A Deep Dive Into Rates, Markets, The Economy

Charlie is just reporting one point four eight percent. We did test one point five one in the thirty year we are at a two point zero four percent. We're just about two percent right now. Um, what's that mean? What's that telling us? Here? Let's bring in Tom Purcelly, chief US economists for OURBC Capital Markets. Tom, thanks so much for joining us here. We've seen rates move up pretty significantly, just by relative standards over the last couple of years, just in the last a couple of days here.

What do you take away from it? Yeah, I mean, look, I think that, um, you know, the move higher makes sense. Um that the tomming may not. You know, this all happened to day's after the the FOMC meeting but UM no, I think we're moving um sort of directionally. I think that this is all pretty consistent with you know, the idea that look, um, you know, we're moving away or going to be moving away from, you know, emergency levels

of accommodation. And I mean I think that is um, you know, where we are from an economic backdrop perspective, UM growth is. You know. It's funny. So so let me freeing the conversation this way, because I think this is a really important UM idea for for people to keep in mind. You know, when when you think about the last hiking cycle, um, you know, the one that the FED started back in Uh, you know, the FET had the luxury of of going really slow, right, you know,

we had the jobless recovery. UM, you know output you know I E G d P. You know, didn't get back um to the sort of the pre GFC level the Great Financial Crisis, the pre GFC level of growth. For it, it took like a decade. I mean, you know, the unemployment was elevated for years. Um, none of that's happened now, you know. Now it's taken eighteen months for us to basically get back to where we were pre pandemic level of output for the unemployment rate to you know,

really show meaningful improvement. So I think that this is all going to be much more accelerated relative particularly relative to what we saw after the GFC. Well to that point, Tom, with kind of the trajectory that the FED has outlined here a taper announcement likely in November, and then rate liftoff possibly in even with that timeline, do they risk

being too far behind the curve? I mean, look, you know so uh you know this is the should verse would part right, And I learned long ago, um that I'm always supposed to forecast, but the FED will do nobody I think they should do. Do I think the FED should have started this process um months ago. Yeah,

I do. And I think the people that know our research well know that you know, we've that that that's the sort of the side of them, the the this equation that we will come down on the FED was supposed to start this much sooner, but again we were also acutely aware, um that that's probably not what they were going to do. So I think this is all pretty much in keeping with what Powell has um laid out in terms of the sort of the you know, starting this process in a very slow, methodical fashion. UM.

I think it's all in keeping with with what Powell wanted. UM, But I again I would hasten to add UM. Just keep in mind, one day pal said they were not going to taper, and you know, the next week they said, we're going to tape it. Right, And it's the same thing is going to happen from a rate hike perspective, I mean, palatine the same thing right now, we're knock going to hike rates, but it'll it'll evolve in the

same way. And so twenty two for us, UM. You know, again I think that they should at least give us one hike. I mean again, now the median has shifted for a hike. But again, just keep in mind something. If you look at their their twenty two unemployment rate forecast, UM, it's about three point eight percent. That's not very different

than where we were pre pandemic. And in mind where we were pre pandemic from a funds perspective, we're to fifty, right, So two fifty then equated um to uh, you know, or it was roughly equivalent to an unemployment rate that was you know, where they expect it to be in twenty two, but now in twenty two it only equates to one hike. I mean that seems inconsistent to us again the process, and we're not going to beat up on them. I think that they do. I want to

go in a very slow fashion. But I think that there's a very uh, it's very inconsistent. And Tom, we saw in the Fed's release taking down their economic growth forecast yet taking up uh their inflation outlook. Does that suggest stag inflation for this US economy? No, I think you know, I have to be honest. I hate that. I hate this conversation in that um, you know, the stagflation part of the conversation, because I can make I can get on board with deflation part, I can't get

in part board with the stag part. I mean, you know, we're looking at what four or five growth UM next year? Uh? You know that. And by the way, that's our own forecast, which interestingly enough, is an inconsistent with the FED. I mean, I think the FED is around four percent for twenty two, six percent for twenty one UM numbers that are in line with us. What what what stag about that? You're still multiples above potential growth. I mean that I'm a

fader of that. In higher conversation to stag part of it, the flation part of it, I can buy into more. But yeah, and obviously the Fed is looking at the flation part, and then they also have to look at the other part of their dual. Mean that it was

just trying to maximize employment. As we look ahead to the job's report we're getting on October eight than that print for September, I'm wondering what you're expecting to see, given even though additional benefits have started to roll off, you haven't actually seen the corresponding return of people to the labor market. Yeah, so we don't have a Um,

we'll have a forecast for next Friday's Piero report this Thursday. UM, but what I can tell you is, you know, and I have people already asking about it, as you would expect. You know, you know now that the um the kicker has expired. You know, well the generous kicker has expired. Well, Olson, we'll see this, you know, um burst of hiring. No, we we we don't think that that's how it's going to happen. Um, you know, I don't think there's another you know, sort of million plus job print waiting out

there for us. I think it'll be a bit slower than that. Again, you know, is it another two thousand like we saw last month. No, I think I probably will wind up looking a little bit better than that. Again, I got to go through the numbers still, But I

think more importantly, who doesn't matter? Palt basically pulled us already that it's um uh, you know, as long as we see you know, a sort of another decent pay will report, and he already had the two thirty five in hand, so I'm guessing that that sort of would

meet some of the criteria quote unquote decent. Then I think that you know, tapers on and again if their forecast for the end of next year comes into play, that we're back to where we were pre pandemic um and that should be enough for the to to start the process of lifting rights. Is there as we're talking about labor, is there a point where we really need to think about realistically wage inflation? I mean, it's happening, right you know, wage inflation. Wage inflation is upon us

right right now. I think you know, again, most people are aware that you know, eleven million job openings, people having a hard time finding workers. As results, wage pressures are building. But again I would hasten to add, I don't think that that means that that these games that we've seen are going to be sustained. I don't think that they are. Um. I think leisure in hospitality is

sort of a great example of that. Leisure in hospitality is the biggest shortfall in jobs right now, excuse me, And once um, you start to get some of those jobs back, you know, when there's you know, three and four and five people, um applying for a job for a single job, I think that those wage pressures can abate. But again, the benefit has already has already materialized, right. I mean we're now well above where we were a

pre pandemic from a wage pressure perspective. So I think the level of wages is going to matter very much so in the months to come, more so than than the rate, because again I just don't think that that these rates can be maintained. All right, Tom, Hey, we really appreciate getting your thoughts here, Tom. Lots of data, lots of moving parts out there, so it's good to

get your perspective. Tom, Percelly, chief US economists for OURBC Capital Markets, joining us here, and and uh Kaylee, you just reminded as Amazon target cut it Morgan Stanley on impact from rising wages. So yeah, exactly, the cost of labor is going up for a lot of companies. And that's not just a conversation for the FED and wage inflation. That's earnings and what that's going to mean for margins. Yeah,

that's a great point. And so the question is how transitory are some of these factors versus you know, how longer term we'll have more certainly coming up on all of those issues. This is Bloomberg, Good morning. All right, let's bring in Frank Holmes. Frank is the CEO and chief investment officer of US Global Investors. He's also executive chairman of Hive Blockchain Technologies. Joining us on the phone from San Antonio, Texas. Franks, thanks so much for joining

us again here. I want to start with crypto. I just want to get your thoughts because since the last time we chatted, China has taken a decidedly different approach to kind of all things crypto. What's your take, Well, it's it's the leadership actually believes that they allowed under Danks helping capitalism was a transitory phase to the road to social and socialism is all about centralized and control.

And when we're witnessing an attack on all technology, limits on capital returns and capital for risk taking um and so you're seeing that this is now going into crypto because they're coming up with their own digital money and they and they just do not want to have anything to compete with it um and next will be They've been trying to push to compete against the US dollar, but oil nations like Saudi Arabia, so they won't take their currency want dollars. So now they're trying to buy

a lot of gold. You're seeing huge gold movements going to China to try to create legitimacy behind their currency. But they're further along in the path of having their own digital money. But they become a non event. You know, the markets bounced right back. It's been a big boom for America UH in taxes in particular. I know that building one point to gigabytes of UH energy that's stranded from natural gas, which they can turn around to do

bitcoin mining. And you're seeing that more and more people nodes are growing in America, so it's very very positive this shift is happening here. Is that why we've seen the crypto market basically take around trips since that China news came out on Friday. I mean Bitcoin is back around forty dollars like it never even happened, and Ethereum jump twelve from those lows. Yes, you know that's a good, you know, good observation. The same thing out of Europe.

What we noticed is that the number of miners in fact, Etherorium is more decentralized than Bitcoin, because when China came down with the hammer, uh, the mining, the number of miners in the world dropped dramatically. So the difficulty there's

no competition felt greatly. So even though bitcoin felt the thirty thousand, the profit margins we had were growing because there's no competition because it basically it's limited to nine hundred coins a day that you've run and it's a jump ball to see if you can touch that ball, and you got to touch that ball, then you can mind coin. So we're minding close to eight coins a day a bitcoin uh and and that difficulty only helped it.

Now it's been growing slightly because they would shift the Kazakhstan. But the big move has come to the US, and I think that's very positive. Ethereum hardly came off that difficulty. All the gamers in the world when etherium rises, they basically try to turn the machines on. They run up their parents electrical bill and they take that GPU chip they need and they minded an ethereum coin and then

they go off in a holiday. So Frank's I'm wondering, you know that strategy for China here, because you know, if you listen to the bowls of crypto and bitcoin, it's the future, It's the future of decentralized finance. If that is in fact the case, does China not run the risk of just falling behind the global you know, competitive landscape in terms of crypto, absolutely and in other technologies.

To mean it's return to socialism, is a return to trying to drive your car looking out the review mirror um and and there's nothing but guilt and shame and attack, and everyone's looking out the review meer. You can't drive forward. Uh, And so I think it's it's quite dangerous. Well, but for in China also is in the process of rolling out a digital you want, right, So in some way

you could argue maybe they're making space for that. How do you think about kind of government controlled centralized digital currencies versus the crypto world and the likes of bitcoin. It's a complete opposite. And if you notice that the more socialist the country is, the more they are anti gold and they're anti bitcoin. Um, they wish to control everything that has to do with money. Money is basically evil unless the government is in control of it in

every part of it. When you just look around the world for that idealist and that takes place, and that's what happens, and and bitcoin is the opposite. About something else is really important for all your listeners, is bitcoin

validated the blockchain. The blockchain was created by telecom companies to move money in and it wasn't really validated to the Bitcoin came along and showed this triple entry accounting is a major breakthrough, an accounting that hasn't taken place since the Medici's uh they created banking and the Venetians in the four hundreds. So the bottom line is a blockchain is going to grow and the adoption of bitcoin is so decentralized as thirteen thousand nodes around the world.

So we're and and Hive is the first public company to mind mot bitcoin etherory. And we only use green energy, so we're not consumed with these other difficulties some of the other miners have had. All right, Frank, thank you so much for joining us. As always, we appreciate a Franklin CEO and Chief Investment Officer of US Global Investors Mo Hagmen, chief operating officer for Investo Investment Solutions. He joins us to day. They've got their sixth annual Global

Global Factor Investing Study that's released today. We're gonna talk to them all about that. Factor investing has become a big, big way for folks to look at investing in these markets. Well, thanks so much for joining us here. I love to get your thoughts the highlights the takeaways from your Global Factor Investing Study. Thank you for having me. Good morning. Yes, as you mentioned, we released our sixth annual Factor Investing Study today and the study basically interviews two forty or

so institutional and retail investors around the world. Roughly about one trillion in assets by those ascid owners held by those asset owners, and what's interesting is we continue to see no surprise that factor investing continues to gain adoption, both institutionally and more recently in the retail market. And specifically.

What was interesting this year as we saw a lot of rotation within kind of the factor strategy landscape, given kind of the markets and what we saw post the presidential election last year, we've seen a very large shift towards value and more procyclical factors at the expense of defensive and low volatility factors which had been gaining a

lot of traction over the years. Well, and then when we talk about the momentum factor as well, there was a lot of conversation, particularly in kind of the first quarter of the year when we saw that huge rush into value, that value was then the new momentum when it had been growth before. How do you think about the momentum factor now given some of those dynamics. Yeah, it's a very interesting observation. So momentum is a technical factor, so it kind of shape shifts, it actually takes the

characteristics of other factors. And what we have seen over the last twelve months is momentum looks very much like value in size, whereas historically it had been very much growth and kind of low volatility oriented, as the mega cap tech companies were the best price performers. You're absolutely right.

We've seen actually some more concentration within the value and momentum factor, and those two historically have been negatively correlated, but more recently there's a positive correlation between those two factors. So MO would just I'd love to take a step back here. When I was an equity analyst and I'd be walking into a meeting with a fun manager in Boston, my salesperson returned to me and say, Oh, this person

is a growth investor. Or, This fund managers a value investor, isn't So how is that different from this factor investing we talk about. It's really not that different. I think it's very much a different lens of looking at the same thing. I think for a very long period of time, we thought about the world in like the Morning Star style box, where managers really had a discipline whether you're

a value fundamental manager or a growth manager. Factors are actually a very precise way of capturing some of those same outperformance characteristics. We know factors over the very long term have a premier attached to them, very much like asset classes have premiers attached to them, and you're actually able to capture that by focusing in systematic ways on

parts of the equity market. So when you want value, for example, in your portfolio, you look at fundamental metrics such as earnings and revenues and cash flows, and you're looking for cheapness in the market. When you look at momentum, it's a technical factor which really looks at price appreciation over the recent, recent past. So you know, it's not really that much different. I think it's a new lens

of thinking about it. And what we've seen is that adoption is actually moved, as you mentioned, from the equity markets into fixed income. So this this year's factor study was really interesting and that we saw investors looking at fixed income factor strategies as a way to reduce cost and a low yield environment. Well we're talking about fixed income.

I would love to just get your take on the bond market and the action we've seen over the last couple of days post FED decision, this dramatic move upward and yields to test one fifty again. Just do you think the bond market in the equity market are now in sync? What's interesting is you know, we talk a lot about rates, but rates are still historically very low, and I think at this point in the economic cycle, you should actually expect some steeping of the yield curve.

We actually think that's actually quite healthy for the bond market. Although when we look at certain sectors within the equity market, obviously there's going to be more sensitivity to rising rate environment. You know, tech has always been very sensitive to rates, and if you think about what really drives tech valuations,

it's the discount rate and future cash flows. We know, future cash flows are kind of priced for perfection, so any move in rates has a very very big impact on kind of the pricing of those of those particular securities within the market. Alright, So Moe, it looks like a lot of folks are kind of thinking about a re reopening trade here. Uh um, You know, the vaccination

numbers continue to trend in the right direction. You know, how are you thinking about that here as you take a look at the some of the factors that you're hearing from your clients. Sure, so the economic backdrop is still very supportive of risk as sets. Although what I will tell you is that our economic indicators are leading indicators are showing into showing a little bit of softening and growth, and that deceleration is actually noticeable across every

region around the world. That said, investor sentiment and risk appetite in the market has been improving, which we kind of look at as possibly pointing to a rebound in growth as we go into year end. And there's really a couple of reasons that I think that is a very plausible outcome. One, we still have a very accommodative policy backdrop. I know that FED tapering has been a topic, but it has been very well socialized, and I don't actually think the market was surprised by a lot of

that commentary. What we do think is more important, though, is lift off right and if there's any change in that accommodation around rates rising, you know, if it's end of two, that could be very impactful. All Right, we'll keep an eye on that. Mo hag been chief operating officer for invest Go Investment Solutions giving us his thoughts on these markets. End factor investing more coming up this

is Bloomberg. We'll talk about our performance. We're starting to get some of the big universities endowments they're reporting their fiscal their returns for their fiscal year ended June. Boys some big, big numbers and again kind of the pandemic impacting the returns given the timing there, but still some pretty solid fort returns. And I see my boys down at Duke University, Neil Triplet from the Duke University Management Company six percent return. So I will buy Neil a

beverage of his choice when I see him soon. Down in Derham. Janet Lawn, higher education finance reporter for Bloomberg News, joins us on the phone. Janet universities endowments are putting up just some stellar numbers in this most recent fiscal year. Yes, it's really once in a generation that you're seeing some of these members. We reported wash you last week and they added, are you sitting down six billion dollars value what the go into unless they made that money in

twelve months? And only about two dozen universities even have at least six billion dollars. So it's it's really been, as I said, once in a generation, are you going to see these kinds of returns? And it's really coming from two ends. One is, you know, you look at how global equities performed during the year. You know, the U S stock market alone was up forty one percent during that time period. So if you had a nice allocation to certain global equities, UM, that certainly helped you.

And even if you're going to see the smallest endowments that invested in US equities UM will have some nice returns where typically they're not able to capture what the big ease have done. But you're also going to see it from the venture capital side. So you know, two ways to get these crazy returns this year. Plus you know, if you are lucky to have a really robust and the right venture in your portfolio, you know you're seeing

these super duper outside return Yeah. I saw a data point that broadly high our education institutions are on track for their best return since nineteen eight six. I mean we're talking decades here, And to Paul's point, how do they put it to work? What do they do with all this money? Well that's a really good question and that UM colleges are going to be having to answer that. You know, as they're posting the returns. This is all very new. In the last week. We've just been getting

these numbers UM. But you know we've already heard um. You know, the endowment test which many of these schools are are paying UM likely is going to be UM uh, not necessarily rescinded, but that that what's on the table is if schools are going to give money towards financial aid. So I think you're going to see that pressure, you know, having to increase scholarships. You know, do they what else

do they do with this money? You know? Of course their position is we can't spend it all because we have to be fair to the current students as well as the future students. So it's it's a really good

question what are they going to do with it? So Jen, give us a sense of the strategies here, because we know a lot of these endowments, and I'm thinking about Yale in particular, a couple of decades ago really embraced alternative investments UM and successfully so so it's kind of become the Yale method, if you will, of managing endowments. How big has alternative investment has been to to some

of these returns well quite quite a bit UM. And if you look at Yale, which we haven't seen when they announced their new UM chief investment officers since David Swinton passed away earlier this year. Um he there was a note in there that he manages the venture capital portfolio, and the venture capital portfolio at Yale alone is over. So you know, you get a sense of how big

alternatives are. Um in a place like Yale. You know, they haven't directly invested in U S equities in decades, um So among the biggest colleges, they're you know, they're not holding US equities, but you know they maybe had that exposure through a hedge phone or through global that's putty fun um so. But but largely um you know, in alternatives have been where they've seen a lot of

their outside returns. Yeah. Very interesting and uh that's a certain level of risk into these endowments that they historically did not have. And so that's one of the challenges for these endowments is to manage that risk. But it's certainly paid off this year. Janet Lauren, thank you so much for joining us. Really fascinating story unfolding as we get more and more of these universities reporting their endowment

returns for the fiscal year ended in in June. Janet Lauren, higher education reporter for Bloomberg News, joining us on the phone here and again, I will just point out, for those that weren't listening earlier, duke fifty six percent return, and I know it easily beats our friends down in Philadelphia at University of Pennsylvania who also had some pretty good numbers up forty one percent. 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 nine seventy three. Pet On Ball Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radient m