Carrots and sticks

visible maths. Anti COVID lockdown protests broke out this week in major cities and universities after nearly three years of rolling lockdowns. I spoke with Bloomberg Opinions at Clara Ferra Marquez. Klara will obviously be seeing references to Tianamen Square in nine for the foreseeable future as this continues. Are those comparisons warranted? So I think it's important to understand the context of protesting and authoritarians to Surman and protests in China.

So protests and China is actually less unusual than people think. So it does happen, It is tolerated, but in very specific circumstances. So it tends to be around livelihood issues, the bread and butter issues, where the government does allow people a bit of space. It also tends to happen within particular groups, so students, workers, ethnic minorities. What's particular about the last few days is really that all of this is happening simultaneously. All of these groups are protesting

at the same time, united by the COVID factor. And also importantly and dangerously for the government, you have the livelihood issues overlapping with political issues that very quickly the slogans you hear on the streets are not a stop mask testing, it's become a shooting. Things stepped down very quickly, and I think that is what creates a combustible situation.

I really think this comparisons of nine nine are very premature and a little bit hyperbolic, very easy, especially from the western um point of view, to see these images on Twitter and where on social media and really jumped to that. And while I wouldn't take anything away from the incredible bravery of people who are standing outside even with blank sheets of paper, um, you know, that's that's

a very very difficult thing to do. And I would also highlight that small numbers are still significant in authoritarian systems in a way that you know, a hundred people might not be much of a protest in Washington, d C. Or in em Paris, but it's certainly and I think it's really too soon to get to that stage. But it is particularly striking that they are actually targeting season Ping himself right after his consolidated power and has never

been in a more powerful position in China. In some ways, Um, well, it's striking in this note. I mean, if you're a highly personal system, highly centralized, you're ultimately the person responsible, right and I think you're the target. And I think that's is both the strength and the weakness here. And it's obviously where people go in terms of attributing blame, which makes the situation dangerous. It's also what's made the COVID situation very difficult to handle because it's quite hard

to be responsive. And remember China was famous for its responsive authoritarian system. It's very hard to be responsive when you're taking all the decisions invaging very distance from a lot of your billion people. So um, and it's also very hard to modulate. So if you look at countries have done well then their COVID responses and done well and emerging from recently draconian regime to manage COVID. They've done well because they have been responsive. They have done

it quatually, but surely they've managed education. There is absolutely no way that China can do that without empowering local government, local officials, neighborhood committees to some extent, and that isn't happening. The incentives of the people have not changed. It is still COVID zero. How will the Communist Party and presidency deal with this? How long will they let it go on for and build? Because I'm sure if something isn't done,

then it will continue to build. And obviously media coverage, ole and so on will build, and that's not good for she's reputation. Um. I mean remember that people in China not seeing exactly what we are seeing. I suspect the government would very much like dis tocive about I think it is unlikely to do so without some sort of COVID response. I think they have a number of leavers at their disposal. Obviously, exactly how they respond is the million dollar questions. We do not know the answer

to that. I would just point out that they have a lot of levers still at their disposal, including the response was force a response using either COVID or just police forces they used in Hong Kong in but the precedents are not good here, and all of that remains in Shijing ping arsenal as it were. I mean, all of that remains at his disposals. He has not used those responses yet. I mean, they're really hoping that with a few tweaks here and there, they can get it through.

But I think that's quite hard to quite hard to see. It's very hard to get inside his head, obviously, But I mean, what do you imagine his instinct would be. Would it be to be harsh and to crack down on this in a harsh way immediately, or to respond with some kind of as you say, COVID response, in other words, more easing, giving people what they want, what they saw desire, even if it means additional deaths. No, I think it is very unlikely that he will give

people what they want. I mean that there's a very There's two things that I would frame you're thinking around that, and one is because she's thinking there are very few events more important than the collapse of the Soviet Union, and the way he always lookeded that, and he gave a famous speech not long after he came to power that he where he basically said it collapsed because the party didn't control the military and because and I think his effect words are something like no one was mad

enough to stand up. So I think given mass and given what we've seen elsewhere, his instincts are absolutely to deal with this in a repressive way. And when I say a COVID response, I actually mean exactly that. So extra lockdown, extra testing, you know, other ways of repressing people that are not police force. I mean, you can still do that with the stretches that are in place

in China today. I think it would be very dangerous for somebody in his position to very quickly yield to protest, because if you do that, then you know the message that it's sending to people is not one that I think the government will be very happy to the stand, which basically, you protest and we give you what you want. Exactly. So, is there an appetite if he does crack down in

a harsher way? Is there an appetite for a continued protest and for he just say it, but for people to defy his orders no matter what that might entail. I think that really will depend on how they respond. So if you have an excessively harsh which protect can trigger, you know, as it did in Iran and as it

has in other places, it can trigger more protest. But you could also have a Hong Kong situation where it actually does bother to count down at least silence, you know, don't deal with the discontent by any means you stop people coming out into the street. So the answer, I don't really know how he will rundlebod, but I would certainly play. Both of those are possible. Noomerg opinions at

Clara Ferro Marquez. Stay tuned Barry Riddles of Riddle's Wealth Management and Bloomberg Radio's Masters in Business next on Bloomberg Opinion. You're listening to Bloomberg Opinion. I'm Vannie Quinn. Hard to believe, but there's just one month left in twenty twenty two, so it seems fitting to chat with Barry Riddles of Riddles Wealth Management and Bloomberg Radio's Masters in Business for a look back at the year. That was, how markets

responded and what we should anticipate for the rest two. Okay, Barry, we've had this period of huge volatility that seems to have died down. What are we supposed to do between now and the end of the year. Nothing. I mean, I was half expecting you to say that, But it's really the case that there's nothing to be done now that we're post all the catalysts. So so let's put

this into a little broader context. Right twenty huge market returns thirteen fourteen percent a year on average, far above the eight percent we typically see in any given year over long periods of time, and then hits and the market drops, recovers sixty eight percent by the end of the year to finish the year up almost one plus twenty eight percent. We have been spoiled by twelve years

of amazing returns. Hey, you know, if that means we have to one out of thirteen years down on the equity market down in the bond market, that's a trade off. Take every decade for the rest of eternity, a little bit of mean reversion is to be expected, especially if we're expecting some kind of an earnings recession or a worse period for earnings, which we are, And yet we

really haven't seen earnings numbers that bad. Every now and then there's a mess, and those companies get punished, but for the most part, earnings have been holding up pretty well. It seems like a companies are able of passing through input cost increases to their end customers and be even companies without input costs increases have been passing price increases along.

And so there was a recent study done by e p I that found that typically something like fifty percent of inflation is wage related and eight is corporate margin related. The past two years, it's been the opposite. You've had, you know, ten percent has been wage related, but over fifty has been due to corporate profit ability. When we look at inflation, a surprising amount of it is what's

holding up corporate earnings. Companies are raising their their fees, they're raising their prices, and consumers are paying it, and inventories are pretty high. Now it feels like there's something waiting in the wings. Have we seen the worst of it or are we in for another huge downturn? I mean, we are down still in the NASTAC and six so in the SNP. But might that not be the end

of it? You know, it's always easy to tell what the bottom looks like after the fact, and it always feels like there's something waiting in the wings, isn't there always? So you don't know what's going to happen with the whole crypto blow up. We have no idea when the Russian invasion of Ukraine is going to end. No one knows what's going on in China and the zero COVID policy and how aggressive they're going to be towards Taiwan.

And the funny thing is, whenever you see the year in advance forecasts, there's always a list of horribles that could happen, and then when you look backwards, it's always this unexpected horrible thing. I don't remember anybody at the December year ahead saying, hey, global pandemic shut the economy, markets drop. So if you have been watching China really

really closely, you might have anticipated something like that. You have to be looking in the right place at the right time and receptive to maybe a global pandemic is coming out of this. Now. I think we're, you know, every general fights the last war. Now we're definitely more receptive to a global pandemic. But in other than Bill Gates, how many people were really talking about the risk of a global pandemic? Not a lot of people outside of

you know, world of epidemiology. So we've stopped seeing plus one percent moves. Do we try and pick up a few basis points before the end of the year. Is the arizonta Cal's rally coming? So forget the one percent moves and think back when we had this giant seven percent gain in NASDAC five or six percent on the SMP in the TAO. Not only was it a giant move up, but it was on massive volume and very very strong breath, meaning many, many more stocks were going

up than going down. So we looked at the history of those sort of moves, and when you look at the past, going back to seventy one, you look at the twenty largest moves on the NASDAC and as it turns out, about twenty five percent of them and take place as markets are bottoming. So that's not enough to say, hey, bet the house, it's over. The worst is behind us, but it should be enough to get you to pay attention and say, and by the way, the other s

all took place during bear markets. You don't get those giant moves up ard down in a normal healthy bull market. It's during a bear market where the market gets deeply oversold. The rubber van is stretched too far in one direction and then it snaps back in the other direction. So you know, almost of of these big moves taking play nearer market bottom should be enough to make people think, well, I don't know if this cyclical downturn is over, but perhaps the Fed is getting closer to the end than

the beginning of their rate hiking regime. There are all sorts of indicators that peak inflation was six months ago. Maybe the FED will figure that out. And the economy continues to be surprisingly robust. Consumers continue to spend. GDP is two pc plus. It's hard to be too negative about three. Hopefully we don't have another asteroid from out of space like we had with You know, the pandemic to me was not a market internal It wasn't an

economic thing. It was the asteroid that killed the dinosaurs. When it's from outside of the market or the economy, that's sort of almost random event tends to cause markets to wobble and then they go about back to what they were doing. You add five trillion dollars in stimulus, and and that's how we got way ahead of ourselves. Lots of fiscal stimulus, lots of monetary stimulus, and as

often is the case, investors got a little carried away. Barry, You've seen the implosion of FTX and that whole farrago, like really just a terrible story, particularly for retail investors that would have gotten involved in this is this sort of the unveiling of the emperor with no clothes when it comes to at least crypto, not defy, but crypto.

So when you look at some of the exchanges that have been offering ten fifteen guaranteed in air quotes, guaranteed yields um you know, you would have thought we learned the lesson in the financial crisis when people were promising, hey, the ten years yielding two percent, we'll give you four percent, every bit as safe as h as treasuries and you just have to buy this securitized subprime mortgage debt. And that turned out that two hundred basis points was a fantasy.

How is fifteen hundred asis points not a fantasy? It's you know, finance and investing is unique, not just because the lessons come along every generation, but nobody ever wants to learn from them. If you learned anything from the Financial crisis, is that risk and reward or two sides of the same coin. There is no free lunch. And if you're gonna go chasing yields, you're taking on a

whole lot more risk. And that's going from two hundred based points to four hundred, from two percent to four per someone's guaranteeing you fift in a zero percent environment, which is when that began. Either there's a Nobel prize there or someone's going to jail. There's nothing in between. More fallout, though it does appear to be slightly contained. You know, the thing about crypto is it's relatively small

compared to fixed income real estate equities. At its peak, what was bitcoin two and a have three trillion dollars, So it's an apple and a half, it's two amazons. And so I think of crypto as a specific company as opposed to one giant um asset class. And so if you think about that, hey, any given company can blow up and it doesn't mean the world is coming to an end. So contained is still a dirty word post financial crisis. Remember subprime is contained. Yeah, it was

contained to planet Earth. Other than that that one place, the rest of the Solar System wasn't infected with it. Crypto really seems to be much First of all, nobody has to buy bitcoin, but you have to live somewhere, whether it's a house or an apartment. So that's a huge difference. And and the other thing is, you know, the whole crypto defied sector, it's a speculative trade. It attracts people who are I'm gonna gamble and hope to see ten x or a hundred x or whatever it was.

That's very different than people who are historically fixed income buyers or even equity buyers. And so yeah, I a group of people who are speculating in a specific space end up getting run over because the space is down six that that's the nature of speculation, you know, you you buy a ticket and you take the good with the bad. That said, it doesn't mean that DeFi is dead. It doesn't mean that crypto has no future, and it doesn't mean that the blockchain isn't a really interesting technology.

But you have to be specific tokens and coins right there and n f t s and you know, I kind of came up on a trading desk right into the teeth of the dot com implosion and when all the dot COM's dropped and people forget the NASDAC from from its peak to the bottom in in March two thousand and three fell. It doesn't mean that that's the end of technology. There's no more Internet, there's no more software companies. It means we got wildly speculative and how

to be taken out to the woodshed and punished. I kind of get the sense that crypto is going through its own dot com implosion. It doesn't mean the space is invalid. It means the speculation got a little crazy, and now that things need to come back down to

earth right, stay tuned. Barry Riddles continues with us. Next you kind of have to say to yourself, is the stock market saying, hey, the Fed doesn't have a clue about inflation, and we think that the market will force them to recognize that inflation has passed, and that's why we think the tonal rate is not five and a half. Don't listen to what they're saying. Look at what they're doing. We discussed the federal reserves performance in two and how

the Fed will proceed through three. This is Bloomberg opinion. You're listening to Bloomberg opinion. I'm Vonnie Quinn the time for modern rating. The pace of rate increases may come as soon as the December meeting. Given our our progress in tightening policy, the timing of that moderation is far less significant. The Fed ered your own Powell there, and we're back with Barry Riddles of Riddles, wealth Management and Boomberg Radio's Masters and Business. Well, with just one more

f OMC meeting on deck for two. I asked Barry about the Central Bank's reaction function and how the bank will continue to react to higher than desired inflation and markets digesting higher rates for the first time in fifteen years. Let's talk a little bit about the federal reserves. So the terminal rate the market is pricing in five percent now, which seems a little optimistic in the sense that maybe it should be a little higher. So let me um,

let me channel my inner FED critic voice. And you know I'm fond of telling people my job isn't criticize the Fed. I don't work in a think tank. I manage assets for clients. But still you can't help but look at the FED and say, let me make sure I understand the history here. So the pandemic happens. You take rates to zero, and as the market begins to recover and from the lows in March, just for the rest of that year, the same sixty eight percent to

finish the year plus eighteen percent. That's a giant market signal that the Federal Reserve completely ignored. They stay at zero. Despite on apparent recovery. Inflation ticks up that year, it goes through two percent, which is their target. They're still at zero. They stay at zero through all of one into this year. And the question is, how did you miss, at the very least the fact that inflation was elevated.

Forget the spike. We know a lot of this is pandemic related and reopening and supply chains and all those fun things. But so they miss inflation. They stay on emergency footing too long. They're just way late to begin raising rates. And then once they begin raising rates at a very belated period, a ton of indicators come out that show inflation is peaked and falling. Houses, use cars, new cars, copper, lumber, food, oil go down the list.

Just item after item shows us that inflation peaked May June and has been falling and the biggest contributor to CPI, inflation is owners equivalent rent. It's about the total and it's being driven higher by the Federal Reserve, who are pricing people out of the housing market and sending them

into the rental market. And so you kind of have to say to yourself, is the stock market saying, hey, the Fed doesn't have a clue about inflation, and we think that the market will force them to recognize that inflation is has passed. And that's why we think the terminal rate is four and a half, four and three quarters, not five and a half. Don't listen to what they're saying. Look at what they're doing. So you're a market believer,

then you think that inflation definitely has peaked. We are not going to see spikes up again in CPI or pp I or prices paid or any of that kind of thing, even after inventories. They'll get sort of worn down and that the Fed won't have to be more hawkish. So it's yeah, I'm I'm a market believer up into a point. Markets occasionally get things wrong. But when we look at prices wherever I look in the good side

of the equation, the peak was six months ago. It's hard to find something that is as elevated today as it was six months ago. Forget prices increasing, we're starting to see disinflation and outright deflation and certain things lumber is now back to pre pandemic levels. When you look at shipping containers, the cost of moving goods, they've dropped fifty six. That was a giant cost push through pretty much wherever we look. The spike in in prices and wages.

You know, good good luck negotiating a big wage increase these days. It's not what it was six months ago. And let me remind people we've had thirty to forty years of wages as a deflationary impact. The fact that you've had two years of wages going up after decades of them lagging inflation. I can't get too bent out of shape over that reset. What do you have confidence the Fed won't overdo it? Then? Has the Fed got its finger on the pulse? Uh? No, I don't have

confidence that they won't overdo it. In fact, the probabilistic bet that markets are making is the bulls are saying the FED will find religion. They'll realize they've raised enough. Listen to what Lele brainer, a vice chairperson of the FED is saying she's recognizing that, hey, lots of signs that inflation has already peaked UM. And then the bear argument has been the Fed is always late to the party.

They were late to get off zero, they were late to begin recognize inflation, they were late to begin raising, and they're going to tighten pass the point they have to and cause a recession. Those are the two warring um arguments, and the question is which one is going to be right. I think there's a lot of data between now and let's call at the beginning of the second quarter, where we'll have a much better idea of which side is calling both the economy and the FEDS

recognition of the economy correctly. Do you have confidence that we'll avoid a long and deep recession right now? If we continue on the path to five five and quarter five and a half percent, that sounds more like a mild recession that lasts a couple of months. However, you don't know what's going to happen with the war in Russian and Ukraine. You don't know what other random events are coming up. You know, historically a robust economy can suffer UM, a solid hit and and come back from it.

You know. It's it's like a healthy football player. They can take a solid tackle and get up. The problem is when you get a weak, wounded, um fragile economy, it just takes one solid bump and it it sends it off the path. Right now, the economy continues to be fairly robust. Consumers continue to spend, there's plenty of cash. Balance sheets look pretty good, both at the household and

corporate level. But you have to wonder, at what point does four or four and a half, five five and a half really cause people to say, hey, you know, I'm going to really throttle back and and see what comes. It becomes um a vicious cycle, very self reinforcement. So you manage three billion dollars, what have you been doing with it? In the last couple of months. We shortened up our duration on fixed income just because the Fed has told us they're going to continue raising UM. That's

probably the biggest change we've made. For the most part, everything else we've done has been, hey, you know, we've had a great decade. This is an off year. The assumption is this isn't the start of five or ten years of of bad markets. The the the economy continues to be strong enough, and there's enough appetite for risk assets like equities that you know, sometime it wouldn't surprise me.

I'm not in the forecasting business, but the dot com enclosion bottomed in March two thousand, the Great Financial Crisis bottomed in March two thousand and nine. The pandemic seem

to have found the bottom in March. I wouldn't be surprised to see this cyclical bear market find a bottom sometimes towards the end of the first quarter, maybe March, and then you know, you shake off the cobwebs and the market goes back to worrying about earnings, games and and I p O s as opposed to crypto and SPACs various Tech overvalued and is more fairly valued now or would you go so far as to say it's actually undervalued. So it's hard not to say tech was overvalued.

You know when when pe s go from fifteen to twenty to thirty, Hey, that's a little price. Some of the strategists will tell you, well, a lot of these companies are pricey for a reason. There's tremendous demand for the products, for the services people want to own them. Indexes have to own them, so that that's one of the arguments. I don't see how anyone can look at the nasdack down and not say, alright, tech is a whole lot more reasonably priced today than it was, especially

considering prices have fallen. Earnings haven't fallen. They've actually held up pretty well. But there are question marks about amount of products, about advertising, about reputational risk for some of these large companies depends on the company you're talking out. Apple just came out and said, hey, you know, we have stronger demand than a lot of people realize for iPhones,

but we have some supply chain issues. You're still dealing with the leftover effect from the pandemic, and supply chains are tied up. You want to get a new car, it's a six to twelve month wait. So these things are certainly having having an impact. On the other hand, when we look at certain companies, Facebook is probably a perfect example. Facebook has a giant Apple size hole in

their advertising revenue. And then when we look at Tesla, Tesla had an amazing run a lot of people sort of front running them being added to the SMP five hundred. Since then, Tesla, like Facebook has been cut in half. Keep in mind they had the market to themselves for I don't know, five seven, nine years. Now every major automaker for GM, bmw U, Volkswagen, Audie, Porsche, Hundai, even

Toyota just did the Prius. There is a lot more competition in the e V space than there was, So it's going to be harder for those sorts of companies to maintain, to say nothing by the way of Lucid Orivian, it's going to be harder for a company like Tesla to maintain the sort of profit margins they've they've been able to put together. When we look at companies still

watching it Almosk for how much more? You know, it's hard enough to run one company, let alone three four really right if you if you think about it, and so I think part of what we're seeing with the Tesla stock is how distracted is Zelon And part of it is how much more stock is he gonna have to sell? Stop and think about it. He sold a ton of stock at appreciably higher prices than this Twitter may you have just been a great excuse for him

to lighten up a little bit. Most of his net worth is Tesla Stock, Barry Riddles, there of Riddles, wealth management, and Bloomberg Radio's Masters in Business. Well that does it for this week's Bloomberg Opinion. Don't forget to send us your thoughts. You can email me at v Quinn at boomberg dot net. Also, we're available as a podcast. Catch us each week on Apple, Spotify, or your favorite podcast platform. We're produced by Eric mollow This is Bloomberg Openion. H