A Deep Dive Into The Markets, Inflation Outlook

New York. Kat, I love to start with earnings. You know, we've had some good tech earnings. We had some We started off the season with good bank earnings UM away through the SMP five hundred. In terms of reporting, they seem pretty good to me. Are are they enough to support this market and the folks that raise the valuation concern? So far, so good, Paul, I mean, I do think earnings across industries have come in uh stronger than analysts had anticipated um on a relative basis and on an

absolute basis, just really strong. You have strong earnings from industrial companies and banks tech as you suggest, So yes, these earnings are good enough to support markets here at even these high valuations um And as we know, and I know you've mentioned this before as well, valuations are a pretty poor market timing tool over a short term period.

So even though valuations are a relatively high today, it really doesn't provide a useful inforcation for investors who are trying to guess what they're going to do over the next six or twelve months. Katie. I fully understand that the earning story is looking pretty good, and that kind of feeds into a bullish narrative. But then I think about risks out there, and I can think of many. I can think of policy normalization on the behalf of

monetary policy and fiscal policy. You have COVID risks still out there, inflation and never present fear in these markets. Why are earnings enough to offset all of that? Well, the fundamental backdrop is really strong, Kaylee, and I think that's really what investors are buying into right We're buying these robust, resilient company earnings and cash flows. But I do think you raise some really good issues. Probably the biggest risk for investors right now is inflation, um how

persistent for how long? And maybe more important than that question is what will the FED do about it? And I think that's where we sort of differ with the market narrative UM on on that score, because our view is inflation is going to be transitory for longer. I know, that's sort of become the phrase djure um. We do think we're going to have you know, higher than than than UM target inflation probably for the next six months or so UM. But but after that point, we think

we're going to normalize. I mean, at a certain point the supply chain disruptions are going to ease, and at the same time demand is also going to be easy. As we get into two. You referenced sort of the fiscal issue. Um. Not that there's necessarily a household fiscal cliff coming, but we certainly see on a relative basis, you know, far less fiscal stimulus in the system in two relative demanding just as a line is really coming on stream, and I think that will ease the inflationary concerns.

And in the meantime, we don't think the FED is going to react. See that the market is pricing in a couple of FED hikes in two, and we think that's really overdoing it. Alright, So the FED is doing its job, Katie, how about our friends in Congress? How concerned are you are? How concerns tould the market be with you know, the various pieces of legislation winding the way through Congress. Is it simple enough to say, at the end of the day, they'll get something done. I

think they will get something done, Paul. We're looking at you know, one point five to one point seven five trillion, which is significant. UM. So we do think that they'll get something done. And you know, the pay for is now. The good news for investors is it doesn't seem as if we're going to get a wholesale increase in the in the corporate tax rate um from one to twenty five or even we might have this fift minimum tax, which seems very manageable. UM. It's something that would obviously

hit the tech sector harder than most um. But it does seem like it's a it's a more manageable uh hit. If you will for for corporate earnings to take then it would this wholesale increase in the corporate tax rate. So yeah, we'll get something. UM. I think the market will probably have no real reaction to it because the pay fors are are so far diluted from what we had feared actually coming into this. So it's that kind

of policy backdrop, Katie. And given the earning story, is the US still where you want to be putting your money? Are you looking toward other regions? So we have been looking um inside the US Europe in particular, Katy, because we do think the valuation story is a little bit stronger there and that's where you really get the bank for the buck in terms of the global economic rebound.

And what we see is we're sort of seeing another another second wind for the for the global economy, now that the delta wave has has really been suppressed across much of the world. We're seeing another sort of mini reopening trade and that really favors UM areas of the world like Europe that are exporters that really have that leverage UM and have more cyclical exposure in their benchmark. So we like Europe, but of course we we do like the US. I mean, the earning story here is

super strong. Uh. The incredible resilience that we see across companies UM we think is going to continue into two and we think we're gonna have a pretty good year for earnings next year. As well here in the US, Katie, I'm looking at w T I crewded Northern any dollars to share any dollars in barrel. Did I miss the

