Surveillance: Cathie Wood on Investing

This is the Bloomberg Surveillance Podcast.

I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app.

We We've always invested for the long term. And what interrupted what was a very nice move up in innovation stocks, especially disruptive innovation, was a massive increase in interest rates, the likes of which we have never seen, of course, twenty fourfold increase. So all long duration assets, especially in twenty twenty two, were destroyed, including bonds, which are usually a flight to safety. They had their worst year last year since the seventeen hundreds. There's no way in that

Are you going to change?

I want to know how you're going to change the sobering quarters.

You've been through. What is the new?

Kathy would approach to macroeconomics, frankly, pandemic economics intruding on your belief and innovation.

If anything, innovation gains traction during tough times, and if you look at how the reason our portfolios are outperforming this year is they are and they are is it is because they are gaining share in what is becoming a difficult environment, right, and so one by one we're going to earn our way back and it's all about revenue growth, margin expansion.

In the Wall Street Journal, they do a fabulous thing with al farts like me, and it's people with over five million dollars and they believed in Kathy would to a person, those retirees bought innovation, they bought tech, they bought apple, Apple, Apple Apple, and they didn't listen to financial TV or radio. Can you do the Kathy would approach for one three five years given the volatility you've.

Seen, Yes, I think we're on the other side of that massive interest rate increase which did destroy a lot of performance. That's the most important thing, and we are ready for prime time. Many people are concerned about our kind of strategy and.

The company we just.

Acquired rises because in Europe, in London here, for all of Europe and UK, they're focused on global mega trends as well, and you know, interest rates hurt everyone in that space. If we are right, and rates are going to down at some point in the next year. You know, the market is a discounting mechanism. Then I think that the muscle memory that hurt our strategy, and it all has everything to do with the tech and telecom bust and people thinking, oh my gosh, are we here again?

John is really important that the profitability stream down the income statement of new tech is very different than two thousand tech.

Let's talk about evase and not just Tesla. Is it good news for Tesla? What's happening in Detroit right now?

Yes, because if there's a strike, of course there will be more production shortfalls. You know, I think that there's just now the supply chain is freed up, so unfortunately, we'll have all kinds of questions about that. But you know, I don't think think it has anything really to do with the strike. It has everything to do with a consumer preference shift towards better vehicles electric that are falling in price. Tesla is leading that price decline simply by

The complaint we hear is that people can't afford these vehicles. That is changing in the UKs. You can see Richie Sunac is pushing back targets to get rid of all of these total combustion engines to twenty thirty five from twenty thirty. We're being unrealistic about this transition. We don't think so big.

No, no, no, we do not think so We actually the total cost of ownership, Now this is in the United States. It's a little bit different here, but the total cost of ownership of an electric vehicle fell below that of a gas powered vehicle about two to three years ago. Soon sticker prices.

Does that include insurance?

Yes, includes insurance. Yes, and as I said, local differences, but yes, in the United States, that does include insurance. And in fact, Tesla is so sure that its cars will have fewer accidents and fewer fatalities that it's willing to provide insurance. So yes, that does include everything.

All in you were a USC you didn't get to be Laffer called up Robert Kirby a Capitol group, and so I just shut up and hire her.

So you walk into Capitol Group, which is.

The land of an R square to ninety eight Washington Mutual Fund Investment Company of America, everything is completely diversified. Out you're the polar extreme that through y'ad you almost fell into the Pacific Ocean.

They were so upset with you.

So you go out and you're saying, I'm not going tight R square to SPX, I'm going out and do my own thing. Yes, people have prospered off of innovation and technology.

How does that continue in America?

Can you be less diversified and win five years out?

Well, you mentioned Capital Group, and that is where I did start my career, and that is where I saw tremendous research and a long term time horizon. So really what we're doing with ARC is just going back to the future my initial experience, which was in the late seventies when I was in college. And we're doing deep research, first principles based white sheet of paper.

But you're away from a R square like Washington, neutral of the other funds.

What's your squared right now?

To be honest, we're the correlation of our performance to broad based benchmarks is very low. For better or worse. What it tells. What it tells our clients and perspective clients is we have a very good diversification strategy. Our funds. The active weight if you're comparing to MSCI World or SMP or Nasdaq, the active weight is less than five percent, So really good diversification strategy focused on companies that are

Are Kathy, Thank you, Kathy, work about convesting, joining us around the table here in London. The conversations continue. Patrick Armstrong's CIO of Plerimi Wealth, Patrick got to see you. Things good are just terrible because I can't decide based on our conversation so far.

