, Y and Z. And the people who created Spy basically read that passage and reverse engineered it. It took them a while to get approved. But yeah, you can listen more on trillions. We re redropped. Do you know a lot about it? We we re dropped the et F story, which is six episodes about the

history of the ETF. That's right. Be sure to check out the Trillions podcast hosted by Joel and Eric Bautunist. The latest episode the e t F Story six part series Very cool Stuff, Very cool stuff. As always from Katie gray Felt. This story is going to be in the upcoming new issue or thanks to Joel as well. You're listening to the bloom Bird Business Week podcast. Catch us live week days from two to five pm Eastern

on Bloomberg Radio the Bloomberg Business Band you Doo. You can also listen live to our flagship New York station, Just Say Alexa Play Bloomberg E Love and Dirty. Something else that we've been talking about as of late, and that is the world increasingly pushing back stronger if you will, against China. That includes uh, the Japanese, that includes the United States, I mean a lot of them are pushing back at this point, banning advanced chip technology exports to China.

This is China continues to move ahead with it's Made in China program to dominate key technology such as semiconductors and AI and more with US now and back with us is Bloomberg New Economy Editorial Director Eric Shatzker here in our Bloomberg Interactive Broker's studio. Eric, good to have you with us. Welcome back to back. So it's not just the U. S And China anymore, It's not the US versus China anymore. This is starting to broaden out,

oh very much so. And I want to say first off that there is Carol just for you at chat GBT angle to this story. As you may recall, back in October, the United States the Commerce Department moved to ban exports of advanced chip making technology to China. Why ostensibly to slow the development of Chinese military capabilities, especially in artificial intelligence, which is now the vanguard of modern warfare. And of course this is true. The United States does

want to constrain the Chinese military. But now, as of Friday, the United States has an agreement with the Dutch and the Japanese to join this coalition if you will, and so the Netherlands and Japan also will ban the export of advanced chipmaking technology to China. It's important to mention that three of the world's most important chip making equipment suppliers are one Dutch a s mL and to Nikon

and Tokyo electron, both of which are Japanese. People tend to think that this is an industry dominated by American companies. Into a large degree, it is, but no one would be able to make the world's most powerful chips without the photo lithography equipment that comes from those three companies that I just mentioned. So yes, on the surface, this

is about a military battleground. Quite possibly, and I know that this is hard to process given what's going on in Ukraine, but quite possibly the most important military battleground in the world. But practically speaking, this coalition of the United States, the Netherlands, and Japan banning the export of advanced ship making technology to China is going to accomplish

three others. One, it's going to preserve the West's dominance of this critical enabling technology it underpins almost every aspect of modern life, to keep certain sectors of Chinese industry from posing a competitive threat to the West. And three, by forcing the Chinese to enter this arms race and try to match Western capabilities, it will divert important human and financial resources to that endeavor that might otherwise be employed in competing with the West. So it's a multi

pronged strategy. All you'll hear from the White House and from other authorities that this is all about national security, and again, to a large degree, it is, but it is very much economic and commercial. At the same time, I wrote some notes to myself making chips equals arms race. It's the new arms race, right in terms of you know, we look at the world, chips are in everything. Right, this is so important that hard, right, it's hard to persuade the Dutch and hard to persuade the JAB and

needs to join the Americans in this effort. Why because they sell so much of this stuff to China. It's an it's an immensely important market and you know the kind of it's like cutting off your arm, right, so much potential revenue is being sacrificed in this effort. But if we which is to say, the West, don't do this,

it threatens dominance in smartphones. It's threatens dominance in the ability to predict things like climate change, for example, it threatens our dominance in self driving cars, and it threatens our dominance in artificial intelligence like chat, GBT. There it is, Carol, I know you're waiting for that angle. Well, if we

continue this idea that it's it's an arms race. And if we continue with that sort of historical parallel here, Eric, is it fair to say that, given what the stakes are, we could have some sort of I don't know, way to keep everyone safe from war, given that it could be mutually assured destruction if the supply chains get taken out, taken out in which way, if there is some sort

of skirmish, if there is some sort of conflict. Let's hope there's no skirmish in the short run, because if there were, and what we're really talking about here, I think is an invasion of Taiwan. If the Chinese were to invade Taiwan, that doesn't mean that they all of a sudden get this stuff. These are chip making at this level is the single most complicated, demanding engineering undertaking

