The Fed, ECB, M&A, And Rising Prices

I'm thrown it. Well. I have been waiting for at least a week um to get Neil Grossman back in here since the fed UM decision. He has worn many hats on Wall Street as a prop trader at JP Morgan. He took risk for the No August Bank, the Central Bank of Norway. Um he ran a hedge fund. Yeah, for sure, Well he was. I told you he was a road road for Cambridge. I saw a gretty picture from must have been the seventies over the weekend. But um, now he is a vintner and an historical fiction author.

Neil Grossman joins us in the Interactive Broker Studio. Neil, I want to get your take first on UM, the FEDS inflationary goals because they already were aiming for two percent. A lot of people have a problem with that to begin with. But now we've well overshot that, and if we ever want to get the average back to two percent, it's gonna take years. Well, let's start with why you

should get the average back. Mr Powell and before him Mr Bernankey spent a lot of years explained to us that having inflation a little under two percent was not really good. Um, despite the fact, of course that their statutory mandate is actually zero price stability. That's just what Congress says. But they can do whatever they want, right. That's well, we can argue that too. That's not yes, they do whatever they want. That's not really the idea.

But they spent a lot of time and then arguing that they wanted to let the economy run a little hot to push up inflation over to so you could average it. So let's using that as a baseline. Now that the fact is is that they let it run a mock to get it back to a two percent average,

let's use a reasonable time frame like ten years. You're gonna end up this year probably about twelve to four over what the two percent trajectory was which means you're going to really have to have inflation average like one percent for eight years or something like that to get you even close to the two percent. And that's, let's face it, kind of a pipe dream. Well they're not talking about that. Mr Powell has said I want to get inflation just back to two percent, and let's talk

about the probability of what that takes. I mean, Paul Valker got rates into the twenties and it took twenty five years pretty much to get a stable two percent ambient environment. I mean, you had your moments down, but for the nineties we were still averaging three to three and a half percent. If let's not anybody's business other than than Congress is they're the ones who have to just say that's not right. I I actually think that there's a legitimate reason for having low inflation. It creates

an extraordinarily healthy environment. Done right, it minimizes volatively Matt. Matt and I were doing some calculus this morning about how to maximize the area inside of a fixed geometrical This is interesting if you take if you I can see doing that any any four sided shape, right, I would have thought the area. Um. You know, if if the total uhs around the perimeters, say thirty six inches, I would have thought, it doesn't matter. You can stretch

a rectangle out, make it a square. It's all gonna be the same area. It's not a square. Is the maximal area and and and and any end gone, you know, cube or whatever else you want. The maximual area is equal size, which applies to returns on your investments, and

it also applies to things like compounding of inflation. So, for example, if if I say to you, over a ten year period, you can choose either ten percent returns each year, or you can have eleven percent this year, nine percent next year, eleven percent the year after that, nine percent the year after that, eleven year after that nine. You're much better off choosing ten percent each year. In fact, is an RB. I would take the ten in short, the eleven nine for for eternity, and I walk away

richer than Bill Gates. Um. But but the point is that this applies to things like what the FED should be doing to manage the economy. The FED should find reasonable trajectories of g d P inflation and everything else, and that and even the stock market and you want to find a sustainable trajectory where you're minimizing the variability, minimizing the volatility. That's actually how you get the maximum long term. But in the I don't I don't think that. Well,

that that their mind. Well, two percent an interesting issue. Two percent is a two factor optimization, right. They have to mandates employment, full employment, and price stability, and they're not totally consistent. So two percent has become their sort of maximum of both. At the same time they beat that. That was the sad thing they were. They were ahead of that about eight six, seven years ago. They didn't

like that right. As my first sales manager, Pain Webber would say, after I went through my big pitch about what I wanted to do with Meatia stocks, he would just interrupt me and say, Paul, are we buying him or we selling him? What are we doing here? I'm well, last time, two times ago I was on, I was short, I went a little long, and yesterday I started going short again. I think the market's got a lot more downstays. And by the way, I think this is also quite healthy.