Normal things are pretty normal. Everything feels so different to how it was. But we've got inflation on a track down to something that's going to be sub three percent next year. I don't think it's going to fall to the FEDS mandate. I don't think they want it to. You've got economic growth that's potential in the United States. Who would have thought that you're probably going to go two percent for the US economy this year. That's probably

We come back to the old normal.

I think we are going back to the old normal. I think inflation is going to prove to be persistent, sticky, with intermittent spikes, just because the big picture issues are populism and protectionism from governments, and that's just by its nature inflationary. You've got unions coming back like the seventies, maybe a little bit. You've got job seekers having some power that's inflationary, but you've got disinflationary forces coming from China, and you've got fed policy at a point where it

Your charm is your truly cross asset at the margin, How are you changing your cross asset allocation into the fourth quarter.

So what we've done over the summer months is we've marginally reduced our equities that have just kept drifting to overweight. We wanted to have neutral weight, but just as equities performed so well, they kept moving overweight. We've moved marginally underweight now, not so much that we're worried about equities. That we're getting pretty compelling returns on tips right now that you're getting at two percent real yield, And like I said, inflations are still a risk in the long term,

So talk to our audience at radio and television, particularly across America. How does Patrick Armstrong utilize the ten year inflation adjusted yield or the five year inflation adjusted yield? How do you use that as a tool to have confidence in market allocation.

Well, the tenure break even is two point three percent, and my view is we're going to have persistent above fed target inflation, so I want to be hedged against that. I'm happy to get a real yield of two percent. You put your capital at risk to preserve capital as a starting point and row the purchasing power of that over time. The tip provides that to you right now in the tenure, So I like duration there, but you're being compensated with really high yields on we talked about

It's a Chris Whalen moment. He's channeling Chris Whalen. Those JP Morgan preferreds.

Whalen would say, should we do single names? A lot of people at the start of the year, we're getting checked up on LVMH. One of them say you back to white, you stepped away. The post of chart of the European market now is Nubber Nordisk. Where are you on now?

That's my biggest stock right now. And again it's come from drifting. The pandemic used to be COVID. The pandemic's obesity and diabetes in the West, and Novo NORDICSIC and Eli Lilly. They don't have monopoly positions, but they got the dominant share here.

Boing earnings if luxury come in enough off China gloom Bernstein I believe is out with a note overnight saying we've got some ratios of luxury back to two thousand and eight.

Is it pulled back enough for Patrick Armstrong almost?

So?

I sold LVMH in March. It was at thirty two times forecast startings. We're now in the mid twenties. I bought it in October the previous year when it was at twenty one times. That's a small premium to the market multiple. That's where I'd like to buy it. So I think it's fair.

Folks right there.

We don't do much equity chat because you know who cares. The answer is what you just heard there from Patrick Armstrong is a clinic and how you bracket a beloved dominant stuck?

I was with you, we were talking about it when you backed out of ALVMH. You kept ms though we did. Yeah, how was that?

Well?

I didn't want to move against what I still think is the dominant trend is the spending power of high net worth individuals and also the immunity to input prices. Rischmond talked about inflation hurting spending power of people, but at the input prices are things that are hurting mass market retailers and it doesn't impact the high in luxury.

So what's the distinctive feature of the Duma family? Ermez, what are they doing differently? Bloomberg Intelligence Deborah Aiken is just brilliant.

On this, and she singles out a few of these names.

What is the Ames model that makes them different from forty seven other luxury brands.

The leather goods part of it is incredible, the margins, the growth they get there and people pay up for that and there's just a waiting lines of cues for that sort of things. But it's their brand management. There may scarves and ties and the leather goods, it's all.

We touched on it briefly. Let's finish there another nor Esk. We're already out forty percent this year. The stock's been climbing for five consecutive years. Can you spend just a little bit of time, a couple of minutes just outlining how big this opportunity actually is.

Well, it was a vanity type drug, their weight loss. It is vanity product basically, that's people in Europe, America and China. They spend the money to look good, field good. But what they've found is the heart disease and the benefits on that. It may become an ensurable product as well. So that just expands the potential market where you're not just getting vanity uses, but health uses which may be ensurable as well. So a heart and stroke disease it's

The run on the stocks home has been phenomenal, absolutely phenomenal. I'm not sure where we are right now versus alvimh percently at one point earlier this year it was bigger than alviam Ice, right.

