A Closer Look At The Markets

So let's get more on that now with Jeffrey Cleveland. He's chief economist at Peyton and Regal. So, Jeff, I don't know how much of Lisa and Ice conversation you just heard there, but talking about the inflationary forces at work in this economy, do you think that central banks, like the FED or underestimating it? Still? I know, I don't think so. I think this is, you know, very difficult topic and popular talkic topic among investors. But um,

and there's a lot of noise. So, but you have to go back to taking in and maybe a longer term perspective commodity prices. The price of oil, for example, doesn't tend to give forecasters such as ourselves a good lead on where inflation will be in you know, a year's time, and I think central banks know that, you know,

and they're taking that into consideration. Although this is really dangerous to say, these are I think the four this time is different for most dangerous words in the economics profession. The idea here that we have oil prices that are climbing at a time when supplies might not naturally increase to compensate this. The business case has changed in an era that's trying to decarbonize. How much does that change the pack drop for you? You know, it does, It's

a it's a factor. But I think I always come back to Okay, when you're talking about inflation, you're talking about a general increase in all prices, right, You're you're not just talking about particular sectors. And if you know, what we're seeing is driven more by the supply side, which is the case in a lot of areas. We did our our chart of the we for example, on natural gas prices on Friday, and you know, there are some very interesting supply side stories there that I think

explain a big chunk of the move. If it's coming from the supply side, I don't think that's inflation. That's really the key. It's it's something you know, idiosyncratic, and it seems like, you know. The difficulty right now is we have a bunch of these types of stories piling up all at once, right, So you have you have the crude oil stories, you have natural gas, we have bottlenecks and all kinds of areas. I attribute that this

is just a very unique macro environment. Um. But I still would caution investors from jumping to the conclusion that we're going to have a persistent inflation from here. Um. I think you can fall back on some pretty good reliable indicators. One we got on Friday, for example, in the US in that Personal Income and Spending Report, the Dallas Fed tabulates the trimmed me um PC. It's an alternative core inflation measure, and it's hanging in there right

around two percent year over year. And I think that's where when the dust settles on all of this, we will we will see consumer prices right around that two to three range. Well. And a huge question within this, Jeffrey, is how much wages are rising to meet higher prices on pretty much everything you can think of at the pump at the grocery store on your holiday gifts. We

obviously have the jobs report coming up on Friday. I would argue it's going to be a pretty big one, given September is supposed to be the month where kids are back at school, those additional unemployment benefits have rolled off. It's supposed to be the great return to the labor market. Do you think that actually materialized. I'm a little skeptical. I think, you know, we saw a very weak August report that was driven in large part the slowdown and

leisure in hospitality. I don't know, you know, just anecdotally walking around Los Angeles, for example, if we saw a big surgeon hiring in the month of September, I think we're still under the you know, the weight of the pandemic of the variant, at least of the September data. So maybe that story will have to wait for in the fall. I hope full that uh, I'm wrong and in the labor marks at back bounce back much more quickly.

On the wage question, though, that that you brought up, I think it's a really essential one and the only thing I could say I would urge investors um again to look at the Atlanta fed wage tracker, and you can break down the different categories by you know, income level, by hourly versus non hourly workers, and I think what you'll find is we are seeing wage pressure, no doubt, but it is confined mostly to UM you know, the

lower wage tiers of the spectrum. So definitely seen a lot of upside pressure there on wages that is UM that is you know that affects businesses, that affects small and medium sized businesses. Yes, But if you look at the broader wage trends UM. You can look at a median you know, wage growth, it's still running three to four for an um UM. Nothing worrisome in terms of wage price spirals. So I think investors again that we're we're trying to look out a year from now and

and understand where inflation might be. The wage data is not telling us a worrisome longer term story. If you recall the nineties, I'm sure you do write we had five or six percent medium wage growth and we still

had moderate inflation right around two to three. So you can even see wage growth take up from here, which I hope it does, and and still not have a runaway inflation story, which really raises the issue Jeffrey, of how much is being priced in that is that I dread using this word because I will get hate males tag inflation and how much this is just sort of a new reflationary trade that basically have gone past the peak reflation and we're now heading into a normalization. And frankly,

it is choppy with higher prices. It sometimes uh than growth, and and sort of this mismatch in how things come back online. How you distinguish between those two scenarios which are very different, with one not leading to an expansion, the other one leading to an expansion that's just more tempered when you speak with your fellow with your your fellow members of paid and regal. Yeah, I think you're right.

