Surveillance: Global Hike Race With Abby Joseph Cohen

the heart of these decisions. What do these decisions mean for Everyday Brits, every day Americans, when city are basically saying millions are going to end up unemployed? And the question I've asked, and I think you're perfectly positioned to try and answer it, is higher unemployment of price worth paying to try and get inflation down? No? Well, we have a lot of evidence. I mean the central bankers forever have said how important inflation is and they just

kind of guessed it. So there's a huge body of literature that I've contributed to and we look at what's the what's the impact on the country's well being, if you like, on the wealth of nations of a one percentage point rising unemployment compared to a one percentage point rise in inflation, and the answer is it's absolutely clear between five and ten times worse. So a new paper says that the rising unemployment that they're going to bring about is ten times worse than the problem they're trying

to solve. And you started this thing out. We I've been talking a lot about the woman on the mile in road, omnibus, and what I mean by that is so so the Bank of England sits in the city of London. One mile away is the mile in road. It's called the mile in road because it's a mile from the city and it's where the two worlds collide. And the question is, what's going on that's going to help the bankers and the city folks that we talked to and the woman riding the bus on the mislen road.

And the answer, it seems to me, is that is that we're we're seeing disaster coming. We're seeing rises in interest rates in the UK when the Bank of being there's agents today talk about slowing demands, slowing output. The Bank of being the four has before the rate rise that there's a high probability of deflation and that output is going to fall over the next three years. So what are they trying to do for a problem that's not about demand driven inflation? And the other thing, Johnathan

and Tom I think we really should think about. In a sense, you guys talk about this all the time, but there's so little discent the story at the ECB, the story at the Bank of being the story at the Fed. We kind of do things a banning flesh. We've got to raise rates. Potentially this is going to crash the economies and it will all be much worried.

Professor Blanche floor, I stood in the bottom of our building here in New York with Secretary Treasury Tim Geitner in the heart of the financial crisis and Geitner brilliantly laid out that they needed to extend the x axis and use time to heal the wounds. Are these central banks that are panicking because they refuse to send to extend time, to extend the x axis, to to diffuse

inflash Canary Impulse? Well, that's absolutely right, Tom. I mean the thing that it strikes me as very interesting is these central bankers seem to want to respond to every piece of MINU Sha that comes in every day. Their job is to focus on the forecast, to rise at what inflation is going to be, let's say, in two years time. But if that causes all kinds of problems, there's no reason why you shouldn't say, okay, let's let inflation come back to target in three years or four years.

I mean that's absolutely allowed and the sensible thing probably to do is to see if this temporary shock dissipates. So you could sit there and say a sensible path would be to sit and wait and watch. But again, where's the dissenting voices? They're all saying the same thing, based on zero data. They have no precedent to this and the danger is that the soft landings are not

going to come. And in the forecast yesterday from the Fed said output is going to be fine, impost is gonna rise just a little bit and raising rates to four and a half percent, no worry, it will slowly bring inflation to and that's for Garga land. That's not gonna happen. Danny is there? Are there any circumstances under which you would argue for raising rates? Well, of course, obviously. I mean the re absolutely. So what? So? What what are the scenarios that would cause you to say it

is important question? That's a stupid question in a way. I mean what we've seen since two thousand and eight is the mother of all shocks. We saw the mother of all shocks, negative shock to output in two thousand seven eight, which you had to counter. If you haven't counted it, Ben Banankei said unemployed would have been so I'd buy that. So now what we have a giant shocks, I mean giant shock from the covid and from the war.

We don't know how it's going to recover. So why would I want to punch the labor market and punch demand before I really know what's coming? I mean it's as if they know what's coming, because they clearly don't. So under these circumstances, supplied driven shock that essentially is going to drop out. My guests in the United State Eights and in the UK will see very low inflation by June, as those big numbers, one off big numbers

that we saw dropped up. So I would have not been rotive over rate rises because of the large negative shock. And the debate over the last decade is about the scale of that negative shock. Danny. It may be a stupid question, and yet some people might be wondering that because they're taking a look at CPI where it is and saying why wouldn't you want to raise rates? So, and I mean I'm just saying so, from your first from your coat, what data point would you be watching

to prove your point every week? Okay, so let's just go with the claims that the Fed has made and the claim that I make. So what you've got was a couple of once off events which are basically driving the base effects. You've had inflation of zero and zero point one in the last two months. If you just take two thousand twelve to two thousand ninety and you impose those inflation shocks over the next eight months, inflation

gets to one by about you. If you go back to two thousand and eight, same date, July, two thousand and eight, inflation was five point six percent. It was minus two a year later. So the question is, everything's being driven by the base effects. So I would be watching and waiting to blanche. Thank you, sir. Our guest is so important on what to do with your assets, your money forward. Lisa, help me here with the data check. So much going on. Equities give me a mixed story.

The vix went out above thirty and pulled right back into twenty. Seven, point six, eight, maybe a more quiescent response to Dow, just still above thirty thousand. Didn't get to the twenty nine thousand level. Lisa. What do you see in bonds this morning? Well, what you're seeing is a front end that just won't quit. Right four point

on that two year old, and I think that's really important. Also, though, in the currency space, and this sort of goes to the scene that we've been talking about over the first two hours of the show. How does the other central banks respond to this? The Swiss National Bank rose, raised rates, baviusly left uh the negative yield regime, which had been an eight year regime, and their currency is weakening the

most is two thousand and fifteen. What is the path ahead in this currency war to get a stronger currency at a time when nobody wants anything other than the dollar? For those keeping scored at home, let's be clear. The Swiss went one way, the Japanese went another way. Maybe that's called a currency war, Lisa. I mean, and a very different one than the ones that we're used to over the very different. It's really, really important, is Jeff. You said earlier with B and y melon. It's asymmetric,

to say the least. We need to solve the Carnag in your portfolio, Lisa Shallott, with us, chief investment officer Morgan Stanley Wealth Management, and we readjust this morning. Are we rebalancing, Lisa? Are We readjusting? What are we doing amid the carnage? Well, look, our our advice to our clients is certainly that we should be rebalancing here. You know, what we have said is this is a time for active risk management, and what we mean by that is

taking Um a maximum level of diversification. That means diversification by sectors, diversification by technical factors, diversification, uh, you know, by region, uh and UH. You know, I know it's not popular right now, you know, to speak about uh, you know, American investors owning uh, non US stocks, given

relative out performance of the last decade. But you know, we think that what's going on in the currency markets is material, i. and that this, this divergence, ultimately will mean revert and and that there is going to be some catch up. So we're recommending, uh, you know, maximum

active management, diversification and things of that nature. I really look forward to speaking to you because I want to talk about the strange words scale and I'M gonna go back to the Great Peter Lynch at Fidelity, who got angry one day and he said, look, I care about your forty seven stock pick, knock your number one stock pick. There seems to be so little to choose from. Lisa Ala, Mike Wilson. How do you get scale or diversification within

US equities now if you've only got so many good ideas? Well, I actually Um I might push back on that. I think that, you know, underneath the surface of the S and p five index and even the Nastack in disease, Um, you know, we're finding real opportunities. There has been carnage in this market. We know that in small and midcap

land there's been carnage. We know that there's a host of uh, sectors that that have sold off across sably, including things like home builders, uh, you know, again, contrarian perhaps, but where, you know, a lot of the bad news or likely news is discounted, uh, and so we do think that there, you know, are our things to accumulate out there if you are willing to do the fundamental work.

I mean, I think one of the UH, you know, one of the challenges for a lot of investors is the last thirteen years have been dominated by a handful of stocks in the US with a growth orientation in the tech and and and communication sector, and people didn't have to do much work because they could just buy the index and get the job done. Uh, this is

going to require homework navigating in these markets. Um, and this is when active managers actually, you know, uh, for good or for bad, earn their fees and, Um, you know, we, we think that that is the place to be. Does that mean Le so that you think the headline in figure for the SMP, for example, could trade sideways for years? I do. I am, uh, you know, more in that camp.

I mean, I think that one of the things that has continued to surprise me is the extent to which equity investors have been willing to hold the levels of forward multiples that we're holding in the face of decade high interest rates. We know mathematically and fundamentally that the movement and interest rates higher should equate to lower price earnings ratios. Um, and you know, yes, have we pressed down a bit from where we are in January, as the Fed funds has gone, you know, from zero to uh,

you know, three. Yes, we have some. But you know, you know that we're also in the camp that the current figures in terms of estimates for forward consensus earnings estimates for two full year and then probably remain too high, especially if we're in this debate about, you know, recession, no,

recession Um. And so while you know the current pricing and markets at at thirty eight hundred and change may suggest, you know, a sub seventeen times forward multiple, uh, if you adjust those earnings down, we might be back at seventeen and a half, eighteen times forward. And so this market has more work to do in terms of quote unquote, getting real. So who is going to be the leadership? And I asked this because it sounds like in your scenario,

big tech cannot be it anymore correct. I think big tech is going to have to consolidate and I think those valuations are going to have to come in and I think that they're going to have the come to Jesus moment which says, yes, these are great companies, but they are no longer great stocks, because everyone knows the stories and expectations are extraordinarily hot. Um, you know, the reality is that they do operate in the whole big

wide world, global world. The Global World is slowing, the US dollar is a material headwind and inflation and cost pressures are realities for them as well. So new leadership, you know from where we sit, is likely to come from different areas, areas like healthcare, areas like energy, industrials that may benefit Um from some of the infrastructure and capital spending that we think is gonna occur over the

next couple of years. Lisa, we at a point, and I'm thinking of Andrew Mellon the nineties, on transactions and combinations. Are we at a point where the zombies roll up? I mean we finally at a point where the real interst rate market, which was a gift of zombies head for seventeen years, whatever the number is. Is this the point where the zombies end? I I love what you're saying, Tom Because I do think that that that is going to be the next phase here where the cost of

capital does start to pinch. I do think that those who have, uh, you know, strategic capital to deploy uh, you know, are going to be able to to, Um, go out and and acquire some capabilities. At the same time, I think some of those zombies are going to go by the wayside. Um and, uh, you know, start from not being able to get financing. Yeah, I gotta leave it there. Lisa shallow, thank you so much, Turvic. Brief there. And actually what to do with your capital with Morgan

Stanley wealth management. Is this joy? And how do we know? It's an historic day of Japanese intervention, Bank of England action. To Abbe Joseph Cohen with his Professor at Columbia Business School, a modest career at Goldman Sachs as well. Abby, thank you so much for joining us here. How to keep us informed on the underlying finance and equations, the mathematics of these equity markets? Abbe Joseph Cohen. Suddenly the sharp

ratio matters. I guess Beta man otters again, but outside of Beta we've got the risk free rate and it is returned with a vengeance. Are we revisiting the sharp ratio? Are we back to the articles you wrote for the CFA years ago? Tom Wonderful question and I'm going to respond by giving a bit of a prologue, which is that many models are broken have been broken during this period of time, because they typically respond to cyclical phenomenon.

For example, your question to Michael before about the Phillips Curve, and the reality is that there are so many structural changes in the economy and the markets as well that a lot of those models simply have not applied. Some of them are coming back and force uh, the Phillips Curve, for example, had no way in this model to reflect the fact that there was a pandemic uh, that we have had this generational shift in La reforce participation, by which I mean the baby boomers are now stepping out

of the labor force. And the other thing, of course, is that we have had a four year uh deceleration, if you will, in terms of immigrants coming into the United States, and over the prior decade immigrants filled sixty to sixty of the increase in employment in the United States. So there are a lot of things that are different. Within the market itself, a lot of the models haven't

applied for a while. Keep in mind this weird twenty to thirty year period in which interest rates and inflation were extraordinarily low and, to your point, real rates reached negative levels Um, something we had never seen before. I for one, now I'm answering your question. I'm happy to see that the Fed is now focused on making sure that real rates, really yields, are in fact positive. And

does the market believe them? And the reality is that we now have a too inverted yield curve, which suggests to me that bond investors and least, are giving the Fed credence, in credibility in terms of believing that the Fed policy will have efficacy. Abby, are you saying that stock markets are not accurately reflecting the fact that inflation would be higher and would remain higher even after this cycle collapse, if the Fed were not to keep rates at a much higher level than they had been um?

Another very good question. Let me just talk about what happened yesterday in response, uh, and that is the equity market didn't know what to do. Um, first it was up, then it was down, then it was up, then it

was down big time. There was really erratic behavior because, to your point, Lisa, equity investors are really confused because there is this Yin Yang between inflation and higher yields versus will the economy and earnings continue to grow, and I think we're now at a point where, given the significant rises in Um interest rates and yields across the yield curve since the beginning of the year, the equity market is now focused much less on inflation and yields

than it is on earnings, and there there's a lot of confusion. Um Investors are not sure how this is going to play out Um for the rest of the year, let alone for three we see, for example, that they're ongoing adjustments to the consensus earnings forecast. But let me point out we're starting at record profit margins Um. It's not as if profit profit margins and R O e were low. R O e for the SMP five is

an excessive Um, you know. So if there is in fact ongoing profit margins squeezed, I think the impact overall is not dramatic. The impact, however, in individual sectors may be significant. Do you see the possibility of a lost decade? I've given the fact that we're trying to readjust and renormal realized rates, renormalize some of the financialization of the economy. You mean a lost decade in the offense in G D P and a lot of things that people hearken

back to the seventies. About sure. I mean if if you look at the valuation of the US Equity Market and some of the markets as well, at the end of one they were at record high levels in terms of where we were on percentiles, almost every valuation model was between the ninety nine percentile, indicating, in my view, overvaluation, unless you believe that the dream scenario of extremely low interest rates and strong profit growth would continue uninterrupted. So

where are we now? The valuations are roughly at average levels Um. SMPI PE, for example, is about sixteen times earnings Um and given where we are, even with a rise in interest rates, that's not a bad place to be. So when we talk about the lost decade, let's talk about two different phases. Number One, we've now had a correction and share prices from record high levels and record high valuations. Can we get back that? I don't think that happens over the next several months, UM, over the

next few quarters. I think the economy will slow, earnings growth will slow, but I think it's possible that we could see higher equity prices. I kind of peg that along the same lines of the growth and earnings, which is probably, uh, what do we call it, five over the next few months. I mean a few years ago you wrote an iconic paper for the CFA institute. You mentioned an old strategist I used to talk to named Aristotle.

Aristotle never saw a bond market with yield up, price down and the losses that we've seen over the last year and a half. How do bond investors re ever, given this historic carnage? The damage clearly has been much more dramatic in the bond market and in some ways the overvaluation and bonds was much more extreme. We had central banks around the world who kept interest rates nominally extremely low levels and real yields were low in many countries.

You know, two thirds of major economies, not the US, but two thirds of major economies, had negative real yields. So the damage that we've seen in the bond market, Um, I think it was expected. When we look at government bonds, it's one thing. The damage and the credit markets, Um, is something that we've not yet seen fully rolled forward because a lot of those are ill liquid securities and

I think we're going to see more damage ahead. But for the average investor, who is willing to buy, for example, an individual bond um and now can get a three or four percent yield, depending upon the maturity they're willing to take on. Uh, that is something that is one of the best opportunities in twenty years. Very good. Are you like in teaching, Abby? I mean this is a whole different act for you. You you you're surviving Colombia. Do you throw chalk at people? I do not throw

chalk because we use white boards. So anything. Um, so I'm I'm I'm loving it, tom it's it's a great opportunity for me to be involved in the next generation. Wonderful, you look Tannon rested. Thank you so much, Abby. Joseph Cohen, Professor at Columbia Business School. This is a week of well, at least a traffic at midtown Manhattan. How about that traffic that we all see, with thousands descending for the

United Nations General Assembly meetings? And much more, far more important, there's a migration in October to the meetings of the International Monetary Fund in Washington. Someone who knows the schedule is Sergey Nikolacheck, deputy governor of the National Bank of Ukraine, and we're honored if you join us today amid a terrible, terrible war. I need to go first of all to a simple anecdote of your Kiev. You're educated in Kiev.

You've seen the transformation over twenty years. How does Kiev recover back to what you knew when you were younger? How do how do you see that happening? Actually, kieve changed dramatically for the last twenty years before the war. It looked like normal European city, capital of the European country, so you may he you was able to enjoy the restaurants, clubs, uh shopping malls and so on. Definitely a change, changed to real sizeable since the beginning of the war. So

Gi was completely empty in March April. So nowadays the life is recovering, coming back, coming back. But still you feel, do you feel the consequences of the war on a on each step Gore gave of the International Monetary Fund has a few distractions away from your war. What is your unique message to the International Monetary Fund as you cry for help? What is the distinction, you say, versus all the other headaches they have around the world? Definitely

Ukraine needs their support from the International Monetary Fund. So we are very grateful for the International Monetary Fund for providing US one point four billion dollars under the Rifi at the beginning of the war, but so far we need more and we are ready to engage into the full fledged program so in uh, mainly. So, mainly we focus our efforts in order to launch the e FF program of the large scale, and the authorities are fully functional and ready to negotiate and to discuss the policies

for in order to uh to launch such problem. Sergey, we've been talking a lot about central bank great decisions over the past week and we've gotten a lot of them in the past twenty four hours. You recently kept the rate unchanged. How do we even have monetary policy and try to keep a normal sense of monetary transmission in the face of a war, in the face of such incredible disruption and day to day commerce that it becomes sort of not really a main feature? Yeah, definitely.

Our approach to the monetary policy change dramatically. Stance at the beginning of the war. Before the war, were relied on the inflation targeting framework, very similar to many other central banks all around the world, but at the beginning of the war. Are we UH. We moved to another setup. We started to rely heavily on the stability of the change rate. Uh, we supported our actions on a fixed market with a tough capital controls. And after some period

of UH adjustment. So when we keep capt the interest rate stable at ten percent, in early June, so we raised it to twenty five in order to help ourselves to uh, to maintain the stability of the exchange rate. And UH, UM, last two H, our last two monitory decisions, we are to keep this interest rate at twenty five at the same time. So, as you rightly man mentioned, so we struggled to improve the monitory transmission, which was not perfect before the war, and definitely it's uh, it

is even worse since the beginning of the war. But so how we see that? Our decisions, so they are translates. They translate into the banking rates more or less, uh, as we expected, and we hope that title monetary conditions will help us to maintain the stable change rate. What will it take on the physical side? And you're talking about the I M F aid and how much you

might potentially need. How much would you need? How long would it take overall to rebuild the economy in a way where you could go back to something more akin to normalcy. Okay, so, frankly speaking, the losses from the

world tremendous. So that relates both to the current situation, when we have a huge budget gap which we have to help to finance from the Central Bank site, and actually this year we already provided uh more than ten billion dollars to to to the to the government, in order to support the essential needs, financial, the essential needs and at the same time, at the same time, that

puts a sizeable pressure polytics market. Here you were, you were running out of time here, governor, and so I've got to keep this short and abruptly and being rude and doing that. Ukraine has had a courageous two weeks. The news flow has been extraordinarily good at the military front. What do you need from the allies right now? What do you need from Mr Biden in the West right now?

Definitely we need the continuation of the support of both on military front and also an also continuation of financial eight so we prove to the whole world that we have we may us, we may we may win, and we hope that with a continuation of the support from the democratic world, we will achieve the Victorias as soon as possible. Thank you so much for joining US Bloomberg today. Seray Nikolai check of the National Bank of Ukraine here among this week of this UN United Nations. Really an

extraordinary set of meetings. Lisa, I'M gonna call it post pandemic. 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