Christopher Smart on the Markets (Radio)

those words. I mean, I think we are in a part of the cycle where economy is slowing, where price pressures continue to persist, and that is going to put a crimp into both profits as well as at some point or other, the jobs market. And that's where the real pain I think is going to be felt among among most Americans when unemployment still, you know, closer to three and a half percent, probably has to take significantly higher for inflationary pressures to cool. Essentially, Christopher, what is

being done is the inflation. They're trying to slay the beast of inflation at the price of job law is. Do you think this is the right strategy. Well, I'm afraid it's the only strategy that we have have for us right now. Inflation is one of those persistent problems that ultimately affects everybody UH, rich and poor. Ultimately leads

to lower growth, ultimately to higher unemployment. And so you have to stabilize prices first, which comes with a certain cost, obviously, in order to set the ground UH and the foundation for that next leg up of growth. UM. Obviously the FET is hoping to do this with as little cost as possible. But I think what we are seeing is that energy you know, inflationary pressures have been much more

broad based than we thought. Inflation is coming down, but much more slowly than we thought, and that's why the FET is, you know, forced into some of these significant rate hikes. Here, I would say the bigger question I think for markets is not the hikes, but it's the it's the cuts when the cuts might come. And I think you you are alerted alluded to this earlier in

one of your reports. UM. Markets are starting to wonder when next year the FED will stop raising rates and start to cut because the economy of we week, I think our view is that there is such momentum, you know, behind the economy right now that it those cuts aren't going to come anytime soon next year. So we have Ford added to FedEx his story is it inevitable here or is the jury still out on this spreading to

all of corporate America. Well, it's gonna spread beyond those two names, and obviously others have announced job cuts as well. What is still remarkable is, as I mentioned this low unemployment rate. Unemployment is a lagging indicator, so we shouldn't spend too much time focused on it. But anecdotally, it still remains very difficult to hire people in certain areas of the economy. U wage growth continues to be uh,

pretty strong, and the quits rate is quite high. So so clearly people most Americans who hold a job feel that they can quit and find another job pretty easily. So cipher having a look at what we have at the moment in terms of the reaction to what the FED is doing. Um, the thing is we have many things originally which were not part I should say, we're not. Really they weren't able to deal with I eat with supply side inflation. Now tell me something, how is that morphed?

And is inflation here to stay? Well? I think it's here to stay for for a while, in the sense that you know, getting back to that sub two percent inflation that we enjoyed before the pandemic looks like it's a couple of years off. I think as we look at cp I and the different pressures that are driving it right now, it includes pressures on housing and shelter rent prices still remain high and are likely to continue to be sticky on the way down as long as

wages remain resilient. UM. I think energy prices, you know, seem to be cooling off a little bit, but you know, this escalation that we're now seeing in Russia and Ukraine is likely to lead to tighter sanctions and may lead to further disruptions and energy markets. And then of course on the food side, it doesn't directly impact the US necessarily, but global food markets there might be threatened by um this very fragile deal to allow exports from Russia and Ukraine.

And I think those are all question marks that have to lead people to to be expecting those pressures to to continue a little longer, a little higher, and a little longer. So some of the pain that we referred to is in the markets. Obviously that the pain that j. Powe was talking about had to do with the economy,

but you can't separate the two. So easily. So you have the bond market and the all country World index down between twenty and say, is there a corner of the market that looks safe or attractive to you at the moment? Well, I think any corner where there are you know, strong balance sheets, relatively low debt service UH, fixed rate debt rather than floating rate had I mean,

I'm not sure I can tell you know. Obviously, defensive parts of the market, utilities, um maybe healthcare look like better plays than the more um UH than other parts of the market that that are going to rely on very strong global growth. I think most investors right now, you see it in the surveys, I see it talking to my colleagues are kind of um much more cautious in the short term. But you know, these are things

that will pass. And as I mentioned earlier on at some point the hiking will stop and the market will start looking for moments when the Fed may start easing again. I think that's the that's the conversation will be having early next year. Is that is that why many people at the moment really betting there could be a pivot,

even though they've been told that there won't be. In essence, I mean, we've got at the moment a lot of CEOs talking about cost reductions, which which which means effectively layoffs and you know, in the last of these gone from the JPAL said housing activity is weak, and well it's really has weakened if we have a look at the data. So the thing is that impact, the impact of that can start to spread very quickly. Indeed it can, and I think, um, you know, that's what we're all

watching for. Uh. And I think maybe the the pessimists are the ones who are hoping and expecting rate cuts to come soon. I think as we look at the data, as we talk to companies, um, there is still a lot of momentum in the market. Um. Uh And I'm sorry, a lot of momentum in the economy, which leads us to believe that those hikes have to remain in place for a little bit longer to again to cool down

those those inflationary pressures. Um. I think the um, those are the kinds of things that have to play out before we can expect the FED to really start um start lostening again. That being said, of course, you know there's always the possibility for an accident in these tightening cycles. Something always pops uh in a in a negative surprise. Sometimes it's Mexico, sometimes it's Orange County. Um, there's a lot of attention today in the in the private equity space.

You know, it's hard to know, it's impossible to know exactly where that could happen. But that's why putting money to work today, you want to be in places with strong balance sheets and low debt service. If you think it's just time that we have to get through, like you said, at some point, interest rates will probably stabilize. What is that time? If it do you feel like, uh, say six months from now, we're nine months from now, will be in a better place or not yet it

feels like we will be in a better place. I wouldn't say we're in a place where um inflation is back at the FEDS target of two on average. Clearly that's a long way away. That's a longer way away. But I think the good news or the last couple of weeks and months is that inflation seems to have peaked. It's not going to higher from here. Christopher, thank you so much for joining Excrucifist about the chief global strategy that at Bearings giving us his take on the markets