energy trade here? Well, I mean there's going to be support here for higher energy prices for sure, as we see demand continuing to be pretty robust, and we are all very well aware of some of the supply constraints. So we think energy and energy stocks in particular can stay pretty strong here into this uh into this second

wind economic rebound um. But I think from an investor perspective, it's also important to note that you know, we're far less energy intensive than we have been in the past, So those who fear that sort of energy inflation will undermine the global economic recovery, I think are missing that really important component. Katie, thank you so much for joining us. We really appreciate your thoughts, your perspective on these markets as we make a way through the busy part of

third quarter earning season. Katie Nixon, chief investment officer in Northern Trust Wealth Management, joining us on the phone from Ryan in New York. Katie, this morning on Bloomber Experience, we had Doug cass On Seabreeze Partners, and he's been notably barish, and he came out with a note today saying I've been wrong. My good friend Tom Lee has been right to be bullish. But here's my wall of worry and it's kind of all the things kind of we we know about, and he says, at some point

that's gonna get this market. Let's check in with another voice here, Ross Mayfield, Investment Strategy analyst at bat Ross. Where do you come down on that? I mean, that wall of worry issues and we're all aware to whether it's inflation or stagflation, whether it's supply chain woes and so on. There's a lot of stuff out there for this market to be concerned about, yet we grind higher.

How do you view the market? I care? Yeah, well, I think first and foremost, you know, a wall of worry and investor sentiment being you know, actually quite negative despite the all time eyes is a is a positive from a contrarian perspective. I mean it was earlier in the year where um, you know, enthusiasm and euphoria and everybody's you know, retail creating, and that is that is pulled back so um with investor sentiment fairly negative and

consumer sentiment kind of middling. We gotta beat the other day, but it's it's still down. Um. We we think from a contraying perspective, that's good for the market, uh, the near term performance. And then more broadly, I mean we we remained bullish. I think there is a cocktail of of risks and and you know, headline risks, headwinds that

that you can count towards. But you know, the couple of legs that the market stands on as far as the bull case in corporate earnings, which you're seeing, you know, tremendous resilience and strength. They're a very strong consumer picture. And then still accommodative policy. I mean it's coming, you know, it's it's definitely less accomminative than it was, but still you know versus history, still still quite easy policy. Uy. So there's a lot to like about the market as well.

On the subject of easy policy, though, Bank of Canada one example today outlining the path for quicker tightening than expected in the face of inflation. We see the BOE moving in that direction as well. The Fed is trying its best to be patient, but can you foresee a scenario where it gets so uncomfortable with inflation it's forced to make a mistake. I can't see that scenario. If I were talking about the risk that I were worried about, that would be you know, near to top of the

of the page. Um. I'm not worried about papering. I think, you know, that's a policy meant for kind of extraordinary circumstances, and we're certainly through that. So I think papering makes a lot of sense. Now. I think that the speed and paste, you know, it's kind of irrelevant at this point, since they've done such a good job telegraphing it to the market. But I am a little concerned that they

will start to get itchy on their new inflation policy. Um, and Titan tightens too aggressively, pulled forward a rate hike or two in it's not a problem immediately, um, I mean, the first few ray hikes are never usually you know, big, big scary items for the market. But it pulls forward the whole timeline and eventually, you know, the Fed has kind of a history of tightening us into you know, either a market panic or recession or at least economic weakness.

So I can't see that scenario. I hope that inflation of bates to the point where they're a little more comfortable riding it out. And they have done a good job of trying to separate papering and tightening in the mind of investors. But it's a concern. Russ UM. A lot of folks, uh thinking about how they want to play this market, how they want to be in this market,

how where they want to be overweight this market. A couple of camps out there, one being I guess, you know, I'm sticking with the tried and true great growth stories. We saw some pretty good tech earnings this past week. Others just say no, that cyclical trade, um, the reopening trade. Maybe banks on the steepening yield curve, maybe some energy here. How do you think about that? Yeah, I mean if it forced into one camp the near term, you know,

we remain pretty positive on the cyclical trade. So we'd liked financials for a while now. I do think the earnings are quite supportive. A lot of different factors of the businesses that big banks are doing really well, you know, you know, making M and a um, wealth management, you know, just your classic bank activity with keeping yield care about you. Note. Um, With that said, I think there's plenty room the portfolio

for longer term secular growth stories as well. I mean really, at this point, um, you know, the only place that I wouldn't want to be is getting hyper defensive. I mean, you know, I kind of outlined our goal case at the beginning, but things like staples, um, which which not only are they you know, rate sensitive and defensive and uh an early cycle market. But well we'll first challenges

with input costs and rising wages. UM, things like utilities, which are which are hyper rate sensitive as well, so we we expect rates to continue to move higher a little bit from here. But I think there's room for both of those trades in the portfolio, you know, force to choose one. We like cyclicals. Ross. Before we let you go, I just want to get your thoughts on inflation, because you can pick your prefects. Deflation, stagflation, hyper inflation.

Do any of them sound right in this environment? Or any of them an accurate description? I think just good old, tried and true inflation is probably good. I mean, hyper enough strikes ascessilly, Um, that that's that happens when collapse. Um, that's not something we're experiencing here. Deflation and disinflation are I think, longer term still possibilities. There are a lot of structural forces out there that um have caused those

phenomenons in the last couple of decades, UM. But for now this is just some some some pretty classic inflation. Too much money chasing too few goods, and the economy and companies are working on it. So um. You know, it's kind of a weird environment, but I think it's the inflation will eventually a bit maybe settle in a

little higher than the last decade. But think about Ross, thanks so much for joining us, really for ship you're taking the time there, Ross Mayfield, investment strategist for Bared. Looking at this market here again, you know, kind of mixed. I got the SMP essentially unchanged a little about two tenths lower on the DAB, but we've got a little bit of strength on NASTAC, most likely reflecting some of the good numbers we saw from some of the big tech names over the past a couple of days. And

getting Microsoft numbers really really jumped out at me. Some some really strong top line margin, imperiment, free cash flow, the cloud really the story there at Microsoft. Well, as we get our way through this third quarter earning season, generally the numbers are coming in quite quite good. The question is is it enough to satisfy those folks in the marketplace that do have concerns about evaluations in this marketplace.

Let's check into with a professional on that topic. Another Sylvia Jablonski, chief investment officer for Defiance et S. So, Sylvia, again, some earnings have been coming through this week Big Tech, some pretty good numbers. How are you view in this third earnings period and is it enough for you to support of the valuations we're seeing out there in the market. High, Good morning. Well, I think that what the market is

doing is somewhat what I expected. You know, we had a whole year worth of conversations around fear of inflation and you know, sort of fear of COVID coming back into the market and impacting stocks and um, you know, sort of fear of recession and pull back. But what we've actually seen is that, you know, a lot of companies are proving that they really are quality companies and

they're exceeding not only meeting, but exceeding earnings expectations. So we haven't had a whole lot of names report just yet, but we still have a number which is pretty high, eighty five percent of them or beating expectations. So even you have, even though you have these supply chain issues, UM, a lot of these companies are sort of proving that they can pass that costs onto the consumer. And you know, in terms of valuations, I think that again it's it's

the earning story, right. Earnings have delivered and they've exceeded at expectations. Were also in a seasonally strong period now, so we're past that September of folatility number. Um, there's loads of liquidity in the market, over two trillion dollars. You know, half of essentially half of GDP is sitting

in is liquidity right now. Um. Race may rise in the long term, but I think that will be because we're going to see better growth and the economic recovery and the biggest part of the economy, to consumer is

doing quite well. So UM. You know, we keep talking about the high demands right now and the supply issues, but I just think that these companies that are reporting now, especially the sort of the large cup companies that make up the top percentage of the SEC five hundred are going to continue to outperform and and we'll see positive

margins coming in. Well, let's talk about those companies, Sylvia. Obviously, growth was not the name of the game coming into the year, and yet it has outperformed value more often than I think many people expect. It seems that we've kind of gotten out of that conversation on value versus growth, cyclicals versus defensives. How do you kind to think about the baskets in which we put equities and which ones

you think will outperform? Yeah, great question, And I think it's interesting because I'm just not a big I don't trade that way. Um. So, so what I look at actually is is quality companies. You know companies. Look for quality companies that have strong balance sheets, that have you know, future earning potential that you know will not be impacted um with some of the inflation reads or will not be impacted with you know, sort of the modest growth

in rates that we expect to come over time. And the companies are the ones, some of the ones that have reported last night. Um, you know Microsoft and Alpha that are two great examples. I mean, these are cash

heavy companies. They're doing things like UM increasing the amount of buy back, they're increasing the amount of dividence that they pay out there, they have sort of loads of cash, and they're also just thinking about a different type of future, so they're investing in you know, disruptive technologies like the cloud, like AI, you know, virtual reality, the augmented reality UM. So, so I think that they're well positioned to do well

for the next decade or so. And then you know, on the other side of it, well, you know, banks will benefit if interest rates UM go up, and they sort of have weathered COVID well and and have proven that they're sort of you know, stable and and and cash heavy too. So UM diversified portpoleio makes sense right now.

But I still really like those growth names, and I've been actually pretty excited about UM the pull backs on on on the names earlier in the year, as you mentioned, when they weren't outperforming value ship gears a little bit. So yeah, I want to take advantage of your expertise and E T S and crypto because we have crypto E T F B I T O can just give us your thoughts here we have bitcoin trading off of some recent highs here today off about five percent pretty sharply.

Just give us your overview today crypto, the e t F of crypto, give us your thoughts. We'd appreciate that. Sure. So, UM, first of all, I get excited when I see pullbox in crypto because the camp of it's going to do longer thousand and that's going to happen sooner than later. UM steel the same way about ETHEREUM. I think in the next year or two we're there. I don't think it's a five year trade. Yeah. And I think, you know, they're sort of various reasons for that. You have countries

like Al Salvador adopting it. You have you know, companies sort of using it now as a currency to buy and sell. Um. Crypto is going to be part of this massive movement in n f T S which is

just sort of take slowly taking over the universe. We don't talk about it enough, but UM, you're gonna have crypto, which is which is right now the only way to pay for for n f T S or one are the main ways to pay for n f T s. UM, and I think that you have UM, you know, you have the ability to now trade them or or or get exposure to them through an e t F to a mutual fund through a trust. So um, you know, marketmakers are going up to buy more to hedge that exposure.

Uh So I'm very bullish on crypto, particularly you know, bitcoin and thee UM n F t S. But to answer your shin a little more directly about the e t F UM, you know, I think it's great. I think it's great for particularly for advisors that don't have a vehicle UM where you know, by which they can get exposure to bitcoin. Um. You know, if you ask me like, what is the best way to invest in crypto, I think it's to to get exposure to the actual physical asset. I think it's it's worth just buying it

and storing in a digital wallet. But not everyone is sort of savvy enough to do that, or or perhaps uncomfortable with with doing that UM or perhaps just unable to do that based on firm restrictions and things like that. So I just think it's awesome to have these different options to get access to bitcoins, physical trust and now e t S. It's it's great for great story for investors. Sovia, thank you so much for joining us. We really appreciate it.

Sovia Trablanski, chief investment officer for Defiance et s. One of the problems of getting bitcoiners if you get the code, you can for you and that is a problem for some people. We'll have more coming up. This is Bloomberg. Wait. When I was at Research Channelist, I would darken the door of tc W a couple of times a year when I was out in l A to check in with my UH analyst kind part out there and talk about some ideas. That was equities. Equities are much more

fun than fixed income. But we'll check in with Lard Landman today. He's co director of Fixing Come for t c W based in l A. Uh Lard Fixing Come is a tough place to make a buck these days. I'm looking at the ten year at you know, one point five seven. What are you guys doing? Yeah, it is it is not the exciting place that has been Um.

It is a bastion of stability. You know, we see problems in the the property sectors, controversy about fiscal stimulus, and you look at spreads and you know it was eight over at the end of June for investment gradity over now, um, you maybe get a basis point or two of widening hero there, but it has been uh, incredibly over liquefied, we would say, Um, but we have seen you know, obviously the market is moving ahead of

the fed. Here. We've tightened since the beginning of the year a good sixty five basis points just through the market and the belly of the curve, you know, more like eighty. So markets are beginning to price rice action in. Well, let's talk about the yield curve, because we're sub eighty basis points on the five thirties curve. I mean, that's the flattest going back since April. Can that flattening persist or is the market starting to overdo it a little bit?

Probably in the interim it's slightly overdone, I would say, but obviously depending on what happens on the fiscal side, which is really the interesting story in our opinion. Um, there's still a lot of money to be spent that was authorized last year, how it's spent and when it's spent. You know, the states and the cities that got money have spent very little of that. If you put more fiscal stimulus on top of that, I mean, I don't

don't think there's any doubt that. You know, Carl Smith's piece this morning on Bloomberg was right on about the fact that this pushing inflation that you see in the US, it's greater than other countries, is not just a supply story. It's not just you know, the ports are involved. Obviously there are supply chain issues, but a lot of it's excess demand that has been placed in our economy versus others. You look at our curve versus the euro curve, it's

a really very different story. Our curve looks like it's supposed to be flat around you know, to a little bit, a little bit above two percent. Uh. The euro curve looks like it's gonna flatten according to the markets, you know, around fifty basis points in the next five years. So um, there is a lot priced in. I do think that if there is more fiscal stimulus, you do see the FED eventually try to move here um, and as they move, the curve could again overestimate the ability of the FED

to titan. We don't think it's that great, we don't think it's that big a threat, but it's one of your high yield portfolio managers, and I walk into your office and I say I want to push the envelope on yield and return. How how far will you let me go in terms of you know, ratings and things like that. Well, I think the thing about TCW's approaches that we've always believed that you have to have sort

of a macro risk management overway. And I think our macro risk management approach looks at where things are now, and again, the stock markets could run a lot more stocks you know, can go to the moon. As you know, if you look if you take your Bloomberg out and you do your your chart of high yield spreads, what you'll see is they mean revert and that two D and eight over is pretty close where it is today,

uh to where where it stops getting any tighter. So I let you push it in terms of maybe adding yield to the portfolio, but not spread duration. I don't want to get in a situation where it spreads widen a hundred or two hundred basis points. I'm looking at eight or ten percent losses on that portfolio. That's what we have to protect the client against, and that's sort of the job of the macro call at TCW. Well, but to your point, I mean some three basis points.

Those are remarkably tight spreads. Do you think the appetite for credit risk can continue in this really cheap borrowing costs for even kind of junkraded companies, they're going to be able to continue to borrow easily and cheaply. Well,

I think that. I don't think it lass indefinitely. Um, it could when you look at sort of the amount of demand that's been stimulated in the US and how liquid the markets are and how much liquidity the FETE is put in until they begin to withdraw that liquidity, which of course could be as soon as you know, next month, um, when they probably announced the taper. Until that's withdrawn, it's hard to know. Um, But certainly this

could persist for a while. And I think what you have to do as a manager in high yield or in any space, we have to make sure that we're capturing some yield in the portfolio without going you to the zombie companies that today look healthy because basically there's such huge demand pull. But in a recession, basically these are companies that can't make it and they don't have assets.

And so as the more we overstimulate, the more UH inventory of companies like that builds up and in the high old market and then you run into problems and so we really have to watch that. Hey, Lard, thanks so much for joining us. Really appreciate it, Lard Landman,

he's co director of Fixing come for TCW. They have two sixty five billion dollars in assets on the management based in l A. And again, Kelly, when you went out there as an analyst, you had to get a tc W meeting, and you had to get a meeting a capital group. Those are the big dogs and then you can build everything else around it. But it's amazing, Uh, you know, the you know tc W and the fixing comes Oude really for a couple of years now been

very cautious, uh in their view of the marketplace. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever pod cast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio