The Latest On Bond Markets, Fed Strategy And Investment Outlook

I think the transitory arguments kind of halfway out the window, all the way out of the window, but the investors are still trying to get a handle on that. Let's check in with the professional, get his thoughts on Esta Ramo's Chief investment Officer b MO Global Asset Management in the US or now. So, thanks so much for joining us here. Let's start with inflation because it's everywhere and we we just got through a big earning season where it was certainly one of the most talked about topics

on the conference calls. How do you think about the inflationary environment we're in today and how does that color your investment look? Thank you for having me um inflation we believe might actually not be as persistent as some people expect. There's a couple of reasons for that. Number One, you have strong base effects. In other words, once you have inflation ramping up as much as it has by now, but compares get easier, you can't have I mean you could,

we saw it in the seventies. You can't at ten temper cent temper cent stacking up year over year unless something dramatic has changed the economy. We think a lot of the inflationary pressures we see right now are derived from COVID and COVID after effects, supply chain disruptions that are the result of COVID lockdowns, and other things like that, and all of those will be in the process or

are already in the process of resolving themselves. So I wouldn't be surprised if we start to see inflation come off of these high levels and perhaps into two end up in the maybe two to four range, which is a lot lower than received right now. So it actually might turn out to be maybe the word is not transitory, but not a permanent six going forward for the next couple of years to speak, well, it was, I mean the seventies inflation was transitory. Was just that one decade

pretty much. I'm curious. I'm curious um ernesto to hear what you think about transitory. I mean, you did UM your undergrad and something, Matthew, I think at M I T. And then you studied UM statistics for your PhD at Harvard. You get PhD in statistics. Well, I think that's pretty cool. You do well. I had one semester that in business. One was enough. I loved I loved it. But you don't. I'm assuming you don't really use words as vague as transitory or do they mean something different to you than

they mean to the rest of us. What do you what do you think about? Well, the idea, I think positial people thought transitory was one or two months or maybe three months of high print. Uh. I think inflation as a as a compounding mechanism is not gonna last more than a few months. Uh. And that's that's basically our base case. And look, the important thing here is not so much that inflation is going to be here forever or not. Is the fact that nobody really knows.

There's so many things right now that nobody really knows what it's going to look like, inflation being one of them. Do you have a huge, a very big distribution around the potential inflation outcomes, supply chain disruptions, fiscal policy and monetary policy, economic growth, earnings growth, all of these things that normally people understand or are able to forecast with some sense of accuracy. Right now, the outcomes are all

over the place. So so what do we tell investors right now given all of the uncertainties around all of these potential UH disruptures or positive forces for the for the markets. The one thing you know is that stocks are the safest place to be, even though they're richly valued, because everywhere else you look things are even more expensively valued, especially bonds and let alone are more speculative assets like

cryptos and so on. So so, at the end of the day, the one place where you can find refuges in stocks and within stocks, do you go growth, do you go value? To use go small cap, do you

go large gap. We're thinking that right now the sweet spot is quality stocks, and by quality I mean low leverage, stable learning, profitable companies that are not necessarily your highest growers, not necessarily your your cyclical place, but companies that are relatively immune to the to the to the cyclical forces also relatively immune to interest rates, but will provide some decent return given all of the uncertainties that I just mentioned,

because the world is really murky right now and we don't know how all of these forces will resolve themselves. Na, how do you feel about the valuation in this mark could place? A lot of people are raising that as a as a red flag. Yet we just had some really strong earning, So how do you think about that? Well? Also, if stocks are the only place to be, do you care? Do you care? Right? Well, that's the thing. I mean.

