Let's got the James Abatte, managing director and chief investment officer at Center Asset Management. So we mentioned that the Jolts survey was pretty frisky, James, but the prices paid component in the I s M was was way down. So I guess the main takeaway is the same. It's a solid economy. And a question could be, then is there enough momentum in inflation coming down to to cheer the bulls or is it is it time for the bearers to to continue to reign supreme. You know, it's
a little too early to tell. I mean, as you point out, you know, the I s M Index, which is to the stock market as important as the Department of Labor's monthly payroll number is to the bond market. It's literally the most important top down indicator. So the manufacturing index came in at fifty point zero two, which means we're literally catering on recession, but the directional momentum is still down, and you know, from that perspective, I think,
you know, we have to egency. But as you said, the saving grace and that was that the inflation index was below fifty, giving some indication, but that tends to be more geared towards producer prices rather than consumer prices. And unfortunately, what we've seen lately is a sharp increase in services inflation, and I think a lot of it has to do with significant decline in productivity that was witnessed James the ultimately we were not getting huge wage increases.
You know, that's is a fact from the data that we've been looking at. And that would also then mean that perhaps what inflation is doing at the moment is perhaps I want to use those words transitory. It's not as not as actually deeply as embedded, and it has not as much momentum as people are looking at with the policy response that we have, oh well, with the fact that productivity falling so rapidly. Let's not forget that the latest reading was minus four. That's the lowest number
we've seen in seventy years. Um. So from perspective, when you think about what the FED has to do, you know, there's never been an environment really when the FED is raised interest rates. We've brought on a recession where productivity didn't go up. Companies have taken the steps to right size their operations. You know, we're in a very sticky place here, and I think actually stagflation is the more likely outcome here. The bears have had the wind in
their sales this year and probably feeling pretty smug. But since June the SMP is actually a little bit higher. UM So I suppose the question is what is this transition to next? Yeah, that's that's that's the million dollar question, right. So bear markets have three stages. There's usually that sharp down effect, which was the d rating that we experienced in the first half of the year. You get a
reflective rebound, which we enjoyed over the summer months. But then if you have a bear market, you have a drawn out fundamental down. Yea. So it seems like we're we'll have to continue in a moment James almost treading a lot at the moment, James Abatte from Center Asset Management, up against the clock, James, you know we've been talking about the day to that jold state that we're talking
about some of the other Um. I suppose fasts affecting what's going on in the economy, but tepically, how do you see things panning out? Because we left on a note where you use the s word stagflation, The reason why I use stagflation is that I think one of the things that is a problem right now with most analysts is that they suffer from recency bias, meaning that they're still looking at the two thousand eight two thousand nine global real estate and financial crisis rather than dot
com bus is a you know, a good analog. I think what people have to remember is that the important distinguishing characteristic of that O eight oh nine period that's overlooked by most in the financial and analysts and media world is that the misallocation of capital back then leading to that crisis was not confined just to real estate and excessive balance sheet leverage at the financial sector, but also who included the energy and resources industries that underwent,
you know, an excessive period of investment to feed the
growing industrialization of China in the mid two thousands. You know, right now we have a misalignment of capital spending cycle with the stock market or consumer business cycle, meaning that my fear is that the wholesale destruction that we may see from the wealth effective cycle will be as intense as it was during the dot com bust, but the inflationary declines that emanated from the excessive tangible capacity that came online proceeding the two thousand two thousand nine recession
and the energy and resources industries is not evident today, so it's not going to provide the disinflationary benefits to
interest rates. Yeah. So, I mean it feeds into what what is the biggest unintended consequence from this most recent dislocation, you know, from this relocation is that we stay in an environment where pricing become the dominant variable, you know, in the marketplace, and almost we go back to a period of time where in the worst case scenario, if you think about the price to earnings multiple being kind of a inverse relationship of you know, interest rates and risk,
you have an environment where interest rates stay high and continue to basically reflect that higher inflation, but also you get people's risk appetites declining, so you get a compounding effect, which means the PE multiple continues to fall in the SMP. Yeah, I mean, we see you're looking more at I suppose at the end of the day, the the e if earning is fool, but you know, what did you make
of the earning season thus far? Then you know that's exactly the point and our thesis going into the year was that basically you're can have a broad D rating in stock. So what you wanted to do is find companies that could generate high earnings growth and that's why you've seen energy. Um you know, the EPs growth rate and energy I think was like eighty or some out percent, but that had offset a ten percent decline in the
PE multiple even for the energy sector. So when you look at the smp F I've ventured as a whole, you know, if you look at the total return year to date, you know about it as a decline in the PE multiple with just about four percent of it
being positive EPs growth. But most of that came from you know, energy, staples and utilities, nowhere else really, So so the problem for the average investor is that even even if they thought, well, okay, if that's the case, then I can go to the bond market and have a mix of corporates and UH and sovereigns. But you're saying that inflation will stay high. So that's going to
erode those yields. Yeah, absolutely, because I mean people again with the recency bias, this inverse correlation that exists between stocks and bonds has only been the case, and you know in evidence since two thousand and two, you know, prior to that and for the majority of the past one years, stocks and bonds moved together based upon inflation.
So I think when you look at the where we are today, you know, the problem is people look at price momentum and trend following is the deal and end all. But when you look at long term perspectives of history, you know, the big money is usually made when you can anticipate regime changes. And we're in the midst of that regime change that you know started this past year. Uh well, just so what do you do then, I mean, that's the final question, it's the big one. Well, let's
just let's let's just look at the stock market. Right. Everybody's talking about how great the tao had a month in October, right, it was the best months since nineteen seventy six. You know, the problem is if you look in nineteen seventy seven, it was a terrible year for the markets and the SMP felt you know, seven out of the first ten months of the year ended with a loss. Um. You know, that's had small caps did
very well. So I think doing the underestimate the ability of stock picking, sector rotation and other things, but basically try to limit your market your market risk at least a positive a positive finish up there, James, thank you so much. Always always a pleasure, James about it. The Managing Director, Chief Investment Officite Center Asset Management