PGIM COO: Minsky Moment For Climate Change Is Happening Now

trends affecting investing longer term. 'm talking about climate change and our good friends at p JIM have some some good research out on that. Tim Er Hyatt, he's a chief operating officer for p JIM. PEJAM is a global investment management business of Prudential Financial one point five trillion with a t under management UH based in a researging Newark, New Jersey. Tamer. Thank you so much for joining us here.

Talk to us about I know you guys are out with a recent report weathering climate change, opportunities and risk in an altered investment landscape. Climate change is such a huge issue on a global scale. There have political ramifications. How are you guys thinking about how that affects your investment paradigm. It's a it's a it's a great question, and you know, I really think it's it's long term.

But with what we saw in Texas not very long ago and all the issues there, the sort of Minsky moment for climate change is happening around us with beginning to be priced in. And that's maybe our biggest pieceis that for all investors, whether they have an E. S G lens, but even if they don't, the data now this distinguished between winners and losers. Those will be on the right side of climate change and I'm making the evolution and those will be left behind as dinosaurs and

stranded assets. And that increasingly every asset and every security will start having climate change externalities which have been there for you know, one group of people, but not reflected in market prices, increasingly reflected in market prices for but five different, very important reasons. So my question is we're all against climate change. Obviously, where can I make the most money on this? I mean, where are the opportunities that haven't already been uh, that are haven't already been

crowded into? So I would say that two biggest areas are looking for places where climate change will actually impact a company's performance, but the markets haven't internalized it because they haven't utilized the data or seen the writing on the wall. And the two areas that give us examples is first, hidden risks in areas like semiconductors and pharmaceuticals. They seem like the in pristine areas, right a Swiss

pharmaceutical company, a Taiwanese semi conductor company. But if you attract the supply chain back, you can separate between companies who have risk to medical manufacturing in India or semicon up to risk in Arizona where the water stress will really affect the manufacturing processes. And if you look back, you can start seeing which companies are much more immune to climate risk and therefore will perform better versus which

that are not and will perform worse. Uh. And then the second area I would say is on the on the greener end of the brown fossil fuel industry. You know, not a lot of people have said, you know that

divestment is a responsible investing strategy. I think there are some investors who are saying, I can actually now have the data to distinguish between companies like BP and Shell were maybe doing much more in evolving ensuring that don't become stranded acid versus energy companies that haven't made the transition that might die out as dinosaurs. The data now allows us to distinguish what we call the olive industries

at the greener end of brand. And that is certainly another opportunity across the fossil field sector, which will be by the way, with us still at least twenty fifty we think about forty percent of energy consumption will come from possiblitives. Even then, despite meeting the parents agreement alright, time more. You know, here Bloomberg, we're all about data. If you can't measure it, you can't management and manage it.

Is what the one of our our folks here at Bloomberg is fond of saying, talk to us about the data that you think investors and maybe even companies should be disclosing and focusing on what's the data that you guys really look at. So so there are about a range of data providers, of which Bloomberg is one, but you know, you use about five or six different providers.

Obviously the most common one is stubbing emissions, but increasingly, and we have a really big real estate business, as you all know, Increasingly it's satellite data flood maps that are more frequently updated than kind of you know, official

government map is storm stress. So on the real estate side, I would say real assets in general infrastructure, there's a lot of good data that allows us to make an environmental assessment and often that aligns to actually creating more value for our customers by understanding how we build resilience to that. On the public market side, stuff and bond

there's a long journey still to do. The basic ubun emission data is there for large caps, but if you go into high yield, if you go into emerging markets, the big data gaps there. The good news is they're filling in quickly, so we'd encourage all investors to just keep tracking this, not on an annual basis, but every

two three months. The data is enriching and demanding more transparency and accurate disclosures from the public sector companies will allow people to build in What is important not just for E s G investors but for every investor, which is look at climate as a risk and an opportunity as just part of your co integrated investment process and that's what we do across PGM. Alright, Timer, thanks very

much for joining us. Pleasure having you on the program time or high at Chief operating officer a PGM talking to us about a Really, I mean, now it's almost generally accepted umah investment. Uh. It's part of that whole E s G movement that is becoming so so prevalent among institutional investors. Every factor is the word I was looking for. It's really one of the one of the factors.

And I remember, I think it's just in the last couple of years become one because two or three years ago there were still question marks about the validity of investing UM through the prism of E s G. And now all of the big houses I mean, look, PJAM has one point eight trillion dollars UM, so they got a lot of weight behind it, and they're joined by

a lot of other big players out there. Well, yes they we heard from FED Chairman J. Pal and I think the message was generally, uh, status quo lower for longer as it relates to rates, Yes, monitoring inflation, but not overly concerned yet rates today looking at the tenure it is trading it just almost one point seven three percent. We see a steeping in the year field curve as well. Let's get a update from a good friend of ours, Lindsay Pexas she's a chief economist for Steple, joining us

on the phone from Chicago. Lindsay, thanks so much for joining us here. What was your takeaway from the comments from a Fed chair poal yesterday. Well, as you mentioned, the the policy announcement was very much in line with expectation rates unchanged as it purchases on a monthly basis unchanged. But when we look at what was released along with that policy announcement, the set or the summary of economic projections, it does appear as if the committee is increasingly optimistic.

They lower their outlook for unemployments, they increased their outlook

for growth and inflation. And yet when the chairman was pressed on this improved outlook, he continued to downplay the improvement and focus instead on some of the lingering risks and the lingering pain in some of the hardest hit sectors of the economy, so really highlighting some of the further need for recommendation when the forecast does seem to be painting a much brighter picture, which the market anticipated the FED would have started to indicate, uh, maybe taking

the foot off the gas. So it was a little bit of talking out of both sides of the mouth from from the FED chairman yesterday. For first of all, lindsay, thank you very much for clearing that up for me. Cameron Cries talks about the feds SEP forecast and I was reading that like, what on earth is a SEP forecast? But um, that's why we have the experts like you on the program. How high do you think, um Bizarro Vulcar is willing to let inflation go before he moves

away from zerp. I mean, uh, if we see four percent inflation, does Powell still say hang on, it's transitory, it'll go away, or does he do something with raids? Well, it really depends in the near term. The committee seems pretty convinced that any sort of bump up in the coming month through the summer is really a reflection of this reflation trade so as the low loads of fall out of the annual calculation. So they're looking at this as a temporary bump up, not an indication of longer

term inflation. But even if we did cease the stained upward momentum and prices. The fed new framework allows the FED to allow inflation to run hot without forcing their hands. So essentially they're now looking at inflation through an average flexible target, meaning that we could actually see inflation run near three percent for the next several years, but still not exceed the FED longer term average of two percent. So there's a lot of wiggle room that the FED

has now when it comes to their inflation mandates. Hey, Linda, you know and that we got another piece of economic data this morning on the you know, the jobs claims, and they came in higher than expected. They came in stubbornly high, seventy thousands. It just doesn't seem to see, you know, much improvement there. How concerned are you about the labor market? You know, I've heard a lot of positive sentiments from folks saying this thing is going to

bounce back really quickly when when we reopened. What are your thoughts? Well, I don't think we can expect anything to bounced back quickly when we're talking about one of the worst recessionary scenarios for the US economy and history. But we certainly have taken big steps in the right direction. We have put roughly half of the twenty two million Americans that lost their job at the onset of the

crisis back to a position of gainful employment. That being said, we're still talking about roughly ten million Americans out of work, So there still is a big gap between where we are and where we were prior to the pandemic. And I do think that's one of the points that share Paul was trying to uh really acknowledge yesterday when he talked about the six percent civilian unemployment rate, but the real rate that he feels in the labor market is

closer to ten percent. So there still is a lot of linkering pain in the labor force, giving the Committee no incentive to act with any sense of immediacy to remove accommodation. It's interesting, what do you expect um say at year end in terms of the reopened economy and continued client continue you in claims well, I would expect for a further improvement in the labor market as the economy is further able to reopen, and we see this as businesses are are able to open their doors. Welcome

back employees, welcome back to sumers. We are starting to see the cycle over of organic We see it in some states, right, Lindsay, I mean Florida is absolutely Florida is open for business. Yeah. Absolutely, And you see a big economy between the growth rate in Florida versus the growth rate in California. And yet arguably the case rates were not that different. Uh, And so there is a very different approach rate by faith and certainly those that

are allowing businesses to return. Now that being said, there are some federal impediments that businesses are facing with the extension of these very generous unemployment benefits. Some small businesses they're saying they're having difficulty now reconnecting with employees even as they're trying to reopen. So again, nothing is easy. Nothing is a flip of Swich scenario. The U S economy is still struggling to get back to pre pandemic

level real quickly. I just want to get twenty seconds, Lindsay. The stifle GDP outlook, well, we are looking for a very robust one when you're talking about trillions of dollars coming down the pipeline as well as the opportunity for trillions more as the Biden administration has expressed UH somewhere between two to four trillion a likelihood for additional infrastructure, health, and social programs. So we're looking for an annualized rate

somewhere around five to six percent. Very cool wealth of information from you, Lindsay appreciated as always Lindsay PEXA their chief economist at stifle Uh. Paul I was just gonna point out, there's a really cool chart that Mike McKee put together showing initial jobless claims holding continually above the levels, the high levels that we hit in the Great Financial Crisis, and even back in two and that's seven seventy you quoted, is still above that level. So still a lot of

pain in the labor market. This is Bloomberg Mixed mixed markets here today, a day after FETE Chairman Pal says, stay the course, lower rates for longer we have inflation. Uh in check. Let's get a sense of maybe some a longer term perspective on these markets. And we love to do that with our good friend Barry rid could be well, now, it's always upbeat with Barry Suns. He was always a half half full kind of guy. Bloomberg Opinion Columns, host of Masters in business on Bloomberg Rady.

He's also the founder in chief investment officer Rid Holts Wealth Management. So Barry, let's step back here take a longer view. FETE chairman Pal says, basically, we got this. Did that come across to you yesterday? Never or less? I mean, I think the big error that everybody has come to accept following the Great Financial Crisis is that we let all the heavy lifting get done by the

Federal Reserve without enough fiscal stimulus. It was it was too much monetary policy, not enough fiscal Now there's some pushback from some quarters that hey, it's too much fiscal uh. And Pal sort of said, you know, explicitly said, this is the right sort of task for an economy that is still limping along in many areas and still hasn't fully recovered from the financial crisis. This is about unemployment and underemployment, which is really important. You know what. Uh

depresses me. I'm looking at um looking through your blog, Berry, and I always feel like I was born too late. You know. I wish I was a trader on the floor of the New York Stock Exchange in the eighties, Like I want to just front run the crowd and make money for nothing. But you're looking at annualized returns on equities and bonds across different generations. The baby boomers had it good. Gen Z is s o l that

to say the very least well. First, the bigger picture takeaway from this is just how random so much in life is. The year you happen to be born has a really significant impact on how your portfolio does over time. I remember my parents buying a house in the late sixties early seventies and then selling it um just about twenty five years later for about ten x what they paid.

You're not gonna get that sort of return today. And similarly, if you were a working stiff in the seventies and eighties, and you not that there were four oh one case in the seventies, but if you were saving and investing in the stock market, you got a huge je return over seven percent annualized versus what we've seen over the past twenty years. You know, the market was essentially flat from two thousand to two thousand and call at eleven plus.

Back then, you got a pension, dude. I mean, my grandfather worked for General Motors after he got out of the air force, and he retired with you know, pay until he was dead, right, and and that you know, a big part of the impetus behind four O one case and and this is sort of unique to the United States, was that we have shifted a lot of what is normally governmental responsibilities onto corporations, um things like

healthcare and retirement. In most Western democracies, industrialized economies, the government manages that it's their responsibility. It's not so I run a business, I take care of the health care for my my employees. We take care of there for oh one k. That's so unusual. The rest of the

world doesn't do that. And trying to shift set away from I think that what you're pointing out is when we try to shift that away from corporations, it moved to individuals instead of moving to the government, which has created a giant doughnut for a lot of people. Meaning there's a big hole in about sev the retirement expectations out there where people are going to retire with vastly insufficient money. Although Barry, you know, go to go back

to your chart. I'm looking at you know, baby boomers and Generation golf kids, they all had decent returns on stocks and bonds, but none of us have thought to buy an n f T of people, you know, none of us the gen Z kids, maybe they were all in bitcoin ten years ago. So maybe, but I don't think, you know what, there was a if you if you fast forward a few days in in on the blog at Dholtz dot com, you'll see the right up I did.

Merrill Lynch, Brent America, b Mail Interest did this immense study on cryptoconcy in bitcoin, and one of their main takeaways was that the vast majority of holdings in bitcoins, something like two point four percentity accounts are responsible for for a huge chunk of the assets, far more concentrated than what we see in either stocks, bonds or real estate.

So I don't think the millennials or or I don't know what they're gonna call the generation after them, I don't think they're holding enough bitcoin to fund their retirements fifty years from now. Yeah, you know, it's interesting. My kids are, you know, entering the workforce, and you know, one of the things I told them is, you know, just max out on your four one K and it really really really makes a difference. But boy, this low

interest rate environment, this low return environment. I'm not sure that's enough anymore. Um Well, first of all, the low interest rate environment. Who knows how much longer that's gonna be here. Um we're already up to one seven. It's going to be a long time. Um Well, the Fed. Everybody forgets the Fed doesn't determine what bonds are yielding. They only determine the FED funds rate, which drives the

shorter turn rates. It it's the market that determines what the yield um on the ten or thirty or if we're lucky, fifty and a hundred year bonds are. So I think what we're seeing with these rising rates is optimism about uh the economy on the other side of the pandemic. That doesn't necessarily translate automatically into higher stock gains. The correlation between GDP and and stocks are is surprisingly low.

All that said, a good economy and expanding tax base, um innovation and new technology tends to lead to higher living standards and higher stock prices. I will say, also, Paul, if you can get your kids a job at Bloom, they get an employer match, so that's they're automatically making

fifty returns. That's pretty sweet. Yeah, it's pretty sweet, and you know, be you gotta gotta get that savings mentality back out there into certainly one of the messages I'm trying to convey to my kids here as they enter their workforce, because boy, this low industrate environment, it's can be a tough environment to make money. Barry rick Hilt's founder of rick Holt's Wealth Management. He's also a Bloomberg Opinion columnist and of course, host of Master's in Business

podcast on Bloomberg Radio. We always appreciate getting Barry's thoughts and I get talked to him about cars at all, which we kind of will do that next time. We'll do that. I want to do a whole show with Barry about cars. I feel like I think we could probably do that. All right, let's bring in Brian Shipata from our Bloomberg Opinion team. He's writing about the FEDS move or lack thereof yesterday. I guess a lot of

people Brian were impressed by j Powell's press conference. I believe it was either m or John this morning that said it was the best job he's ever done in the press conference. Do you agree? I mean, I think he was just remarkably consistent, and for a good reason. I mean, he's basically just falls back on this framework that the FED has. Now every time anyone presses him on anything, he says, Look, we have laid out the conditions for what it will take for a rate hype.

People keep asking why won't you high rates in twenty three He's like, there are reasons why. Um, you need to have a maximum employment, you need to have inflation that has reached two percent and is on track to moderately exceed two percent for some time. Those are the conditions. If we see those conditions, we will raise interest rates. If we don't, we're not going to It. Just kept repeating that over and over and and I tried to get the message across. I don't know if bond Trader

has got it though. Yeah, Brian, it's it's I'm looking at the treasury market right here, the tenure treasury down seconds, pushing that yield up to one point seven four percent. Boy, it's been more than a year since we've seen that. And when I see moves in the bond market like that, I want to chat with either Lisa Bramwitz or you. So, Briant, is there a risk here that maybe the market will lead up. Mr Powell behind here. I mean, I think right now, what the market is suggesting is that we

will get inflation. The markets growing content that there will be inflation, and that the SAID will see that inflation and the FED will be compelled to act. The Fed's not going to do anything that the FED is going to be reactive um, whereas the bond market is more forward looking right now, and they're suggesting that we are going to see inflation down the pipe. We are going to see robust growth and that's going to um ultimately

cause rates to go up. But I think the thing that's missing here is that this is exactly what Jerome Powell and the FED want to see. They want everybody

to be talking about inflation. They want Google searches for inflation to be the highest since two thousand eight, which apparently they are um because it's been so long since anybody's been worried about inflation, that the FED was worried that no one was worried about it, um and that that would that would keep them at the zero lower bound and prevent them from having flexibility to conduct monetary policy. So I think this is all playing into the hands.

And I don't know if bond traders necessarily realize that now get out and buy that washing machine now right, because next month it could be a lot more expensive. Um. But the the flip side of this is, you know, Brian, we call um what bond traders are investors are doing a tantrum. Really they're just making money. I keep thinking about Bill grows a short position, and I know he's only the airstwhile bond king. But as these rates march higher, everybody who's into the inverse treasuries e t S is

just making more money. How much longer can they do it? Yeah? I mean I think right now the positioning is definitely UM for higher rates. UM, it doesn't seem like anybody really wants to step in on any on any major sell off you're seeing today. For example, UM, when you reach these kind of milestone numbers, it seems like every twenty five basis points, UM, there's there's buyer that come in. So one point seven five on the ten year, two point five or some of the thirty year you saw

them pretty quickly retreat from those levels. So there are certain points, but you are seeing many of these gaps Um, I was just looking at how how much ten year yields to move. For example, I think there's been five moves of eight basis points or more in the past sixteen days, and in the entire second half of there were only four. So you're seeing these big moves, uh, in pretty quick quick order. So, um, it's hard to

step in and buy at that point. So, Brian, I'm I'm looking at the d O T S GO function dots on the Bloomberg terminals. I look at. Yeah, it's very cool. It's a cool function. It looks neat, and it really shows that we're getting I guess a little bit more upward bias for rates higher. I'm looking at I guess seven dots above the trend line for three. That's a little bit different than we had before. So I guess that's suggested even at the Fed there maybe

recently thinking about higher rates. Yeah. Well, I think what was kind of telling in the press conference was Jerome Powell's that the strong bulk of the committee still sees rates near zero. So that kind of tipped the hand that that he and probably Vice Chair Richard Clarida, and probably New York Fed President John William Kind of the three big ones probably all still see rates near zero UM.

You probably expect to see some regional FED presidents that aren't quite buying into this, this new framework that that Richard Clarida and Jerome Powell Leo Brainerd, I mean kind of the core of the FED UM has implemented. So and I think there was a lot of effort by Jerome Powell to say, can we please keep the median dot at zero UM for now we haven't seen actual inflation.

You could raise it maybe in June when you start to see some of those big inflation prints due to base effects in the next few months, as Bill Gross said, for example, a three percent or four percent, you could see those on CPI in the next few months. Just because of how lo it was a year ago. Francine this morning was comparing Um Powell to the provincial commander of the UM, you know, regional American Army during the Revolutionary War, saying don't shoot until you see the whites

of their eyes. But but really, Um, what Pal's messages. I know, I'm going to see the whites of their eyes and they're gonna run right past me. So the idea is we are going to see inflation and we're not gonna shoot right, Yeah, pretty much. I mean the idea of average inflation targeting is inflation below two percent for so long that we will tolerate a modest overshoot is the way I think they phrase it. Will they tolerate four percent? Probably not. I've heard they'll tolerate three percent.

I think Charles Evans among others, has said, you know, three percent would be okay. Uh, there's been talking with two point five percent kind of being maybe a lion the stand um. But I mean if you look at core PC, which is one of the things that they put on their Summary of Economic projection, it was basically no point um in the entire post global financial crisis period, where for the entire course of a year at average two I think was the only time where it actually

met that threshold. So it's a pretty high threshold, and I think that markets are getting with the program and maybe that that merits tenure yields being above two percent eventually once this inflation starts coming around. But until they see it, the FED is not going to necessarily fak out about it or overreact. Brian, what do you think is the key metric that the FED is really focusing on as they think about rates. Yeah. I mean, I think there's a lot of talk about inflation, but people

are underestimating just what maximum employment means for the FED. UM. You know, the FED is projecting a three point five percent unemployment rate that would match the low of late early before COVID UM. But that might not even be enough to get them to move because they've changed their view to be broad based and inclusive um, and so they want to see other metrics. They want to see later forest participation rate come up. UM. They wanted to

see minority employment UM be strong as well. So there are a lot of a lot of different metrics could come in here, UM that I think people are are underestimating, and that could keep the FED pin toneer zero for a while. Yeah. Interesting. Yeah, Look, the rhetoric was certainly a constant from FED chairman Pali. You stay with his prior dialogue, Brian Chapatta, Thank you so much for joining

us Brian's debt markets calmness for Bloomberg Opinion. You can read his work and all of the other fine work from the Bloomberg Opinion columns at Bloomberg dot Com. Slash opinion or by typing O P I N GO on the Bloomberg terminal. 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 Falseweeney. I'm

on Twitter at p T Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio. M