We did see growth peak in the second quarter. We definitely saw slower growth in the US in the third quarter. We've shaved our our GDP estimant for the full year now too. We started at seven point four for we're down to five point five, so we've shaved growth. So growth has sload. Is it stagflation though? I don't think so. I think it's really tough to do this, But there's so much noise right now. Growth slowing to you know, for the year five and a half percent. To me,

that's not stagflation. The reason you have to go back, I think to answer your questions directly, why, what's what's causing this? You know, we think it is pandemic related. We think it is bottlenecks on the supply side that have knocked down our growth estimates, and some of that we will we will get payback on in two we think.

So it's it's not a more you know, worried. Where we would get more worried, I guess on the growth front is if it was demand had swumped off, and that's not really what you know, we think we're seeing here. Demands you know, particularly from sumers and households will remain very very strong, we think um throughout this rest of the year and into two UM. So it's it's not a demand flump type story. It's you know, it sees idiosyncratic supply side things that are holding back growth. So

that that's one part of it. Just discerning okay, what is driving the slowdown that we're seeing. And then the inflation, you know, is inflation and remain elevated um, you know, on a sustain basis more than a couple of quarters. And we think the answer, again, as as I labored already, is no, So we don't. I can't put myself in the stagflation camp quite yet. All right, Jeffrey, I want to ask you you were talking about all the noise

that's out there. There certainly has been a lot of noise down in Washington, d C. I know that's pretty much always the case, but it seems like it's gotten a lot louder as of late. You have the ongoing question mark around the dead ceiling, you have discussions around the infrastructure package really at a stalemate now in October thirty one deadline. How would it change your view on the U. S. Economy if we don't see that trillions

of dollars in longer term economic expending materializing. Well, I think we will get something done. I can't tell you when it's impossible to figure that out, but I don't think it's going to be the three and a half trillion so to the extent it And it does seem, you know, when you look at the headlines and market movements, market is sort of fixated on that three and a half trillion dollar number, and that could disappoint UM some investors if we don't get it, um, you know, I don't.

I don't think we're going to get that that number for us though, the big fiscal pulse already happened. You know, we're already on the other side of it. You look at transfers to households, you can look at you know, quarter over quarter UM those were actually down in the second quarter relative to a year ago because we saw this huge surgeon in spending. Our transfer as the household that's done and for us that that's really the more

critical question. UM. Households. Fortunately, you know, they're they're being you know, they're going back into employment. They still have pretty ample savings, so that will be good. But the big party in terms of the fiscal side, I think it's done. So that's I think something to keep in mind for investors to you know, the death ceiling is important. Well, you know, I guess we're playing, um a game of brinksmanship here and it probably lasts you know, into mid

October membe later. Ultimately, we think that does get resolved, perhaps something similar to what we saw in I think the other Washington story though, is the FED, the FED board, the possible departure of Jerome Powell, and then two other spots that look like they're going to open up, and

that could change, that could change. I think what that gives you is a little a more dubbish FED um And if that's right, that is more important I think for for markets for risk assets than you know, the death ceiling or you know, I hate to say it to my political strategist, but I think that will the FED will ultimately be more important than the size of the fiscal UH build the budget that ultimately ultimately they

get decided on monetary policy for the win. Thank you so much, Jeffrey Cleveland, he's chief a anonymists at Payton and Regal. There is, of course the big elephant in the room for anyone who covers markets right now. It is inflation. What your viewpoint on it will determine much of how you position for it. However, which way is up in the air in terms of depending on who you speak with. We're going to speak right now with Efan Devit, chief investment officer at Monida with twenty seven

point four billion dollars of assets under management. Even before we get into your inflation call, how do you use this to shape what you want to buy. Inflation is something we look at always as a part of the factors that drive where our portfolio should be positioned. Our goal is that our client portfolios should be resilient too

many risks, in particular inflation. So we look at the different components of that portfolios, such as equities and real assets, and want to ensure that we have enough diversification into them, because some have explicit linkage to inflation, such as real assets and real estate, and then some have de fact um positive correlation to inflation, such as equities. Well, let's talk about some of those equities. The NASAC one hundred is now down two percent on the day. We can

maybe attribute some of that too higher yields. How do you think about technology in the place it does or does not have in your portfolio right now? Technology will always be a huge components for our portfolio, particularly because many clients will have exposure to large cap stocks, and quite frankly, the Fangs have really comprised such a large percentage and increasingly large percentage of those large cap portfolios. So it is a lynch pin, and we actually saw

that they performed very well. Obviously, we spoke your earlier guests about to stay at home stocks and how they really were quite resilient throughout the COVID crisis, and any time there's a crisis of confidence, they do seem to rebound. So technology will always have a huge component there. We do let look to have balanced portfolios across the course,

across growth and value. But the fact that with technology and interest rates, if anybody does use a DCS valuation, as interest rates rise, well that will make the future earnings looked up at st and technology. So that seems to be part of the correlation that we're seeing. What do you how do you view the sort of decline that we saw last week that's carrying over to today. Is this the beginning of something bigger or is this a blip that you want to dig in and kind

of start buying. I do think it is not the beginning of something bigger, because what we're seeing is a tremendous amount of assets on the sidelines. They've been sitting there waiting to get exposure to equities. And what we see is at every time there is a correction and equity markets or even just just a blip, as you say, or just crisis of confidence. It doesn't last very long. And that's the real phenomenon of the current cycle, is

that none of these adjustments last for very long. Because there's such a large amount of money on the sidelines looking to go in. Why where do the sentiments dip come from? Certainly there's a lot of backdrop now in terms of both geopolitical concerns we're looking globally, we've seen the specter of a large scale default. There's a political gridlock. Again.

The news on the virus seems to be moderating, and that probably is has not really factored into to send months, but certainly that the tech news you mentioned earlier around Facebook, that is just a reminder of the ability for regulatory twip flash to occur, not just in China, but also here. Well, I'm so glad you brought up China because we continue to watch the evergrand saga unfold day by day by day, and it's that's sprinkling not the only issue you have

to worry about there. You have the ongoing regulatory crackdown, you have a broader slow down and economic growth. How do you think about China right now and the risk that it poses. Certainly we've had to completely rethink how we think about China as a source of risk. There is even a suggestion among some commentators that China has become uninvestable. Such has been the frequency of these negative surprises that we've seen time and time again. It seems

every week there is a negative surprise. What I would say is that China is only going to be a portion of an emerging markets allocation, and even emerging markets is only a portion of a non US allocation. So it really is quite risk controlled within a portfolio. And as for whether that is sustained as that portion, well that really remains to be seen. Certainly, the risk reward has changed dramatically, and what we can see for China is just as it was first in and first as

of the pandemic. It can certainly be a harbinger for the concerns that would perhaps be more global and the ever ground is a great example. And then some traders in this market have never seen at any kind of a large scale default of that nature. The last time we saw it was an O eight, and many people's

whole careers have been built in so eight. So that simply is a reminder of just the specter of a large scale default, what it can look like, and how it can it can ripple through the system, not just for other real estate developers, but for banks financial institutions as well. It is a salutary reminder, I believe, of some of the risks that can actually be there bubbling

onto the surface. Are you more concerned about the financial risk here or the economic risk of a slowdown in China percolating through the entire ecosystem, through the supply chain disruptions and other sort of transmissions that are more insidious and slow moving. Certainly, I would say that the impact of a slowdown a it's going to be less felt over here. The US has been the engine of developed market markets for some time, and I don't see a

slow down in China as really having tremendous round applications. Here, We've already had a significant change in the trade conditions, and that is it's likely to persist. So I don't see that the US is particularly dependent on China. But certainly China does affect the fortunes of the surrounding emerging markets, and for that reason, any slow down there would just be poor for global growth alright. Efan devit Cio of Monetta giving us her market outlook and her take on

inflation at least of the China story. Getting a little bit more interested today when you talk about the trade narrative that even just brought up. We obviously got some harsher words out of the Biden administration. We're waiting for the US trade representative to speak, uh later on today, but basically saying they're not holding up their end of the bargain when it comes to be as one deal. And right now we are looking at markets that are

going deeper into the red. And just now, Gayley is you just pointed out a headline crossing the New York City says that end of school staff is vaccinated following the mandate that went to effect today. The teachers had to be at least have gotten their first shot, otherwise they could be put on leave, and they're saying that they've got in compliance. Interesting to see, really, you know,

being sort of on the precipice of this debate of mandates. Yeah, absolutely, and you're seeing it play out so differently in different states and different sectors where there have been more legal challenges to this. But it's pretty remarkable the jump we have seen in vaccination rates as soon as a mandate goes into place. Some of the hospital systems had vaccination rates around and now they're also in the nineties as well,

now that you've put people's jobs on the line. So it is something that is working, even for all of the debate that's around it. And this really translates into just where we are and coming out of the pandemic and how this translates to a market call as we do seem to be on the downward swing in the

number of cases and hospitalizations. Ryan Jacob has to evaluate this along with the FED, along with debt ceiling debate, along with all of the mess uh in Washington, d C. And beyond all the way to China, a c i O of the Jacob Internet Fund talking here with us. And the reason Ryan why I say that is because you kind of have to dovetail a rates call a global macroeconomic picture with your view on tech. More than ever, how do you sort of gauge this connection between rates

and the tech sector. Well, I do think we're a bit in the minority and that we're not that concerned about higher rates for our particular portfolios. Whether it's the et F of the mutual funds because we tend to

focus on smaller MidCap tech companies. UH. In terms of the large higher interest rates, we're really seeing more of an impact on the large and mega cab technology companies that quite frankly, we'll have more difficult time overcoming the headwind of higher rates in terms of revenue and earnings growth more of the companies We focus on our higher growth companies and should be about to overcome it. Basically, Well, there's the rates headwind. There's also a China headwind for technology.

Ryan and I was looking through some of the holdings of your fun and saw that Ali Baba Intencent are in there. How worried are you about that crackdown that's happening in China. Does that make you want to rethink some of those holdings. Well, we have been shareholders in Chinese companies for over fifteen years now, so we've seen a lot of highs and lows. Admittedly, this is probably one of the low points that we've seen in terms of um, you know, what's happening in China and the

ramifications for these companies. H And admittedly we had cut back our positions considerably. They're probably two of our smallest positions at this point, um, and quite frankly, until conditions improve or we see it, uh, you know, I doubt

will increase our allocations. What type of technology companies are you seeing as the greatest opportunity at a time when we already have priced in some of the shift to working from home, where we already have priced in some of the Internet prowess of the likes of Google and Facebook and sort of the dominance that they have, are what types of tech should we be looking for? Well,

that is the biggest challenge this year. Which companies can build on the success of last year, uh, and which companies will have a fall offer kind of come off a bit of a sugar high in terms of the impact of their business. And so the companies we're focusing on are the ones where broader adoption has been accomplished and now we've see an acceleration and that's that's what we've seen across our portfolio. So, um, you know, there's a host of names that really fall in that category,

but it's a very very tricky environment. Well, give us some of those names, Ryan, Can you get specific which companies in particular, are most fascinating to you right now? Well, you know one of the companies, it's one of our larger positions. Optimized r X basically has electronic health record, advertising and communication services. So this is something that the

drug companies were very interested in pre COVID. Once COVID hit and sales reps could no longer go out no more industry conferences or events, they allocated more money to digital and across different platforms. Optimized benefited from that, and then I think when a lot of the drug companies realized the returns they were getting from these investments. Uh, they've been basically accelerating ever since, even even with the prospect of going back to more traditional methods to advertise

their products. UM and optimizes seeing that the bump last year and now an acceleration in their pipeline this year, Ryan, before I let you go, when you take a step back, everyone wants to be a tech company. McDonald's wants to be a tech company. Who doesn't want to say that they are on the cutting edge of what's next. How do you parse out what actually fits with your band aid? It's a great question, um, because every company incorporates tech and it's it's very it's not an experimental part of

their budget. It's poor to what they do. So um, it's becoming harder and harder. The fund is the Jacob Internet Fund, the mutual fund, but now every you know that was launched over twenty years ago and things have changed and involved and h it is a constant challenge. It actually widens the investment universe for us. So actually in some ways it's been helpful. Alright, Ryan Jacob ce io of the Jacob Internet Fund talking to us about

all things technology, Thank you so much. Kind of right now, I want to shift to one area that has been hot, and that has been commodities. And the interesting thing is that we have seen stock sell off, we've seen bond sell off in the past month. The one outlier has been oil. What has not been an outlier gold. It still is not acting materially as a hedge. Perhaps it's up a little bit today, but in general has not. What gives when can this act as a traditional hedge

against volatility? Ashraf Rizve probably is wondering at the same thing and probably has an answer, Chief executive officer and founder of Gilded, joining us here in h New York right now, Ashrof, can you give us a sense of the dynamic behind gold and why it hasn't benefited from the risk off feel in both stocks and bonds over the past month. Sure, thanks for having me on the program. UM. I think gold is is caught in this UM comparison

of is it inflation? UM. I think most people believe that we are seeing inflation, whether it's transitory or not. UM the impact of potentially real interest rates going up with the taper UM. Physical demand of course has been increasing, but the dollar has been strengthening as well. So the combination of these four factors it's kind of gotten golden a bit of a quagmire where it can't decide whether

it's really going up or down. That being said, I think we know that historically it has over long periods of time done very well UM, whether it's an inflation environment or in a even in a deflation environment, particularly now that we're suffering through this UH significant increase in debt that's happening all across the world by governments. So you see a case for holding gold here at least in the long or term. How does what you do it guild in it guilded enable people to own gold. Yeah,

that's a great question. I think the key here is that gold has as an asset class been difficult to homee. So what we've really focused on is how can we make physical gold ownership functional? And so that really means

making it digital, mobile, and usable. So let's leverage twenty one century technology, a smartphone, a mobile mobile device, a mobile app, and blockchain to be able to provide that physical ownership direct to you in a nice easy way where you can be the direct owner of the property rather than a fractional banking system where it's an IOU where you can leverage it to be able to do things like not only buy and sell, but even in certain countries, were already able to send or gift and

and then be able to do other things for example or ultimately a return or be able to borrow lend against it as well. Sure, if how much is this?

If you can't beat them, join them? Basically people saying that bitcoin was taking over for gold because people didn't want to have to store the thing and they wanted to have some sort of store of value, how much is it saying Okay, we get that, we get that all right, But well, we'll give you the benefits of that, but we'll give you the absolute reality of gold, which is, you know, last of the test of time. Yeah. I

think it's a great question. Um. Ease of use is always paramount, and I believe that one of the things that's happened with digital assets is they have made it easier for people to access. Physical gold has been hard for people to access, and so I think we're making it easier by making a digital mobile and usable. And most importantly, perhaps is that that marketplace is huge. It's a twelve trillion dollar marketplace, probably the single most widely

held asset in the world. Billions of people own it, most every major central bank does. So it's really time to bring it into the twenty first century rather than just being what a lot of people have claimed, which is that it's a it's a very expensive paperweight. But by baking it making it twenty century, we can make

it usable for everyone and very functional. Yeah. You know, Astrov, a lot of bitcoin bowls call bitcoin digital gold, but you are actually literally doing digital gold over at Guilden. That is Ashraf Risbee. He is the CEO and founder of Gilded talking to us about gold, which, yes, Lisa, she's smiling of a really expensive paperweight. We now don't have paper to even wait down because everything is digital anyway. I mean, it just sort of talks about the other era. Yeah,

who even needs pens anymore. It's a brave new world where people don't need gold to hedge against anything. Gold, though, is getting a little bit of a bit to day on a day when the markets are down. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller, I'm on Twitter at Matt Miller three, and I'm fall Sweeney. I'm on Twitter at

pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.