in human history. Nothing more complicated. And there's only one company, t SMC Taiwan Semi Conductor Manufacturing Corporation, that has perfected the process, and the perfection of that process has taken place only in Taiwan. So all of the world's most advanced simic conductors are made in Taiwan. And yes, if the Chinese were to invade Taiwan, the world would lose access to those chips and that technology for the time being, but so would the Chinese. They don't have the engineers

to run these factories. One can assume, I mean, what is an undred ten miles from mainland China to Taiwan that there would be some warning and that the engineers would be able to escape. The question is to where if they make it to say the United States or Europe, are there fabs ready to employ them? No, they're underway. I mean Brown has been broken in Phoenix, and America and Europe are fast trying to catch up. But this is a very important point that you raised. There is

this period between now and whenever again. America Europe very badly want to replicate, duplicate, uh, you know, not make redundant, but at least create some redundancy in the supply chain system, so that if there were even an earthquake in Taiwan and those fabs were to be taken out, there would be something to replace them. Because without those chips, all those things that I talked about before, they just don't happen.

So I think about, you know, coming off of you know, in Singapore, the Bloomberg New Economy, I mean, when you guys, you obviously touched on a lot of big issues, global issues. How much or how often did people think about what's going on between kind of the tech race, semiconductors and

the role that's not enough, not enough, not enough. Again, I'll go back to this idea that you know, take Ukraine off the table for a moment, because it has our attention, and it obviously is a very hot military conflict, and as it has the potential to get hotter and and possibly even go nuclear, and heaven forbid that ever happens. That aside, this is the single most important battle ground in the world. This is going to decide the dominance

of the one and twenty second centuries period. Right, It's the key to artificial intelligence, it's the key to virtual reality. It's ultimately the key not just a supercomputing but quantum computing. Whoever gets there first owns it. Right. It is a zero sum game, period and China has made it very clear, right, they're made to pursue kind of higher technology and no more you know, manufacturing to the rest of the world.

They want to play on this higher plane, if you will, and with access to the equipment from s mL Tookyo Electron, Nicon, Applied Materials, LAMB Research, etcetera. Those are some of the American companies. They might have been able to get there, but without them they have to build this stuff from scratch. It has taken decades, decades to perfect the photo lithography process to manufacture semiconductors at two nanometers. Go to the INSCL contact with Pedia Britannica and look up how small

an anometer is. In a sense, Eric, certainly the Chips Act and the billions that are is going towards chips here in the US is a big deal. But at the same time, would you imagine, given how important this this is, perhaps governments would want to do even more and it would be a bipartisan issue. Well, it was bipartisan inasmuch as the Chips Act was passed. Could it become more of a bipartisan issue? You're like describing it

as like an all hands on deck situation. Almost. The sense I get is that many, not all, of our elected representatives in Washington do feel very passionately that it is an important issue, and yes, we may see more action on that front. But let's not forget that government subsidies. You know, are a double edged sword. Right. Everybody who's been covering these issues for long enough remembers the cylinder debacle with solar manufacturing and the government loan million dollars

that had to be written off. That is a situation that this administration and no subsequent administration wants to find itself in just quickly ten seconds when we look back at this time and say, Okay, this was a smart division, you know, decision and really change the game when it came to China going forward, at least in terms of business and semis. There are many people who describe this just like the race to develop and perfect the Adam bomb right in World War Two. It is the stake

sport that high Eric sask, thank you so much. Good to have you back in studio, Editorial director of Bloomberg New Economy. Here in our interactive Broker studio, you're listening and watching Bloomberg Business Week. You're listening to the Bloomberg Business Week podcast. Catch us live weekdays from two to five pm Easter on Bloomberg Radio, the Bloomberg Business app band you too. You can also listen live to our flagship New York station, Just say Alexa Play Bloomberg e

Love and Verdi. I'm broom a journal now. But you let me drive? Oh no, no, no, no, honey, please, I'll do the riding gravels. I want to drive. It's good question. This is the drive to the Clothes music on Bloomberg Radio. All right, got about seventeen minutes left in today's trading session. It's going to be a big week. We know, lots on our mind. The fo MC meeting they kick off, kick off that two day meeting tomorrow,

the decision on Wednesday. You've got to be a fly on the wall, as you say all the time, Can I just like bring in like the treats you know they just here. What do you guys think of you know, higher for longer exactly ongoing, Gonna use it anyway. There's that there's some big earnings Amazon Alphabet, Apple Meta D no am D snapped tomorrow. So a lot of stuff going on and then the jobs are put on Friday. Yeah,

really eager to get through. Our next guest. You know his voice, you know his name because he's been on with us quite a bit. Abbe Dish Ponde as the founder and chief investment officer at the registered investment advisor Centerstone Investors joining us via zoom in New York City. I'll be good to have you with us. Global value

is what you've been talking about for a long time. Um, before we get to your picks, I want to get a look at from where you're standing, what you see in well three starting off thankful a little different than two. So far. We were talking about this the other day, like little do we know it was about to get unleashed all us for the full year last year, last January. But so far this year it's it's a it's almost on your opposite. Uh you have, I mean going region

by region. Um, you know, Europe has luck maybe fortuitously avoided the worst case scenario with the winter. Their energy usage has been weighed below what they were fearing. The economies can are sort of able to maybe absorb that a little bit. Um, that that hit, that hike cost hit a little bit easier this year. China's of course opening up. Um, the dollar has at least stabilized for now, which is good for emerging markets. So a lot of you know, if a lot of positive takeaways to start

the year. Um, you know, so so far, so good. Granted, it's you know, January. Yeah, it's still going. But you know, for someone, one of the reasons I love talking with you is, you know, the global perspective, right, and we need to think about that, certainly for all investors, and you know what different monetary policies might mean, global risk

factors might mean for different parts of the world. Having said that, I wonder what you mean, what you think about and something we talked with our Eric Shatzker about the increasing tensions with China, and there was a headline just a few minutes ago about how the Body administration is considering cutting off Huahwei Technologies from all of its American suppliers, including Intel and Qualcom, as the US government

intensifies a crackdown on the Chinese technology UH sector. And then we just had Bloomberg a few days ago talking about how specifically the Dutch in Japanese are joining the US and banning advanced chip technology exports to China. Are we seeing that dividing up of the world happening that kind of tech great wall? Yeah, I mean we have been kind of getting people heads up on this, uh, you know, like five six years ago. UM, and I think that that that path still lays in front of us.

Where the you know, different countries have different diverging interests, and one of the main diverging interests is is this idea of intellectual property, and um, the Chinese you know, very local use of it to to try to create some sort of a technological military advantage for themselves. Um. At the end of the day, though I don't believe that. Um, it's really uh, I don't think. I don't spend much time worrying about like a war or anything like that.

There's just it's nobody's interests right now. I think where Peak possibly Peak kind of worry about about China versus the United States, And just the other days in general came out of the Air Force general came out and said, you know, hey, we're gonna go to war with these guys in It just doesn't seem why that to me just seems like maybe a little bit more worried than

that than is warranted by reality. The reality is Chinese are kind of boxed in a little bit Chinese government, as I should say, um, by the multiple policy failures and and you know this very chaotic COVID reopening, COVID reopening, but it behooves no one to just box them into a quarner and try to you know, punish them like like you know it has been done with Russia. China's is the largest exporter in the world. I mean, it's

a huge manufacturing center for the entire world. Without it, a lot of the world's you know, the globalized supply chains, they exist, they just don't exist. So I don't I don't think that there's a reason to expect a major conflict. We only have about ninety seconds left, and I want to get to some of the picks that you have, because there are a couple in here that sort of seement opposite ed into the spectrum. I'm gonna ask you about both of these companies at once. We got on

one hand, Ross Stores and on the other hand, Porsche. Yeah, two different kinds of concepts. They what happened last year We had a fairly you know, dramatic sell off in all kinds of companies, good and poor quality in terms of the franchises. And when that happens, you know, value investors, it's great for us at Center. So we're value investors.

That's great for us because we're then able to just sort of migrate interra higher quality names, things that have franchise values UM and represent you know, a good long term investment for our our clients. It's unusual that we get to do that in you know, a a you know, a very general way, which we're able to do last year, so that if you look at our portfolio you bought

like overtend new names last year. The common element with whether it's a Ross or Porsche or some of the other companies we bought is that their franchises are run by good management teams UM, and they have good balance sheets. Like essentially the companies are on autopid they run themselves. And beyond all of that, of course, is that they traded you know, very attractive prices compared to their intrinsic values.

So we get every thing in one one right one going alright, We're gonna have to leave it on that note, UM, and we love talking names with you. Rush Stores, by the way, is up about fift since a low in last August, so we've certainly seen a bump up in that one. Um Bonde, thank you so much, Founder, Chief investment officer at center Stone Investors, the registered investment advisor joining us via zoom in New York City. This is the Bloomberg Business Week podcast, available on Apple, Spotify, and

anywhere else you get your podcast. Listen live each weekday is starting at two pm Eastern pont Bloomberg dot Com, the I Heart Radio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Term level