It's I think it's bigger right now. They're basically the same market caps.

Can there be European exceptionalism without technology?

The way we trumpet Apple in the other eighteenth s.

Well, and I never noticed. I think is a form of US exceptionalist Yeah, the wrong kind of US exceptionalism, right.

Yeah, it's buoyant, to say the least.

It's yeah, it's exceptionalism is very clear in US and technology. Europe can compete in healthcare. It's showing no ability quickly.

Are you buying big oil? You buy big oil.

Here we basically there's going to be more oil consumed in the next three months. We've already had more oil consumed.

Today's single best by come on, Patrick Ironstrong, single best buy big.

Oil EOG I like rather than the Integrated's exploration production.

Patrick got to say Patrick Armstrong of Plarini Wealth.

Also Lingos is hugely qualified global had a foreign exchange strategy at RBC tour of duty working in Europe with different institutions to look at the political economics of the moment as well. You know, to you, I can say, like, what's euro going to do or what's Sterling you to do? What are they going to do if they actually get disinflation? Can you call a disinflationary trend in place?

Yet?

Too soon for that, But I do think this morning's CPI data will be very welcome news from the Bank of England perspective, because they'll feel like finally their policy measures are biting and they're removing some of that tail risk of stagflation.

How many months or quarters do you need to establish a disinflationary trend?

Not the data dependency.

The media is focused on one surgical point, Well, what's your timeline to say trend in place?

Well, I think it's also the composition of inflation, right, because we've seen headline inflation come off on energy prices. In fact, if anything, now ticking back up again, as we saw yesterday in Canada. So really what we're focusing on is that core measure, or even more so, the supercre measure. What's happening to those demand driven components of inflation and are those weakening enough to signify that we're going to get to target?

And Paul Krugman with a brilliant essay out Folks Wheelhouse for the Nobel Laureate on Trends. He looks at disinflation and I love what he says about plane vanilla inflation. John Ferrell's family in England is living plain vanilla six percent plus inflation. Do people like you and these elites do they look at plain vanilla inflation?

I mean, you see plain vanilla inflation across the board, right, And I think that's the important part about the current rise and energy prices because for all that, central banks like to look through those and focus on core inflation. If headline inflation goes up, comes down, a bit goes up again because in oil prices or commodity prices don't really come off. What does that mean to your average consumer? Their kind of lived experience is that prices just keep going up.

I can't believe we're sitting here and we've got this note from bank, not the bank of England from the Goldman Sax team on the Bank of England suggesting we're done here when inflation is in the high sixes. Can you make sense of that for our audience? If we were in the high sixes in the United States, we'd be talking about the prospect of a fifty basis point

I think it's the wage growth that's more important, right because don't forget the Bank of England look through high inflation in the immediate aftermath of the GFC, and there was a long period wheen Mervin King was writing regular letters the Chancellor about inflation being outside the target ban and yet you know they were happy to leave it zero. It's that which is the difference. It's the fact that they're happy to look through it if they feel like

As Simon French with panmil Gilden was in your seat yesterday, he suggested that this Bank of It has a communication problem, a credibility issue.

Do you agree, Yeah, it's hard to say they don't. And I think more than anything, it's the inconsistency in the messaging that people struggle with. I mean, sure, this is a particularly difficult time to be forecasting. I think economists have struggled in the Byside. But from the Bank of Indians perspective, it's the fact that that message seems to change every month, rather than just sticking to this data dependency mantra.

You speak fourteen languages, you've got parchment and physics from Cambridge. I want you to talk about the physics of Christine Legard's speech at Jackson Hall. You live the ECB theory, the ECB process, if you will.

Is there any hope.

In prayer that the ECB can get away from the data dependency that she despises sadly?

Not really, And I think the reality is that you've got so many competing views on governing council. You saw that just over the weekend, right, they had that announcement last week and then they already came out with voice of saying, oh you we should be doing more. We're not quite done yet. And it's that kind of coophony of voices which ends up with the data departs.

Are you tour expert in this, John, you've lived it as well as is also And what I find fast in your is a simplistic American view of Bundesbank versus Portugal.

Now it's not that way. You both know, it's richer and more complex.

To be honest, my good friend Christine Leakarr doesn't have a chance on this.

There's no chance that they're going to take a.

More holistic, longer Philip Lane trend.

Is the difference in this policy.

Under Dragi, who was not a consensus builder, he would builly the Government Council into a corner and say we're doing this, and he'd have to get the Bundesbank to come along. The god is a consensus builder, but she gets an easy time of it now because Germany is the weak spot. Germany is the Weekskan And what I don't hear from the hawks on the Governing Council they're not screaming rate hikes. They're not screaming rate hikes at all. So how much of a deal was there actually to

Well, there are a lot less hawkish than they used to be, because, as you say, Germany itself is feeling the weakness. But also Draghi in many ways had to do that right because it was chrisis situation and that forced his hand. Whereas now we're not really there. We're kind of in a situation where central bankers have a bit more time to assess, to be data dependent, to build that consensus.

I teased this a little bit earlier when we were assessing what was happening with Sterling, and Lisa raised the question I think is a really important question to ask regarding the UK and Sterling, but I think we can take this broadly to Europe and the euro How important are rate differentials for currency pairs at the moment When you see developments in the UK, it's this kind of development meant to be Sterling weaker or Sterling stronger? What does it mean?

Fully agree with Lisa that it's ambiguous, right. I've heard a lot of people, probably more from the cell side than the byside, trying to talk up Sterling as this carry trade.

There's much better carry out there. I mean, if you really want carry.

You're going to Mexico, You're going to Brazil, like the UK is not necessarily where you're going to get it. But at the same time, the fact that, like I said earlier, you kind of remove some of that terro risk of stagflation. That's a good thing. And from a policy credit ability perspective, it's good that the Bank of England is finally seemingly getting inflation under control.

What is your question for Pole today you're in the press conference. McKee gives the last question, they go go lingos here here, we'll give you one. What's your question? Did your own pile today? From your EUO.

Perspective, I'd be really interested to hear how he's thinking about the run up and energy prices and the feed through that will have to headline inflation.

Oh wait, we'll stop the show here. Halima Craft. Okay, you've got something. It's pretty good at this right.

What does the wonderful Helena Craft? Heleima, wonderful to see you, Thanks so much for stopping by.

Helena Croft. What does she say about this move to one hundred?

I think she's been bang on the money with that call. Now that we're there, it becomes a lot less obvious that we continue further from here. But she was very open and talking a lot about it earlier in the year, and markets were just ignoring it for a while. They were ignoring the supply cuts, the production cuts were here. Now we feel the impact.

You can para ignore this later on this afternoon, and.

Let's see, it's a very short inter meeting period between September and November. December is probably the time they to make that call.

Did you think the Bank of any can ignore it a little bit more? I'm just wondering who is this more important to? Bailey A Eueida.

We can almost forget about the Bank of Japan and not doing anything anytime soon, and even when they do, it's going to be tiny. Now I'd be most concerned in the ECB's position energy and porter. You still have that regional difference between US energy prices and European and they're the ones really that are facing the economic weakness.

We're staggering beyond Duisenberg through Truche. John mentions the wonderful Draugy of Italy and now La guard is the easy be a more mature institutional or are they still making it up as they go as they did when Mercing was there.

And absolutely more mature. And you know, you've got to remember they've been now in existence for over twenty years. They've been through several crises. That's knitting them together. But more than anything, the fact that it's the core now feeling the weakness, I think.

Yeah, I don't mention it naturally. I didn't mention that.

Jen Foley talked at the prospect of paralty on the euro in the new year. You're going there yet? Can we finish that?

Come on?

We've had one O four for year end podcast since the start of the year.

That hasn't changed.

But we looked into twenty twenty four and actually said, why should it stop?

Hell?

Why should it bounce back?

We've got one O two.

Could we get to party shore?

Maybe? I just don't think it. We'll stay that long old Alsa. Thank you. That's quite a cool so far. The yeh, we'll see how we ended, but quite a cool so far. Alsa, Thank you. Aselling us there of RBC, As.

Joan mentions, the week starts today for Bruce Kasman, it does not on Friday, evening, Kasman, along with the dreaded doctor Faroli and others, put out their Weekly Prospects. The way things are moving, it could be daily Prospects Kasman of JP Morgan Jones.

This morning, Bruce Kasman, what will you listen for from Jerome Powell today? Well?

I think the issue really when the FED certainly stays on hold and certainly also continues to maintain an August bias, is how on this color are we talking about their confidence that they're done here? And I think of course they're going to continue to maintain that bias. They're going to give us some sense of progress on inflation, some ongoing concern. I don't think we're going to get a strong message, and quite frankly, I don't think it's going

Our optionality, our ambiguity, our degrees of freedom, and all the other mumbo jumbo buttresses up against Michael Faroli's arch call and potential GDP that goes into our stard Do you have a low statistic on potential GDP?

Does that give you a low our stard that goal. The Jerome Power says he's trying to get to well.

I think there's two things here. One, which is perhaps most important, is potential. GDP is low, but cyclically there are a number of forces which have raised. What interest rate is consistent with stabilizing inflation and stabilizing utilization rates. So I think that's what's operational for the current environment. The second point, Mike and I have both been writing about the hints that US supply side performance is actually improving.

Productivity growth, which has.

Been stuck in the low ones, looks like it's moving higher on an underlying basis. It's too early to get confident about this, but it does feel to us that US supply side and pro performance is actually improving here.

I know you and Bob Michael aren on speaking terms, but just a few times where you've got to get together in dovetail your economics into Bob Michael's fixed income, which I believe is price moving against yield. Can you make a yield call here? If we get kasmin disinflation, do yields come down.

I think it's going to be a lot before yields come down. If we're right, inflation is going to stay sticky here. The Fed is not going to have the room to ease anytime soon. The economy is not really at material thread of going into recession anytime soon. So I think, you know, four percent tenure yields five and a half percent policy rates is going to be with us for a while.

Bruce, you touched on it, and I think it's a really important aspect. I mentioned of the feder Reserve conversation today and into this decision and news conference, the extent to which this labor market has rebalanced. Do you think that rebalancing is close to complete then, Bruce.

No, we have a very tight labor market. We still have very elevated wage inflation. I think we're seeing good signs on the labor market that things are moving in the right direction. But whether we get all the way back to what is consistent with the Fed achieving its inflation target, I think is still not by any means determined. From my point of view, I think it's more likely that things stick at a level that's going to keep the Fed uncomfortable over the next year.

Does that mean low unemployment with elevated inflation or higher unemployment with elevated inflation, because one makes is a lot more toxic than the other.

I think it's most likely the unplayed rate stays below four percent. I think it's most likely that wage inflation stays at four percent or higher. I think it's most likely in that environment, the FED is not going to have the opportunity to ease.

And the question is whether or not that.

Restrictive stance over time undermines what is still a pretty healthy US private sector and eventually causes an end to the expansion, or whether the supply side improvement, whether some of the other supports can carry us along here.

And put us on a path to a soft landing.

I'm going to boil the frog scenario, which is the first one I described, but I think it's still a pretty close call here as to how the environment plays out over the next year or two.

I mean, Ris Keseen, what's so important here is simply there was a pandemic. Are we beyond the pandemic? Are we beyond supply side studies? Getting back to Chasmin one oh one.

Look, I think we're beyond the I hope we're beyond the pandemic in terms of its impact direct impact on economic activity.

But I think there's two issues here.

One, we're still in an unwind of some of the pandemic dislocations. That's what inflation coming down is about. That's what some of the normalization going on in service sectors are about. We're not quite done with it, We're starting to get closer to the end. And then we're dealing also with the reverberations of this pandemic on a more lasting basis, And a couple of them are the damage

Chirst Let me expand on this was one thought you pick up on it. Can China export disinflation or a deflationary trend? What does JP Morgan see of domestic China exported out across the world.

I think China is exporting deflation and goods pricing to the rest of the world. Chinese production is picking up right now. You see impoort prices in Europe and the US from China going down sharply. We think global industry is starting to pick up, China's benefiting from it. So I think the Chinese economy is going to be weak, but not hit the fears I think of a real disaster that people expect.

I think global industry is picking up.

I think China is going to keep a lid on global goods price inflation among other things for a while, except, of course, for what we're seeing in oil.

So just before you go, I've got to do a little bit of housekeeping. The takeaway from this conversation Hi for longer got all of that. Can we just play with the dot plot a little bit and get out to twenty twenty four. What do you think that doll plot will look like lights on this afternoon?

Well, the most important is probably twenty three, and it looks like you're going to have a divided committee. We're on the side of them still having the median voter with a dot. But it's a close call, I think. Regardless of that, and regardless of big changes in the forecast for twenty three, the twenty four forecast is still going to have something close to one hundred basis points of easing it's still going to have a big drop

And you don't buy it, Bryce, I'm skeptical.

I'm not pounding the table on it, but I'm still skeptical we can heal here without more damage being done to demand.

Bryce, thank you, sir for the update for Jpie Mulk and Bryce Casman Mack.

Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In.

And the Bloomberg Business app.

You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg