A Look At Markets, Inflation, And Bank Earnings

Northwestern Mutual Wealth Management. They got two five billion dollars in retail assets under management. Brent, I love the way you guys have been writing about UM the market about investors by dividing them into three camps. You've got the too much camp worried about UM you know this inflationary boom, the two little camp worried that I guess growth has peaked. And then the too expensive camp UM that is concerned

about valuations. Let's start there, because we're so deep into the e UH season right now of the pe what's your view on the value of the market. Well, to me, value is a relative term, and so it's not an absolute call. And so yes, stocks are more expensive, But when you look at it compared to the alternatives the tenure treagury, for example, at one fifty and change, they

still look cheap. In the nineteen twenty Times earnings does not appear to be overly expensive, just given us back drop, and I do think there aren't areas of the market that are cheaper and they're going to benefit from still strong economic growth. Things like small camps, things like value stocks. I think those areas will do well in the coming

quarters as economic growth remains strong. So print does that suggests that you're perhaps a little bit overweight those types of reopening trades or cyclical trades, and perhaps a little bit underweight some of the more growthy technical areas or healthcare are those types of things. Yeah, we've scared our portfolio towards that direction, and so we were much more overweight in that area post April of last year, and

we took it back a bit. But still in general, we do think that even tying in the peak commentary, I think economic growth is more like a plateau, and it's all this talk about stag flash and I think ignores the fact that economic momentment is still really strong. So you have the six month annualized l a I up thirteen point one per cent, which means there's a lot of momentum still the economy. If you look at the underlying fument fundamentals of the consumer, they are still

in fantastic shape. And so I think that as you continue to see the economic growth remains strong, those areas of the market do much better when economic growth is strong. In here now technology is more of a secular grower. Um. I just think it takes a little bit of pause here to reflect the fact that you do have some reopening going on, you do have some strength and cyclical areas like energy stocks, and I think that's the way

that we're gonna move forward in the coming quarters. People have been defining stagflation in ways that I never would have thought of. Um. You know, as as a kid who grew up in the seventies, I always learned it was contraction in growth and uh and uh, you know, runaway inflation, the likes of which we experienced around the

time of the oil shortages. Um, what we're what we're hearing now is people are thinking growth is not going to be enough, only three or four percent, which is far from contraction, whereas inflation we're actually seeing measured at more than five. Are you concerned about inflation? Does it? I mean I heard the term today persistent le transitory, and I thought that was just there you go, Um,

are you concerned about inflation? Yeah, so this is something's waning about and something we've been hedging against and actually are recommending to own commodities and tips and have been for some time. And so inflation to me, during this cycle is going to be more of a worry. So you think about the last economic cycle, we woke up every day and we wondered about deflation. I think this cycle is going to be the opposite, because policy makers are going to continue to push on demand. The question

will be can supply keep up with it? Right now? I do believe this is transitory, but my definition, I think is perhaps a bit different than others. They think of transitory only as time. I think of it as what is the underlying root cause? And to me, you still have labor markets black, you still have manufacturing capacity slack that I think will come into the into kind of the forefront. Here. You're going to see people have

to come back to work because extended unemployment benefits are ending. Um, you're gonna see some of these supply chains begin to heal. You're seeing some actions right now being taken to do so, and certainly it's going to stick around for a while. But I don't think this has got the permanent type, because I do think that as covid um cases hopefully continue to roll over, I think you'll see ports open more often. I think some of the supply chains will

come back to normal. You're certainly going to see a push back more from the good side, which is what is imported back to service sector spending, as people come back on public once again. I'll give you an anecdotal point on inflation. A gallon of gas in New York City now is north of five dollars. That's the first time that's been there in about seven years. So, uh, that's inflation for a lot of folks that are looking to fill up their car. So, Brent, talk to us

about the Federal Reserve here. You know, a lot of observers I think, say, hey, this Fed has done a pretty darn good job here. Are you confident that this that is going to navigate this tapering and these rate increases in a way that a week, you know, not shocking on a negative basis to the markets. Yeah, I mean, I think that's where they're lined up. They want to try to do everything that possibly can to get more economic growth and to get those people that are still

in the sidelines back into the labor market. And I think they're gonna be as patient as they possibly can be. You're seeing that right now. And it's funny you mentioned talking about Hockey she Fed. I've heard that term a few times. I heard it used yesterday for someone who moved their rate hikes into November of next year. Yeah, that's hardly hawkish. Um, You're talking about a FED that put on a sheet of paper and I know it's

just the dot plot. They put one point seven is their medium expected rate at the end of If inflation is two point one, then that means we're still gonna have negative real rates in which is still stimulative. Now that's not a promise by any means, but I don't I do think it shows that the FED, despite all the talk that's out there right now, is going to do everything that possibly can to be measured in patient. And they certainly have a viewpoint towards the market because

remember at the zero bound, the way they impact the economy. Um, they don't have much downside for room to lower rates. Where they impact it is by um lowering treasury yields longer term, which pushes people towards equities. And so certainly if you think back to nineteen, they were expecting to hike three times and they lower grip three times, not because their forecast changed, but because they quote unquote, we're listening to the market, all right, Brent, thank you so

much for joining us. Always appreciate getting your perspective. Brent Shooty, chief investment strategists for Northwestern Mutual Wealth Management, joining us on the phone from Milwaukee, giving us his thoughts, continuing to be bullish on these markets going forward, and again major move up in the markets today, the S and P up one point three. This is Bloomberg. We've still got a lot coming up in the program. Liz Young joins us chief investment strategists from Sophi to get us

her market outlook and investment strategy. And what a day to do it on as I was saying Liz or earlier, the best day that we've had in markets since July. Because the E is rising in the price earnings ratio. What's your outlook in terms of value valuations. Yeah, hi, I'm so excited to be here. Um, it's a great day in the market. I actually just came out with a column today that says my outlook for the fourth

quarter is maybe not quite as rosy. So as much as I love a rally in the markets, especially a day like today where we've had quite a few days of down or maybe flat markets, UM, it's nice to see this, and especially after we get positive earnings news. So um outlook though into the end of the year. Here a couple of points I would make. We made our most recent high on September two in the S and P and we haven't seen another new high since then. So this is actually a pretty long stretch, um, that

we've gone without a new high. Relatively speaking, We're used to hitting new highs. It seemed like on a weekly basis for a while there, so we've we've had a longer stress to without a new high, and I don't think that we're going to see another new one into the end of the year. But that does not mean that we are going to be negative. So if we just look at some of the numbers here, if we and the SMP went back down and just kind of

sniffed at the two day moving average. That would be about five and a half percent from where we are right now. Even if we ended the year at that two d day moving average, we'd still be up about eleven for the calendar year. So this has been a tremendously strong year. It's been. It was a tremendously strong first half and then obviously a rotation, but still a strong summer. So a lot of the games have happened

in the earlier part of the year. I think that there are some headwinds in the market, the first of which is that we do have a little bit of a slowing and momentum on that macro data. We've seen a lot of GDP forecasts be revised downward. We have

earnings coming in reasonably strong. But I think what we're going to start hearing once we get past these bank earnings is from the companies that are dealing with supply chain issues, that are dealing with inflationary issue you that maybe they haven't entirely passed through yet, and they're dealing with labor shortages. And the big issue that I think we're going to face this year that's different from last year is that in the title of my column this week is no ace left in the hole, is that

we don't have a catalyst on the calendar. So last year we got past the presidential election, that was a positive. We got really positive vaccine news about a week after that, another huge positive that drove a market rally. I don't know that we're going to have a catalyst like that

this year, Liz. You know, you mentioned how we're hitting, you know, seemingly new highs on a daily basis a little bit earlier in this in this quarter here, it feels like for a lot of the bulls, they come back and they're just saying, basically, this is a market that just has to move higher or will move higher because there really are no other places to put meaningful capital to work. That that's not a very rigorous analysis, but boy, it certainly seems to be right on many days.

But you're not buying that, are you? No? I mean I am buying that. And so I want to be clear, even if we don't hit new highs and to the end of the year, I'm not saying get out of equities, because that's absolutely true. There isn't another good option. And even if the ten year rises up, let's say it goes above two, it's still not that good of an option compared to equities because you don't have price appreciation

potential that matches that of the equity market. And even a ten year yielding two isn't that much above a lot of dividend paying stocks. So you can still get dividends in the equity market and more price potential in the equity market. I absolutely think that that's where investors should be. I just think that we've seen much of

the strong gains for the year already this year. So if you're an investor and you have money on the sidelines, if you have cash on the sidelines, then the question becomes, Okay, if the question isn't should I put it in stocks? I mean, yes, you should put it in stocks, But then the question is where in stocks? Right? And what I would say to that is, let's say we go down a little bit further from here. Who knows what

the pattern is going to look like. But if if I'm right and we go down a little bit further from here, and then we have maybe a mediocre bounce into the end of the year, I think it is those cyclical sectors that are going to lead in that bounce.

So here's another This is I don't want to get too in the weeds here, but if you look at what's happened through summer and rallies that were driven through summer, they were really driven by those big cap tech stocks, or at least the the top heavy part of the SMP five hundred. If those aren't the stocks that are leading us, all the other stocks have to work a lot harder in order to bring the overall index up

because they make up a smaller percentage. So if those cyclical sectors do well into the end of the year, it's still going to feel like a lot of hard work to get there. But I would be looking at financials, I'd be looking at industrials, I would be looking at dividend paying stocks, because there is some inflation protection built in in the overall market, and we just got about

thirty seconds left. I don't want to take your Garth Brooks quote too far, but if all your cards are on the table and you've got no ace left in the holes, I mean, we don't have to worry about too much volatility or start Garth quote as far as you want. I've got Guarth quotes all day long. Um, so I think I think there is more volatility that would come. But here's the thing. Volatility is not a bad thing. And volatility happens when we're going through a rotation.

So that the line about all my cards are on the table, that's sort of there isn't any really big positive news catalyst coming right. All we have to do now is kind of trudge through the mud, hope that earnings come in strongly and that nothing goes wrong. I think the FED continues to taper and we have to really hand the baton back to fundamentals. Liz, thank you

so much for joining us. We really appreciate you taking the time here, Liz Young, Chief Investment Strategists for so far and reminding us about all of the great lyrics from out of Brooks. I just you know, went through back through what the Cattle when I was reading her notes, and uh, the double live album is so good. I'm gonna go back and listen to it later on. All right, We had some Mr James Gorman on our radio and TV airways just earlier this morning, and he generated a

lot of headlines on the Bloomberg terma. One of them is he's not buying this whole inflations transitory thing so much. And uh, I'm want to bring that up with our next guest, Pete Earl, economist at the American Institute for Economic Research located in Massachusetts. So Pete again, James Gorman's CEO of Morgan Stanley, kind of saying he's seeing some more pronounced and profound inflation out there in the economy. How do you see it? Good morning? Yeah, thanks for

having me, so um, yeah, I mean so so. First, I find the whole transitory story a little irksome, to be honest, because first, because we had Powell earlier this year Chairman Palace that he didn't see any unwelcome inflation in April, and he said we were likely to see more pressure and they would be temporary. So it's a

somewhat self serving narrative at this point. But the more important thing I think is that anyone who knows or studied monetary economics knows that we have what are called injection effects, right there can't a lot effects and other um schools of beacon offers call them, and it means that the disproportioned impact that new money has makes permanent distortions.

So even if this inflation is transitory, whether that's in three months or five years, the higher prices, paid, allocation decisions, all that sort of thing and other outcomes are gonna be baked in. They're gonna be permanent. Um. I'm way more concerned if we're gonna bring up the ugliest word in economics and one of the ugliest words in English, stag inflation. I'm way more concerned about the inflation than

the stag you know, I'm totally feeling you that. Um. The transitory thing was annoying, but it's also been a gift for people interested in economics. I took a deep dive into Kine's long run again the other day, UM, just just for fun, because you know, in the long run, um, everything is transitory. Also, Mohammad al Harrian pointed out today that he hurt someone, um, someone serious say persistently transitory,

which I really appreciated. UM. On on the stagflation side of things, Deutsche Bank had a great report out a couple of days ago showing that UH clients had at least three different definitions for what stagflation is how would you define stagflation? Yes, I mean the basic definition is again the really nasty portmanteau, is that we have stagnation, which is of course slowing or negative growth, and we have inflation, and there's a there's a I think there's

some pretty good arguments against stagflation occurring right now. Um, but I also think that what stagflation looks like today for those of us who were in my case of kid in the seventies, you know, I don't think even if we did have definition, uh, definitional stagflation, it doesn't mean we're gonna see eighteen or twenty percent interest rates. I mean from here six percent interest rates are elevated

and growth of two point five percent is down. So it doesn't mean it's better, but it does mean that I think people are looking at the seventies and they're thinking of it the same way they think of disco balls as they do. You know, the actual economic numbers,

it would look different. But um, basically, you know, right now, households have and end businesses have very high levels of cash, actually record levels in some cases, and publicly traded companies have highest the highest operating margins they've had in almost thirty years. Um. So both of those speak to a level of savings and potential consumption that I think puts the idea of slowing growth to rest, at least at

the at the current time. Pepe, how about some of these global supply chain issues that so many companies in so many different industries are experiencing. We hear them on these quarterly conference calls, that the management teams talk about them. How do you think that's going to impact global growth in remainder of this year going into next year. Yeah,

so it's definitely a drag. But I mean, I think what the recent step that was taken and I don't I don't think it necessarily needed, um government devention, but the fact that the ports are gonna be working seven in many cases, um, some of the things being done by private firms, which include buying fleets of aircraft, chartering or purchasing ships. I think I think that right now is the big link that will serve to to to sort of relax some of these Uh, if you can

find anyone to work there, right Yeah. I mean, that's that's the big issue, is that we have this great reconsideration whereby people are saying that I really enjoy what I was doing, you know, can I take some time off, retrain myself whatever. I think that's that's an issue too, And that's that's very difficult because that's not economics, that's

that's that's sociological, that's psychological. But I mean what we've seen in the last two days and c p I and p p I is really what we would would expect um the retail prices, the the the five point three percent year over here. I think most of that it's not really monetary so much as it is shipping problems.

What we see in pp I and producers where you have capital intensive industries where things are produced, they're seeing actual inflation, you know, where you have four dollars competing for the same number of things, whether it's materials, oil, etcetera. That's where I think shipping containers. I think the monetary

part is shipping containers. Yeah, you know, in one case exactly, I mean the CEO Fastenal was talking about how thirty five percent of their containers that would normally be sent across the country by rail of the United States, that is, have to be now manually offloaded and put on eighteen wheelers and that quadruples the cost in some cases drives it up six times where it would normally be. So I thought it was incredibly fascinating. Pete. Great to get some time with you. I hope we can get you

back on again. Pete Earl is an economist for the American Institute for Economic Research, coming to us from Great Barrington, Massachusetts. This is Bloomberg. Certainly, the hardest working analyst at bloom Bring Intelligence this week has to be Alison Williams, Senior Global Banks Analysts. She joins us here in interactive Broker studio in between bank earnings conference calls and Allison, tons

of companies reporting this week in your space. You know, as I listened to some of the commentary from these management teams, they've remain pretty confident in the outbook as well. What are your takeaways they do? It's a strong quarter, strong equities trading, huge M and A fees. Those are sort of the highlights for the banks. And then on that, um, you know the other side of the house and interesting

coming coming in line. I think there's sort of enough to hope for in terms of um, you know, green shoots, uh for loan's next year. There is some variation in results of Bank of America. You can see trading positively today, um,

you know. And part of this is really just a strategy and how they're managing their bound sheet there, you know, deploying excess liquidity, so that's helping their not interesting come a bit Jamie Diamond saying he's you know, waiting to do that um, and so he has a excess cash sitting there. So maybe just a little bit different strategies.

What do you mean by that? The point their liquidity in terms of lending money not lending, so basically all the money they have because no one's borrowing, so all the money they have so key. So if you think about their bounty, we have tremendous deposit growth, we've had that since the pandemic began. Um. We don't have people borrowing. So the cash can either sit there or you can buy securities. So that the risk of doing the ladder

right is that you're taking duration risk. You're buying um securities when rates are extremely low to get a little bit of income, and so it can depend a little bit on your interest rate views UM. And that also takes away when we look at interest rate sensitivity. So Bank of America traditionally has had a lot of exposure to long rates rising. But because of their change in strategy, you know, that's come down a little little bit, but

you're seeing it come through in the interest income. All right, let's go to the area that's most near and dear to my heart, which is are my friends on Walsh. You're going to have a big pay day this year. Let's like it. I mean, you know, first of all, as I said, you know, the M and A fees were talking record fees. I p O super strong. Competition is very strong. So what we're um expecting is that bankers are going to get paid, traders are going to get paid. It's going to be a very good year

for compensation. And it's going to be a good year next year. We're already looking at that. And so if you think about the banks, actually last year they were able to hold the compensation ratio down. A lot of that was just because you know, the massive surge. A lot of that was electronic trading. Um, I think a lot of people did not expect, you know, this year to be as good as it was, so um, you know, perhaps there was everyone expected normalization that really hasn't happened.

Things have come in a little bit, but we're still above where we were a couple of years ago. And to the extent that there's still a positive outlook going forward. Um, you know, that's going to keep the market competitive. Goldman Sachs tomorrow, Um, what are you expecting? Goldman Sachs has has a really high bar now, Um, I mean the numbers were getting the read across should be really positive

right there. The leader in M and A revenue, they're not always the leader on transactions, but they far outweigh everyone, you know, basically forever in terms of revenue, so that bar is raised. JP Morgan is sort of the one to beat there in terms of dollars, even though Morgan Stanley had the biggest increase. Um. Uh, well Morgan Stanley up there as well. And on the equity trading side, Uh, you know, go, you know, Morgan Stanley is the one

to beat there there. We expect they keep their lead in this quarter, but Goldman could you know, take their leadership for the year, which is something they haven't done in a while. And so to some extent that sort of bragging rights because they're both really big, they're both profitable in that business, and as we talked about, compass higher.

But the returns this year because of the revenue surge, are are really strong, and so um really raising the bar in terms of expectations for Goldman Tomorrow Now, Alison, thanks very much for joining us. Alison Williams, Senior Global Banks analyst and incredibly busy woman this week from Bloomberg Intelligence, as we get just an absolute slew of bank earnings. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever

podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Pet on bal Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio