CalSTRS Ailman: Concerned For Markets When Fed Money Flood Ends

for Calisters. I think one of the most important investors in the US because, um this is the California State Teachers Retirement system. It's definitely not evil. It's an investment fund that wants to not only make returns but also do good. And it's great that they have Chris as a representative because he's such a good person. It's been so long Christ since I've talked to you, so I'm really excited to get your take on a number of things,

the first of which is Biden's infrastructure plan. I was talking to a former World Bank economist, yester Day Exotic Waba, who was saying, UM pension fund plans like Calisters should really um be helping to invest in infrastructure because this is a great way for you know, teachers, firemen, police officers, kind of the salt of the earth of America to make returns. What do you think. Well, first, Matt, thank you for that kind introduction, and I would like to

get together again again in Berlin. That was the last last time, uh And I have to note from your conversation last time, I think it's just you that Germany wants to track when you move around. That's everybody else has to pull out those cards. So, hey, we already do invest in infrastructure and in a big way. I'm long term patient capital. You hit it on the head. I need a long term, stable return. Infrastructure provides that.

But in the USA, infrastructures primarily funded through municipal bonds, so it's I always say it's built by by municiples. The problem isn't maintaining it. UM. A lot of our infrastructure in the US is is around the energy supplotline, not drilling, but just moving energy. And then it's about solar and when UM. Our international infrastructure is definitely linked to green energy UM and very successful. So I agree.

Um Biden's plan though, is pretty pretty huge and all of the map, so it's tough to figure out exactly where private capital can sit in and owning some of that infrastructure. All right, Chris, we'd love to get your thoughts on the markets here. The you know, the bulls have certainly had their way here since those March loads of a year ago. Here, lots of fiscal stimulus, lots of uh uh, you know, the fedback stopping this market. I guess I want to talk to them, a pro

like yourself, where is the risk in this market? What could go wrong? Because the bull are really having their way here. You know, if you step back and you know, you guys know, I'm very long term oriented. We have a thirty year investment horizon. But look back at the last say, fifteen months. In essence, the bulls are saying that a pandemic, a global pandemic, is good for global stocks and good to the economy, And obviously that's nuts. It's what it's the Fed. It's just the said that

the Fed flooded the market with money. Jamie Diamond thinks it's going to continue to be easy money that comes at a price. You know, we have not faced the huge deficits that basically the government financed the economy for the last year and a half pushed the market to an all time high. That's artificial. It's got to be paid back at some point. Doesn't mean we're gonna have a bear market in the next say even twelve months maybe, but everything is priced perfection. A pandemic cannot be good

for stocks. Yeah, that's what the lesson we've been taught. So I'm concerned that that we're over priced and that we're gonna be chopping for a while. Lots of Fed keeps providing free money, We're gonna be fine, but at some point they are going to have to start to tighten back up. And even just like they did before after oh eight, where it's just moving back to about three what's considered a normal interest rate, it would be enough to slow this market down a ton, which it

probably deserves. P ratios are at two high of a level. Don't we have to pay the piper at some point? Chris, I mean we've now put I think five trillion dollars of stimulus into the economy. Biden's got a two point to five trillion dollar plan out there, and we know there's part two coming, plus the Fed has I mean, I don't know how much many trillions in emergency measures since this started, like twelve trillion. We're looking at a

balance sheet that's um continues to be inflated. Like, is it true that as long as we continue to pump um we're gonna be fine. As long as we don't stop, it's gonna be okay, that the magic money tree is gonna somehow save us. Well, Matt, you know that sounds just like modern monetary theory. That's that's Bernie Sanders economics, which is the the US is still the country of choice, the dollar is the currency of choice, or oil and all the major commodities, so we can just borrow money

endlessly and never pay it back. I just don't believe that's true. I'm worried about not just future generations, but the recognition that that this debt and we've had some was just a month ago, that we had a couple of options that didn't go as well as people expected. So but when did when did the problems comes? Or what or what assets get get hit first? When the house of cards starts to fall. Well, I've been saying for a while you gotta pay attention to the bond market.

That really is I think the barometer for the equity market. The equity market has a lot of sugar and stimulus in it right now because of that money and all the all the rob and hood traders at home. But they're gonna we're all gonna have to go back to work. And I think that if bonds continue to back up right now, it's a nice, you know, reset, But that's what you got to focus on, and then it's gonna

be equities will soften. Um. Obviously certain commodities have gone up through the roof, but they're gonna fall back in their price range. UM. I would just be worried about not just US, but global equities, UH setting back and seeing a slower economy for a period. All right, going back to work, Chris, what are you guys doing at Cowsters? What's your plan? You know? I I was just talking to Tassima and the team. I'm basically telling my staff,

let's let's work remote through the summer. Everybody plan on being back on Labor Day. That seems to be a common phrase. Even though the economy is gonna open up, this has been such a mental stress on everybody. You know, people need to take vacations. None of us have taken any vacations for a good year and have people need to get out, go somewhere, refresh, reset, and then come back. Remote worker is going to be with us, I think for most industries forever. Uh, it's but it's I'm really

concerned about that hybrid world. Instead of the best of both worlds of being internal and remote, I'm worried about it being the worst of both worlds, that that meetings are not convenient and not effective when you have people out and in trying to figure out whether somebody's online, off or on travel or in the office. It's crazy, but we're gonna work through it. It's twenty two is going to be a real trust transition. You're trying to

figure this all out. Interesting. Yeah, I think you're a representative. You know a lot of managers out there trying to figure out what's best for their team. And we'll see how this plays out. Chris Alman, thank you so much for joining us. We always appreciate chatting with you. We look forward to seeing you in our New York offices soon. Chris Alman, Chief investment officer for Calsters. They are the folks out in California managering the money for the teachers.

Um it is a go to meeting if you're a cell side analyst. When you go at the California you got to see the folks at Cawsters. Now, UM, I mentioned JT is gonna like this story because you know, during the Great Financial Crisis he became uh internationally renowned for opening his four oh one case on air. And you know a lot of people got hit hard during the last couple of recessions, thrown out of the middle class.

In the US, that's not as much of a concern, I think in the recovery from COVID, but worldwide it is huge. And in fact, we have an amazing story on the terminal. Millions are tumbling out of the middle class in an historic setback. And I don't just like this story because they said and historic, which we always should. It's not a historic setback. We should treat the h

as a vowel there. Um. I read the story and I thought, well, it's no big deal, right, We're gonna bounce back next year or at least the year after. Everything will be fine. That's not the case. This is causing long term damage, that is changing a trend that hasn't changed for decades, and we're gonna bring in right now, Sean Donn, and senior trade and globalization reporter for Bloomberg to talk about it. He's part of the fantastic team that put this together. Sean, you know, I learned a

ton reading this story. Um. First of all, that the middle class has been growing for decades since the nineties, and um, this last year was the first break of that trend we've seen, and it doesn't look like it's going to be repaired so quickly. Right. Yeah, Look, I mean that's the big question we have in front of us. We've got this unwinding of a big idea that has

governed business decisions and investment decisions for decades. Now, that was this idea of you know, remember the bricks, uh, you know, Brazil, Indie, China, that these big emerging economies UH that surged onto the world scene in the last thirty forty years, and they brought with them a whole new set of consumers, this enormous middle class that has just been growing for the last thirty years. And last year the pandemic UH knocked that story on its side.

And we now have a middle class that is shrunk. And we also have looking ahead, and the I m F has warned about this this week, really diverging paths in the global economy. We have the US and other advanced economies likely to recover very strongly from from the the economic hit they took in the pandemic, and a lot of developing economies that are gonna have a much

slower path back. And who's that going to hurt. Well, that's going to hurt all of those people who have been hoping to, as we all do, to to find comfort and security in a middle class lot. Well. And if I can be a little bit superficial here, multinational corporations that have relied on this burgeoning middle class as the main pillar of their growth strategy, right absolutely, this is this is you know, of the world's consumers live outside of the United States. That's a mantra we've heard

from CEOs for a long time. It's what was behind the trade policies of the last thirty years or so, and it's it's it's really a big bet that corporate America, and not just corporate America, you know, big multinationals in Europe and Japan and and and elsewhere have made on these new rising economies and these new consumers. One of the guys we talked to for the story is a guy called Rabbi Charmer. He's a great example, uh in

India of this middle class. He's been saving up for years to buy himself at six thousand dollar Maruti Alto. It's this entry level car. It's made by a joint venture between Maruti and Indian company and is Uki, the Japanese maker. And you know what, Robby last year lost his job, he had to move cities. He's got a new job at lower pay. He's not gonna be buying that car. Instead, he's gonna be faring around his family

on a motorcycle for the coming years. And he said to us, you know what, my life's been set back by three years, and all of the dreams I had beforehand feel out of reach. What are those dreams? Those dreams are A lot of them are are buying consumer goods. They're they're buying things that big multinational companies make. Sean, what are some of the countries or regions of the world that are seeing the biggest losses in their middle class.

So we've it's really been concentrated in two areas. India is such an enormous uh population one point four billion people that the hit that we saw there meant that South Asia really led the way in terms of the reduction of its middle class. But we've also seen Sub Saharan Africa take a take a big hit. And that's interest thing because we know that the pandemic, the actual virus hasn't hit Africa as hard as it has some other regions, and yet the economic consequences have been there

in a in a big way. I wonder if the rebound that we see, I mean, has anyone measured how long it's going to take an economy like that um to come back or do we just not know if they're going to get vaccines out in terms of heard immunity. Yeah, so look, I mean, vaccinations is the big question. Right. We know an economy like Brazil is still dealing with a huge outbreak. Have not got their handle on that. Uh, They're they're on a very different path from the US

right now in terms of infections UH and vaccinations. And so the I m F kind of did the math and it figures that largely as a result of that slower recovery and emerging economies. The global economy is going to be about three percent smaller in are folks at Bloomberg Economics have also done some calculations, and you look at a place like India, it's gonna be five smaller

than it would there. My friend Sean Donn and senior Trade and globalization reporter Bloomberg News with a fascinating story here about the global middle class and the risk to that from this pandemic. Maybe it's just because I have a Bloomberg turminol sitting in front of me, but it just seems like the day lugion information continues on a

daily basis for investors to digest that. We have Fed minutes being released today at two pm Wall Street time, We've got a fiscal stimulus plan that Washington is debating. We've got earnings starting next week. There's never a shortage of data for the market to digest. But fortunately, our next guest can help us pass through all of that. Danielle Di Martino, Booth CEO and Director of Intelligence at Quill Intelligence, also a former advisor at the Dallas Federal

Reserve and a Bloomberg Opinion contributor. If that's not enough, She's also the author of Fed Up and Insiders Take on why the Federal Reserve is bad for America. Danielle, thanks so much for Journeys taking some time out talking about the Feeder Reserve. We're gonna get those minutes today. Anything we should be looking out for. I think you're gonna see the word transient and transitory um kind of extrapolated through thess dot com. You're gonna see it whacked

six ways to Sunday. They're gonna emphasize and doubly emphasize their patients. Uh, there's never any such thing as coincidence with Fetch surveys. There was a fresh FETCH survey out today that shows that of the stimulus checks are are being spent, the remainders is being used to pay down debts or saved. So the FET's gonna take note of this. They're gonna take note of the fact. The Bank of America. Michelle Meyer, a good friend of mine who's I'm sure

a guest on your show many times. She showed that the check recipients spending peaked on day six. That would be Marche when is when recipients spending peaked after those direct depositive deposits hit their accounts on March the seventeen, So we're gonna see a monstrous retail sales figure in March. It's gonna come down in April, it's gonna come down in May, and by then we'll be starting to talk about that September the six fis school cliff and all

these unemployment insurance benefits that will be expiring. Then that's going to give the FED pause and more reason to say, you know what, We've still got very high permanent unemployment. It's the same level as it was during the crisis. We're gonna have to be patient here, and I think you'll see a lot of patient talk in those minutes today.

So I think it was Novgrats on Bloomberg yesterday who was saying, it'll be interesting to see if the FED can stand pat um through you know, Jackson Hole next year. Of course, these inflation numbers are gonna look transitory, but um aren't we going to see the kind of growth that will push real inflation through? You know, that's a big unknown at this point. We we just we can't say there are many unfilled job positions in this country, but right now the vast majority of them are low

paying positions. So in this coming month, you're gonna see complete perversity in the data. If you don't get an o point four percent increase in average hourly earnings. When we get the April labor report, you're gonna see a negative print on your over year income. That that makes your head swell when you think of the base effects that that are going to cause us to see for the next three months, huge prints for consumer Price Index

north of the feds f two percent target. I think we have to keep in in mind SED thinking they're looking back at two thousand eleven when cp I printed it three and back then they said it was transitory. You know what CPI year over year by two thou fifteen was o point seven percent year over year. So they're gonna look back and pat themselves on the back in retrospect and say, we're not going to let the markets hustle us into a rate hike because we know

what transient looks like from recent history. All right, danielle Um, that's the FED. Let's talk about fiscal stimius. A lot of money has been thrown at this pandemic problem by the US government. You know, call me old school, but doesn't somebody have to pay for this? How should we think about that? And is that a worry for you? You are too young to be a funny dutty. The bills actually come due? Is that? What is that? What shows up? That's kind of what I'm asking. Yeah, he's

a dad, it's in his nature. If you're an individual, if you're a corporation, bills actually matter. Uh. The assumption that the bills don't matter is a very slippery slope. Just because we've gotten away with this for as long as we have doesn't mean that it's a perpetual environment that we're going to be in. You know, we ignore the fact that China is busily rolling out a central bank digital currency and looking towards life after the dollar.

These are things that we want to wholly disregard. What we can't. And if there's another incident, if there's another disruption in the markets that prompts the said to move, many are saying that it's going to go. It's going to force them to go in the direction of some kind of a digital currency too, to to deliver money directly to the people. Think of Ben Bernanke helicopter vengit helicopter.

I still have that tie I gotta tie from. I think it was Van Eck with Ben Bernankey and super Mario hanging out a helicopter dropping um buckets of money. And of course it would be cool or if it were digital. But I wonder, you know, Danielle, markets really don't care. I mean, everyone's still willing to lend money to the US federal government with the debt to GDP ratio of like one thirty right now, um for ten

years at one point six percent. I mean, even with the gain and rates, even if we see that go to two percent, it still tells me people are will going to accept a nothing return basically less than nothing if you look at real yields. So they must feel comfortable. Investors must be totally complacent about trillions and trillions and trillions of dollars in stimulus. Well, I think the complacency is more a game of chicken. They're like, wait a minute,

this is nothing as magna. You know, nothing of of the magnitude of the loss of reserve currency status is going to happen overnight. People know that, and they're banking on it, and they're banking on US treasuries being money good and being the you know, the most attractive horse in the glue factory for multiple years to come. And that's that's kind of how investors see it. As long as none of the wheels fall off, as none as there.

As long as there's not a disruptive, high rapid move in rates that makes the NASDEC fall out of debt. You know, that episode is ancient history as far as investors are concerned with the NASDEC pressing into all time highs following the down the ns and p Alright thirty seconds, Daniel, what's your biggest worry? My greatest concern is jump on yield. Right now, they're at their lowest jump on spreads. Excuse me, there at the lowest since June of two thousand seven.

So the rubber band has been stretched extremely tight, and we're not paying close enough attention to Corporate America's balance sheets which have not been repaired. Yeah, and so many investors that we talked to, um, that's one of their favorite investments right now because they'll do anything for a return, right UM. So junk bonds still look good. Um. And if you have a giant fund, they're willing to let you take massive leverage with their balance sheets right now. So, um,

it's it's pretty insane out there. Daniel, great to have you on the program. Always good to get your insight really important to us. Daniel DeMartino Booth is the CEO and director of Quill Intelligence. Formerly an advisor at the Dallas Federal Reserve Movie he joins US equity analyst for c f R A research and before we get into the cruise ships, um, Paul Sweeney says, you're the best dressed analysts. So I never thought I would ask this of a guest, but what are you wearing? That's guys,

good oneing to you. Um. You know, we we try to, um, you know, do the best we can. But I really appreciate those compliments from from my Matt. See the thing is here. Tune is the only one I know that can give Tom Keane a run for his money in terms of wearing the boat tie. He sports a sporty boat tie every time I see him out there on Wall Street in the trenches. Tuna, again, thanks so much for joining us here talk to us about Carnival. They

put out some really interesting guidance about bookings. People are going to go back on those cruise ships, aren't they. Yes. Indeed, Paul um as I was kind of Parson through the comments on the on the ironings call today, UM, there's definitely UM some excitement UM that clearly pent up demand. The company said that is actually pasting much higher than the pre pandemic nineteen, which was an all time record before UM you know, volumes of bookings and also prizing

training significantly higher. But that being said, there's still been some fits and starts in terms of when the CDC is actually going to UM allow things to get back to some semblance of normalcy. Right, So Carnival UM say today that they're looking forward to this summer UM kind of when they start to um, you know, sail again the US with limited capacity. They're already UM doing that in some parts of over the world. But it's pretty clear to us, Paul, that there there is going to

be a major heavy lifting to come. You know, it's not anywhere close close to business as as usual, and we think it could not. It could take beyond three for the industry um as a whole to get back to anywhere close to normalcy. And remember the most of the cruise operators Carnival included, have significantly reduce their capacity. Carnival divested nineteen ships out of its ninety fleet. But

the liquid is another thing we keep an eye. I have to wonder do they not have a whole new consumer because you know, um like Paul has never been on a cruise. The only time I ever took a cruise with my grandmother. So that tells you, you know, what I expect to the clientele. On the other hand, once we get our vaccines, We're gonna feel freaking invincible,

Like I will go to anything. I'm willing to try new stuff, including getting on a giant boat with hopefully not all old people, and then going around like drinking as much as I can. Like, are are not a lot of new customers gonna be you know, happy to do this once they've gotten vaccinated. That's a great point, um, you know, Matt, I think there's a core um consumer out there, the core customer for cruise lines for those people that are UM kind of repeat um you know

cruisers if you will. And talking about myself, I had my first cruise left in twenty nineteen. But I think I think as I think about you know, yeah. Well, frankly, I think it was. It was a very interesting experience, but not something I would personally rush to rush back, do we understand, Yeah, yeah, So the consumer is out there waiting to get out there. Um, and the company said the vaccine is going to be a game changer.

We agree, just at the timing is somewhat sporadic in terms of when they can get back to to to what should be a new normal. What are the companies saying about their operating procedures. Are they going to change how a typical cruise goes, I mean the buffets and crowding people into big rooms for dining events and other things indoors. How are they going to change going forward?

It's a great question because the CDC has released this voluminous um you know, things of what they might consider, you know, the protocols that cruise lines are going to be implementing. Uh, the bunch of things that no one really knows how you know that's going to go in terms of temperature checks and you know, vaccine passports and things of that nature. So um, you know, I think

it's really a moving target at this point. And I think given the cruise lines themselves are wondering, but there's no question that it's going to create a very different dynamic for both the company and not in the customer. And as far as the financials, I think there's gonna be additional costs um in the business that's going to

probably make the long term business profile to be much riskier. Uh. That being said, I think the the what you know, depend on demand is quite tremendous and that's something that as we cycle through this uh you know, this year, which I think will be in a holding pattern, there's definitely some costs to be optimistic. All right, Tuna, thank you so much for joining us. We appreciate it. As always, we always go to Sooner for all things on the

consumer side, including media. 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. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.