June CPI, ETFs, Oil, And Crypto (Podcast)

four months. The Cow's e t F CEO w Z is the ticker, and a lot of people have been opting to get into this e t F concerned about inflation. We got a heck of an inflation print. Let's talk to Sean O'Hara. He um runs the Cow's e t F as president of Pacer E t F S. Sean, thanks so much for joining us. Give me first your reaction to this inflation print. Well, first off, thanks for having me, and thanks for telling everybody the cow story.

I'm not shocked by the number. Um. I was speaking to some folks over the weekend and I had said I thought it would be a print over nine. You know, it's sort of a time issue, you know, towards the end of the month, you know, gasoline prices came down a little bit, and oil prices sort of fell a little bit earlier in the month. We're still were under

some great, great deal of pressure. And I don't really feel that that that the inflation number is going to subside very much going forward, just because we haven't really addressed the supply side of the inflation equation. I know, the Fed, uh, you know, is really determined to just hammer down the economy to try to work on the demand side. But you know that in my view, that's just causing more pain to cure some pain. I'd rather see us be more focused on the supply side of this.

I mean, I think that would take care of everything, and then we wouldn't necessarily be in this position where we have to continually worry about rates going up and and the FED being so committed to their path going forward. Well, and I've I've heard sean so many very smart people who made a lot of money in the past with growth companies, with startups, with tech. Who have you know, said to me in the last six months, you know what, I'm just looking to get into busines. This is that

spin awful lot of cash. Um, Well, what's the connection there? Why? Why? Why? Are we seeing people make this switch? Now, it's a pretty simple equation. When you buy growth, you're buying future earnings, and when you buy companies that produce current cash, so

you're getting a current return. So those future earnings must be discounted by inputs, and those inputs are inflation and interest rates, and so if I was going to buy a dollar's worth the future earnings UM, i'd have to discount that back and so that sort of trickles down into PE ratios. When you buy companies to give you a high current return on cash or on your investments, you're less bothered by the higher interest rates and higher

inflation numbers. And so in an environment like this, what's going on really is that there's a shift in sentiment away from growth and towards companies that are giving you a much higher return. And that's because when we have rising interest rates and rising inflation and then god forbid, the threat of slowing earnings, PE multiples on the overall market have to contract, and that to where all of the big growth returns where in companies that had high pvs.

And we're starting to see the pain of staying in that trade as opposed to repositioning your portfolio to get a high current return on your money that's less damaged by those higher input costs. So Sean, I understand that in principle, with the discount rate and all of that, that's why you see tech sensitive to so much of

the yields picture. But I'm curious if that perhaps definition or that categories should change in that Tech perhaps isn't the growth play anymore, it's non defensive play anymore, and perhaps it's actually a value play, just given how much fundamentally it's become a part of our lives, but also how much fundamentally it's become a part of say even the SMP five. I'm curious, is there an argument to where say, a name like Apple is the new Coca Cola.

There's definitely it's a great point. You know, if we look at the history on the cow zt F, We've owned Apple at different periods from points in time, but that's only when the price of the stock came down enough to warrant it having a high enough free cash flow yield. We own Meta in cows you know, that's a tech play. We've always had a little bit of a tech exposure, mostly on the chip side, like with a name like an Intel or even on IBM. I

would be very very happy to see that happen. And that's sort of in the pattern if we look sort of historically at you know, the methodology that we've built is when you see these big reversals and you see peeps come down, high high quality names that would were growth names have a tendency from time to time to fall into our screen, and and so we would be very excited to see what you said happened. The thing you have to worry about is that how long that

that transition is. You know, if you look at a Microsoft in the nineties that went nowhere for almost a decade, even though it was a profitable company, and that was because it was going from a regime or had a high p and their growth slowed enough to where they had to adjust to it. So I would expect to

see some of that happening in the text basin. And by rebalancing the COWS portfolio on a quarterly basis and can attation to the free cash flow and free cash flow yield, we might actually avail ourselves as some of those opportunities. I see, you have a lot of healthcare holding. He's just got thirty seconds left, but I'm looking at Moderna here, Bristol Meyers Squib guilelead visor. Um, these healthcare businesses are just kind of recession proof. Is that the idea? Well,

it's it's following the free cash flow. But you're you're actually correct on that. Healthcare as a sector has grown its earnings almost as fast as tech has, but their stock prices haven't gone up as much as their earnings. For as tech stock prices went up like two or two and a half times they're earning. So as a as a safety play, if you will, as a way to be less susceptible to pe contraction, healthcare looks like a great place to be because those stocks never got

too expensive relative to their earnings and their free cash flow. Sean, thanks so much for joining us. Great talking to you and uh UM great to get the voice behind the e t F that we've been talking about here for so long. The cows e t F c o w Z one e t F of the Year from with Intelligence Mutual Fund and e F Awards last month, and it's one that we high it on our E t F show as well. So Sean we gotta get you on the E T F I Q show. Um that

we run Monday's at one pm. Dream Team here while Paul Sweeney is out surfing and bonfires on the beach, He's at a lu ow and he's listening to the slide guitar. Man. I wish I was in why you right now? We should take a little Bloomberg Markets field trip. In the meantime, though, to do that field trip, we would have to get on a plane board it. Try to get to buy a ticket. Yeah, we have to. The flight would have to not be canceled, pack snacks because we don't want to pay. It would be expensive.

You know, I can't fly economy. I'm six three and forty years old. So oh really see, I was gonna say, I can very easily fit into like, um, what's the cargo cabin below? I could do that if they would just decrease the air fare. Um. Maybe Peter McNally, our next guests, can help us with that prospect, especially on a data like today where we did get those Delta earnings. Peter McNally, the global lead of Industrials, Materials and Energy at Third Bridge, joins us and I should say my

former employers. I'm extra excited about this guest. Peter, thank you as always for joining us. Well, Matt and I just put out a few suggestions. How are we going to afford airfare? And is that really an issue right now? Given everyone wants to travel, It's not like there's any shortage of demand. So what is wrong with these airline earnings? Well, Creedy, I think we'll be pretty sure that those costs are not coming down, you know, I mean there are three

issues in there, all into related, right. It's capacity, it's the cruise, and it's the costs. And airlines would a more capacity if they could. They just can't get enough people to staff these plants. Now they've been aggressively hiring, but to pay people a lot more money to work on these plants. And you know, it's like it's like other industries, but even more so from what our experts

have been seeing than uh than in other places. But you know, people who work in these airlines are making more money today than they were a year ago and what they were pre pandemic, and people costs for the single highest cost for you know, for any airline you know, anywhere. So while there is that demand Um, it's it hasn't been able to be met because we can't get enough planes with people, so they can't get enough planes out there to meet demand. But they also can't raise prices

enough to um keep margins where they want them. Is that the case? Yes, yes, I mean, look, it's fundamentally a less profitable business than it was pre pandemic, but they're they're still making money. Um, we just probably would have expected a bit more, you know at this point. Some of that does have to do, you know, with the oil price, and some of it does have to do with the lag. Right, they're any people, you know, but the people have to be trained, so they're not

necessarily generating revenue for these companies just yet. UM that will turn you know, in the future. And Delta's talking you know that in about a year's time they should be back to twenty nineteen levels of capacity. Now, that's not going to help anyone in in this summer's travel season, and you've seen all the delays and the cancelations of the results of of these shortages. But you know that's

where we stand today. I mean, had they been able to really do something on prices because um, I recall flying out to see the Dead at Giant Stadium in from here, and then I went out to see the Dead at Giants Stadium in two thousand and fifteen from here, and my airfare was basically the same. You know, even though it was twenty years later. Have they been able to really move the needle on prices? Well, you know some of that twenty fifteen was one of the you know,

the low years for fuel prices. You know that did that did have you know, have a factor um and you know, as you guys have you know discusses like you know, oil prices are are high, and they're probably going to be staying high, at least relative to history, according you know, according to our experts. But there's also a lot more competition, um, you know, particularly on the leisure side of the industry today. I look at this

fight over spirit you know airlines. This is the ultimate low cost airline, you know that you have for a company like Delta where the upside is still yet to come as in the business and international side, and that's that's the big driver for them, for United for Americans, UM, So their market is going to be a little bit different, and those profits have been slower to come than what we've seen on the leisure side. But Peter, there's also a bunch of labor issues that play here. I think

American airlines had increased their pilot salaries. I think Going United did the same. I think about four increase. Delta, Alaska Southwest correct me if I'm wrong, But they're still in negotiations. And that doesn't even take into account flight attendant, crew, baggage handlers. We know as an issue abroad in London, for example, even Heathrow now capping their passenger account to a hundred thousand labor is a major problem. Is this

a problem that is solvable in the next two years? Well, you know, for a company like Delta, who you know is in negotiations with their their pilots now, it is, you know, our experts believe is a bit more managable. They've got a great balance sheet, it's well capitalized, plenty

of plenty of liquidity, and they are profitable. The carriers that are going to struggle a bit, you know, in our view, or these regional carriers where they have seen their pilots poached by these major carriers and pilot it's like to fly new planes, you know, and and to the roots they want and that's usually not something that regional airlines are able to offer. So look, there is serious wage inflation in this, you know, in this industry,

and it is leading to higher fairs. But you know, as we saw from the inflation data today, it doesn't seem like it's gonna be easy anytime soon. All right, Peter, thanks so much for joining us. Peter McNally, Uh there he is the lead analysts for Industrials over at Third Bridge talking to us about the airline story. Oh actually, wait, Peter, before you go, I gotta ask about Heathrow and rationing and is that the kind of thing that's going to

happen at more airports. Well, I think we've seen you know, we've seen it from the airlines. He's even starting right, I mean, Delton got in front of this before July fourth weekend and trying to discourage people from taking the flights that they had booked. Um. Yes, they're going to be some airports that are just going to struggle, um with getting the right step and handling you know, all this demand. We've got a few more weeks left to go in the summer. Things should ease up in the

fall on that front. Um. But it's tough all over on this industry, all right. I'm glad I got that in because I was shocked at that story yesterday. And the concern is that that spreads and we get rationing everywhere because of a shortage of not just flights, but uh, you know gas in Europe, electricity in Texas. I mean, it's all over the place. In any case, Peter, thanks so much for joining us. Peter McNally, they're global lead

for industrial materials and energy. Over at the third bridge, we have an interesting move going on in markets, not anything like what we saw on June two, when inflation came out at eight point six percent. That was three tents of percent higher than the analysts estimate UM in a survey ducted by Bloomberg. At that time, the NASDAC, the big text docs dropped three and a half percent right away. Today we had a print at nine point one percent, also three tenths of a percent higher than

the analysts estimate UM in a survey by Bloomberg. And yet the NASDAK is gaining. What's the difference. Matt Winkler is here, Bloomberg editor in chief Amertius to talk to us about why the market isn't tanking the way we saw it due last month, Matt, Matt Um, As you just said, just about everybody UH knows inflation as measured by the CPI is hovering at this forty year high

and seemingly out of control. But when you look at combined in less conspicuous metrics on inflation, you see that consumers, economists, and investors all are in sync and they're anticipating a gradual return to stability and moderation. And that seems quite surprising obviously right now. But when you look at the data closely, you see that, for example, in the bond market, what we call to break even rates, UH, they actually plummeted on June and have stayed stayed at that level since.

And then when you look at consumer behavior, consumers, even as pistomistic as they are, they're not UM struggling to make ends meet. Actually UH. If you look at personal income, for example, UM, it's higher than at any point prior to UH. And then when you go to economists and ask them what what are you seeing? They're all forecasting. And we you know, talk to dozens of economists and get their forecast quarterly. They're all seeing a moderation inflation too.

So you put that all together, add to the fact that lumber is way down this year from its highs of twenty one. Same thing with copper. You mentioned or somebody mentioned oil and gasoline, and gasoline is actually down, uh to the level of April. So even the aggs, I mean, if you look at the chart, the eggs are down, the metals are down, the oils are down from their highs, and so that's why, I mean, this

is obviously a backwards looking number to some extent. But I loved the point you made in your piece with Roger, which Robert Burgos made um in a piece this month that consumers spend three and a half percent of their disposable income I guess on gasoline, and that compares to a three point six percent average, which which drives with the higher personal income for it. And I was gonna say, Unfortunately, what happens too often when our profession is reporting on

the economy is the context is missing. And I would say in the inflation narrative, a lot of it is driven by politics, of course, and that gets picked up right away because everybody's writing about politics, but the context of the economy and inflation is often missing, and that is definitely the case, UH with today's numbers. That you can look at the CPI as we are UH and

draw a conclusion. But if you look at every other number that's related to the cp I and you look at what the FED looks at itself, the personal consumption Expenditure Index, that's three to four percentage points below the current CPI depending on when you look at it. Well, I think the key point that you made just moments ago was that people are still spending. I just got a text message from a friend in London. We're figuring out vacation dates and she said, I just looked at

prices coming out of New York. Is it's going to be too expensive for you? And what I'm saying, I mean, yes, but I still want to take this trip. It's something that Greg McNally over at Third Bridge was talking about as well. It feels like you pull the trigger now right because you're afraid that prices are going to go higher later. I'm buying tickets for October for December, because

isn't that something that happening. No, No, what you just described is that's to run right, that's the that's the runaway inflation scenario. And in fact, that uh stampede is that people think of to get something today because the price of it will be much higher tomorrow. It's just not showing up in the data. Is there any evidence that we're actually seeing demand destruction? We're talking about rationing, but I feel like it's skipping the step of demand destruction.

We see some rationing. For example, the bitcoin miners have shut down their machines in Texas, but that's because the grid is weak, or heathrow um has ration the flights that they're gonna sell, but that's because they don't have the labor that they need. Well, there's a whole set of a store of goods and services um, but goods in particular like washing machines where the prices actually are

not going inexorably higher UM. And you would expect that if we were having running, running away inflation, you would expect people to say, oh my god, I have to buy this now because the price a month from now is gonna be so much higher. And that's not really happening yet. It kind of about thirty seconds here kind of sounds like you're saying we're not in a vulcaresque moment?

Would you agree? The seventies was extremely painful and that was, you know, a decade it's worth of, if you like, not inflation going straight up, but trending higher, ever higher. And we're talking only about a couple of years now, and so it's very Uh, if you will early in this cycle to say where where Paul Wolker was in well, I mean, if the Fed raises rates now points, it'll keep its credibility and the next inflation print we see should be much lower than nine. That would be welcome.

All right. Matt Winkler, Bloomberg Editor in Chief emeritus, talking to us about inflation. You can check out his column on the Bloomberg terminal type n I Winkler Um. If you want to see it on the website, you'll see it there as well. Bloomberg dot com is the best way to access that. Now. Speaking of growing thriving business as we have involng here in Bloomberg, Interactive Broker Studios, chairman and CEO of Garrison Fathom and Uh, it's great

talking to you. Um. We have you have a number of businesses that you incubate and grow and UM focused on in different areas. We want to talk about the crypto, the blockchain side of things. UM. Right now, what's your main focus when it comes to uh, you know, fintech or crypto? Right? Are man focus right now is really educating world leaders. We're establishing a global association to really

educate lawmakers. And should we draw a fine line? I think the issue right now is that cryptocurrency, in my opinion, is practically a Ponzi scheme. Right, It's it's it's the greater good so and so, but it relies on on on the on the other persons and no offense. That's the next idiot to to pole on top of that, Right, no offense, You're an idiot. No offense, I said, no offense, right to pole on top of that, because there's no

actual value being delivered on cryptocurrency. The real value is really blockchain and Web three, the actual technology and applications. Now explain Web three because not everyone knows exactly what Web three is. We hear the the phrase all the time. Yeah, I mean the Web three is pretty much the decentral light decentralization of the Internet, right, is the ability to be able to have your own control of the Internet and your own privacies, right, um, and your own chain.

So that's really the important side. The web three and that's to us really brings value as well as blockchain because and and n f t s as well. The code for n f t s can be used for contracts. Blockchains can be used to make trading more efficient. But the cryptocurrency, I have to keep coming back to it. It has no value. It's a Ponzi scheme. We actually look into it and it actually delivers um to me, a very scary moment in history because consumers are getting

off did negatively and we can't let this happen. A really good example is defy, right, Defy is the biggest and the latest thing. You look at defy. Our world was practically liked defied before. If you look at before nineteen thirty three. Um, you know the investment banks are running rapid with the central banks. Everyone was defied, right, Ponzi schemes everywhere, But then our government, to be fair,

you could call gold of Ponzi scheme as well. But at least gold is an actual value that you actually touch and feel it. Now I agree where it depends on your opinion on goal. But I mean, we don't invest in gold. Um, but if you look at equities, commodities, and bonds, it's actually something that's producing something. But but bitcoin has the same kind of scarcity. I'm just making the argument for the other side, is it, though, right? I mean what is bitcoin? I mean bitcoin to me,

like I asked you, has a hundred different people. They're sounding a bunch of Amway salesman, right. Um, But if you if you look at bitcoin, freedom man. But but it's not attached to anything either. Right, when when you own a stock, or when you own commodities, or when you own goal, at least have something that could be can be traded. Um. But bitcoin is just putting out

false hope. And we really want to make sure that our regulators understand the difference between the blockchain technology and cryptocurrencies that bitcoin And I hope Twitter is not listening now because we're gonna get We're gonna get here now now just real quickly, though, you know, we want regulators to heavily regulate cryptocurrency just like the financial markets. Right again, back to the Glass Deegel Act. They pass that act under FDR because of the Great Depression and how financial

folks are running rampant with Ponzi's. Unfortunately, it was overturned by the Graham Leach Blindly Act in nine and that practically led to oh eight. So the current system has already learned, and why it's the best system right now in the United States is because it's learned. It is evolved. Now cryptocurrency and deflies is running rampant, and we need to make sure we heavily regulate cryptocurrencies. Meanwhile, blockchain technology and web three, they shouldn't touch that yet because the

amount of innovation there it's gonna be remarkable. Wait, so I'm confused. Where does this place. Things like the digital dollar, the digital euro, digital you want if you have this there you go. I think those are fantastic because those are actually utilizing blockchain with real currencies, right, real value.

Um So, so to me, you know, and and the folks we work with, we see value in that because the dollar, for example, is actually the currency of the world, right is actually backed by treasuries and all that kind

of sorts. But but does that mean then that the introduction of say a digital dollar or digital euro for example, that's not necessarily equal to cryptocurrencies have No, it's not equal at all yet because because all they're taking is actual real world currencies that have value on the blockchain to make it more efficient effective. Right. Meanwhile, you have

these tokens running around that have no absolute value. The only value I see is again for listeners, understand, tokens for blockchains like a theereum, do have some value because tokens are like a stock to Ethereum. Right, You're owning a stock of a blockchain, and blockchains are very important. So blockchains will evolve and these platforms will evolve to be more efficient. Let me just ask you one final question on this, because we don't have much time left.

I'm excited for the day when property deeds, birth certificates, when my driver's license can be on the blockchain and I have to carry in my pockets. See that's actual value. Yes, But as Ethereum switches to proof of steak from proof of work, I'm worried that the network is going to be weaker unless I said, the theoms haven't last. In my opinion, if there's don't last, Bitcoin is gonna drop

to ten thousand. The theorems have gonna last, because there's gonna be another blockchain platform that's gonna be much more efficient effective, um and actually going to be you know, in my opinion, some of the larger companies you see that are embracing blockchain are gonna wipe them out. For example, JP Morgan real quick. They're already starting to utilize blockchain for training here soon. So imagine how that's going to affect the whole world. And these other projects are backed

by nobody. Okay, not nobody's but people have no expertise in fly and answer anything, and and most of the time, like three complo arrows, the runaway and go hiding when things go wrong turns into a rug pole exactly. Been great having you in the studio. I'm afraid about the reaction we're gonna get on Twitter, but I guess we can deal with it. We have thick skin here. Vin Volng, chairman and CEO of Garrison Fathom, hope to have you back on because the uh Garrison Fathom business I find

absolutely fascinating. Let's get over to Hugh Johnson. I hope he doesn't get it from us via satellite. Hugh, thanks so much for joining us. Chairman of Hugh Johnson Economics, And let's just is it fair to say a legend in the UH? In the markets? I think that's fair. Um, Hugh, we've been talking to you for years and years, and you all always offer us insight that's so valuable. What do you think about the inflation print that we saw today? It's shocking at first, but it doesn't seem like the

markets are really that moved by it. Yeah, and they and they really shouldn't be. And I certainly appreciate you're referring to me as a legend. You could do that. I want to do that, but nevertheless, thank you very much. But no, Uh. The reason for that is that, first of all, if you take a look at the reaction of the response to this news, and just about any news,

there's usually an overreaction from the financial markets. Investors tend to be a little bit, so we say, excitable when you get numbers, and especially when you get numbers that are the extent of the surprise that we saw today. But I think when you look carefully at the numbers and you start to crunch down on the numbers and ask yourself, really, what does this mean for federal reserve policy?

Number one. Number two, If it means such and such for federal reserve policy, what does it mean for longer term interest rates? Because they're tied to federal reserve policy? And therefore, what does it mean to price earnings ratios and stocks? And the answer to the questions that I just posed is, well, they mean something, but they don't mean nearly as much as everybody thinks. In other words, maybe the Federal Reserve will be a little bit more aggressive.

We have to worry a little bit more about the September number for the federal funds rate or what the Federal Reserve decides to do in September. Certainly not July. July looks like seventy five basis points, and that's pretty much what we're gonna live with. The second thing, it probably means that longer term interest rates when we get out to I'll say that December time frame might be a little bit higher, maybe up the three to three

point two percent, and therefore priceings ratios a little bit lower. Therefore, the upside potential for stocks not quite as great, but it doesn't meet as much as the markets initial reactions seem to convey. It means a little bit I'm still a little bit I'm a little bit on the positive side for the equity markets, but maybe a little bit less positive, but still on the positive side. So basically, when you crunch the numbers, it doesn't mean as much

as some markets initially said. Well, I'm curious about let's let's bring it back to today's data, in particular the CPI report. It doesn't even feel like the consensus reaction is that this is the peak by any measure. So I'm curious about how the market is supposed to price this in. I mean, we're looking at an SP five hundred that was down over one percent, almost down one a half percent, on this inflation print of nine point

one percent, only to turn around. I feel like the market to some extent has I don't want to say priced in, but perhaps become complacent to bad data. Would you agree, Uh? Yeah, for the next couple of months, that might be the case. In other words, that the consumer price index on a year over year basis might stay elevated not only for the month of June, but

for say July and August. It's really hard to time these things, but you know, you've got to look at some of the leading indicators of inflations that tell us where inflation might be going, and what they all tell me, and especially if you look at things like the purchasing manager surveys, which told you that purchasing managers are not seeing bottlenecks to the extent that they've seen before, they're not paying higher prices to the extent that they saw before.

Is starting to see that the year over year gain in wages from the employment report not quite as bad as it was, coming down slowly but still coming down.

When you look at those things that tell you where the rate of inflation, the consumer price index and a year over year basis is going, they kind of tell you, and I think they tell you pretty clearly that we're going to be lower when we get to the fourth quarter of two thousand twenty two, and especially when we get to the fourth quarter of two thousand twenty three.

So where we are is not good. Yes, you're right, it's hard to time this thing, and maybe another couple of months of elevated rates of year over year consumer prices, but in time these things are going to start to come down. At least that's what the numbers tell me. Everybody can disagree on that, but that's what the numbers

are telling me. So I'm not accepting it or complacent or relaxed about it at all, but I'm I'm a little more optimistic about two thousand and twenty two of the late late partitutes twenty two and twenty three, So I can I can manage this emotionally. All right, Well we'll we'll call you back after earning season, Hugh, and then see what kind of margin compression we got, because I think that's the big concern here right, Yes, it is.

It's very clearly. I really think those numbers, like you know, what we've been talking about, are really in the cake right now, and I think really the issue that focus is going to start to shift very much to earnings and very much the margins. That's that's gonna hold the outcome, the key to the outcome for the equity markets. Very clearly that shift is going on. All right, Hugh, Great

talk to you. I really appreciate you joining us. Hugh Johnson there, he's the chairman of Hugh Johnson Economics talking to us about the inflation print and how we should be reading it. 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 on bal Sweeney.

I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio