Infrastructure And The Markets

here at Bloomberg Radio. All day, we've been focusing on what's going on down in Washington. Uh, you know, getting some of these bills passed. Do the good folks at Jennison do they care or you guys just focusing on what are earning? Is going to be next quarter, next year, that kind of thing. Hey, guys, it's it's good to

be with you again. And it's actually a really funny question because I think for the most part, we aren't really as concerned with it, and I don't know if even the markets are, um, you know, admittedly on our team and we you know, we're on a morning meeting every single day. We're just not talking about uh the

infrastructure package, the social package that the DC is talking about. UM. Instead, we're really focused on more immediate issues like UH inflation, interest rates, the supply chain disruptions, UH, COVID, and you know things even like China and the power shortages there. So so to your point, UM, I think we're focused more on immediate term issues that are affecting our investments UM and looking forward to what what companies will say

on on third quarter earnings. Yeah, so she tells us, you look at kind of all of these media intern issues that you just listed out, especially the supply change as we approach earning season, how is that affecting your investment thesis at this point? It's a real challenge, UM. You know for pretty much all of our companies across

all of the sectors. So you know, we at Jennison we invest in companies that broadly UM, you know, whether it's tech, healthcare, UM, industrials or work there and there is very few parts of the economy that have been untouched by the supply chain issues. And I think what we're trying to do on our team is really figure out is it really transitory? As the FED has suggested it or is it going to be more persistent? UM?

I think what is clear is that UM that the alleviation in some of the the supply chain issues, whether it might be labor or UM, you know, products coming from China is going to persist for longer UM. And so what we're looking at with where regard to our investments is UM, is the demand environment still strong and can our companies mitigate some of these supply chain challenges still put up decent earnings? And the hope is that UM,

the economy just stays you know, stronger for longer. And she told you that's a big topic, that being the supply chain issues. That's a topic that Kaylee and I and Matt, you know, we spend a lot of time talking about, talked to is many in a diverse group of people's we kennel this issue. It just feels like a boy it's it's a global issue number one and number two, it doesn't seem to be abating at all. I mean, it's not just microchips and uh, it's everything

UM and it includes logistics, transportation. How do you guys think about that? Are you are you discounting that this could be a longer a bigger issue for longer. It's a really tough question and and certainly at the top

of mind for everybody. I do think that the pandemic has created uh, some near term and medium term challenges in that things shut down and our economy shifted from a service economy to a more product oriented economy, and the ability for so many manufacturers across the entire global supply chain just couldn't ramp up fast enough. Uh. Couple that with COVID related shutdowns, government stimulus that are that are impacting labor, we just have a real height crunch. Now.

I think one by one some of these issues will resolve, UM, but it's not resolving at the speed and um at the pace at which I think most people expected. UM. So I do think that we are expecting that this is going to happen in the longer term. I do think that things that will resolve, you know, investments in automation, investments in um in you know, reasshoring, getting supply chains close sort of manufacturers, all of that will be deflationary at some point. But we just it's going to be

a lot longer than we thought. We're also looking for resolution as Paul said at the top on Capitol Hill, and I just I just want to kind of pick apart why you aren't interested in infrastructure spending because coming into as we looked at those runoff elections in the Senate in January, the narrative was, if we get a blue sweep, we're gonna get a ton of fiscal stimulus. That's great for domestic stocks like the small caps. So is the small cap thesis not predicated on getting some

of that longer term to stick orient and spending. You know, I would say to you that it is really the fact that we're very close to getting anything done in Washington is a really positive signal. Um. Having said that, um, you know, as we just talked about with supply chains, if we do see an infrastructure bill. Uh. First of all, you know a lot of times what happens with many of these funding packages, it takes a while for some of those moneys to actually flow down to the local municipalities.

So you know, we might not see the money or the economic boost of that at least for some period of time. Um. The other thing I've mentioned is that some of the things that are actually in the infrastructure package are things that we at Jennison are already investing in be that five G, you know, the broadband, um, you know, electric vehicle charging stations and just you know, many different things to again bring back UH manufacturing and supply chains to our you know, to the U S

show worth. UM. So I think what we'll expect us, what we expect to see is the infrastructure would be a would help sustain the economics thoth that we're seeing today rather than boost it because the truth is we don't have the labor or the materials fair enough. All right, Chantil, thank you so much for joining us as always should Teel Prossad small emit cap Growth PM at Jennison Associates. Alright, we had a ton of ECO data out this morning and one of the bigger numbers was the m manufacturing

came in better than expected. Let's break it down with Tim Fury, chairman of of the Manufacturing Business Survey for the Institute for Supply Management based in Miami, Florida. So, Tim, good number, good gain from last month. What's your take on the ism manufacturing? Yeah, thanks, Paul. So another strong month of demand. Demand was really positive in all areas. New orders were good, new export orders are up, Customer inventory is still way too low, backlog still near record has.

Demand just just continues to beat expectations. The production side saw very slight growth about a half a point if you combine production as well as employment. Uh. The issue there remains labor head count at the handless companies as well as their suppliers. So the big story again for the month is this is a supply restricted growth environment. We actually reverse some softening on the supply delivery side. Uh, and we also saw prices kind of go up again too.

So yeah, demand has never been the problem, and on some of those kind of supply side constraints. I see the average lead time for materials rose to nine two days in September. That's the highest going back. Is that going to improve anytime soon? What's your sense? Well, I mean that's driving a lot of other activity too, So you know some of the things that that is probably doing is probably having having an impact on the new

order levels. Because the price is continuing to go up, you're going to try to capture the rice today, especially if you're not so confident what's gonna happen three months from now, A couple of months from now, there was a belief that Okay, prices are going to soften a little bit, so hold back on your orders until you see it happening. But I think it's a reversal here on on the prices side. People are jumping back in

and placing orders extended lead times. You know, I'm here in stories of fifty two weeks on semi conductors, six months on steel, and you know, who really knows what's going to happen one year from now. So that's the risk to the manufacting environment, is that if things start to soften and you have all these extended orders out there at higher prices, you know what's going to happen. But none of that's going to happen in the short term here, I because everybody's really positive that things are

going to continue. As we close the year, Q one is going to be a strong period Q two most likely to the questions that remains on Q on half two. But I don't think anybody sees a falling off the clip of that, So Tim. It's interesting though the labor issue. We we hear that in so many different industries, but it's one thing finding it difficult to find people to come in and wait tables and flip burgers. But I'm thinking these manufacturing jobs are are highly paid, you know,

good benefits, um some unit unionization. I'm kind of surprised that, you know, manufacturing America is having a labor problem. Yeah, it's a mix. I mean, it's it's a mix. There's there's definitely a cadre of direct labor who have long tenure with the company, a lot of knowledge, highly skilled. They're most likely not going to jump for a five percent increase down the street. Um. And that's that's probably not the issue. But there is quite a bit of

load of moderate level, skill level labor. We had of our comments were higher. Comments again for the month of September of those indicated that they were having difficulty, which is up twelve points from August, which was a bit of a surprise. Of those companies claimed. Of all the companies claimed high levels of turnover being a significant challenge. And and that's that's people jumping for a way it increases down the street, as well as what's becoming clear

is a lot more retirements than we normally see. And and finally, just quickly, we know that there's an energy crisis on going in many parts of the world. China factories are getting hit by it in Europe as well. Is there any sign of that becoming problematic here in the US? Well, here we go right, controlling and products and natural gas feed into pretty much everything you can't make steal without energy. Probably the cost of steelers energy, cement,

I mean, classics is all natural gas. We we we never we haven't seen crew this high in a long time. Eighty I think it's like eighty bucks for uh less less touchas intermediate. What concerns me more is natural gas is five fifty to six dollars. That's that stars limited our competitive advantage around the world. Part of that is being driven now by the fact that we don't have enough wells injecting, and we're also exploring quite a bit of energy to the Southeast Asia that the places three

acts so not very good. I think longer too. We gotta fix that because that's what makes America really competitive. It is it's very competitive of dos. Hey, tim thanks so much for joining us. Always a love of conversation that includes cement and steel and all that good stuff. Good manufacturing talk for Friday. Timothy Fury, Chairman of the Manufacturing Business survey at the Institute for Supply Management. They're based in uh wash, Miami. And but we've had some

good manufacturing data pretty much all throughout the pandemic. Uh, you know, kind of Middle America has been cranking it through, so some good data there. So kayleie, this is day one of the fourth quarter. A lot of folks are saying, I got a sprint to the dash here to put up some numbers. I'll hate DESPONDI joins us. He's founder and chief investment officer of Centerstone Investors on the phone from New York City. So I'll pay if I'm a PM. I'm sitting here October one. I got three months left

to the year. Maybe I'm a little bit behind my my index. What do I do today? Uh, what's a good question. I mean, there's there's so many cross currents. I mean, at center Stone Investors, we're running the marathon, not the sprint, so you know, we're kind of um taking a longer view of things. But you know, for those people who are focused on more of the short term, short term, there's plenty of cross ones. I mean, the main thing I think that people are struggling with is

