Surveillance: Era of Moderation with Mahajan

Vitro joined us the kickoff two. He's looking for a fourth straight year of double digit gains after three of them, after a gain of on the SMP last year. Mona, I understand you're looking for gains, but not more of the same. Yeah, Yeah, absolutely, and thanks John. Happy new year. Um. Look, I think the good news for investors is this BOOL market probably does have some legs, but what we're calling

for is an era of moderation in two. So for US, that means not only moderating economic and earnings growth, moderating inflation to some extent, moderating FED policy support, but it also means moderating returns. So we do expect SMP returns to be more in line with earnings growth, which we see as single digits this year UM. But expect a little bit more volatility, you know, as we get as you noted in the fourth year of this tremendous will run for the SMP, we probably will get more normal

levels of volatility pull backs. Historically that's meant one to three corrections in the five to ten percent range UM. But the good news again is that those bouts of volatility or pullbacks could actually offer opportunities to maybe add to or diversify risk. I'm on a very important question here,

As you mentioned return total return lesson total return. Is that aspersion of return that we saw in two thousand twenty one the Financial Times with a superb summary of hedge fund under performance that we've seen, does the dispersion of return continue? Yeah? You know, look, if you look at the SMP five, uh, the the top line or the headline doesn't really tell the full story of what's happening underneath the surface. One was a great example of that.

We had a rotation into value, as you know, the vaccine rollout happened earlier in the year, but then after that we saw a rotation back into growth, a rotation perhaps back into value as as the delta variant waned. But towards the end of the year we actually saw a little bit of defensive moves. We saw defensive sectors like healthcare and staples take a leadership role in the last month. We expect a little bit more of the

same this year. You know, we do expect the year to begin perhaps a little bit more strongly, driven by the value cyclical rotation. We do expect at some point we will get another re opening two point oh a little softer than what we saw last year. But as the ear progresses, we would definitely recommend um having a

more balanced portfolio. You know, as as your progresses and comps get harder for value uh and growth slows a little bit, perhaps still above trend, we would expect areas like growth, like defensives like those quality names to really pick up the mantle, and so a more balanced approach to portfolio management this year we think makes a lot of sense. Keep in mind, you know, our old friend Tina does come back into play. There is no alternative UM.

You know, investors as always are putting new money to work. Where do they go UM, While an environment where liquidity is waning, they're looking for large liquid markets, and the US equity market does come front and center once again, at least for now until the global story picks up. Mona, do you get the sense that basically a balanced portfolio is the way to go And frankly, just owning the index continues to be the best bet at a time

when rotations happen. Uh, and it's unpredictable when you know, I think investors that have owned the index have done well over the last three years and will continue to do well this year. To Tom's point on active management, you know hasn't panned out. You know, it hasn't outperformed, and all investors are looking for some alpha and so yeah, in our view, owning an SMPI index is part of a strong balanced portfolio. And certainly that UM index ownership

will help you outperform over the long run. And so certainly that's part of a portfolio. This can be you know, complemented by certainly parts of active management that that perhaps do give you outside exposure to a value set sector or a growth sector, depending on where you're you know, underweights and overweights are so it's important to have a combination of both, Um, but you know, certainly we are in favor of having some exposure to index UH index

ETFs index management as well. Not always awesome to hear from you as we kick up one too and look ahead to the year ahead, Madam john that of Edward Johns on the equity market from Harvard University in Krall, Megan Green joins us UH to give us a first look into two thousand twenty two. Megan, thank you so much for joining. I want to frame out the many uncertainties we have into the boom economy of the United States of America. Greg Vllier quotes Atlanta g d P

now six seven buoyant g d P in America. What is your belief in our ability to sustain and to surprise a better economy than many people predict. Yeah, so on that, friend, Tom, I actually think our conversation around growth and inflation in the US will look fundamentally different in nine months from now from how it looks right now and from how it looks towards the end of last year, as everyone seemed to be jumping down the Fed's throat for being behind the all allowing the economy

to overheat driving up sustained inflation. I think that could be exacerbated in the short term because of the omicron variant. I think supply chain chain disruptions could be exacerbated. But looking over the next six to nine months, actually I see a number of risks to growth in the US, whereby will still be growing by well above potential, but but growth should look weaker this year than it did

last year. Certainly, one reason is that we're facing into a significant fiscal drag that was already going to be the case if we had passed build back Better for next year, in particular because a lot of build back Better is is backloaded, not frontloaded, and even if we get individual pieces of legislation passing pieces of build back Better again, that will be backloaded. So we'll see a fiscal drag going into this year. Also, I think a lot of our growth in the second half of last

year was driven by inventories as companies were restocking. They're only going to do that for along and I think that this year we'll see de stocking, which is a

headwind for growth. And then, finally linking it to Ian Bremer's top risks, I think a Chinese slowdown it's a pretty significant risk, not at least of all because China has a zero COVID policy that I think will be really difficult to pull off in the face of more transmissive variants like the Omicron variant, and so Chinese authorities are certainly pressing on the gas pedal in terms of

Slo monetary policy. But I think there is a fundamental commitment to things like common prosperity, taking moral hazard out of the property market, and so I don't think that authorities are going to fundamentally reverse those those two priorities and and go ahead and pull on the same lever as they have in the past to prop up growth, namely fixed acid investment in the property market. So well, I think China will stop slowing down as much as

it did last year. I think a slower China poses risks for demand not only for the US, but also for emerging markets. Megan, you have an earned expertise at the transatlantic view, your academics in England, your academics here as well. How much right now is Jerome Powell central banker to the world, and much more specifically central banker

to the EU in the United Kingdom? I think that J. Powell and the rest of the f O m C are really primarily focused on what's going on domestically, and so while there are repercussions of course for FED policy elsewhere, they're not taking into account much what's happening in Europe UH and also in the u k UM. That being said, there will be repercussions, and so while the FED is going ahead and tightening UH and and tapering already, the

Bank of England might also see some tightening. The e c B, on the other hand, will probably keep policy loose for much longer. So there will be some monetary policy divergence with implications not just for inflation but for currencies as well. The dollars should strengthen relative to new euro um and and the EU will be importing disinflationary pressures if if FED policy is tightening faster than the

ECB is megan. There's an idea right now in markets that the omicron variant will accelerate inflation and will actually accelerate Fed FED rate hikes. How much do you buy into that given that it will also likely slow growth at least on the margins. Yeah, So it all depends on how long this like lasts. If it's actually going to be as short as as a South African data suggests, then I don't think that the FED will end up

accelerating policy in order to address the omicron variant. Um Yesterday, I looked at a bunch of the high frequency data that comes out looking at Apple mobility data, open table bookings, uh T s, A security spreadings, and actually it looks like the impact of omicron on demand has been fairly mild.

That being said, it's only been dominating for about a month, and that was of course over the holiday period uh and so people could have decided, you know what, we're just going to have a better Christmas than we had the previous year and ignore this, and the demand hit could could come from now on that's yet to be seen. On the inflation front, I do think that the omicron variant will affect supply chains, not only because workers won't be able to go to work in the US and

also along the entire supply chain. But we've already seen factory closures in China with a zero COVID policy off the back of the omicron variant, and so in the first quarter, I think we could see inflation continue to rise. But but going beyond that, I think not only because of the fistical drag the de stocking slowdown in China that I mentioned suggests that growth should be lower this year, but also just statistics the base effects suggests that inflation

should be a bit lower as well. And I think the supply chain insruptions should start to alleviate towards the second half of this year, and and so in in nine months from now, I think, well the FED might see more alarming inflation data coming out in the first quarder. By the second half of this year, I think inflation should abate. I should confess I'm a paid up member

of team Transitory on this front. Even if the FED has dropped that term, I don't think towards the end of this year that will continue to be so alarmed

about higher inflation. Well, it does matter though where the inflation comes from, and there's this idea that perhaps it's going to shift from supply chain disruptions and labor market disruptions to a wage driven, a rent driven type of inflation, which will be really exemplified by the savings rates going down and people having to go out and get a job. How much do you expect that to be the dynamic of inflation and actually encourage the Fed to raise rates

more heading into your end. So I think that there are legitimate concerns to worry that higher rents will reset this year and feeded through into inflation. But when it comes to the labor market and a wage price spiral, I actually think part of the reason the labor force participation rate is lower now than it was before the pandemic is that a number of hourly service workers are are waiting to figure out They're waiting on the sidelines to figure out how they can get into higher wage,

higher our jobs um. And at a certain point, uh, they they'll have burned through their savings cushion and will end up having to capitulate and jump back into the labor market. Debit Card data from JP Morgan, for example, suggests that might start to happen in the next couple of months. UM, So we'll wait and see. But if that does happen, then actually, even with the omicron variant, keeping some people home because they're a freight going to

work will get them sick. Others will end up having to jump back into the labor market, and that should should alleviate some of the labor supply shortages that we've had. Um I also think we've seen wage hikes over the

past year. So there have been wage pressures, but that needn't be inflationary if we also see productivity growth, and so that is one of the upside risks I see for the outlook actually is that we've had even more productivity growth than we expected because companies have taken the opportunity to automates and digitalized, and therefore, even with higher wages, you won't drive inflation higher. Mike and Green of the calls you and of course the Hamma Kennedy School as well.

Something's out front and center. And our next guest, of course, leading to charge. We've been thrilled at the support we've had from viologists, epidemiologists and outright just playing doctors during this pandemic and giving us great leadership is Amashdalgo the Johns Hopkins at University. Dr Dolgo, I want to talk

about the mystery of the moment. It's a mystery for Mayor Adams of New York, it is a mystery for the President of the United States, and it's a miss three for the woman that lives three doors down from Lisa A. Bramo. It's trying to figure out what to do next on COVID. What is the timeline forward of this variant. What does the research show of what to expect one week out, in three weeks out and the

glide pass of cases, hospitalizations, and deaths. What we've seen from other countries and we have to see if this is extrapolable to the US, is that the omicron variant takes a very quick, a very quick tour through a country. It's not something that lasts for months the way delta does. That it comes in week intervals rather than in months.

So two to three weeks seems to be what it takes for it to peak and then to rapidly decline, maybe because not not because it's infecting everyone, but because it's infecting those people who are most susceptible to get infected, those people that are out there, and then everybody else starts to change their behavior and then it collapses. That's how people are predicting will happen. Maybe by maybe the next couple of days two weeks, we should be able

to see if that pattern holds. But it is going to cause a lot of disruption in its wake because many people get infected, and we have to worry about hospitalizations even if they're lower, with a macron being at least of a magnitude big enough for some hospitals that are already kind of act capacity to get pushed over

the edge. Speak of our understanding of its virulence. If I do the easy mass of three hundred thousand dead at a given rate, or I look at a normal flu of forty or fifty thousand a year dead, speak of the relative virulence of a macron. So it's probably about half of what delta was in terms of its ability to hospitalize and kill based on what we're seeing from other countries, but it still is likely a little

bit higher than influenza. And you have to also take into account than the transmissibility, because O macron is much more transmissible. Even if it has a lower case fatality ratio, if it infects more people quickly, that could still end up being awash in the end that the same amount of people get infected because the attack rate is so much higher. But what we do know is that yes, people tend to be hospitalized less, less oxygen less. I see you use, and I think that's good, but it's

still maybe too much for the system to handle. Dr Adlga. How long are people contagious? Most people are contagious for maybe about five five or so days. That's the average of the median contagiousness of time period. So there are some people that are contagious US for less contagious for less maybe two or three days, and some people more

maybe ten days. And that's what we were trying to do with changing the guidelines for isolation and quarantine, realizing that the one size fits all way of thinking about this doesn't actually work, and you could precision guide by using anagen tests to see when someone goes negative. But the contagiousness is clustered in the very first part of infection. We knew that from case control studies looking at contact contact tracing, seeing when people got infected in was always

clustered in the first half of illness. Dr Dalgo. Let's say we are moving into an endemic phase of the pandemic,

which you said probably happened a while back. What should the guide be for workplaces in order to get people back into the office and back into rotation, Which aspect, which tests, which quarantine period should they really be looking at for organizations, I think that they could use ANAGIN tests because they're trying to make sure that it's not transmission in their workplace, so that means trying to exclude

people who are contagious. So I think they could do daily ANAGIN testing for people, and when people get infected, stick with maybe a five day default isolation period, and then have rapid tests to kind of precision guide when that can come off, and then you can use masks as you need to in that situation. But if you're using a lot of rapid tests, if you've got a fully vaccinated workforce, I think you're in a good position.

But what's happening is many organizations have zero tolerance for cases. And if you have zero tolerance for cases of COVID nineteen, there's no path into opening your office because there's always going to be cases there. So you've got to find a way to come over with a sustainable approach that you're not getting outbreaks in your office, but that you know that there's gonna be cases and you can't shut

down go to virtual every time. Just like schools and universities have to do the very same thing, don't do. They them just have zero tolerance for cases. They also have requirements, right, PCR test not just a rapid test. Can you explain to us the usefulness of that after someone has been isolating for five days they've had a positive case. Is a PCR test useful in the weeks afterwards? Absolutely not. It's actually the wrong test to be using.

They should be using anagen tests because PCR positivity can go on for maybe twelve weeks, and it doesn't correlate with anybody's contagiousness because there may be viral debris that's taking some time to clear, and someone who's fully recovered not contagious, and the PCR is going to continue testing positive.

So that's an incorrect way to do it, and it's going to artificially disrupt your office workplace much more than if you actually use anagen tests or use time based saying maybe ten days or just ten days with out of the tests. That would also be better than using PCR test. PCR tests should not be used for a screening of asymptomatic individuals. That's not what they were designed for. It's the wrong test that's giving you the wrong answer.

Don't thank you Sir, that's exactly what they've been used for in some casis right now with you know, he thought to Amada of John's help kids right now and as well understood as we saw Ian Bremmer with Elizabeth Economy yesterday in China that Dr Bremer like a magnet, attracts qualified people to the Eurasia Group to generate their top ten risks for any given year. This year's Nuanced Brilliant list includes around We get an update from Henry Rome,

who was with Eurasia Group, Henry Rome of Cambridge. Henry Rome of his journalism at the Jerusalem Post, gives us the immediacy of the moment. Henry Rome, what I know is there's worries about drones in the air flying in I believe it's to Baghdad in danger. Give us the immediate right now of drones in the danger of drones from Tehran. Sure, well, good morning and great great to be here again. I think what what we've seen over the past day or so with the anniversary of the

assassination of customs Sulamani. Of course from a couple of years ago, UH the Iran backed militias in in Iraq flying these explosive drones at at bases that house US forces. Now, I think the real kind of risk here is is is the kind of ever present one that that you get US forces killed or or or injured in some of these attacks, and then pressure on the Biden administration to retaliate, to try to show that there's a cost

for this kind of activity. Now, there's there's a lot of ambiguity with drones like these about whether they're ordered from Iran or whether these are the actions of the kind of local militias. But I think the concern overall is real. Henrit help us with our stereotypes. We are all molded, certainly of my generation by nine nine and permanent damage of our relationship with Iran. Give us the update. What is the number one thing Americans get wrong about

Tehran and all of Iran? You know? I think the number one thing is that, you know, despite that image kind of seared in in our collective memory, the Iranian leadership today UH is quite rational in the sense of making cost benefit calculations when pursuing its policies. They might not have the same kind of way of looking at things that that we do, certainly in different ways of

assessing costs and benefits. But when you ask questions like why and under what circumstances would they ramp up their nuclear program? Why or under what circumstances would they seek a nuclear weapon? What is their policy around the region? You know, I think it's easy to get caught up in a lot of the rhetoric, which is fiery, is explosive, But I think when you look at the actions at least over the past several decades here, you see a pretty consistent through line of of of a fairly sober

weighing of costs and benefits. And I think we're seeing that today with with the ramp up on the nuclear program and the fairly imperiled nuclear talks andry. There's an issue of this being a regional up problem. And then there is the more geopolitical risk that your Asia groups seem to identify in their latest report of risks when you talk about it, potentially less come year for Iran, where there can be a conflagration of some of these tensions.

What's the broader read through the geopolitics of two yeah, so so so. I think we were a bit lulled to a false sense of security last year given the kind of on again, off again nuclear talks, I think the real key to stability in in in the region are these negotiations, and the negotiations aren't aren't going well, and I think the kind of real pivot point here will be likely over the next month or two when it most likely becomes clear that a deal is is

out of reach. You have the US, you have Israel, the Gulf States, and of course Iran, all kind of pivoting to their respective plan bs, and those plan b s are all different, and I think that as you see Iran start to realize it's it's its goals of increasing leverage against the US, the israelis increasingly concerned about what is an unconstrained Iranian nuclear program, as well as concerned from the US. I think all of those pressures collide uh this year and that's why that's why it

made it onto our list. Henry, how much does this lead to higher oil prices? I know you're not an oil strategist, but usually that's the direct market read through from this type of tension. Yeah, you know, I think that's right. I mean, over over time, I think this is a kind of factor that that that will push

oil prices higher. Of course, there's there's a whole number of factors that that go into that, but I think on the kind of bullish side, this is certainly one of them, especially if you get into a scenario that that that we talk about, that starts to look like a conflict that I think we're going to have conversations like this again and again about will the Israeli's attack or won't they attack? Will there be air strikes on Irani nuclear facilities or won't they And if that sounds

a lot like conversations, that's because it is. We're essentially back to a position where where it appears diplomacy is not going to succeed at this present time, and that they're more aggressive options are being contemplated. And and anytime you talk about military action in the Gulf region, I think that that immediately has a pass through two concerns

about the stability of supply. Henry Rhyme, Henry, thank you if you write your group, thank you very much and thank you to you right a gree putting imprema over the last twenty four hours working through those talp risks again this time, it has been extraordinary what we've seen in terms of action and particularly in electronic vehicles. Electric vehicles, I should say in response a competitive response to Tesla joining us now from dearborn, and that can only mean

the Ford Motor Company Kamagalatro joins us right now. Thank you so much, sir for joining us with your leadership at Ford Motor on electric vehicles. I am thunderstruck by the response to the manly F one fifty pickup truck. It does appear at two hundred thousand units. People want to buy an electric F one fifty. Tell us how important price is to that decision? At thirty nine thousand plus? Has that been the trick to get that preorder? You've got?

Good morning and thanks for having me. Um prices one factor, I would say, But I think it's the compelling nature of the product. Uh that's really important here. Uh this product has when we were doing research with our customers, UH, they love the acceleration of it, they love the torque it brings in. They love the payload of two thousand pounds. Uh, it's it's great driving truck. It's credibly fast. You know, truck owners love torque, and torque is what this electric

vehicle brings. It's more than seventy seven hundred seventy feet pound of torque. All of that capability, it's for built for tough. UH. You know, it's one of the vehicles that's been in a leading high selling vehicle for US, you know, more than more than forty five years in

a row, UH, leading its segment. So combine all that into a very compelling product proposition with a starting price of under forty thousand, nine hundred seventy four is what's made this uh such a compelling proposition for our customers. I am I'm so glad, Kumar you brought up the physics of this. The first time I felt the modern torque of electric vehicles was an electric cab Chinese made I believe in London and I the pull down the

road was absolutely extraordinary. Explained the new torque. The physics of a new torque versus our stereotype view of a tesla. So the torque, uh, you know, especially for truck buyers, is incredibly important. And if you start with an internal combustion engine, we're all used to what's what's the traditional torque curve? As you start pushing on the gas pedal, the torque starts building up and eventually piques at some

point and then sort of stabilizes at that point. In electric vehicles, there are two key things that are different. The torque is instantaneous the moment, so that build up that's in the elect in the s vehicles is not there. It's almost instantaneously. You push on the the pedal, accelerator, pedal and it's instantaneously there. The second is the amount of torque that's available is incredible. Uh. For for this weekle it's going to be over seven pound feet, which

is just just an incredible number. And that's really important for our customers for not only for driving dynamics as well as for towing. UH. And go ahead, Well, no, Kumar, is is the issue here selling it to consumers or is it actually producing enough to sell to consumers? Because that's been the real hang up when it's come to

auto sales over the past twenty four months. Yeah. You know, between the COVID crisis the chip crisis, UH, the entire industry has struggled to produce that at the levels that we were producing U. So you take that crisis, those two twin crisis and then as we're transforming the company to go from internal combustion engines to battery electric vehicles. Uh.

Changing the demand has been a real trick. We thought we were setting up our factories appropriately for the demand, but as soon as we revealed the vehicle, we had to nearly double the capacity to eighty And that's why today's announcement is so important, because even after we increased capacity for this vehicle to eighty thousand Lightnings, that the

reservations continue to come in at record pace. And today that's why we're announcing that we're going to now increase capacity in this plant, Lightnings, and that involves then you know,

all the entire supply chain, the batteries that motors, the controllers. So, given the fact that you have increased production, that you have seen such robust demand, and that the potential of additional stimulus from the federal government in a broader base of electric vehicle manufacturers, do you think the electric vehicle could reach ten of the American market by the end

of this year. That's that's difficult to say, like you said, because it will be both not only demand based on the demand are we are seeing for our vehicles and and the rest of the industry is seeing. It feels like the demand is certainly there, but the question will be how quickly can we all of us execute to build capacity to meet that demand. And that's what we

are very busy doing. By the next twenty four months, we expect to get to about six hundred thousand battery electric units globally, and that's before our bigger investments that we're making in Kentucky and Tennessee. Votes for barried batteries as well as assembly come online, because they don't come on line until about Kamar, thank you so much. I've got about fourteen more questions, including charging stations, but we'll

do that another time. And and Comar, I just gotta tell you, Lisa Bramowitz looks good on the streets of Manhattan in a Ford F one fifty pickup truck. I just think that's that's a natural there as well. Camar Galatra with us of course running the shop for Ford Motor Company Dearborn, Michigan as well. This is the Bloomberg

Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg.