Surveillance: Inflation Downturn with Emanuel (Podcast)

the consumer. Yes, it's also about the cloud. But John, what happens to the index if big tech disappoints hasn't been priced in? And that's what really is the big question hanging over this week. We've got the perfect guest for that, Judean Emmanuel in a studio here in New York, a good friend of us, the chief equity and a quantitive strategist at Evercore Race Si Judy and the big tech players have pulled back on hiring intentions. Do you expect some of that to show up in that guidance?

No doubt. And I think when you think about the evolution of markets over the last couple of weeks, we've actually gone from the pulling back from hiring to where now Corporate America is announcing layoffs, automotive, social media. We're gonna see a lot more of that, and that's really why bond yields are back near multi month lows on a daily basis. Julia Emmanuel, your morning note is the most valuable three paragraphs I read. You quantify SMP earnings,

and you go through all the math. We don't need to deal with that right now. What it means is corporations are adjusting given ed Hyman's growth recession. E kind of feel in the micro analysis you're acclaimed for. How will corporations adjust over the next quarter. Well, they're they're gonna have no choice because you know, you've got every single thing coming at you. You've got the need to reshure, the need to stock because your supply chains have been

broken and they're no longer dependable. But at the same time, you've also got this fact that you know the world is changing. Economic volatility is so much higher now than it was the last thirty years, that all of these factors are are really very different. I think what it ends up meaning is that at the stock level, valuations continue to ratchet lower. But again corporate America has always found ways of you know, squeezing profit and figuring out

how to transform itself. We don't think it's different this time, Julian. That's nice for companies that can actually do that. Yet every stock analyst that we can do and I see John laughing at anything, it's nice. Every stock analysts we speak to is becoming a rate analyst and saying it's all about the FED, whether the torpedo the overall economy or not. And as much as the companies can adjust,

they cannot adjust in the face of vulcar. How much does the fate of the SMP really depend entirely on how far the FED has to go versus some of these adjustments that each company can make. Well, it's really at this point means a lot. Uh, We're we're at a crossroads. If you look at it, the average recession bearer market that loses for the average non recession bearer market.

You could argue we've already done that, But the fact is is that we have not seen any indication other than the FED is really concentrating on the single mandate of the dual mandate, which is inflation, and from our point of view, you've already started to see signs of

a turning down along with the economy weakening. And we wonder whether, in a reverse logic of the last forty years, the FED might step back and say, Okay, we have more ammunition to hike if we need to later, knowing that cutting rates next year is the single thing that causes potential inflation expectations to become the anchored Judian. When you sit around the type with that hyman and he's expected bad news, do you sit there and think then that math news is bad news for your market? Again?

That's what's uh really tricky about this current juncture because you don't see the FED reacting to bad news because inflation does not allow them right now to react to bad news. We do think that looking at the next couple of months, that dynamic could change. Julian, I want to just clarify something that you said. A lot of people think that if the FED doesn't go far now, it's going to lead to inflation expectations becoming d anchored.

You just said the opposite that if the FED goes too far now, pauses and then cuts rates, that's what's going to cause inflation to become unanchored. How much pushback do you get to that? Where do you get that idea that goes back to the nineteen seventies something we call the Burns blunder. If you look back the seventy five,

you had inflation really raging. You know, structural inflation arguably somewhat different this time, and Chair Burns cut rates in the middle of that surge to fight a recession, and that caused literally another decade of inflation to become well anchored. Look, part of the dynamic in markets is that we've all been Pavlovian trained to expect stocks to rally when the FED cuts rates. To the extent that we take that away, you're actually doing a service and allowing to see the

fundamentals emerged. He was chief Marcus strut just at JP Morgan. Do you remember that maybe d l J. I can't remember. John pavlov was just outstanding. Jennia, Thank you, Jenny Emanuel of Core High signed Sarah Malex Sages this morning, Chief investment Officer of New Vene. Sarah, you have to readjust and rewrite the market call for New van What what

category of readjustment are you thinking about right now? As you see earnings and as you see the economic data come in, we've been thinking that earnings could easily be the next shoe to drop for the markets. If you look at consensus estimates, they were up high single digits coming into this quarter, and that's going to be the

issue going forward. You're seeing this with these companies. The ones that have pricing power are going to be the ones that when just talking about technology, they're dealing with currency issues, macro issues, and potential estimate cuts and just breaking down Alphabet and Microsoft, both of these companies have outperformed the Tech index year to day. Um we think Microsoft is more defensive. They have more of a resilient commercial business and nice divid and deal with about one

percent to protect them. Alphabet likely runs into the same ad related issues we saw with snapping. With Twitter, they've investing investing heavily in their cloud and the and their II business. This could hurt their margins. So within that world, we think Microsoft probably puts a better numbers and outlook than Alphabet does. Sarah, where does it leave an Amazon?

I mean, Amazon is a challenge. This is a company that's been been making the right investments in the shorter term they've taken so much control over their logistics business, but they could easily run into that same retail problem

we're seeing with Walmart. The consumer is an issue because they've been dipping into their savings in order to spend, so the consumer is not as as resilient as they've been in the past, the more sensitive to prices, and we've seen that pretty rapid shift in spending from business services. I think that could be an issue first Amazon in the short term, but both Amazon and Alphabet are very

well positioned companies over the long run. So this is just short term paying for a lot of these technology companies. So given that you are seeing that, probably some of the downward revisions are not being fully priced in. Where do you see this earning seasons taking the SMP through

the end of this year. Given what we've seen so far, it's interesting if you look at the prints for the starning seasons overall, we're actually seeing moderate earnings be so it looks like a good earning season on paper, it's just the outlooks are murky and weighing all of that together has to do and other things we're gonna see this week, like GDP for example, that could come in close to flat, it could easily come in negative. That means we likely already arn our session. We're seeing cracks

and manufacturing data. Employment has been holding up. That that tends to be a lagging indicator. All of us are going to play into earning season and whether those estimates can hold up going forward. We don't think that they can. We think those estimates need to come down. That's the one factor that really hasn't budged this year, while so many other data points have deteriorated. I want to elaborate a little bit more on something you said that we

probably already are in a recession. This is the political discussion, is parsing the difference between the technical recession and a real recession. How does this really shape your view your belief that we're in a recession regardless of how you define it, and that we may be climbing out of it, but we're already there. Well, odds are we're either in a mild recession, and we also feel like otherwise it's

going to be hard to skirt that recession. So then we turn to market valuations in the conversation of what's priced in here. I don't think everything is proceed to these markets. We think the SMP likely stays in a trading range of s and be thirty forty hundred until something happens, and that is inflation breaks one way or another. The good news is we are seeing it cooling or the Fed pivots. There's expectations the Fed could pivot in early three. That sounds optimistic to us. We're coming into

a seventy five basis point rate hike tomorrow. The interesting thing out of the FOWC will what kind of guidance do they give in terms of how far past neutral they'll go and what a rate heights look like for the rest of this year. Sea How do you think we'd respond if the chairman acknowledge some of the weakness in the economic data? Do you think I could get problematic quickly? I think that would be mostly an expectation.

Seventy five basis points and the Fed admitting that economic data is weakening and they'll stay data dependent would be something I think the markets expect. What will be curious about, though, is how much more are they going to tighten going forward? How far past neutral that's going to be. The tea leaves that everyone's reading to try to understand are they becoming more hawkish or less hawkish? Sarah awesomeing to get your view on things, particularly earn a little bit lighter

from Microsoft and Alphabet ceramatic. There of new than we're gonna rib up the script down. We can do this with french Hill to say he's a Republican from Arkansas. Barely mentions his financial services life, his banking life. He is hugely qualified and respected on Capitol Hill to talk about our central bank, french Hill. One of the jewels of Bloomberg is a guy named Craig Taurus. He's been writing on the Federal Reserve for years and he sent me a blistering note over when is there going to

be a transitory investigation? Let me cut to the chase. Your Washington is transfixed with January six and there was May one, two thousand nineteen where the word transitory was launched by the chairman towards an inflation theory. Two Republicans and Democrats have to investigate the path from transitor. Sorry, I think so, Tom, and I don't disagree with that. You know, a lot of the challenge that we have now is that the Federal Reserves monetary policy is late.

In the face of the tremendous fiscal stimulus, they should have begun shrinking the bound sheet in they should have come off zero, And part of that was j Pal and the Board agreeing in August to let inflation overshoot their two percent targets, saying that they were not concerned about it because for so many years they've been having a hard time getting inflation to two percent. So I

think it deserves a thorough investigation. But I think we'll find that the pandemic just jumbled the FED economic forecasts and Congress's response. There has to be a respect for the uncertainties of economics. Are we asking too much of our institutions and particularly our central bank given the shock

of a once in a lifetime pandemic. Well, I think that's that's conceivable, And I don't expect to take too much pressure off the FED because I think a lot of people Democrat and Republican, in the summer of the fall of thought that we should stop buying a hundred and twenty billion dollars a month to begin to taper and maybe start setting out expectations for coming off zero. And we did not do that. In the face of

tremendous fiscal stimulus. Again from well, given the economic uncertainty that we currently face, regardless of what previous policies were, do you think that it's better for the FED to air on being much more aggressive and curtailing the inflation now, even if it causes unemployment to go up, even if it causes people to lose their jobs, which a lot of people say is necessary, a necessary evil to bring inflation down. Well, Lisa, I think we should focus on

price price stability at the FED. I think that should be their core mission. They shouldn't have let it get out of hand, and so they have to focus on price stability to return earned their good judgment and their reputation. But Congress and the executive branch can be focusing on the supply side, getting any barriers away from people going back to work, unleashing American industry, not adding to regulatory burden at this critical moment, not proposing to raise taxes.

Those are all things on the supply side that I think would be helpful as we navigate this tough time. As Tom has described, an uncertain time between recession and stopping inflation. The Congressman having the supply chain. Fixes are going to take time. That is something that we have seen repeatedly, even with passing potential bills having to do a semiconductors and bringing some of the production back to

the United States. What do you do about an unemployment rate that is expected to rise, a labor market that many people say has to weaken in the face of inflation in order to get us back to where we need to be well. I think that's inevitably the cost, as Tom says, of making mistakes in the past. We've seen this movie before. It's very tough to put inflation back in the bottle and cut expectations. The fit has that obligation to price stability because inflation is a thief.

Families are also hurt by five dollar plus gas and the effects of inflation. You're seeing Walmart's announcements today. Why is it down. It's because consumers are being crushed by inflation. So don't forget. These are two sides of the economic charts, and they're both unpleasant. French chill and want you to speak to Arkansas right now and the rest of the world. What do we not get about your Bentonville, Arkansas? What's the number one thing Global Wall Street doesn't get about

the pixie dust of Bentonville, Arkansas. The Ozarks an amazing place, great food, great water. They didn't have any roads, Tom, they had no infrastructure. When Sam Walton created Walmart, when J. B. Hunt created j B. Hunt, When Don Tyson the elder started Tyson Foods, it was just a country town. And so to me, it's about American ingenuity, American perseverance, not taking no for an answer, and that continues now. Six the years later, John, that was a Chamber of Commerce

announcement from Arkansas. I think that was the problem. Congressman, thank you. I think cash flow, uh stability, good quality companies when this is all over, are going to be valued once again. Nelson Pelts truly one of the most interesting people in finance. We don't see enough from him, we don't hear enough from him, and we do so with David Rubinstein, this is a really interesting and frankly, folks important interview on shareholder activism. Nelson Peltz with Mr

Rubinstein tonight at nine PM as well. David, congratulations on dragging him out for some clear conversation. What is the Nelson Peltz model from ingersoll ran out to the present day. His model is to study consume more oriented companies or companies that have pretty good businesses that are maybe underperforming. Maybe they're too complicated, they've lost their way a bit. He buys stock in the company, approaches the CEO, says,

I'd like to you to make some changes. Maybe I'll go on the board, and he tries to increase the value of the stock without taking over the company. And it's worked quite well for him through his firm called try On Partners. And what's important, David and correct me if I'm wrong. There's not a lot of yelling and screaming. He does this in a in a measured way. Am

I right on that? Correct? In the early days of activist investors, let's say in the eighties, they tech took stock positions, and they were fairly loud about trying to take over the company or making changes. Today it's it's very quiet. He doesn't really do much publicity. For what he wants. He tells the CEO, the CEO agrees to do it, then they don't really have any publicity. If the CEO does not, he may sometimes do a proxy fight, and that can get noisy. At times, but he's prevailed

generally and he's made companies much more valuable. He has a fantastic quote as he's speaking to you talking about why he dropped out of Wharton, saying that the best advice he ever heard of his sales up, expenses down. My father told me that, and that's why I dropped out of Wharton. I knew I didn't need to know much more. That said, from the granular to the macro. He does have a macro column Big Tech that the dominance of those stocks does seem to be on the wayne.

What's behind that? Well, his view is that you did okay in the stock market in the last number of years if you're in one of twelve different stocks, you know, Amazon or Apple or things like that. But the rest of the buy out, the rest of the world wasn't doing so well, and many of these companies lost their way. And he did very uh successful proxy fights and for example a Procter and Gamble or and he got on

the board of Heinz. He got on the board of other companies like DuPont, and he's not a quite quite a successful job of increasing the value of the company without having to try to take it over and leverage up the company. David, we often get lost in the macro discussions here and the difficulties in gaming out what's going to happen in six months, let alone two years.

From his perspective, and frankly from your perspective as well, is there a very simple, not game, but business to play taking a look at the nuts and bolts of a business regardless of what happens, and making smart decisions and being able to identify the companies that are doing that. Yes. His view is you take a company that, say like Proper and Gamble, which had so many different products and in his view, lost its way, wasn't spending enough money

on marketing or other kinds of things. And he goes in and prevent presents his position about what they should do, and tries to do it relatively quietly, and it's effectively

done now. Interestingly, he doesn't have enough money to do it all by himself, so he does have third party investors, just like other private equity firms do or venture firms do, and he early on used his own money, but that was not enough to do the kind of companies is interested in now, David, A question for you, that I would ask of Mr Peltz, and that is, do we underestimate within the back and forth of the financial media and the recession uproar right now, all the different news

flow going on, do we underestimate how corporations adjust? Are you? Would you suggest rather that right now visible corporations in the news today Walmart and McDonald's are adjusting and adapting to the cards dealt them. There's no doubt that large companies, like large organizations of any type, move more slowly. They have bureaucracies, and it's not easy to get something done. It's not easy to get something done to federal government

or state governments or large companies. So sometimes these companies are not ahead of the curve. In some cases, good managers have them ahead of the curve. But it's not easy to anticipate a recession or exactly what you're gonna do, or lay people off well before it's apparent that they have to be laid off. So I would say these large companies are ones that probably have to be brought in a bit by somebody like Nelson Pelts. Given the fact that you're talking about layoffs, I should do want

to just bring you this headline. Shopify just confirmed or report initially in the Wall Street Hurtle that they are saying to cut ten percent of their staff. They're supposed to leave by the end of the day. This is a significant part of their workforce, given the fact that they were building up and they weren't one of the darlings over the past couple of years. From your experience, David, how much is this going to be the theme of the next six to twelve months of companies cutting back

after expanding rapidly, doing to do to shifting preferences post pandemic. Well, I think they'll see a lot of that because some companies staffed up anticipating we would have growth for a longer period of time that we're likely to have it, whether we go into a recession or not. There's no doubt there's an economic slowdown ahead of us, and we've already slowed down a bit. So I think some people have probably overstaffed, and I think the tech companies are

probably pretty good examples of that. Did Mr Pelts talk about Madison Square Garden, small piece of real estate in the island of Manhattan. He's got a knotting interest in that, doesn't he he does, and uh, we didn't really get into that very much, but it's something that he's been involved with as well. And you know, he's a person that takes on a couple of companies at a time, one major one at a time, and focuses on it.

And when he goes on the boards of these companies, he's generally listened to because he's had a pretty good track record. I would say this wasn't the case early on. Early on, people didn't know what he was all about. But now I think his his motors operandi is pretty well known. David. Thank you for the generous time this morning. I really can't say no, folks about this interview with Nelson Pelts. Not all that visible Rubinstein in Pelts, Bloomberg

will look for that. 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. What is the mean