um you know, are we are you? Are we about to do this again? The economy's running hot, so there was some inflation. So the sitting forward looking numbers are that the economy is going to slow down. You can't absorb the inflation, so it's slowing down. But the Federal Reserve are they looking in the rear view or not in the past. This is basically every single cycle, right, you have the inflation numbers go up, and then the Fed kind of panics a little bit racist race, but

by then the economy is already flowing down. They turn something that should be routine into something more, you know, they create the Frankenstein that ruins the village. So it's a lot to process. If you're focused on the short term, that's for sure, okay, But as you say, but you're focused on the long term. So if you're running a marathon, what are your biggest hurdles? Is it, you know, the pulling back of fiscal and monetary support, is it these

kind of supply side issue? Is is it just valuations? More broadly, what makes you nervous? You know, it's it's continues to be the unpredictable sort of unknowns, right, And part of I mean the main, uh sort driver of these unknowns is that policy makers feel the need to

be you know, constantly involved. You they just do not economies that cover Yeah, I mean in some ways, the unpredictable part of it is what are they gonna do next, right, another couple of trillion or shut down the entire world economy?

And things are recovering. So if you, if you, if you, if we, you know, we look at things from the longer term perspective I mentioned at center Stone, and from a longer term perspective, I mean from a value investors you know, perch uh, there's plenty of value and uh, you know, plenty of reasons to be optimistic. Um, you know, provided that you can sort of assume that there's going to be interference in the in the market economies for some time. But the economies seem to be strong enough

to the standard, all right. So with a longer term perspective of a are you guys at center uh center Stone, are you more thinking I'm sticking with the long term top line growth stories tech, healthcare things like that, or are you playing maybe maybe a little bit longer reopening trade on from a global perspective, Yeah, I'd say it. I mean if you had a bucket iss, it's definitely not in technology. UM, I think that area of the market is very expensive, maybe justifiably. So it's not really

what we do. It's not our expert piece, but um for for for us, you know, the last eighteen months allowed many many businesses around the world that we're in more industrial and cyclical areas to address some glaring cost inefficiencies, something that would have taken years. I took a few months that were able to just cut massive amounts of costs.

Frankford Airport, for instance, reduced their expense structure by three hundred million euros, something they would never have been able to do without the kind of the cover of uh you know, quote unquote cover of this past eighty months. So what we're looking at is a whole host of companies that have reduced their cost structures and that have

massive amounts of operating coverage. So as there is a recovery, whether it's six months from now or a year from now, the operating leverage means that the earnings growth potentials is just tremendous and the stock prices do not reflect that. So that's kind of where you know, we find a lot of opportunity, but it does require patients. As I said, there's so much interference by you know, by sort of the authorities that it's you know, pushes the timeframe a

little bit further beyond beyond work. Yeah, so let's let's talk about some of those authorities, the fiscal authorities. I who knows what's going to happen with the infrastructure and social spending package down on Capitol Hill, what ultimately look like, what the pay force will involve in terms of higher taxes. How are you operating with that uncertainty of what corporate tax rates are going to look like going forward into the future, and how that affects some of the companies

you want to invest in. Well, we're US investors only partly, um, we are global investors. The majority of our exposures a global and we don't have these tax issues like this kind of nonsense going around from most of the countries were investing. Um, So it only really affects our US names, and in particular those US names that are only US focused. So the tax cuts that they had put in place

many years years ago really benefited local US companies. So ironically, you know this will affect domestic you know, companies have predominantly or domestically oriented the United States. But that the you know, it's not going from it's going from twenty maybe twenty five or six, and you know, we'll see it exactly as you mentioned, Kay, there's we don't know yet, but um, that's kind of the scale of it. I don't think that's enough to really destroy uh, you know,

a business. On the margin. It will impact what they do with their uh you know, excess sort of free cash flows, right, but you know, I don't see a major effect because of that. All Right, I'll bet thank you so much for joining us. All A Desponde, founder

and chief investment officer of center Stone Investors. Staying long this market here, and it's gonna be interesting to see, Kaylee, when we have earnings coming out a what the numbers are, of course, but be what the guidance is and what kind of confidence some of these C suites folks have an issuing guidance for their business. Yeah, especially considering these

supply chain issues. I think there was an expectation for most of this year that they were going to ease up in the fall, you know, in the months ahead now that is a much larger question mark, And how do you give any kind of firm guidance when there's still so many constraints out there on the supply side. Yeah, absolutely, But on the flip side, I think analysts and investors are going to be really demanding of some guidance. Here,

eighteen months into this pandemic. This is Bloomberg Today's October one. We have three quarters of one in the books. As we start to fourth order, let's check in on Phil Orlando, chief equity market strategist and head of client portfolio Management and Federated Hermes. So thanks much for joining us here. You've had a consistent constructive view of this equity market.

Where are you now as we start Q four? Well, Paul, as we talked about, I guess going back into the August period, we uh the stock market was at record highs. We were up beginning of the year, up a hundred

and seven percent since the pandemic trough in March. But we felt that there were a significant number of Washington related headwinds on the horizon during August, September, October, and we felt that the market was poised for five to ten percent pullback during that period, so we reduced our equity allocation a little bit, raise some cash when a little more defensive. With the benefit of hindsight, the market is down about five and a half percent or so

over the last month. We think there could be another shoe to drop here, given the h the state of play in Washington right now. So I think we're just sort of sitting tight and watching how events evolve in Congress and at the Federal Reserve over the course of the next couple of days and a couple of weeks. So what would your re entry point be where you start to deploy a little bit of that cash and put it back to work in the equity market. Sure,

A great question, Kaylee. I think there are two. From a price standpoint, what we're looking for technically speaking, was a pull back to the two day moving average. So in round numbers, uh, the two day moving averages is a little above the level. From a fundamental standpoint, we want to get a sense that that issues have been resolved or we're making progress towards that resolution. Now I

think we've got our hands on the Federal reserve. Inflation is sustainable, and I think the Fed is now coming to that realization they're going to announce the tapering we think on November three. Uh, complete the tapering by the middle of the next year, and then rate increases start at the end of next year. We don't have any problem what the Feds doing. But when we look at fiscal policy. UM, we've got this continuing resolution that passed

yesterday to keep the government running. But this death seiling issue is still uh, you know, very much an open question. We're very comfortable with the one point two trillion bipartisan Infrastructure bill, even though Speaker Pelosi has moved the vote dates out a couple of times. The big anchilada right now is how do we resolve this this five and

a half trillion dollar human infrastructure bill. Um, We've got to see that number smaller, tighter, better targeted, less debt, less tax increases, and and and that right now is a very open question. And frankly, that's what's going on, you know, with Speaker Pelosi and her her members right now. How concerned are you about this inflation that we're seeing throughout the economy again feels less and less transitory, maybe

a little bit more longer term. How do you guys think about that well, this is you know, you're you're preaching of the choir here. This this has been our talking point for the last six months. We thought the Federal Reserve had completely misread the sustainability of the inflation issues. Their argument was that once the procedural base effects you know, rolled off and made that inflation would sort of tame down.

And and in our view there was there was no comprehension of what the impact was on on shelter food, inflation, UH wages, UH energy. Those prices were sustainable, they were sticky, and they were going to continue to force the core CPI much higher than the FED target. We just got an update this morning. August level for the last three months now has been three point six core pc the FEDS targets two and and it's now August, not May. So at this point I think the feed is thrown

in the towel. And that's why the last two set of dot plots in June and September show slower economic growth, higher inflation. The fact that the set is acknowledging that and they're going to start to taper next month and start to tighten policy in terms of liftoff from zerup by the end of next year. I think that's exactly what they need to do. And so frankly, we're comfortable if the feed is going to make the right set of decisions. But there's one caveat in there. There's a

potential leadership transition issue that is looming. President Biden needs to indicate over the course of the next couple of weeks, the next month or so, what he plans to do with um A chair, Powell's renomination and and and three other potentially open seats on the board. UM that is an too that the market we don't have answers to, and I think we need to have some sense of

were President Biden wants to go with that. Yeah, it's gonna be a tough decision for the president, considering progressives like Elizabeth Warren have made their feelings quite clear this week. We'ren't saying two pals face. She does not want him reappointed for a second term. But then you have the moderates that Biden is going to need for any kind of confirmation Paul who would like Pal to stay. Yeah, absolutely, um in the markets don't like uncertainty. Hey, Phil, thanks

so much for joining us once again. We always appreciate your time. Phil Orlando, chief equity market strategists ahead of the client portfolio management team at Federated Hermes. Uh. They got some money under management, about a hundred billion in equities, sixty five billion in total. So um, they know what they're talking about. And Phil mentioned he's historically been pretty bullish.

They pulled back recently a little bit, got a little bit more conservative on these equity markets when they were pushing all time highs. Uh. They've pulled back a little bit, but Phil thinks it could maybe even pull back a little bit more to give them about the opportunity to put some of that capital to work. So they are a little bit cautious here and otherwise a constructive outlook.

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. Put on Fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio.