Surveillance: Inflation Debate With Dan Fuss

By depressed price bonds, there will be credit improvement and the bonds will appreciate for total return. You can't do that anymore, can you. Well, um, that's right, But all I can do is agree with what you just said to Um. It's a tough road to whole right now in the bod world. Uh, you can make some money. You can ride the old curve at too short end. UM. I don't recommend it, but you can. You can buy a slice of each of the new high yield coming

out and you've got some yield. UM. Or you can be a bit smarter about it and you can say, well, I'm not going to buy a slice of each one of them, but I'm going to buy the ones I like and try to keep my maturities entirely short. And then people say to me, and they said, well, that's all well and good Dan, but you know, I just can't raid a seven the yelder and the portfolios to me and a half. And so what do you expect

us to do about this? Get rid of you? And I said, well, I don't like it to get rid of me, but I have to be honest with you and tell you it's that type of the old environment. And uh so if you're discounting at seven um and the yields you're getting our three or poor even, uh, you've got a problem. And I can't solve that one for you. Uh. Now, last year we were lucky. Prices went up some more, the total return looks nice, and

people say, geez, that's really very nice. You've done it again, and you say, uh, huh, listen, that was luck and by this time, uh, you know, the marketers will never let you in another meeting. But that's the reality of life down I want to jump in, if that's okay. So I want to talk about the experience through the last few cycles, beyond just what we've gone through in the last twelve months, but over the last couple of decades.

What is it about the way we recover and roll over through these cycles that leads to lower highs on a ten year bond yield and lower lows each and every time, each and every time? What's going gone down? What's that dynamic? And do we repeat that in this recovery about to go through as well? Well? Number one, I don't know the future. Number two, Um, I think what we're in right now, Jonathan is in a period of rather low rates for quite a period of time. Now. I am not in the camp that say they are

down they're going to stay down in the US. And I don't think we're going through the popular praise these days the Japanification of inflation in the markets. I don't buy that. And but maybe it will happen. I doubt it. That's a whole different world there, uh. I think what we're in right now is an excess of liquidity finding its way into the bondom market. Now, there are a

couple of indicators. If you look at what's happening with the E t f s for example, you look at you know, say, oh, cheapers, the highli T s Uh, they're not really growing anymore. A matter of fact, it's seemed as reported to have flattened out. O. Um, that's one indication. And then you look at what the new issues coming out are being used for. Um, a good chunk of them are being used to refinance the older ones. You're bringing down your coupons to adjust to the you

know that smart financial management. Uh. And Uh, the underlying fundamentals on a lot of the issuers on some are are quite good. On many more, Uh, they're de degree and so here you have a floppier credit environment, you have lower yields. Yeah. And and basically this goes to the point that you made recently dead in an interview with Bloomberg News, where you said there's no outstanding value

in the fixed income markets. And I'm wondering, Dan, as one of the fathers of the bond market as we know it today, where do you go if there is no outstanding value in the fixed income market. Well, you do what you did, and I'm going to go back in history. You do what you did at a little different level of yield in the sixties. You start to work with the old curve and and your patient. But

it's easier to see immunity. See if you were running Ammuni portfolio, you'd say, oh good, I'm going to buy the five year and I'm going to roll it back out after two years have gone by or three years whatever. That was a pretty steady positive curve. Corporates are are different, and there's a spread between bidden ask, but if you stick to the higher quality and work with the old curve,

you can be adding some value, not a lot. And then you watch for the occasional anomaly anomaly um and on the credit side, and they do come along, not many and not big, and they don't last long, but you can find them. But the one thing I discourage people from doing is saying, well, listen, uh, this economic rebound is going to be ferocious and everything is going to be back to normal. Well maybe that will happen.

I hope so. I sure hope so. But I wouldn't bet that way, and I would not bet against the return of inflation because I think Milton Friedman had some things right. And when you follow the growth of them too, and the rate that it's growing at, or use any other procts that you want, go look at the stock market where there is excess liquidity, and it is in this system and we and the FED is caught because we are fighting a war right now against the pandemic.

And and that's the case. Everybody has to get in and support the work. Don't forgive me for jumping and said, if you can, fantastic to catch out with you. Thank for giving us some of your time, and don't be a stranger. Don't leave us so long. Next time down fuss that of limits sales. Lori Kelvisine is at RBC Capital Markets and they've got a really, really, really interesting exercise they go through every earning season called transcript tagging. Laurie,

what's transcript tagging? And what have you learned? So basically transcript tagging. As we go through on my team all of the earnings called transcripts of SMP five companies. It's a pretty manual, labor intensive process and we just frankly want to see what companies are talking about. UM. We try to gauge the tone. We look at what they're saying on things like cash, the outlook, the tone. Actually the surprised me wasn't as robust as I thought it

would be. So we know that companies are coming in and beating left and right on numbers, But when they're talking about the forward outlook, they're really kind of two camps. There's one that's expressing some optimism over the vaccine rollout, and there's a second that's been really pushing the narrative of things are still uncertain. Um, so it's it wasn't as biased towards kind of that bullish look at the vaccine rollout as I would have thought. Talked to me

about the performance post earnings, Laurie, what's the takeaway? So this is something else that's really been interesting. You know, depending on what which day you update the data, but about half of companies that have posted results so far in this reporting season have gone down one percent or more in the one day trading session after the results.

Now that stat's gotten a little bit better as we've gone through reporting season, but I think it's a testament to how high expectations were coming into this reporting season. So kind of this, you know, kind of one mediocre, Yeah, maybe things will get better, we don't really know. That's not cutting it and you're not seeing one is some ss really go up in a meaningful way. I've been

trying to work out. Just sorry to jump in. I've been trying to work out where the spot on the calendar is where a lot of this starts to manage just a little bit more, because I think some people are still quite forgiving of any downside surprises, whether it's the earnings or the negative economic data, because they're hoping, believing things get better in the future. What's the test state for you? The test date for me is going

to be April. And the reason I say that is we're going to kind of get out of this year ahead outlook season. We'll start to hear the early reporters, you know, kind of talk about what the full year outlook really is. And also stocks have been marching along the two thousand recovery path, and if you look back at that history, April is when you did get a

pull back in the market of significant size. And we also have pointed out that about ten months into recovery trades post recession, you do typically get a big bout of consolidation, and we've seen this over the last three economic cycles. So you know that April time frame is perhaps when we will finally get that pullback a lot

of people have been looking for before that LORI. Next week in Washington, d C. We're gonna be getting those hearings about what happened with game Stop and AMC and some of these other big share moves that we saw that really were attributed to retail but had a lot of other institutional players. How much does this affect your focus, which is small caps and the indexes that track these

kinds of shares. I mean, how big of a concern is it that this type of activity could wildly distort both returns as well as money allocation if it persists. So it's a great question, and I have, you know, kind of two critical thoughts here is one. I don't think retail investor participation and some of the less liquid names in small cap is necessarily a bad thing. Of course, we want it done in a way that's not bringing

excess at risk upon those individuals. Um But you know, I think that the door has been opened to some extent. So unless the regulators really kind of come in and close it down, and I don't think they will, you know, I think retail is probably here to stay and keep fishing in the small cap pond for a while. Second thing, though,

I would tell you from an institutional community perspective. UM, there was no one more unhappy about this Reddit issue to start the year small cap value managers, and the reason why was that they did not own the kinds of names like GameStop that retail was going after, and it created big performance holes in their benchmark. If you look at the last week of January, only nine percent

of small cap value managers beat their benchmark. They were not willing to go in and buy these stocks, but they were definitely curious to know if everyone else was. So this raises a really interesting question, Laurie. If it's not going away, how do they play this? Do they

start following Reddit and just going along with the crowd. Well, look, I think that we have just sort of an inherent problem and active management, which is that you know, even value managers, everyone's kind of got these quality biases and has sort of veered over to the same side of the quality trade, and these kind of lower quality names UM have really kind of been ignored, you know, are

sort of orphans in the market so to speed. And I think we just need to recognize that this kind of situation where everybody in the institutional community is going to sit on the same side of the boat. It is just not going to be allowed to exist. And definitely so they do need to fish more in that side of the pond. I think I've missed you until I've really missed you. What John, what she just said there is extraordinarily important. I mean, this is the act

of do you buy passive small cap? Do you buy an active? It's important, Laurie, it's been a long long time. Can we do a shout out to baby Emmett? How is baby Emmett? Baby Emmett is great. He just got his first tooth and he's sleeping through the nights, so he's been baby. Did he get any bumble shares? Oh my god, no no, but my five year old did try to talk me into letting him trade some stocks. Laurie, I'm sure I'm not alone. Wall Streets missed you. Welcome back.

It's going to catch up of OURBC capital markets. Just fantastic research. What we knowing for certain here team surveillance, folks on radio until elevision is a fancy guy in a fancy suit with a fancy bow tie. We'll go get a second vaccination. At eleven am this morning, the national disgrace that we have is a distribution pretty much is for the fancy people. Dwight Evans is living this in Philadelphia. He is a Democrat from Pennsylvania, where thrilled

he could join us this morning. You know, Congressman Evans, and it's a disgrace the way we've distributed the vaccine. The key word here is fast. What do you need from President Biden and Congress so that we fast distribute the vaccine to all who need it. There's no question that the programs started started as a failure at this particular point. But I believe President Biden and we're working

together to address those issues. There is no question as senior citizens, the essential workers, people of color are having a very difficult that I'm giving access to the program and that is wrong. So we us changed that, and I believe that we're moving in the right direction. And I think it's clear we ultimately around April should get in the right place. Tell us in the trenches of your legislation, what we're doing about educating people and particularly

people that don't have an acute science background. We seem to be so far behind. How do we educate and again educate fast? Well, there's no question that you know, you know, there's no use I can talk about what has happened in the past, but we need to talk about the future. There's no question right around this particular much. It's been a year that we have faced this pandemic and this global pandemic, and it's not that we created.

It's a question of how it's been managed. So we can need to point fingers that we can find a pathway to address it. I believe that the President United States, in conjunction with the House and the Senate as a partnership, does the attempt need to address this pandemic. So Congressman, let's talk about the future, and let's talk about the current stimulus plan. When you discuss with fellow Democrats what

to approve, how big to go, how much? Are people talking about the political will to follow it up with an infrastructure spending bill, as Joe Biden will be talking about today in Washington, d C. Well, you go by the chairman of the Feather Reserve. You said a long time ago that we need to go big, and we need to go bold, and right now is a very appropriate time because you look at the aspect of barring. Barring is very low and very appropriate. So those tools

are available. So I believe that we have to use all the tools that are available, and I believe that people are ready, they are ready for a type of change. We've gotta build it back better. So we have to crush the virus of coruss that first and foremost. Secondly, make the necessary fatigue event, reopen our schools, reinvest in our infrastructure, work with our small businesses. These are all the things that we have to do. So it's not easy,

but we can do it well. But but you believe that, and a lot of people do believe that a part of the Democratic Party, but even among the Democrats, there is some disagreement about how big to go and how much to follow this up with, and the idea that Republicans are getting a little bit more concerned about the debt pile. I mean, how concerned are you that if you pass a big and bold stimulus package right now, it will withdraw any political support for getting that infrastructure

spending done that you're saying is crucial. Well, I think it's important to understand that in the House, we just had a hearing uh in their Ways and Means Committee, and the chairman of the committee is very confident in terms of where we are. We understand the concerns that people, but we realize this is something we can do. We cannot afford not to do it, so we have to take that. Actually, I believe that we're in the majority in the Senate and with the houseworking together that I

think that you will see a new, different day. So I'm very optimistic that we can achieve this. Joy Evans tell us the the the forward motion of the Congressional Black Caucus. It has been a four year challenge, without question, I think anybody of any political persuasion can agree on that. Tell us about the new effort by a Congressional Black Caucus in Congress. Well, you know, um Joyce Baby from Ohio is the new chairperson. Fact, she's on the Financial

Service Committee. I work very closely it being on the ways and means committed. So I share with you with a leadership taking place of Karen Bass from California, that she will not miss a step. You have some very good new members, new blood, new energy, who are ready to take this challenge on. So, in spite of what a lot of people said, I believe that the Congressional Black Caucus ready for this challenge. Congressman Waved love to have you back, saying please stay close. That would be

a stranger to this program. Congressman Wide Evan's that wank. Diane Swart joins from Grant Thorton. Just wonderful about calibrating the pulse of that equation. Why I will see plus I plus G plus n x, Diane Swark? Right now, the mystery to me is a persistent six five g d P and we get out into Q one, maybe into Q two, and then there's a mystery. What is

your clarity on Q three and Q four of this year? Well, certainly the hope is that we see this unleashed pent up demand lift us even higher and get to the end of the year. Ours is a little bit more muted because the multipliers, we think are more muted on services coming back than they are on goods coming back. This is a very unique reset and where you do unleashed pen up demand. But how many times do you eat up out in a day? How many haircuts do you get to make up for what we lost? So

it's a different kind of unleashed pen up demand. But we could easily see the strongest year since nine four. That is important as we go into two thousand twenty two. What's also important is how do we manage the virus. I mean, we're talking about not eradicating the virus, but managing it so that it's not a significant part of

our everyday lives. But that process of going from eradicating her community just flipping a switch, to managing the virus is a very different economic equation as well, in terms of how fast we can ramp up all showing up at big theaters and sporting events in crowds and congregating in the way many of us would like to dance swank. We spoke with Heidi Sheerholes out of your University of Michigan the other day. She is expert, expert expert on the dearth of jobs that job GEP that we have

with a aren't economy? Do we close that job? Get Yeah, it's a great question. One of the things we're really worried about it in Heidi is as well, She's great at this is the dichotomy between high wage jobs have come back and in fact, in some sectors they're reporting labor market shortages. Of course, we all know that anyone doing anything with their house right now cannot find a

skilled carpenter. But beyond that, you've got in the low wage sector jobs that are being replaced by automation and digitation. Even thinking about things like the peloton and doing fitness and home that allows one person to personally train a lot of people. Reduces the cost of some of these inflation fears I think are overstated, but it also reduces

some jobs that might be coming back otherwise. Also cashiers, anything that can be automated in terms of getting out of a store, not having that extra touch, and the world we manage the virus rather than just contain it. All of those things mean it's going to be even harder for some of these workers that have been displaced

to come back without reskilling. And that's before we get to the last educational component of We've now got many low wage household suffering, not only our math scores suffering, which need in person care and elementary schools, but low wage household suffering dropouts not getting access to online education, and it really is exacerbating inequalities and diminishing that labor poort. Going forward, Let's pick up on that word inequality. There

the structural issues. Let's talk about some of the cyclical slack this feed has been conditioned to understand. Now, Chairman pal chair yelling, now, Secretary yelling. They need to run this a whole lot longer to really reduce and eradicate any cyclical slack that is left. They learned that in the last cycle. They're applying that conditioning to this cycle.

And Dan, I wonder how difficult this is going to be to calibrate, because if the Federal Reserve is committed to doing that, then as a market participant, I'm committed to allocating to risk assets as well. So how on earth do you close that gap if monetary policy is one of the tools you're using to do it. Yeah, it's really Monetary policy is such a crude tool on this, and I think fiscal policy is so much better at removing the hurdles to inequality. We're gonna need summer schools

to make up for some of this inequality. We're gonna need to re engage students that have dropped out of college twice the pace they've dropped out in households earning less than seventy five thousand dollars a year. So all of that requires more fiscal policy than monetary policy, and monetary policy kind of running that, you know, sort of and you allude to it, Yes, low rates for a long time if you overshoot what you thought was full employment.

And Powell has really embraced this idea to run the economy hot, to bring in more of those workers that are now most damaged, narrow that gap between the black unemployment rate and the white unemployment rate, in particular, looking at different employment to population ratios, trying to think of this much more nuanced um in terms of what is full employment. Well, that's only one tool, but that's a

really crude tool. And we also know the New York Fed has done a study that in fact, you know, running the economy hot with low rates also exacerbates inequality and wealth and that's something that we have to deal with as well. So I think that's the hard part. Getting the economy hot is also still an unknown. All

these people worried about inflation out there. It we could see a flare of inflation, but to have the kind of wage push inflation we saw, say in the nineteen seventies, overlaid with the opeque inflation we saw in the nineteen seventies of stag inflation back then. Research suggests that of wages in the U. S economy were tied to a cost of living increase that was well and beyond any

union contracts out there. Remember my dad would come home with this extra cola increase as a GM executive back in the late seventies and be excited that he got that extra bonus in addition to his races he was getting. That's not the world we live in today, and I think people the context of inflation is very different than it once. What which brings in the fifteen dollar minimum wage debate which is being had in Washington, d c. Right whether or not to include that in the stimulus plan.

A lot of people saying just take it out, it's a hot potato. The CBO, which is a nonpartisan group that took a look at this, found that it would lead to fewer jobs, but it would reduce the amount of poverty in the economy. What's your view, I mean, do you think that it would help generate the kind of income growth, boost to inflation, boost economic prosperity to raise this or would it actually harm it? Well, it

really is. This is a much more nuanced debate, and one of the things I do think the evidence on minimum wage has really shifted a lot of economist views on it. It didn't destroy as many jobs over that period of time. It's almost a one for one, not quite a million people taken out a poverty, a million and a half jobs loss. If some of those jobs were no longer people working two jobs, that's a good thing.

But the more nuanced view of it that I think is really important is places where you know you're trying to bring up small companies back online, small business back online. While large chain is already moving to fifteen dollars an hour, they're effectively accelerating the consolidation and diminishing the dynamism of the U. S economy and making it very hard for these smaller restaurants, smaller business, and smaller retailers to compete.

And although I embrace the minimum wage and think that it can lift the fortunes of many and it is a phase in process, I think we need to think of it as much more nuanced touff, how do we help those companies that have a harder time coming back online after being just hammered by the pandemics. So in the context of where we're at. I do think it's important to talk about a minimum wage, but I also think you need to think about what kind of consolidation.

What are small business is going to need to do to be able to embrace that minimum wage in a way that's most productive for the US economy, and that's much harder. We know that large chains, large fast food restaurants in particular, pass along the increases of the minimum wage, not in job cuts, but in higher prices. It's a

step function. It's not something that we can't absorb or but I think we need to think about how do smaller companies that want to come back online deal with this in the areas where the minimum wages the lowest, So Diana, Given how nuanced this is and how disproportionately the big companies and the small companies have been affected by the current economic backdrop, what are you proposing? I mean, do you see a place for universal income? What is

the sort of transmission mechanism to even out the playing field? Well, I think one of the transmission mechanisms we've already talked about. You know, increased cashier jobs are not going to be as necessary. We've seen restaurants move online a lot of ordering is going to be done before you even show up at the restaurant. You could imagine now, So it's going to be reduced need for weight staff in different ways, and the weight staff is going to provide different kinds

of um roles. And they did pre pandemic. So there's that issue out there, and I think one of the things we still need to get to, and it gets to investment in infrastructure, but it's restorative policies. Everything from year round schooling to catch up on what we've lost. We're gonna need retrain programs. We're gonna need training programs to allow people to move up in wage group. What we've seen in the past is middle wage earners have lost their jobs and then taking a low wage job.

We've seen low age job workers take another low wage job when they lost their job. Now we're talking about reducing the number of low age jobs out there, and that's something that I think we have to offset with fiscal policy that includes training, that includes more investment in community colleges, all of those kinds of things that allows people to make this transition to a higher wage and more productive wage in a world that's going to be

more technologically savvy. We've been. A pandemic has been an accelerant in our embrace of technology. We've learned to use things that we're in existence that we didn't. Even my husband now knows how to use the Universal remote. That's a big Stummily, that's a big that's a really big stick accelerated, but you know, these are things. It's accelerated that shift. But also in accelerating that shifted excel a rated. You know, we now have gig workers delivering stuff to us.

That's a very different kind of job than some of these low workers had. That's got even less um security on it. So I think we really need to be thinking holistically and it's going to require fiscal policy as well. Dance Swunk quite simply one of the best. Thank you, Michael Nathanson Moffa Nathanson, Senior Research Analysts on what we have wrought, what we've learned through the pandemic. Michael, you've been what I'm gonna call constructive on Disney, but you

were not an uber Bowl. What surprised you about the Disney Plus? What was the lessons learned from Disney Plus? Well, I'll tell you what lessons learned Disney Plus have been the adoption hasn't much stronger in the first year than we ever imagined. And I remember a couple years ago fighting with clients about how big could be. But it's literally been a double triple what we thought it was, you know, two years ago, right, and and and it could have been the pandemic, but also could be just

great execution on Disney. And I give the company a ton of credit because they took this challenge on head on and they've executed so well against it. So there's a question here of whether there's a broader lesson that perhaps there's more room to grow and there are more subscription subscription streams, uh that consumers are willing to have if we see the same kind of growth at Netflix

that we now see at Disney Plus. And then some is there some takeaway, some broader takeaway about the future of streaming and the potential profitability there that's making you reassess your calls. Well, that's that's a good question. We're trying to figure out how much of the adoption of

past year has been due to the pandemic. You know, I listened to you guys and earlier that Thoma has been stuck at home so often, and and the question is when we start opening up back to normal, will there be a bit of a state on on streaming adoption. But with that said, I think what we're seeing, and this is a question you guys I was asking me, is you're seeing court cutting, you know, remain really problematic. Consumers are finding surplus from court cutting, and they're taking

that surplus and the's spending it on streaming services. And that's going to continue for a long time. UM. I think of anything, the rethought for us, this has been true for our Netflix work as well, has been the adoption overseas inter nationally of streaming. You know, historically there's not been a huge market for television outside the US pay TV, but this has changed things and they're more adoption overseas than we ever thought. Michael, there's a lot

to unpack there. I want to pick up on one point you were talking about this idea of how much this is just due to the pandemic and how much this has longer lasting trend implications. What are the streaming services replacing if not for the cable cord that would have been their pandemic or not well, Lisa, you know, people look at consumer spending on entertainment. Clearly, not going to theaters is is a major class savings. Not not buying package media what's left of it, maybe even not

going to entertainment like sports or theme parks. Right, so, if you look at consumer spending, you know, the shutdown of options out of the home, it gets created a huge surplus for consumers. Michael, we didn't have jan because we want to talk to you about sell side. The fact is Taylor Riggs is buried in a PhD course in M and A and she said, get Nathan sent on so you can give me an a plus. Let's do it, Michael. Right now, her exercises who Apple should buy?

Can Apple buy Netflix? Is that? Why would Apple would that cash flow want to buy Netflix. Apple should not buy Netflix because Netflix has a radio achieved the dream. Apple should buy HBO and Warner you know, and Warner Brothers out of a T and T because that dream has not been realized. As you basically need Apples balance sheet into Apples Apple's distribution globally. Right, so you can take an asset like HBO, Max and Warner Brothers and

turbocharge it and rather than pay Netflix. That upside you can create yourself. And that's what I would do if I was Apple. Culturally, can they do it? As you know, Michael, this is critical see Fox Disney. Culturally. Could Apple deal with the Hollywood of Warner HBO? Well, it's Tom's a great question. So far, questions Taylor Riggs continue, Thank you, it's so Taylor. The so far, the two of the three winners and streaming have built it themselves, right, There's

been no Hollywood acquisition itself built. The issue that Apple faces is that they're they're lagging. They really are, that we are. Survey works shows them to be really in six with the seventh place right now. So they need to do something to get in the game, and I think they don't have the time to build to buy. That's what I would take. Taylor writes in to say thank you very much for that advice, and she does

plan to get an A plus. There is a question though, with the cash piles and some of big text balance sheet and the idea that they all want to get into entertainment, especially the apples of the world, and now of course Amazon has already been in. It has a big footprint at what point does M and A raise concerns from an antitrust standpoint in Washington, d C. Given

the current administration. That's a good question. I don't think we will see any of our companies we cover, Facebook and Google or Alphabet buying um company that close to their core business. I think of Apple buys a video company or Amazon does it would be just to to compete more broadly in video and maybe drive again consumer

surplus by creating better, better products. So that doesn't worry me as much as you know, Google buying Twitter, which won't happen, or Facebook buying Pinterest, which won't happened, right, So I think they really need to stay out of their lanes, dude, to do emin at this point. Michael Nathanson brilliant, Really really appreciate it. Taylor riggsuns are loving as well. Michael Nathanson with motht Nathanson, some real smart

discussion there. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast, you can always catch us worldwide. I'm Bloomberg Radio,