Chuck Lieberman on the Markets (Radio)

the overall global picture? Well, it certainly does that. Um, it's unclear how the Chinese government is going to respond. Further lockdowns would obviously be very disruptive to global supplies of products coming from China and also undermine demand. Uh. But if they allow the virus to spread, that could also be very disruptive. Alright, Well, let's talk as well about the broader picture, because we're looking at whether or not inflation has peaked and how much is going to

moderate or how quickly after that? In your view, have we reached peak inflation yet? Yeah? I think we have, although I don't think that's good enough. Um, inflation is going to come down because some of the inflation increase was transitory and that is coming out. Various goods categories saw artificial scarcities. Prices went up. Now that's reversing. Autos are perfect example. Auto production was was disrupted. You couldn't buy a new car, it was demand for existing cars.

Used cars was very very strong. They became scarce as well. And as the supply of cars increases, prices will weaken. And that's coming into the data. But the underlying trend is driven by the labor market. There's no relief yet in labor market that the labor market continues to be very very tight. Wage increases are solid. Uh, labor is becoming a bit more aggressive in negotiating for wage increases.

That's not going away. So it's premature to say that the FED is anywhere close to achieving what it needs to achieve, and premature then to say pivot as you as you point out too. But do we continue to see these aggressive rate hikes of basis points. No, they have every reason to slow the pace down. At seventy basis points to clip, Uh, it doesn't take very long before the interest rate, the overnight interest rate is through the roof, so inevitably they were going to slow um.

That was in that literally had to happen. Uh. And they also need more data. They need to see how much inflation moderates. If inflation comes down easily on its own to two percent, which I doubt, then they don't have to keep on going that far. But if inflation turns out to be more resilient and stays very elevated, then they might have to go that much more. So I think they're going to slow the pace the market expects fifty basis points. I've been in that camp for

a little while. I expect another fifty thereafter. That would take the funds rate up to about five UH. And I think they take it to five five and a half, and then they plause and they wait to see more data, see how the economy is performing, whether the labor market is beginning to loosen, whether there's any slowing and hiring, and whether inflation is moderating more than that I expect

um and that all remains to be seen. You talk there about the strength of the labor market, and everybody's waiting to see what kind of wage increases will happen as well, given everybody's dealing with these inflationary pressures. But how did you read the kind of sluggish Black Friday sales if if the consumer doesn't really want to spend them, well, I thought the retail sales numbers were actually pretty decent. Um. You know, certainly the mix changes. We've seen multiple changes

in consumer spending mix during the pandemic. Initially everything was for sheltering at home, UH, bringing in goods to provide UH services for for people who are literally stuck at home. And then once things reopened, then we shifted over to services um and and now I think it's a matter of UH. As long as income is strong, spending will

stay strong too. And yet some of your thoughts on how to play the markets amidst all the geopolitical headwinds that we are facing, and of course as we're looking to what the FED does next, you're saying it's too late to sell, even if the repricing hasn't hit bottom. So where should you be looking potentially to buy? Then, Well,

typically the market always fights the last war. So the last war from the market's perspective was the credit crisis of two thousand and eight, and so everything related to housing is weak. If you look at the banks, the house home builders, the suppliers to the industry mortgage insurance, Every single one of those sectors is amazingly cheap. You have major banks like Wells, Fargo and City Group trading around book or less than book. U home builders are

trading at three, four or five times earnings. Suppliers the same thing. UM mortgage insurance companies trading at seven eight times earnings. All of these companies are profitable. Many of them are buying backstock. UM. That whole part of the market is just incredibly cheap. What about tech? Do you stay away there or is the opportunity Well, tech is more complicated. Uh, it's there. That's the part of the market that got hurt the most. Uh. It's the highest

pe multiples, so it's very long lived asset. Higher interest rates hurt that valuation, and we've seen them come down a lot. But that's a broad brush. You then have to look at individual companies and judge whether or not those companies are likely to continue to do well. Uh. Some are very well placed. We like, uh, for example, a company like Microsoft or Google or Amazon. We think those are great long term holdings. In other cases, some of the companies are a lot more expensive, and I

would be cautious about them. We're looking at a U S tenure yield around three point six eight percent. About a month ago, we're above four percent. You're saying around three point seven five doesn't really provide any real return without a lower inflation rate. And we've talked about when we might see that happen. What is the likelihood then that it is more yields rutch at lower Where where are you seeing the tenure move? Yeah, I'm on the

other side of that argument. I think that interest rates have got to go up more. The FED is going to continue to hike rates at least fifty basis points at the next meeting, probably another fifty after that. So that'll take the funds rate up to five. And with the five percent funds rate, how do you justify a

tenure at the three point seven percent um? I think that's hard to do, and it's especially hard to do when you put in the context of inflation at the end of I think the FED would be very happy if in ation we're around four percent. That still means a negative rate of return after inflation for any investor in ten years security. So I don't think that the bond market has fully discounted what it should discount, namely that inflation will be higher for longer and therefore interest

rates are relatively unattractive. And just a quick word as well about the the oil market. Will talking earlier about the U S granting Chevron a six month license to resume oil production in Villezuela. At the same time, you've got this China unrest that we also touched on, sending

ripples throughout the world markets. When we look at those concerns, and of course the other side of the coin, which is the reopening, where do you see oil kind of trade when we've got it around seventy six dollars about at the moment. Yeah, I think oil reflects those concerns that you just mentioned, juliet Um. So I think that's why oil is where it is. But the fact of the matter is oil is pretty scarce. Their shortages, we're still scrambling to try to get more natural gas to Europe.

Um supplies of oil or are moving through the back door so Russia can export via India to other parts of the world. Oil is still pretty scarce, and so I think there's a lot of risk that oil prices moved back up to a hundred bucks barrel that'll be under a lot of pressure if the winter turns out to be cold and we start dipping into our inventories of both oil and natural gas, and that will create a lot of upward pressure. So I'm more of a bull on the energy side um as opposed to thinking

that there's weakness ahead. Alright, Chuck, great to have your insights. Thanks for joining us on Depricasia. Chuck Lieberman's co founder and chief investment officer and advises capital management, joining us from nu Ja