You need sort of a washout to equilibrate, and that without that, I think we're gonna have a lot more volatility going forward. I think you need to just get some of the energy out of this system, and then I think, at least for a while, you can be you can be quite positive. Remember yesterday I was telling you Neil Neil's target for the SMP at the end of the year seventeen No, no no, no, that's my that's my target probably next year, next year or whatever. Seventeen

seventy six. We're trading at four thousand. Think about it, and I am a patriot, I get it, But you do honestly think that we're going down. I think we're going down, and I think we're gonna go down a larger than people, partially because once you start to go down, because the arkets are still functionally long and over invested. The fact is that people have to be forced out and to reduce their exposure. And when that process happens, markets extend and over extend, so you can pick what

you want. I think the earnings are too high estimates. I think that that the bottom line is that, um, the pees are too high. And again, going back to one last thing, interest rates at the long end have to go higher, all right, That's good stuff. Here's what you have to do if you get Neil and Adam in together, John, because they are also friends, but they fundamentally disagree because Adams yes, Okay, there we go. Neil Grossman, co founder, former CIO t k n G Capital, Thanks

so much for joining us. You know, Matt, here's the theme of the day. People you know, like Neil Grossman and our next guest, Ted Smith. They get all these fancy degrees in engineering, but I don't see anybody building anything or like, you know, building that's true. Both of them are vintners. Well, I don't know. I think it's a scanner. I've watched Neil put together his vineyard over the last ten years, and it takes a ton of work and planning and forethought, and I think these are

just misspent educations. So he gets Ted Smith, co founder and president of Union Square Advisors. He gets his engineering stuff from Notre Dame, and then he goes to Wall Street. I mean, go figure that, Ted, Thanks so much for joining. You're in our bloom Bloomberg Interactive Broker Studio. We appreciate that you're based on the West Coast, but you're here

in New York. Talk to us about M and A here, because before we get to that, let's let's talk about this engineer, like what did you do when you first got to the street, Because if you're putting together analytical models or if you're trading derivatives, I feel like that's really helpful to have an engineering degree. It was very

helpful for me. Carter McClellan, who had started the tech group at Morgan Stanley, had the bright idea of hiring more engineers into the new tech investment banking group to understand what our clients actually did. I thought I was going to be a two year stop and then go back and finish my PhD. In thirty three years later, I haven't gone back. Still. You still have time building and just you know, kind of making some wine. M and A boy, we look at the equity markets, of

fixing the markets here, just brutal, brutal, brutal. How about the M and A market? What do you see out there? We're certainly down from last year. We're off a little over a third from where we were this time last year. Last year a little bit, yeah, But but I think the key is deals are still getting done, right. I think you have to look through the headlines as you

guys do. That's the whole point of the show. Uh, And understand that even though the markets on both the equity and the dead side are volatile, deals are getting done. The big strategics want to do deals. The large private equity firms are awash and capital, they're continuing to look for transactions and we're still very busy advising on transaction. So so things are happening, they're just taking a little

bit longer. And you know, certainly things that were at the margin that could have gotten done six to twelve months ago won't get done. Now, what's the rising rate environment? What kind of effect does that have or does it not have an effect? I mean, if you're company looking to a fairly sizeable acquisition, you know, maybe you got all your ducks in a row financially already and you're

not worried about rates today rather rates six months ago. Right, So, if you're one of the large acquirers, you probably in tech at least you're a wash in cash. You know, whether whether you're earning you know, fifty basis points or you know, on that cash that you let go out the door to do an acquisition, probably not going to

change your P and L too much. Where it does have an impact or will over the long haul have an impact is on private equity when they're doing buyouts and they're using some of the you know, some debt to ultimately finance those. But again, we haven't seen a slowdown yet. They're taking this interest rate in stride or this interest rate environment, I should say in stride, and

they're continuing to do deals. That could change if we see, you know, continue to see seventy five BIPs changes as the norm here through the end of the year, maybe we'll see some slowdown, but so far hasn't happened, I guess. Also it depends on your view of the path of interest rate increases into the future, right. I mean so many people come on and say, I remember in the eighties I was paying a seventeen percent mortgage or I

bought tried is yielding. Um, if you think that we're headed there, yeah, then what we're saying for mortgages before take that out right, lock it in right? And and what what do you see is where do you see rates going? Um, we certainly see it's gonna it's gonna get more challenging, even this year, you know, a couple more times at least, we think the Fed is going

to be pragmatic about not overreaching. But there's still obviously a lot of debate amongst the governors about where this should go and what they want to see with it. But again to your point, man, I think we see relatively still quite cheap. Capital is available from a broad range of sour if it's particularly in the direct lender market,

which is now a multi trillion dollar asset class. Um. So deals, deals are getting done, and those big buyout firms, look, if they have to do a little more equity and a little less debt to make their deals work, they have the capital to do it. That's what I was gonna say. There's so much money in the pe space. I mean, Matt and I we just read stories day after day after day about another big fund being raised. There's always stories about they have like one point seven

trillion dollars in dry powder. I mean, it's just to the point where it doesn't make any sense anymore. So, but if they have dollars, think about how many yen they have. Now they have dollars, think about how many euros or pounds. We saw the pound go to the loan of nineteen eighty five. Um, you probably hadn't even got your degree at that point. So what is that? Is that? A is that a tailwind for m and

at first for American companies? Certainly it must be. If you want to buy something in Japan, it's at a discount, right well, and just the general valuation environment. Things are a discount relative to where we were six or twelve months ago, right, So slightly more expensive debt capital, but offset by cheaper valuations generally and the very strong dollar. I think this is the age where American pe firms

are looking to go shopping around the world. I know, I just I mean, we talked about what's a pint of beer cost in London? These guys will talk about what's a company costs? Uh in London? Ted Smith, thanks so much for joining us, too short a time. We'll get you back. Ted Smith, he's a co founder and president of Union Square Advisors. Talking about some M and A and tech space. A misspent education, no doubt about it. Electrical engineering from Notre Dame and it goes to be

an investment banker. Go figure that. But what would you I mean, what would you do? With an electrical engineering degree. You learn to look at systems, you learn to analyze things. You know, you know, go to like a defense contract there, you know, and make I don't know whatever they make submarines or something like that. That that that that would be cool. That would be pretty cool too. That's jewelry. I mean I I'm not a jewelry guy, per se

are you you're not? Really? Well, you've got a class ring. Well, I have a Signet ring because my dad always had one, because his dad always had one because his dad had one. So just like a thing when you're a little kid, you see your dad having it and then you want it. But no, I don't wear other jewelry, all right, a lot of but apparently it's a great category within retail. Jennet Drosos joins us. She's a CEO of Signet Jewelers. Signet is a public company trades upon the Big Board

of the New York Stock Exchange. S I G is a symbol to put it, do you you buy a lot of jewelry? Yeah? I'm with you on that, you know, because my my wife loves to wear. Her family is in the jewelry business in Spain. Really, but h I still like stuff for her over here? Sure? Why not? Jenna, Thanks so much for joining us here in our Bloomberg Interactive Broker studio. Matt, something is to change, man. People are coming into the studio like it's an exciting day.

It's an exciting day, saying Jenna, thanks so much for joining us here. University of Georgia alum NBA from some school down in Philadelphia. UM talked about the jewelry business. How did it fare during the pandemic? Well, thanks for having me and it is great to be in person. Uh So, if I dial back to last year on our record growth in the jewelry category, we think the category was up about last calendar year, UM Signet was grew our revenues about fifty so we gained significant market share.

We went from uh six and change to nine point three percent share of the category and continue to be overdeveloped in the bridle part of the category, where we have about a thirty percent share. And that's a big competitive And what does that mean engagement ring swdding rings exactly.

And this is the year of the wedding. Two point five million weddings this year the highest and forty years and that's gotta be the biggest spend, right, because yes, I got married last year, yes, in October, and I bought my wife, uh, you know, another engagement ring and um, fortunately her parents made us the engagement rings. But are there are the wedding rings? But uh, that's got to be the biggest spend that a typical family, a typical household does in the jewelry category, right it is. By

the way, I got married last year in October two. Congratulations, and my team made me a beautiful that is gorgeous. Wow, this is one of those times I wish were on TV. That's beautiful. Thanks, Yes, the craftsmanship was really excellent. And so why do you think the revenue growth was so strong last year? Is it because, um, you know, we had household savings built up, we got stimulus checks, etcetera. Or is it because the market rallied so hard and went to an all time high? What what drove that?

All of those things impact category growth and jewelry. So number one was pent up demand for getting engaged. Uh, couples who had chosen to live together, a quarantine together during COVID, um, you know, became closer wanted to get engaged. But a lot of people postponed the engagement until they can have a view towards when they might have a wedding, and with COVID still going on, they couldn't invite families, So pent up demand for engagements was one. Second, with stimulus,

that really impacted primarily the lower end of the market. Uh. Three big journeys that customers go on in jewelry. One is the bridal journey. You're exactly right. Uh, Buying an engagement ring is often the most expensive purchase a couple has made together. It's very considered purchase. It's a wonderful time to build a lifetime relationships with a couple, exactly. Fantastic. Second,

romantic gifting. Uh, couples who were living together couldn't go out and celebrate, you know, with dinner, or you know, couldn't go to a concert. We're buying jewelry for each other, which was great. And then stimulus really contributed to the self purchased journey, especially at the lower end. So all

those things came together to drive record market growth. So one of the things that Met and I talked about when we have CEOs here in the studio is it seems like every business every sector has supply chain issues. Is that true in the jewelry business? I mean, don't you guys get a lot of diamonds from Russia and other places like that, so it's not free for Signet UM. We were a scale player where the world's largest specialty

retailer of diamond jewelry were vertically integrated. So we buy um a portion of our rough diamonds directly from the beers from the mind we cut and polish those ourselves. Responsible sourcing UM is something that Signet has pioneered for more than a decade. Uh and as soon as in fact, even before the war broke out in Ukraine, we stopped purchasing any diamonds that have Russian origin, and we've maintained

that all the way through the conflicts. So customers can be very comfortable buying diamonds at Signet and knowing that those UM you know, have in no way been part of the conflict that's going on. What does your dealership network look like? And I only say that because I think in cars and motors, sure, but I mean it's the same thing, right, You've got retail outlets all over the place, You've got an online presence how does that

break down? Yes, so we have UM. We we have banners retail banners that exist here in the US market. For example, we just purchased Blue Nile a couple of weeks ago, and we also have James Allen. Those sit at the top of our portfolio more of an accessible luxury online pure play and a big online play exactly our biggest banners. K We also have Zails and Jared, so those sitting in the mid market, and then UM

at our our more value end of the spectrum. We have Banter by Piercing, Pagoda, and we also last year bought rocks Box, which is the leader in rental jewelry. So we have quite a wide range, and we've differentiated those banners. They're carrying different merchandise, targeting different customers. That's one of the success stories behind our share growth. So online somebody will pop down five or ten dollars for

a diamond ring without actually seeing it. Interestingly, in the second quarter price points above ten thousand dollars worth of fastest growing for all of our banners. So okay, sales shared, Yes, I'd say James Allen the website, I have spent some time on it, and it's beautiful, and it's it's it's so user friendly, and it pulls you deeper into it. So once you go on there and start looking at things, you actually spend more time than you may have planned

to do in the first place. You do spend a lot on marketing as well, because I see K's Zales ads all over the place where I hear them on radio. So how important is that? Which outlets do you choose? Well, you know, it's it's interesting. We've been on a five year transformation plan and so I think the cumulative impact of that is really putting us in a great position. Now.

One of the areas we've transformed as marketing. So historically the company has been on TV advertising, mostly in November December, mostly on the NFL, targeting guys who were, you know, buying buying a holiday gifts. We did we make the Hall of Fame ranks, which is great. Yes, so so really exciting. But been anyway, we've really changed that marketing model, so we're always on We're talking to our customers all year long, more and more personalized and targeted, influencer marketing

and social media, online video, educational videos and YouTube. So we've considerably broadened that mix, and as a result, our return on advertising spend has grown significantly over the last number of years. So it's a competitive advantage to us to have a large portfolio and be a leading marketer. But we've we've done that in a way that's highly personalized. Jennet, great stuff. Thanks for coming into the Bloomberg Interactive workers.

Due to Jenna Dress, she is the CEATO of Signet Jewelers. Again, the symbol the trade on New York Stock Exchange. You popped this into your Bloomberg Professional terminal s I G is the symbol to get that there. So good stuff on the jewelry business. Pretty solid business. I mean, yeah, we've been digging into it, so I think it's really fascinating and um, we didn't get to it, but uh, it'd be great to get. Next time we have Jenna on, we can ask her about prices for um gold and

the other uh commodities. Yea, absolutely have some good stuff. We heard from Christine Legard ECB president earlier this morning taking down GDP growth forecast for Europe and not forecasting recession, also adjusting some of the inflation concerns because that is the number one concern for not just the Federal Reserve,

but for the e c B as well. But let's get some thoughts on what we heard from miss uh Leguard from Morgan del Down, head of investment Strategy for Europe at Global x E t F s UM, again, thanks so much for joining us here. We heard from Christine Legard this morning. Do you think the ECB is doing enough here to flight to fight inflation across the continent? Well, I think the ECB has delivered the amount of akishness the market was expecting, so UM. That's why I think

we have had like some muted reaction plast meeting. UM. But what is unclear, and I think it's unclear for food markets as well, because we see no clear direction for for the year of versus dollar for example, is that in the same statement, UM, Christine mcgard said that the inflation and the risk of inflation becoming embedded in more domestic prices and invlation expectations made warrant a several

other other other hikes. But at the same time they're saying that they stayed data data dependent and they will have a meeting by meeting EPPLE. So all of this is quite it's quite confusing in these two opposite statesments kind of con saw each other out. So I think overall the market took these press conference as a more

natural tone that what it was expecting. So not providing more support to the euro from from from the strengthening we so pre meeting, you take a look, I mean normally, I imagine you take a look at the ECB president's dashboard and you see a ton of different data. Can you wipe all of that off right now and just put the Fed right there? I mean, don't they have to do this as long as the Fed is doing

it well. Actually, the weakening of the euro we saw about the past few months is definitely an uncomfortable um situation for for for for the Eurozone and the e c B M. I think we can't really compare like for like these two regions because the fundamental are becoming more divergent um with But if they morgan, if they if they didn't raise by fifty or seventy five, I mean if they only did twenty five, that would put them in a in an even weaker position. Are the

euro right? So I mean they have to do these jumbo rate hikes as long as the FED they had to keep up. It's like they're tagging along. That's actually what the market is expecting so um and it's interesting for the rest of the years, market expects us like about the same amount of hikes um in the FED and for the FED and the ECB. So it's definitely showing kind of a reverse currency wa there where the

e CP is trying to support the region. But I think what is very important for the region is to get back to inflation because this is the sole moderate mandate for for the ECB compared to the FED. UM. So inflation is everything. And there is one takeaway from Prisidon by God is when she stressed that inflation forecast for the end of the projecting period, which is twenty four will not get back to two percent inflation, but

exceeding it by by thirty business points. So this is actually a signal that the ECP will continue to to provide a several large rate highs. In my opinion, Morgan is it is it consensus in Europe that Europe will, if it isn't already in will be in a recession sooner rather than later. I think the across Europe now you see a lot of divergence between countries. If you take the countries that are really UM dependent on Russian gas like Germany. Obviously the outlook for German, for the

German economy is not looking great. But all the major economies like France, Spain, they are doing quite well because they are not dependent on on gas supply from from Russia. So there is some silver lining in what we heard from Christinagam today and from what we see from the

economic data is um. First, the projections they the gross projections for the real GDP across the region does not signal an imminent recession UH and not no recision across the protecting period, but instead more of a statflations denio UM.

So I think what what we are going to see across the region is more economic fragmentation UM and that could be actually some of it could be reduced by cooperation between countries, and this is what we are starting to see more soliarity around UM energy supply across major economies like France and Germany, agreeing on France exporting some of their gas fly to Germany if needs be so. All of these solidarity might just reduce the economic risk that the region is facing in the in this crisis.

But I think um, we have reached potentially that the big pessimist and put for the Eurozone because definitely we are saying, um, the energy prices um and the leverage from from rosha um probably exhausted now. So I'm pick pessimson probably behind her all right. Margane, thank you so much for joining us. Really appreciate getting your perspective on Europe. More Gaine Della Down, head of Investment Strategy for Europe

for Global x et f S based in London. There So maybe maybe peak pessimism is past for the Eurozone. We have to see the tough, tough winter from an energy perspective is expected across the continent in the UK UM, so I have to see how that plays out over the next six to eight months. We did hear from FED chairman j Pal this morning and make some comments uh in a presentation at the Cato Institute. We brought

you that live this morning. I want to break it down a little bit here with Janelle Marte Economics and Federal Reserve your order for Bloomberg News. Thanks so much for joining us here. I guess that you know the messaging if nothing else since Jackson Hole has been consistent, which is, we're really serious about fighting inflation and we know what that means, higher rates. What are thoughts? So

that's right. I mean what we heard again from how today is that the FED is going to do what it has to do is acting fourth rightly, he said

to bring inflation down. So even though he didn't specify what they're likely to do in September, I think he really delivered his message pretty strongly at Jackson Hole, right, which is and he did allude to that today, which is that he wanted to send the morning out there that the FED is not going to stop until inflation is coming down, and that they're more concerned, are very concerned about stopping their battle too early, declaring victory too soon.

We heard that from President Cleveland FED President Loretta Mesters. Well. I think that's just a message that they're all delivering right now, which is that they're they're they're not going to stop too soon. They're really taking this very seriously. I did hear yesterday from Brainerd and I'm trying to find my note to myself because I wrote it down. Um a comment that I thought sounded a little bit

more debbish. Um. She said, here's I've taken the verbatim, but I dropped out the middle part because it was too worthy. The rapidity of the tightening cycle creates risks associated with overtightening, and it's been a while since I've heard of FED speaker talk about those risks. Um. The market seemed to take notice. Do you think we're gonna start hearing more about that? So? I think you're right. She she did make some comments on the risks of going too far. UM. We'll see with time if we

if we hear more remarks along those lines. But we didn't hear much pushback from Powell today. Uh uh. You know, the market right now is leaning towards expecting another seventy five basis point increase. These were Powell's last remarks UM, or last scheduled remarks before the Fed goes into black app period tomorrow, UM night, So you know he didn't

he didn't close the door to another. Of course, we have another big report coming next week next Tuesday, and update on consumer the Consumer Price Index, and that is going to be very closely watched by Fed officials and economists as to UM, what's really going on? With inflation.

You know, there's a lot of folks out there that's saying, hey, maybe the Fed doesn't need to be that aggressive, or or artist seeing inflation start to really roll over when they look at the energy prices Gasoline coming down, oil now trading just above eighty dollars barrel. W t I. I've got the housing market rolling over, really impacted by higher mortgage race. Um, maybe they don't need to do much more after the seventy five basis point hike. What

are you hearing? So one thing that will be very important in the next CPI update is what happens with core inflation. So you make a good point that we are now expecting headline maybe to come down a little bit more because of what you're we're seeing with gas prices easing in that relief that households are feeling. But officials wants to see inflation come down across the board.

So they're going to be looking at shelter and they're going to be looking at the report, um to see what happened for inflation, because, um, even if we're seeing some relief in some aspects, they needed to come down across the board. I wonder we were talking Neil Grossman about this earlier. Now, if we're gonna see the Fed try and bring the average over say this decade to two, or if they're just going to give up on you know, this year and next and restart the clock once they

get there. They haven't specified, you know what time frame they're aiming for two percent inflation over time for that average target. But I mean, one thing that they're saying is they want to see inflation come down for several months in a row before they ease on their um significantly or pause on the rate increases and um. Even if it takes some time for them to bring inflation down, you know, we'll see, you know, how how they eventually

respond or how long it actually takes. But they're they're pretty serious so far aiming for two percent and not lifting that target. Alright, Janelle, very good stuff. Appreciate getting your reporting there. Janelle marte Um Economics and Federal Reserve reporter for Bloomberg DUS breaking down kind of comments we heard from FED Chairman j Pal this morning, which we brought to you live on Bloomberg Radio from the Cato Institute. Again, the message, if nothing else from this fellow reserve over

the past several weeks has been very clear. We are here to fight inflation and that means raising rates. 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 vent three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio.