Surveillance: Fed Signaling With Abby Joseph Cohen

I'm gonna say two thousand four, two thousand five in his vision of a Columbia university that would support Harlem and support New York City with Manhattanville, that is now. And they have moved forward from Bollinger to the great architect Renzo Piano to Professor Cohen joining us how ev Joseph Cohen of course always with god Been Sacks No former Golden Sex senior investment strategists and professor at Geffen

five Columbus Business School. I mean, you're going to start your Future of Global Economy course remote because of COVID, because of a macron is Well, when you get to Geffen five nine, how will you lecture the business students. What will you bring to them different? Well, Tom, first of all, thank you for inviting me to be here this morning. This, in fact is the first time I've

been speaking since my shift over from Goldman Sachs. UM. I'm ecstatic about this change, UM, moving to the Columbia Business School and the Global Economics and Financial Markets course that I'll be teaching is actually, of course I've been teaching for the past eight or nine years. UM. I've been a longstanding adjunctum at Columbia UM, and I consider it to be a great intellectual home. Of course, it's

health is a combination of theory and practice. I have the opportunity to teach with one of the wonderful tenured professors at Columbia, gentleman by the name of Pierre ja Ed, who will be covering a lot of the theoretical macro and I'll be talking about, well, what's really happened in the markets, not just over the last few days, but if you will, over the last several decades, trying to

put this all in perspective for our students. The perspective needed away from your prodigious math abilities, is the new capitalism Columbia Business School has supporters with names that we know on surveillance. Cravis Cooperman, of course, the great gentleman from entertainment, David Geffen. How do the new capitalists and the budding NBA students, how do they deal with a new more responsible capitalism. That's a terrific question, Tom. And let's keep in mind that at Columbia is also this

great legacy of intellectual capital Uh. Some of the great things in terms of capital markets in the nineteen thirties and forties also had relationships at Columbia strong economics department, strong finance department, people like Ben Graham for example. UM. And so what I see in the new students is really quite interesting. At Columbia, about half of the students in my course are in fact non Americans, and they bring an incredible global perspective to what we're seeing. You.

Very often, when we look at structural change in the United States, we say, nobody else has ever dealt with us before. Well, we are actually incorporating the experiences of our students as well. We do find that this generation of students is very much interested in a few things. Uh. Number One, they'd like to know how companies run obviously, and our course we also talk about how government policy is made, and we give the students opportunities to eight

what should those policies look like. And among the topics we addressed, of course of things like E. S. G. But we also look at things like regulatory changes, things that might need to be adjusted as the structure of an economy changes. And of course I always love to talk about the fundamentals the data in the economy, but also the valuation of the markets. And when I say the markets, it's not Lisa Brandma. Do you know somebody in row seven is gonna stand up and say, hey, Abby,

what do you think of the market? That's where? And so I'll do it. I'll stand up in in row thirty six and say, we just got this PPI data after yesterday's CPI data, we're now pricing in about four rate hikes. Were in a new regime for inflation. What's the market call at a time when most strategists are

bullets on equities. Yeah, I I think in fact, the regime change, Lisa, occurred a few months ago when we began to see data suggesting that inflation was rising, that interest rates would be moving up and underneath the surface of the market indusicries. We have seen a great deal of action, obviously the rise of volatility, but we're also seeing that investors are starting to move away from the big mo uh. And that big mo for many years, of course, was fixed income by bonds, regardless of the

interest rates. We see that investors becoming much more selective and fixed income, and of course we see that in equities as well. The thing that is always so important is what's already baked in uh two expectations. UH. My feeling is that we have a few surprises ahead in the equity market, some good, some not so good. But the key for me is always the valuation support. And that valuation support is not particularly good in some segments of the market um, and some it looks pretty good.

Um uh. There are some growthy areas that are not yet priced excessively. But the overall market I think will be volatile because the only valuation metrics that still look appealing are the ones that are linked to low inflation, low interest rates. As those continue to move up somewhat in two UH, the equity market comes under some pressure.

I think pe ratios for the overall market compress somewhat. Um, I think there's some offset in terms of continued improvements in earnings growth, because I certainly don't see a recession. So I think the real action in the market is going to be under the surface, not so much in the indsease. And based on that, this idea of the action under the surface, how much of that is pricing

in a perfect transition to a tightening cycle. This idea of an excit and threading a needle that by all accounts is going to be tough for the FED to do well. You raise two very interesting points. Number one, the needle that the FED has to thread, and they'll be doing it through a combination I believe, of increases in short rates but also adjusting that balance sheet. Could there be another temper tantrum maybe, But I think the Fed is actually doing a great job by signaling these

things ahead of time. You know, when I started as a junior economist the Federal Reserve Board in Washington, the rule of thumb then was you didn't tell the markets anything about what you plan to do as policymakers, and two to three months later you'd start to tell people what in fact had already happened. That's not the way it works now. I think the signaling that gets done by the FED is actually very very helpful in that regard.

So that's one needle that has to be threaded. I think the FED has begun to do a very good job. The other needle that has to be threaded is how to position portfolios. And I think that institutional investors UM have been talking about this, they haven't been doing it. I worry much more so about individual investors, many of whom haven't yet figured out the damage that could occur to their personal portfolios as interest rates begin to rise

UM and and that to me is concerning. And so when we think about, you know, shocks to the system when the valuation supports not so good, we can't assume a smooth transition. There are some risks out there that could knock us off balance. People talk for always about the pandemic, which is not over. We need to worry about what's happening in other countries were vaccine distribution has been quite limited. We also need to worry about a disruption and fixed income markets and what that could do.

UM and I know that there are some people out there who are concerned about what happens when people recognize that there's now been a big difference between cap market performance and equally, and then when they ask you for your market calle, just tell them yield up, price down and leave it at that. Professor Cohen, thank you so much for joining us today with Columbia Business School. Let's get right to it. Lisa Shallott joins us the chief

investment officer Morgan Stanley Wealth Management. Lisa, I want to cut to the chase. How much cash do you need right now? As cash a negative thing, or as cash and a portfolio a positive construct. So we're looking at cash as an opportunistic asset right here. Um, if you look underneath the surface of these indices, you know you've got of the stocks in the market have actually corrected from fifty two week highs, and many have corrected as much as ten or so. UM. We think that this

is an opportunistic stock picker's market. But you have to do your homework, and that homework really requires understanding UH.

If if you've got enough defensiveness in your names, if you've got quality, if you've got the potential to beat UH profit forecasts, if you've got the potential to raise dividends and do buybacks, because those are the types of things, uh, that are going to allow your your stock to be resilient in against a tape where the FED is raising rates and the cost of capital is drifting higher, which means price earnings ratios are drifting lower at least. So this cycle has moved at a rapid pace. Is it

too early still to say this is light cycle? It's a light psychodynamic now, UM, I think it's a little I think it's a little early to say that. You know, we've we've been um, you know, pretty consistent saying that this is a mid cycle transition. Um. Certainly the labor market with unemployment below four percent is starting to feel

late cycle to us. We are in the camp that says structural changes have happened in the labor market that are going to prevent participation rates from you know, rapidly mean reverting to to where we were pre pandemic. UM. But we do think that that there's a big trunk of the economy that has yet to recover, and that's

really the consumer services part of the economy. So we're still in that you know, it's a late mid cycle as opposed to explicitly late cycle, well late mid cycle, at a time when the market is currently pricing in about four rate hikes in two I keep asking investors have equities fully priced this in yet? And frankly, the answer has come back, Yeah, everybody knows it's priced in. Do you agree? I don't. I I think that the

stock market has been extraordinarily skeptical of the FED. I think that that, you know, when you have had as powerful a FED put as we have had in this market quite frankly for the past thirteen years, going all the way back to the Great Financial Crisis and in March of two thousand and nine, UM, it's really hard

to convince people that that the regime is shifting. Uh. So we do think that that certainly the indices, some of the more richly valued names, uh that we all know, those those Taflon megacap tech names, uh, you know, still need to reprice UM a decent amount, maybe maybe ten to fifteen percent to reflect What we do think is is, uh, you know, the distance forward on rates. So you think that big tech still needs to correct ten to fifteen

percent from here. Just to make that very clear, I have to think what's the trigger Given the fact that we just got c p I coming in at the hottest level in thirty nine years, we're about to get a similar read from p p I. Yeah. Look, I

think it's a question of actually seeing the Fed follow through. Um. You know, certainly we now planted the seeds that not only are rate hikes on the table, and rate hikes on the table as early as March, but you know the Fed minutes really planted the seeds that perhaps we're gonna see balance she run off. Now, balance sheet runoff really contributes to actual tightening and really ultimately translates into

the equivalent of additional rate hikes. So I think once there's more clarity on that, that will be quote unquote the last down leg in the market among those names that again here tofore have have you know, proven um kind of resilient teflon like Lisa three to five years out. How do you rationalize double digit revenue growth at the at the technology profit makers, not the ones where there's a story, but the ones that are minting free cash law every day? How do you approach those with a

longer term time arizon. Well, Tom, I love your question because this is the conversation we're having with clients every single day. What we're trying to get folks to understand is it's not a question of whether these are great companies.

It's a question of whether they're great stocks and what's priced in and how realistic is it that some of the growth rates that we've seen, much of which have included a pull forward, a pull forward of demand because uh, many of these themes were linked to work from home or were linked to some of the the unique dimensions of this pandemic. Um, can you really make the case that those double digit type growth rates are going to sustain? And history is just not kind on this point. Uh.

You know, innovation is terrific, but so is disruption. Uh. And it's very rare for companies decade after decade to be able to sustain these levels of growth without quite frankly, being uh disrupted by competition. And think, yeah, this is really important. I wish we had an hour for this, but we've got such a great hour, Lisa for you to start. Can they go play Christiansen and bring the disruption inside? Um? Looks certainly they can, uh, and and

perhaps they may transform themselves. Obviously a lot of these high flyers are are now you know, they've gone beyond betting on on you know, social media, they bet on the cloud UH and cloud services and and now they're betting on metaverse and and you know, some of the virtual UH services. Look, perhaps some of these companies will make that transition to UH you know, leadership yet again

in these emerging markets. But we continue to believe that the next set of market leaders are going to be a different set of six or seven companies if we look, you know, three to five years from now. Lisa Shount of Morgan Stanley Wealth Management, Lisa, wonderful to catch up with you. You know that we always enjoy it. Thank you. Joining us now is Tony for sense markets trying to just and pull folio manager and Pimco. Tonny, great to

have you bank with, especially stop right here. So we've got the strongest print we've seen going all the way back too. We've talked a lot about it in the last twenty four rounds. The question lasked Tom just moments ago, I'll ask you to view how hard would it be for the FED to deliver more than what this market is already looking for in twenty two Quite difficult, but you could see the power. The power of communications. One

of the chief tools the FED has. It can use words and then perhaps use action later, so it doesn't have to deliver that action this year necessarily indicated may have to do more. So we're in the future. And of course the quantitative tightening, which we see not occurring until September who knows, could be pulled forward as one other tool and perhaps use that in place of of a hike. We're looking for three to four heights this year,

rich Jonathan. One of the key things stories for the bond market, for the stock market, for the credit markets, markets more broadly, is the market price for enough in terms of the terminal rate the markets thing the FED will have will stop somewhere around one or three quarters to the FED things mutual is two and a half.

So there's a battle out there in the future. Potentially, if the inflation rate stays high and the JAVA strate keeps falling, we reach late cycle dynamics with the FED has to tell markets we need to do more, and then that's when is more trouble. Let's go to page two of your claimed book. How far out as a terminal rate given a natural disaster. You can't go out seven years now, you can't go out ten years as

a terminal rate. Fourth of July. Well, as you said Tom earlier, you've all been talking about the amount of hikes built into this year. You see, the comfort level is pretty good right now. With the four hikes. The stock market, the bond market didn't react to Powace Hawfishness didn't react to the new highs and the CPI. The markets also priced for three hikes three but then nothing, uh pretty much? Is that? Nothing? Too little? That's the big the money, the money question, with great respect to

the gazillion dollars at him go manages. Are you managing the short term? Tony krissenzis space for the end of the world. You're all in cash, your wicked short duration. Let's see if they talk, folks, or are you guys saying no, the gloom is wrong and we're going to extenderation to find a coupon in some total return. Which is it? It's more of the former, but there's a little bit of the ladder, a lot of it's the portfolio context, and investors should always have the portfolio in mind.

The credit beta, the equity beta, the correlation to the other assets in the portfolio when buying bonds, think about that idea you just brought up tom uh In In a sense you said, are you considering market timing? Uh in a portfolio that's balanced and market timing the diversification benefits of bonds is akin to getting in a car and saying today, I think I would be safe. I don't need car insurance. Not to say that bonds are insurance, but they do provide some benefit in the case that

there's a so called accident. So we are underweight duration. We do think markets are a bit underpriced for the potential for an increase in the terminal rate from the one and three quarters or so that's built into what the Fed thinks is neutral, but it probably would not get much beyond the two's. And so when looking out on the Bloomberg terminal at the five year five year, as they say, where's the where is the market think

the five year treasury will be in five years? Most yields across the yield curve the term structure as they call it in the books, are around two pretty flat curve, which is a way of saying the Fed will will be successful in the long run, any kids moves policy rate up much. So that's what the market saying. We we disagree to an extent, but not a lot tony. In the meantime, we're looking at actual yield, at actual return in cash, at the actual return in the short

term space. Do you think that this is going to be one of the best years in a while for people who are keeping their money? Uh in it that's sort of cash like space. Yes, because we've had already seen an increasing looking look at the two year Treasury note at ninety basis points, historically I would have said, well, when the two year treasury gets to a hundred basis points over the fideral fronds rate, that's kind of it for yields in general. There are times though when it

can be higher than that. Even as why there's two hundred basis points, so there maybe more in terms of yield increases if the market thinks the FEDS actions aren't enough. But stepping outside of what they call the to A seven world, the regulated world, that's for the money market. We all do. It's an exciting thing to do, isn't it, uh Tom At the two A seven world dictates that money market funds have a mature average maturities around sixty days.

UH should cap their cap there. And there's limitations on the types of credits, so stepping outside that a little bit can get an investor a little more yield, but you've got to be judicious about it. So any wonderful to catch you up and send out to put this cyclical outlook this week. Brilliant rad Thank you Sonny, Tony Christency that of Pim cog Looking at the many fronts of Russia right now. It used to be simple math. There was one front, there were two fronts. This morning

there are three or four fronts. For Lisa brand Woods and myself for all of you on radio and television. A wonderful time to speak to Ambassador Hormats. Robert Hormats is managing director of Titaman Advisers, but far far more with his experience from Northern Ireland deep to kazakh Stun as well. Bob, I don't even know where to start, but I guess I'll start with kazakh Stun because I

would suggest that is where Americans are most ignorant. Explained from a diplomacy standpoint, the importance for America of kazakh stun Well, kazak Stand first of all, is a large supply, ire and transit vehicle for natural gas and for oil, some of which goes to China, but some but also particularly from the Caspian, goes to um Western Europe and

the West. So Second, energy energy, particularly uranium where they are however, you measured between forty and of the world's uranium production comes from lu Stand and now we're building up nuclear power, they're extremely important. And third is they're very strategically located. Other than Mongolia, which is sort of sandwiched in between Russia and China, they're the only country in the world that has a border with both China

and UH. So the fact that their Russian troops there for the moment is not worrisome because they'll probably even their stability, but they could be another, as you put it, front on the on the Russian desire to expand its influence Bob, what is our diplomatic inertial force forward, China's got a view, Russia's got a view. Our view is an isolation as toned back two hundred and fifty years, and the idea that Kazakhstan's on the other side of

the world. What is the diplomatic omph that Republicans and democrats can generate towards this important part of the world very little. Um. In fact, there's a curiosity here, and that is, we don't want the Russians, don't want the Chinese, don't want instability in Kazakhstan for various reasons. And that is, you know, it's on the borders of Russia and China and and and if it weren't unstable, it would be an opportunity for the Russians in particular to expand their influence.

But we really have have had very good relations with the Kasacks. I've been there when I was in and several times, and Altobia have tried to play a very clever role between Russia, the US and China. But um, if it becomes an unstable place and a lot of instability, it affects the world's energy supplies and your fect the world's uranium supplies, and it makes for more political volatility. UM in Central Asia. That's the biggest degree in the region.

Investador hormats. As the whole world moves toward a less fossil fuel intensive energy regime, I do wonder whether United States, Is has enough of a footprint in some of these countries that provide such a huge proportion of the raw materials needed to engage in some of these plans. What's your view on that at a time when Russia and China are moving together to try to solidify their strategic

positioning in that region. Well, that's a great point, because the Kazaks really have been suppliers, particularly for American oil come Penis of a lot of oil, but not all it comes to the US, but it does go over some of our friends and allies infect the world price, so it does. It does matter a lot. Uh in terms of our our influence there. Uh from a geopolitical point of view, it's far far less than the Russians or the Chinese, and therefore our ability to really play

a major role as significant. But we want stability there. The Russians and the Chinese do too. We don't want it to be used as a base for radical johadas. I don't think it will be because because I don't want that. But it's it's very important quantitatively on energy and strategically just because of worth located and what neighbors are.

Given your former experience as an ambassador, and given that the vote for the nord stream to sanctions could come as soon as today in the U s. Senate, do you think that is a wise move for the United States to to try to pressure Russia in some of the rhetoric and frankly the Ukrainian border. Well, that's a

big problem and it really requires reading Putin's mind. The question is if you if you legislate that now, uh and the administration has made this point, you're reducing some of their negotiating leverage over the Russians in the future. Um and Sergei Ryabkoff and Wendy Sherman were both very

skilled negotiators, are trying to work things out. If you sort of stick your nose in the Russians face, even if there's a strategic benefit for the United States to tweaking the Russians and putting pressure on them, it does make the negotiations harder and and puts Putin in a much more aggressive move because I'm saying, you're you're taking unilid of election that's going to adversely effect and our and our in our neighbors, because don't forget, there's a

big difference among the Europeans on this. Some Europeans want UH nord string to some do not. And you have now thirty countries in Western Europe united against Russia. I'm supporting the US for the us UH to do this unilaterally, I think with last Division North, which would not help the negotiators. Robert Harmaz, thank you so much. That's all the time we've got for today. Titaman Advisors, Invessador Robert. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

us live weekdays from seven to ten am Eastern. I'm 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. This is Bloomer