Valuations for stocks are rich, but valuation for bonds are we been richer, So you have to put your money somewhere. You can't leave it in cash because of the because of inflation. You have to put it either in bonds or stocks. And right now stocks seem to be the

least richly values of of these highly valued areas. But but yeah, that is the biggest risk to see in in in in the market, in the stock market, and in fact, I wouldn't be surprised to see some kind of a correction here of five to tem per said move, because we haven't had one for for quite a while. So but that is part of investing in the stock market. You have to put your money there, and and and

put up with occasional correction. But over the next couple of years, we think you will be much more highly rewarded for being stocks that for being in bonds. At this point, what about Westchester? Real estate? Is that safe place? Well? Real estate, food and anything you talk about has been so inflated by by your very loose monetary conditions, which, by the way, we think will persist because whether you get power or or brainer, you're gonna have loose monetary policy.

So so so that part of the question is good. But real estate is up through the roof. Alright, thank you so much. We really appreciate our rama's chief investment officer, BEMO Global Asset Management. Let's bring she's gonna talk rates with his managing director and global head of rate strategy at TV Securities. We had Bill Dudley, former New York Fed President in current Bloomberg opinion columns. He was on Bloomberg Television this morning kind of suggesting that maybe the

Fed is falling behind the market. Here's that really late to rates? How do you think about that? So I think it all comes down to the expectation of will inflation slow down or is a being a new normal of high inflation and labor markets lack going the way I think Dudley's comments suggests that inflation his expectation as inflation states high, and so the FED will have to play catch up because they would start hiking in his

view late. We're actually taking the other side of the argument that inflation is likely to decelerate, that there's still plenty of labor market slack. We're dealing with the frictions of the labor market where people have left and they have to come back, and and so our views of the FED hikes only in two thousand twenty three. So

the market is pretty split. I think we have a bimodal distribution in terms of you know what what what are the inflation dynamics the labor market dynamics, And so you've got views of those who say that the FED is too slow, which is Dudley's argument. We actually think the markets pricing into early of a FED high first hike is being priced for July twenty two, right after tapering in. But we think by then the fiscal drag

will actually start to show up. Both with decelerating inflation as well as growth, and think that the FED won't be able to hike next year. So well, it's a pretty split market right now. I mean, because the economy doesn't look that strong enough, doesn't look strong enough to hike into Is that what you're saying. I mean, if

they hike just to stop inflation, that's not great. They need to have a healthy enough economy in which into which to do it exactly, And if it's just inflation written, um, it's not even clear that inflation will decelerate based on Fed hikes. I mean, the way it would have to work, if the FED would have to hike, tighten financial conditions, slow the cormy down, and then bring inflation so through

the demand channel. But there's a lot of evidence that this is not a demand lead inflation, this is supply lead. So it's not even clear that FED hikes help. And to your point, yes, if growth is starting to slow and we think the market is underestimating the extent of fiscal drag, go to have been so strong this year because of massive fiscal stimulus, and even though we expect the one and three quarters TRILLI and build back better

plan to go through. That's not a next year stimulus, that's over the next ten years, and so there's going to be a drag from the fiscal side, which will start to decelerate GDP. We've got GDP decelerating to two percent by the end of next year. So it's a very hard environment for the FED to hike as growth is slowing and if there's evidence that inflation seems to have beat. So as we think about inflation, a lot of folks are saying, you're not going to really see

long term inflation until you get wage inflation. Is wage inflation something that we need to be on the lookout for, absolutely, But I think we have to really dig into the details of the wage inflation numbers. They're high right now. But we don't think this is indicative of the labor market slack having gone away. We think this is the function of the fact that a lot of people left the labor market because of COVID, because of child care reasons,

summer time ins in there as well immigration. There's a bunch of factors that are responsible for a small labor market, smaller labor market than it would have been. But as the economy recovered, as we moved towards the from goods consumption to service consumption. We think people return, and so wage inflation numbers we actually think are going to decelerate as more people enter the labor force, and that's what

prevents the wage price spiders. So there's a key assumption to our call that the FED won't be able to hight next year is that we just start to decelerate because people return. Now that's making an assumption that there's no further COVID spike or another variant. But yeah, so you're right, the wage component cannot be underestimated here well, and the wage growth that we've seen of late hasn't kept up with the inflation that we've seen of late.

Of course, there is a time when wage growth was far ahead of inflation, and it needs to be even out of bit. What do you think the overall picture is when we get to the end of this thing pre two, people make enough more to keep up with the games and prices. I think in the near term, um, the real wage growth is negative and and low, but they've got a buffer through savings. The savings rate has gone up significantly as well. Now there's a question of

do people really run down their savings. We think there will be some component of that next year, and so consumption might hold up okay, even though we just will not be able to keep up with prices. But once the savings rate comes back down to a more normal level, then I think we'll have to settle down into you know, real wages having to go up. Otherwise consumption is going to get hit, which might be a twenty three stories PREA thank you so much for joining us. We always

appreciate getting your thoughts here. Pre A Misra, Managing Director and global head of Rates Strategy for TV Securities. Taking more the transitory call as it relates to inflation, and that is becoming I think a little bit out of consensus the farther we get into this. Alright, man, I went away for vacation and the ten years trading right around one point six percent, and come back a week later and it's still trading around one point six percent.

But I've got a FED that's tapering its bond purchases. I've got a FED that's talking about raising rates maybe next year, Yet not much movement here in the bond market. Let's check in with somebody who does this for a living. R J. Gallows, senior portfolio manager for Federator Hermes. R J. Give us a sense of kind of how you think the FED is kind of going about its business these days in terms of tapering, in terms of disclosing, maybe how it views the in strate structure maybe mid next year,

how do you view their performance? I think they probably wanted to try to find a way to rewrite the dictionary definitions of transitory. Right, there's almost no other way to put it. Um. You know, to the point of the tenure being at one sixty probably should be higher. Um. We when it comes to duration, we like to look at the average yield on market way to average yield on the Bloomberg US Treasury Index. Now that started the year at started this calendar year at fifty seven basis points.

It's now a hundred and nineteen hundred nineteen is the highest it's been since pre covid um. And that's because the most FED sensitive parts of the YOK curb are very heavily weighted. If you look at the overall treasury market to three five, your securities a lot of focus on the tenure, but they may have actually obscure what's going on here the Fed has had to inflect because transitory proved to be an inapt inappropriate description of the

inflation problem. Uh, They're gonna have to tighten more. Uh, So the short ends moved up quite a bit intermediate to hang on, do you think they're gonna have to tighten? Do you think they're gonna have to raise rates? Or are you saying they're gonna have to um speed up their UM taper? I think that the probably both To me eightening tapering may not be tightening, no, but it's pulling your foot off the gas. Uh. It's a precondition to getting to the more traditional method of tightening, which

would be raising interest rates. And the market has come to the realization fairly quickly recently that the inflation problem isn't transitory. It's it's it's at least problematic if it may be temporary, but it's not short lived. Um. And as a result, the Fed will be doing both. The taper may in fact need to speed up. I don't think it would be too difficult for them to do to do that, Uh. And then the liftoff will will

certainly come in two and maybe in multiple steps. Is there we had pre a miserable on from TV Securities on earlier r J, and she was kind of suggesting that a rate increases is not event that it can be can effect be pushed out there, but you're suggesting something sooner. I don't think that's very likely. I think that the Feds, uh, you know, we we have we now have real interest rates at record lows and economy

that's apt to continue to expand. Um. Yes, there are problems that are apt to be temporary in terms of supply chain that are helping to fuel the inflation story. But the problem for the central bank uh becomes more complicated if they allow those those temporary inflation bottlenecks to be reinforced in wage, salary and price expectations. And that's where we're getting. You're seeing break even north of three. Uh. The there are wage and salary increases all over the newspapers. Uh.

You can you feel it. The inflation story is starting to heat up. I don't think this is seventy six, you know, we're going on our way to nineteen seventy nine. UM. I do think the Fed, though, has to inflect back, you know, in a traditional method, which is they have to raise interest rates they're probably gonna have to get the FED funds rate, you know, materially above one and a half, maybe two, maybe even more, they say, to fifty. The market seems to doubt that the flattening of the

curve is the confusion in the market. Does the Fed really have to go that much higher in order to restrain the inflation problem? If they do, then they run setting off a recession and you get that sort of twist flattening of the curve. Hence the tenure isn't rising as much in basis points as we've seen on other parts of the curve. Yeah, but we do see real yields down at one negative one twenty right, um, And

that's basically the lowest they've been, right exactly. And and I don't think real yields would behave would be behaving that way if people felt that greater Fed restraint to come in the in the in the future. Here tapering tightening, um uh comes without risk. It does come with risk. People aren't sure how high the FED can go without suppressing growth, and that's why really yields are not coming

off the floor. Um. I think if people had more confidence about longer term growth trajectories than really yields would be going up with nominally yields, and that's really not happening. R. J. Morgan Stanley is out with a piece today saying steer clear of US stocks and bonds. Is that something you ascribed to? Um? Well, the chief investment officer of fixed income of my company, and I have talked about this for a long time. When inflation finally comes, it's going

to be tough for all financial assets. It's been striking how the stock market has bucked the inflation concerns. I think because transitory, temporary, whatever would you want to pick um? You know, people have bought into that to some degree. As that becomes more questionable, you wonder when does the stock markets start to struggle to Right now, there's a great front page story in the Wall Street Journal about companies are benefiting from the inflation sturge. They're doing this

like once in a generation price increases. That's all great, but you can't keep doing that. So a lot depends in both markets, stocks and bonds on the timing of inflations return to some more tolerable level. And since that's yet unknown, I would think risk premiums need to be installed in bond yields and they should keep going up the stock market. You know, it seems to be bullethrough right now. Of surprising, all right, r J, thank you so much for joining us. We always appreciate getting your

thoughts and perspective. R J. Gallos, Senior portfolio manager manager for a federator whom he's giving us his thoughts on these markets. He thinks we're going to get, in fact, a rate increase from the subtle reserve in two when Matt Miller can't fill up his Ford F one fifty truck with a hundred and fifty dollar prepaid card, that inflation, uh questions is that transitory is not going to be around for a while. Does he have to think about

going electric? Let's bring in Steve Wyatt, chief investment strategist for b Okay Financial. Steve, let's start with the inflation question. It is topic to you're here, uh, in the market places here today? How do you think about inflation and how does that impact how do you put money to work these days? Yeah, thank you, good morning. I appreciate

the opportunity to be back on your show today. It's the it's the sixty four dollar question for all of us, and even as we think about the markets and we're investing, if we're we're going to shift our thoughts on inflation, which we would say that in the beginning we felt like the cyclical inflationary pressures would be subsiding a little

bit more quickly than they are now. Uh. But as we think about if that becomes longer term and the implications in the capital markets around the bond market, what that means from a pricing and a yield standpoint there really make it when you think about managing risk a little bit difficult, the downside risk and longer term bonds. If Rache, you're going to move up to any material amount or almost equity alike at the present time, I will, first of all, I'll tell you, Paul that I want

an electric truck. But if I put an order in now for the F one fifty Lightning, or if I put it in order now for the Rivan or the cyber truck from Tesla, no matter what, I'll be waiting years before I get one of those. Your player, I'm treating which get to the front of the line. So now,

which which kind of which kind of um? I think reinforces the point that inflation is going to be here for a while because I'm not going to get my lightning that I ordered today until three, so I have to buy you know, uh six point two leaders supercharged ram t r X. Now UM when you when you said Steve that it's um. It looks different compared with

the with the fixed income versus the equity market. I wonder we were talking earlier with PhD from Harvard who said the equity market is the only game in town right now. Do you see it the same way? Well, I would say this look a longer term if sharply, higher interest rates or inflation are not necessarily good for equities. But if you're looking for the asset class that at least has the ability to respond to inflationary pressure and protect investors capital at least in the short run, that's

that's the equity markets. If you're looking at cash or fixed income, we just think the downside risk there is even higher. Now within the equity markets, maybe there's some parts of the market that certainly do better than others,

the cyclicals, energy materials. The problem is is that after twenty years a plus of disinflation, they become such a smaller part of the SMP five hundred that it's a very narrow beat, to be honest with you, because those those sectors that benefit from lower inflation have become so much larger, but they can act as an inflation hedge. Um is your point. I bought two thousand, fourteen f one fifty raptor then for fifty eight thousand dollars fully loaded.

I'm ordering a new one now for eight five thousand dollars fully loaded, and it's only been it's a seven years. I'm just telling you the same product basically, um, although frankly not as good because the old one had a six point two leader narse aspected V eight and the new one has a three and a half. The same

product costs more a lot more seven years later. So we do see that inflation, Paul, We do, And so Steve, if I'm if I'm an investor here, I mean, should I be surprised that the ten years still at one point six percent? I thought I would have seen it much higher, given the taper, given the fact that we're

talking about rate increases next year. Yeah, So here's kind of how we view this, And I've got to tell you guys, the fact that the tenure note is remaining as low as it is from Marlins is really kind of a really negative message from the standpoint that we entered this year thinking longer term rates could float higher as we saw better economic activity and be we're able to move to a scenario where the economy can operate

without this extraordinary amount of monetary accommodation. Be a quantitative eas in which I'm glad to see the Fed get out of that. The concept of throwing liquidity at a supply constrained economy makes less and less sense over time. But even as we think about the Fed trying to raise interest rates off of zero percent, uh, we would have hoped that the market could move to that, to

that type of an outlook. But as we've seen inflationary pressures increase as we've as the Fed talks about tapering, now the long end of the market, the flattening of the yield curve, it's almost like the long end is saying the worst inflation is now the lower it's going to be longer term, because it's going to destroy so much demand and make growth harder to come by as we move a longer term. To me, it's just a really negative message out of the bond market and something

we are kind of worried about. Why, uh do we see consumer confidence hit so hard? Last week we saw the U mission numbers at a low ten. You're low, I think, so good time to buy a car, all time lows, good time to buy a house, all time low. It's all price driven. And look, I think you can come back to kind of the old saw in the commodities markets over time is the cure for high prices as high prices. But the downside of that is is it's becas of that demand destruction that uh that it's

not necessarily good from an economic growth standpoint. Look, we're still optimistic on economic growth going into next year. We think the labor market holds a huge key to how this unfolds. The ability to get labor back into the labor market one two, increase the productive capacity of the economy to meet some of this demand that's there, uh, to help untangle some of the supply change and get some of the goods that are trapped in transit to

be distributed. But in a in an almost counterintuitive way that's going to help cap if you will, the amount of inflationary pressure that we're seeing from kind of what you were talking about in your comments, and that is demand that cannot be met. So prices just keep going higher, UH, and look like they're gonna go higher. It looks like it's gonna get a little worse before it gets better.

But if the labor market will untangle a little bit, we start seeing UH people coming back into the labor force right now, there is no fear of missing out. You look at the number of quits and the jolts data. It's almost unbelievable, isn't it so? But when you've got help wanted signs everywhere you look, if you feel like the job, Durana, I don't like this. I don't like this job. Today you quit knowing that you can get

another job somewhere else. But we hope the labor market unfolds from here in a way that it helps us UH improve capacity for output and also help cap inflationary pressure a little bit. All right, Steve, thanks so much for joining us. We appreciate getting your thoughts here on this economy rates UH in this market. Steve Why a chief investment strategist for b o K Financial, and I guess again, uh as Steve was mentioning, the job market

is certainly fascinating. We look at the jobs claims every Thursday. We look at the jobs number on a monthly basis, very very closely here, and the question is will we get some of those five or six million people back into the workforce. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. Pet On

False Swoeney, I'm on Twitter at p T. Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio