Fed Chair Powell Remains Resolute: Riccadonna, Emons

at Jerome Powell. He's delivering his semi annual Monetary Policy report to the Senate Banking Committee, and Matt I think that the one takeaway I had here from some of his comments to date is that he's cautiously optimistic about the economic recovery and feels comfortable with where the FED is in terms of rates and in terms of uh continued bond buying, and in terms of how well they can control inflation as well. He doesn't think it's going to be the kind of problem that they won't be

able to get their hands around. Um. The other's interesting thing, I think, and from j Powell, I guess this is characteristic. He's staying out of President Biden's way. He tried to avoid clashes with President Trump as well, but um, the

opposite wasn't true. Uh, And maybe I guess I've gotten used to the President making comments about the FED chair, but I thought it was interesting today in John Pharaoh's interview with the new Director of the Council of Economic Advisors Brian Deese, Dee wouldn't answer Pharaoh's question as to whether Biden had met with Powell yet. He just wasn't gonna give any ground. And you know, Pharaoh falled up

like three times. Um, des wouldn't say. I don't know if that's because Biden hasn't met with Chair Powell and he feels like that would be an irresponsible message to send, or whether um, this is just a new a new relationship between a president and a federal chair and a big change obviously since the last administration. Or let's get a recap of what we did here this morning from FED Chairman Chow. We're fortunate to be able to do

that today, Matt. We've got Carl Ricka Dona, Chief US Economists for Bloomberg Economics, and then Emmons, Managing director Global macro Strategy at Medley Investors. And let's start with you. Carl here, what did you take away from FED Chairman's comments? Today any changes in the near intermediate term do you believe.

Good morning, Paul. Really, the story here is that no news is news and in of itself here because it shows the FED that is unwavering and its policy stance despite the ongoing rise and treasury yields and the improvement improving tonally seen in the economic data. So the FED is very resolute in its commitment to provide policy accommodation, and they're showing no signs of starting to waiver as they're being tested with potential signs of an economy that

really is surging forward with the pretty robust growth. The least one I want to make uh you to your question is that fast growth does not have to be inflationary. And so we can look back to the probably the best parallel episode, and that was the hard stop procession of two. At that time, it was a FED chair Paul Bulker slamming on the brakes of the economy and then releasing it. Uh. This time that hard stop is

not caused by the FED. It's caused by lockdowns related to coronavirus, and we can unlock the brake, the economy can surge forward. And if nineteen eight three eighty four eighty five is a piece of precedent, and I think it may be Uh, we did not see a lot of inflation during that period. I want to ask Ben the question, but before I do, I gotta say hello to Carl. It has been so long, man, I've it's been since like Bloomberg rewind since I've seen you. And uh,

it's great to hear your voice. Um, and have you on the program. Ben. With that. Ben and I are old old friends now we speak on daily basis. Um. What Ben? The other thing that that the Fed chair said, which you know Carl says, fast growth doesn't have to mean inflation. Um, the chair said, look, uh, serious deficits don't have to meet I mean inflation anymore. Do you think it's a concern at all that we're building up such a huge debt to GDP level and that he

is sitting on such a gigantic balance sheet. Does that bother him? Should it? I met a good talk to you again. Yeah. I think what he was saying is that the link between inflation and deficits has weakened over the years, and he did say that it could change, right, But I think what he's saying too is that because of the twenty five years of disciflationary pressure, therefore the

link between deficits and inflation is low. And if you didn't take that to your question of the debt though, and that matters to the economy clearly, I think him too probably understands that over time large large debt and deficits will drag down the economy again again adding to more disciflationary impression rather than inflation impression. And think that's just what he, I think, is trying to say with that that question. And I think additionally to that that

the message seems to be overalled. Is the same today he didn't respond to a question about the linkage between multipolicy and and the asset valuation. So I do think that he sees inflation in the ASCID markets not so much, you really call me, I just think, you know, I never got past econ one oh one, so I'm probably the least qualified here. But I have always understood that when countries build up huge debts, what they really like to do is massively devalue the currency so that they

don't actually have to pay That. Isn't that, Carl, Do you think that's always the plan? Well, Matt, I know that you're a rule breaker and you like to be the bad boy. So the rules are a little different for the U. S. Economy. So in what we would call an in country, an average sized economy or country, you run into the problems where deficits can be inflationary and cause currency devaluation and whatnot. In the U. S economy,

that's a very unique role. It's the largest economy in the world, is the most powerful military in the world, and it's also a reserved currency. And so that means that in fact, looking back to the last recession, when we had the US credit rating downgrade, that actually proved a positive for treasury guilds UH and the currency actually appreciated because there was a flight of capital into the US. So, well, we certainly can't just run willy milly indefinitely higher deficits

and whatnot. What's happening at the moment is said the deficit spending is reducing slack in the economy. In the best way for the US economy to be able to pay down those debts at some future date is to get back to full employment and full capacity as quickly as possible. UH. If it's a weak, uh, starved recovery like we saw after the O nine recession. Uh, then that that puts the economy a much weaker footing to

make those debt payments. So get back to full employment, the tax revenue will come with it, and at that point then you can start to look at addressing these fiscal imbalances. So so Ben, you know, we're hearing again from chairman Palace, as Carl suggested, no surprise, but lower for longer. Is there a risk here that the market kind of moves past the Fed? Here we've seen a little lifting rates, We've seen uh, some steeping in the Yeel curve. Does the market kind of moved past where

the Fed is and is comfortable? Yeah, it is somewhat happening, Ball because you know, you look at those rate high probabilities in FETs in the futures, right, they have moved off And it does show that the market is pricing in the recovery aided by the vaccination rollouts as at some point that the economy one is fully reopened and then it's a closer to full capacity, by which means inflation will be in the temporary above targets. And yeah, then it pulls forward, as we call it rate hike.

That's the function of the steeping of the yield curve and the rise in nominal and real interest rates, and so that could indeed be somewhat ahead of what what ultimately the FAT will will do. I will say though, that so far it's been viewed as that they're not leaning against what the market is doing, and there was a question about that in the testimony earlier. Right, How the link is between multi policy and asset values. Yeah,

that's a clear link. But there's also recognition that there's a lot of different elements going on at the same time in terms of how the recoverage price into the inter the financial markets. Right, how we're getting out of the pandemic to a full open economy, and it does lead to cep Ye curve and some expectation of feature rates. Ben, I'm looking at a just thirty seconds here, but I'm

looking at a couple of charts that you emailed me yesterday. Um, if the herd immunity and you know, UM continues to rise, infections continue to drop, is the rate hike probability for UM, you know, December going to climb substantially? Yeah, that good math. It's it's it's definitely there that that's a correlation that I think we should take note of that the market is implying that it is really the stay at home trade.

So that speakers we will talk about as being deflated today right that rotation is happening out of tech stay at home into the opening and I think that's the link with that rate high probability. The market is prishing in the economies out of the pandemic fully reopens and that's steep you curve dam reflects that, and that's where the rate type of probability rise comes from. So yes, there's a clear link between the reopening trade and the

rate type probability. Ben, thanks so much for joining us. Pleasure to speak to you again. Ben Emmons there from Medley Global Advisors and Carl Ruka don are chief US economists. Wrapping up the comments from FED chairman Pal of course, will continue to bring your headlines from that event which is ongoing. Me and Greg we know a lot about cars when it comes to drive, trains and design, but when it comes to business of producing them. If I have a question, I usually call up Ed Ludlow, a

reporter out in San Francisco. He knows what he's talking about, and he got a killer story. Um. Today he got the interview with the Lucid CEO, one of the hardest properties I gotta say on TV today, ed what did you learn? I actually learned quite a lot. You know, I followed the company closely for about two years. And the thing is, no one's really been interested in Lucid until all the spack rumors started right in recent weeks

and months. But you know, Lucid is a company that is run by this guy, Peter Rawlinson, formerly chief engineer on Tesla's Model Esque, and for the entirety of the time I've known him, which is about three years now, he has preached prudence and discipline and patience in bringing

the car to market. And what we learned is the kind of main takeaway from the interview is that during the due diligence process with the Churchill Capital spack Michael Klein Spack, that it was actually the guy at the spack, Michael Cline Klein and Alan Moulally, the former Ford CEO, who pushed Lucid to delay production because what they saw was a good product, you know, a luxury TV that has significant range about five dred and fifteen miles on

a single charge, but they were worried that Lucid would experience the same quality control issues that Tesla went through. So that was kind of the biggest and most surprising takeaway from the interview. Today, it should be pointed out that Malali is I mean, he's the man when it comes to this stuff. He built the seven seven seven, notwithstanding the recent engine problems, which didn't have anything to do with Boeing, and he's the guy who turned around Ford.

So when Bill Ford's company was, you know, breathing its last breath, he called up Alan and he flew in and fixed it for him. Right. So it's interesting because broadly speaking, if you look at the SPACs that have done deals with e vs, what is the one thing that they have in common. They have a former automotive executive somewhere near the top I'm thinking of course, like for example, nikola Um and the spack that took them public,

they had Steve Gerski, former GM executive. In my conversation with Lucid CEO Peter Rolinson's day, he basically said that what happened was he took Ala mulally for a test drive in the car, and that it was like that conversation at the wheel in a pre production prototype that kind of brought about this idea that they should take their time now. Peter Rawlinson is an experienced was motive executive in his own right, you know, prior to Tesla he had jobs at Jaguar, Land Rover and other automakers.

But it's interesting that that he rather than sort of going with the new age technology ev approach, there's some deference right to the old automotive head about what the right course of action, and it kind of echoes this. How I've known Peter in the time that I've interviewed him the last few years, it is patients and prudence. And when we started reporting on the back a lot, there's a lot of height from retail investors, a lot of excitement from within Lucid and sources about the need

to get a car to market quickly. It's astonishing how quickly that narrative has changed overnight, and we're starting to see the red headlines crossing the Bloomberg terminal Regarding this interview, and one of the interesting things that came out is that the um you know it's the delay was called. But as you mentioned by the Churchill spack itself, but they're also getting some bridge financing from Saudi Arabia. Tops

about that. Yes, So the transaction with Churchill won't close until sometime in the second quarter, right, And in the meantime, Lucid is hiring like crazy and it's trying to get its production lines fired up. They need cash. So what I'm told is that that's going to simply come from saudiast Public Investment Fund six million dollars bridge financing, however you want to put it. You know what's really interesting. In the run up to this deal, a lot of

retail traders basically aid this back on speculation. But last night in the investor deck, we actually looked under the hood and saw what Lucid's plan is, and they're expecting negative free cash flow or cash burn of ten billion dollars between now and you guys talk about Uber right, not not pyem but spread out over that time, Babe,

you guys, you you guys cover Uber right. You've talked about how cash burn with such a significant story around them, when would they be profitable and stop kind of growing and and think about profitability. Well, if there's one thing you learn on this beat, it's the prototypes are easy. Production is hard, and it all takes cash. It all takes capital, and you know they will have to go to the public markets again, um, the capital markets again.

The Lucid CEO confirmed that during the interview. But but what's astonishing is that you know they are some way from profits, some way from meaningful revenue as well. And it kind of brings it back home that this is a pre revenue startup, right despite the eyewatering evaluation. If they keep it to ten billion, I'll be shut you know, because that's the kind of number that you overrun. I mean, it takes a billion dollars to develop a car from scratch.

And that's if you're already GM or Ford, Right, that's if you already know exactly what you're doing, have your factories built, etcetera, etcetera. Let me ask you about Rivian, because this is the other kind of viable um competitor to Tesla. Lucid and Rivian really the only two that are likely to bring out a car in the next twelve months for sale. And you and Katie Roof and a guy with a really cool name. Keel Porter from the story about their I I P. Keel Porter is

such a cool name. It sounds like he should be in a movie with Tom Keane and White. Yeah, in anyone. In any case, their IPO could come as soon as September. It's not a spack, it's legit I P O. Tell us about it. Yes, according to sources, that's what we're hearing that the Rivian is looking at an I P O. It's speaking to bank is they hide and you see fo whose former JP Morgan executive in the new year, Um,

don't forget. Rivan is raised eight billion dollars to date from private rounds right with some very big name investors. More of ideality t rowe price a lot more. And they have been in stealth mode in the truest sense of the expression. You know, they really spent several years under the radar before going public with their design. Even what I'm hearing in Rivian is it's a really similar story. Lots of prudence and patients. They have a very big

workforce of around three and a half thousand. They have retrofitted and Mitsubishi factory in Normal, Illinois rather than build a factory from scratch like Lucid's done. They have a lot and I cannot stress this enough, a lot of former Tesla engineers at the very senior level for engineering and manufacturing, and on paper they will be the first to bring a new EV product to market here in the US, a battery electric pickup in June. And I think you and I've talked about this map, but Americans

by light trucks. They don't buy sedans, they don't buy hatchbags. People when I talks people about hatchbacks said they didn't even know what that is. So you know the anticipation right exactly. The anticipation here very top year, and the anticipation with Rivan is like, well, here we go a battery electric car that is actually in line with what Americans like to drive. And Jon ed that drove on the long way up with you and McGregor and Charlie Warman. Uh,

you actually saw that Rivan truck and action. So that's a great advertisement advertisement, as you would say, Hey, thanks so much for joining us. We appreciate Ed Ludlow, reporter for Bloomberg News, joining us from San Francisco from red Headlines. Come here across matt Us ready sanctions to punish Russia over mal Valley. So it's very interesting in there. So we'll have to follow up with that story going forward.

One of them, I thought the most interesting stories on the Bloomberg UM so far this week has been one about how Joe Biden will spend more money after this one point nine trillion dollar stimulus package on infrastructure, And we're gonna bring in Josh Deets to talk a little

bit about that, his senior portfolio manager at Aberdeen Standard Investments. Typically, when I talked to somebody Josh at Aberdeen, UM, there in Edinburgh, but you are in New York City, UM, which is a place that probably needs a heck of a lot more spending than Edinburgh. Where do you think project? Where do you? Where do you think Biden? I guess Biden famously doesn't like LaGuardia, right, well, who does? Where do you think Biden's gonna start? So I think it's

a combination. Right. When people talk about infrastructure, historically it's always been roads and bridges, but we actually think that's part of an infrastructure plan. But it's also about modernizing the economy, tackling climate change, and address some racial and social economic inequalities and part of broadband. Broadband right exactly as we're all working from home and our kids are in zoom school from home. It shows what an essential

asset that broadband is currently. So I think it's going to be a combination of all of those. It's just not gonna be fixing Guardia Airport or the airports in general, but that will be part of it. All Right, Well, we have a little tunnel connecting New Jersey and New York that goes under the Hudson River. We need to fix that, uh, Josh, So see what you can do there. So talk to us a little bit about you know

again this uh, this infrastructure bill. It seems like there's a little fatigue here on the you know, getting more money from Congress in terms of fiscal stimulus. Is there a bipartisan support for h kind of a more of an infrastructure type of playing Josh. Both Democrats and Republicans have talked about it for years, probably the only issue they agree on. And I would actually say what we've seen now in this one point nine billion ballots stimulus package,

to me, it's more of a stabilization package. The infrastructure plan would actually be a stimulus for the economy because there's a multiplier effect and will have growth from that rather than just stabilized in the company. And that's why I think it's so important. He didn't meet with the Republicans a couple of weeks ago to discuss it, and I think this was part of his campaign pledged, and I think he really wants to get this done sooner then later, so we could have possibly have it by

the stub or possibly the fourth quarter. Don't forget the other thing they agree on. AOC and Ted Cruz both thought it was stupid for Robin Hood to shut down Game Stop buyers UM. In terms of the money, I mean, two to three trillion is what you expect, right, So if you add that to the one point nine trillion support program and the other four and a half trillion we've spent, you're already getting towards ten trillion dollars of spending in like a four or five year period UM.

That's got to be some kind of record. It is. It's tremendous how much our debt has grown, and it is worrisome. I will say the one part about an infrastructure package ten and should lead to growth, and it wouldn't be all up front like these other packages. This would be spent over an eight or ten year period. So hopefully we'll have growth and that will help the economy and hopefully pay down some of the debt we've

accumulated over the past few months. All right, Josh, given the potential for more fiscal studius, again on the infrastructure side, how are you positioning your portfolio? So it's a combination. First of all, we view this as a free call option, so we were positioning or portfolio currently for what we still have expected spending, not from the government, from the private side, and a lot has to do with climate

change and we see growth there. You know, we expect ten to twelve per cent or I should say low double digit growth and renewables over the next decade um to come. Right now, about the three quarters of the world judge by g d P has committed to net zero emissions, So we think renewables are be a way to play the infrastructure and the growth. And another part of it is um prepared for five G and we believe that macro towers are the most cost effective way

to deploy wireless spectrum. So I would say in the renewable side you like quite a bit. And then from the five G and the towers just one other part as the economy is reopened, and we started to see that with Israel right now and their economy started reopen being they've been able to distribute the vaccines. We do think there's also an opportunity in transportation right now as we start airline stocks move over the past couple of days, we think airports and roads are also a good place

to invest for infrastructure. So if I translate a little bit, and this doesn't have to be the exact pick, but so you like Siemens and and Ge, you like Ericsson and Noki? Are you like American Tower? Crowncastle? What about Caterpillar? What about So? What about what about um? You know, the big industrial earth moving equipment maker. I mean, isn't that the kind of typical infrastructure winner. So it's interesting

because that's the way people look at it. And those companies that cats and DearS, they might be great companies, but they're much more cicklical, right, And that's really betting on some type of stimulus package. When I'm talking about are really we want to own the owners of infrastructure who are going to grow as it commonly comes back, and also have the ability to grow from um countries pledge for zero costs admissions going forward. So that's where

we really want to play. We want to own the owners of infrastructure rather than the construction companies or rather than the suppliers to that. So it's a little bit different than what people wouldn't generally say this is a type of infrastructure place, so we wouldn't have the ricks and manokias in the are fun, but we much more

prefer the wireless powers. All right, Joy Jeff forgot to leave it there here just because of the time, but I'm definitely down with that tower called Josh D's, portfolio manager of the Aberdeen Standard Global Infrastructure Income Fund. We appreciate it. Only we've heard so far from Chairman Pal is probably what most market participants were expecting to hear. That is generally lower for longer as it relates to rates and status quo as it relates to asset purchases

in the market. Let's see how that translates in for a professional investor. We do that with David Harden, CEO and Chief Investment Officer of Summit Global Investments, they have one point two billion dollars in assets under management. We appreciate him taking the time, David, So again, it's kind of seems steady as she goes from the Fed. Is that consistent with what you're looking for and how you've structured your portfolio? Absolutely, Paul Matt, thanks for having me.

Appreciate being here. I think from an investor, stand for it prudently and properly ahead, and that's where the Fed seems to be steadily going forward lower longer they had they said they have the tools that it is not going to turn on the dime. If they're plation out there, well, all of us are saying yes, but obviously the Fed

is saying no. So what does that mean? You know, it looks like the market is worried that inflation is coming back, and that's going to push the Fed to raise rates, and so the market raising rates itself and that's pushing down stock prices. Does this give you maybe an entry point? Is that a buying opportunity this dip,

especially if you're a trader or investor either one? Absolutely, because right now, let's face it, we know this this one trillion plus dollar packages coming as well, and about that it is going to come right into savings in the market, So another four five billion is going to be coming into the market. You want to be in front of that, all right, David, I know that you guys at summit really utilize E s G environmental, social and governance. It's a big part of your analytical framework.

Tell us kind of what your E s G analysis is kind of suggested to your right now. Well, one of the things that we've noticed clearly is the companies that have good environmental environmental social governance standards and abide by those standards have lower volatility, have smoother paths, and companies that violate those standards have much more volatility and

downside risk. And so we want to avoid these companies that you know that they're not very high quality, that have a lot of potential for unwanted surprises through a s G and that's our focus. Obviously, with the size of about two billion dollars, we're not going to go out and make the huge change that everybody would would desire in the world, but we feel like we have really a great method to avoid the violators, and that's

the key. You you point out that risk has been risk management has been thrown to the wayside, and with you know, the four and a half trillion in stimulus that we've had another two trillion at least to come, you can understand why. Um it kind of reminds me John Author's said timing a market bubble is tough, But when you're in one, what do you do? How do you deal with that pressure? You know, it's very true.

Let's face it, a flash mob of retail investors has no idea and does not care about risk, and there is little risk management going on today. But I think that what you're looking for is regardless if we have a correction, you know, in in eight months, or the FED makes a communication mistake, which it did not this morning, you know, or disreplation, trade continues and then falls off. Liquidity wins growth momentum. The point here is that you want to be in companies that will do well in

all of these trades. You know, companies like best buy or companies that you know that we own Best buy up and its online growth executing really well. It's value, it's not really expensive, so it plays well in the value, it plays well in the growth. It has liquidity, so that you know you want to be in these companies that's a tough one today. Well yeah, it sure was um and we go on a little bit of home depot.

But you know, that's what that that I think that's what you want to be into is companies that do

well regardless of the trade. Alright, So, Dave, I mean a lot of folks kind of see this big, big move in the market, you know, off the bottom over the last twelve months and say, okay, that that's due in large parts of the fed flooding of the market, which we got more confirmation today it's due to fiscal stimulus, and now it's due to thank goodness, the vaccines coming into the market, you know, kind of bringing the reopening trade back to the foe. Is there evaluation concerned here? David?

How do you think about valuation in this market? Well, yes, there is valuation concerns, but the risk speaking behavior is going to continue. And if you look back at all these other corrections, valuation wasn't the thing that sparked the big down draft, right, so valueation does not seem to create a market correction in and of itself. And so I don't think in this time period, right at the moment, you need to be so focused, laser focused on valuation.

Take for example, Apple, which we own Apple right now is trading about thirty times multiple, right, but it's five year average multiples only seventeen. So someone would say, gosh, this is really expensive. But look at their innovation, look at their growth. They just had a hundred plus quarter like Amazon, So I think there's a lot of innovation there. People are looking them for the next dance. They've done

great on E S G as well. So from our standpoint, I think you need to let the evaluation maybe hold up, you know, not make as much weight in your decision as it would in a normal trade. If they can make an e V, they could shoot for a thousand valuation, right, I mean thirty that's a that's peanuts. If they could make a thousand dollar phone that doesn't break when you drop it, that would also be another reason to to boost the valuation. David, it's been a pleasure having you

on the program today. Great talking to Dave Harden. He's the CEO and chief investment officer at Summit Global Investments. They manage a couple of billion dollars there. Said they're not going to change the world, but he definitely loves what he does and his employees. So I think that's pretty good. Pretty good, Lake City, It's actually bountiful you talk to check out the website even better, very cool. This is Bloomberg. Thanks for listening to the Bloomberg Markets podcast.

You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Pet Ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio