Surveillance: Inflation Hits Investor Confidence

This from Deutsche Bank. Consumer inflation expectations have now clearly moved out of the low inflation ragime. This is important, Michael. I'm not talking about hyper inflation. I'm talking about finally breaking out of the low inflation ratime that really played much of the last decade. Do you think we have yes,

I mean, straightforwardly, I think you have. I think it is really a very different environment to anything we saw treat COVID, and I think one of the big changes that that is going to represent is consumers now have an incentive to buy today rather than wait for tomorrow. And I think that itself will intensify consumer demand and exacerbate the process. Michael, you are somewhat pessimistic on stocks according to your latest note, how much more selling are

you expecting and why I wasn't that pessimistic. I just don't think for sellings you know, totally done. I sort of say a worst case scenario. I think the index is test their two hundred days. UM. You might not need you might not need to go that that far. But I think what we're in is this process of realization. But the strong growth that we've had comes with persistent inflation attached. And more than it being good or bad for equities, you know, what it does is favor certain

sectors and disfavor other sectors. So I mean, you know, you've said yourselves, you've had a very strong performance by financials, which are very yield curve sensitive. Energy has been you know, far more impressive than than financials. UM. I think you're gonna start to see materials follow suit once people get over their fears about about China. And the losers are a combination of very sensitive sectors such as utilities UM. And if you know, things do sort of proceed and

you do start to get yields baking out. I think the danger event is that you start to chip away the attraction of the very high multiple portions of the US equity market. So as they say, it's it's video winners a loser scenario, um, you know, but that we see ahead of ours, I think it would favor certain indexes and hurt ours. Michael, you are expert across all that we do, equities, bonds, currencies, commodities fold in this commodity moment into the other asset classes in particularly equities.

Do you believe in the commodities super rarely that we're beginning to see? And what does it mean for stocks? Yeah? I mean commodity equities look very cheap compared to commodity prices. Um. You know, energy equities are nowhere close to where they were in two thousand and fourteen, when when trude oil places were at current levels. Um. You know, if you look at the industrial medals, they again look very cheap.

You know, have this collapse in iron or the the iron ore miners, you know, look look way cheap to iron or you know where where it is today. So you know, I think the market remains skeptical. I think it's viewed commodity equities as excellent trading vehicles. I think you know, betther to be large amounts of money have been happy to jump into commodities and then jump out of them. Um. You know what we haven't yet seen is is a sort of moveless, sort of heavy fundamental

investors back into the commodity space. Now, there's a couple of very good recents of that. One is it's been a terrible place to be for a decade. And I think the other reason is is the E s G pressures for a lot of a lot of institutional managers on lead them to want to, you know, underplay investment in a lot of these areas. Are the over Michael, gotta leave it there, thank you, sir, Really good final point, Michael Shaw of market Field Asset Management. I know you

many um an aluminum on the equity markets. Alicia Levine b and Y Melon joins us right now, Alicia, to the point out there right now, and this is really in the zeitgeis this morning. Do you buy on the rumor of banks doing better or do you sell on the news of their earnings tomorrow? What do you do with an overweight in banks? So I think that the market is set up for this particular quarter to be

tilted more towards the reopening and cyclical. So I think here you buy the banks, but I think you have to be careful because we've already had a huge move both in energy and banks coming into the quarter. And the key issue, as you've been talking about, is the loan book, and we have seen anemic loan growth across the banks for for the last few weeks, actually for the last few quarters. When you think about it, households are still flushed with cash and businesses are flushed with cash.

So where is that demand for loan loans coming from? That's really the next leg of growth here. So I would say be long, be strong, but be faded a little bit, only because we've had such a strong move here. I do think the quarter is going to be a higher yield and a cyclical plate for the quarter. I think we're set up for that Atlicia. Set me up for next year. Then you and I have been talking recently, and that's valuable to me because you're constructive next year.

There's a distinction between the chop you expect into year end and what you're looking for through next year through its entirety th two. What's the difference here? So I think we have we have an issue here where we have to get through something of an air pocket, and the supply chains turned out to be stickier than expected. Inflation higher than expected, and growth came down faster than expected. But if you look at the estimates, the estimates are

actually rising for because the demand is still there. So this is still a supply shock to the extent that this is still a supply shock and not a buyer's strike on on the demand side, growth can be higher in two and earnings also, what do we have to do to get there? We're sitting on the hundred day moving average. We're probably going lower from here. You can see how the markets closed for the last few days. It just can't rise. We still have overhead on resistance

above us, so we're probably gonna have to test lower. However, I think earning season is going to give us a really good clue of where we're going on some of these supply issues, which is creating the inflation. So the two sectors we worry about are the industrials and retail because that's where the companies are not able to pass along price as easily. Some of the reason why some of these sectors have been stickier and not moving higher.

If we get through earning season with any comments such as in the last two weeks of September saw an easing of these issues, then if we're off to the races, but we have to hear it well, Alicia, if you do believe that this will eventually pass, that we will see stronger growth in two Do you buy those retail and industrial names when they sell off after reporting stickier than some people had expected supply chain issues for this year,

but perhaps not next. Yeah, I would. I would definitely buy because we're still constructive on the reopening and Europe is behind us more of a stagflation problem there, but on a tactical trade the reopening should work in Europe as well, and you can you can do some trades in Europe as well to add to sort of the value tail. But overall, we don't think you should be tilted one way or the other and more of a barbell.

I hate that we're barbell. Everybody uses it. But the truth of the matter is this year the market didn't reward you for being overweight value or cyclicals. It really was a monthly or even quarterly story. And I think as we move into the second quarter of next year, those supply chain issues are going to lessen commodity price spikes come down, and when that happens, you're going to see something of a flattening of the yield curve and you're going to see increase in growth and you're going

to see a lowering of the inflation. So you want to be prepared for that. So you have a short term where inflation is moving higher, inflation expectations are moving higher. You have to get through it. But we think by the second quarter these supply issues will start to come down. And again, commodity price spikes don't last. So Alicia just quickly, if I wanted a call option on a better supply side story, what do I want to be doing? Kids it through industrials? How do I get that? Where do

I get that exposure? You can do it through industrials. But again I would wait to get through this earning seasons because look, it's not it's not it's not a short bet, right, it could go either way. You need to hear some sort of language that they expect a better day going forward. But also I would look at some of growth sectors, in particular the more value areas of tech where they can earn through it. In the end, we like companies that can earn, that can earn through

this and not be such price takers. It's a stock pickers market, as we've talked about, and that means you have to really do the fundamental analysis on where the supply chains are and how companies can pass price on. So I'd look at growth sectors. I'd like it, look at companies that can earn through this, and I'd also add healthcare here as a bit of a defensive play. In fact, we're not right and yeah, I gotta run. Sorry cloaks, take in produce a get some my oron

screams which we have to go. Alicia Levigne almost bullied. Yeah, just you know it's abuse right now. We will dive into CPI. We can do that with Thomas Purcelli RBC Capital Markets usually on the linkage of labor to the economy. Today we go price Tom Percelly, which inflation series should our listeners and viewers pay attention to. I don't think there's any one. I think that it's good to actually use all the metrics that are out there. So whether

it's UM CPI headline, core PC headline, core. I think that the role um you know, that's how you sort of get this mosaic of what what is happening, because they're all constructed slightly different. But as as you and I have talked about many times over the years, you know, I do like to break down inflation into two components, goods and services. I think you got a really great sense for what's happening from an underlying flation dynamic perspective.

And I think, as we all appreciate right now, goods prices UM are incredibly elevated, which has been the case for a number of months. Service part of it has really lacked um uh and and you know, in fairness, we thought that it would actually be sort of really turning up in earnest sort of right around now. UM. But again it's it's it's not for a host of reasons, not the east of which is you know, I think delta really got in the way of of seeing this shift.

I mean, we had long thought that there would be this good spending shift or spending away from goods to services. It hasn't really materialized, um in large part because because of delta um and, and there's obviously other factors. I mean I think there are supplied controls even in the service space, but those are the right ways I think of thinking about inflation. To your bigger question, is real

estate a good or a service? Yeah, so it's going to show up in in services, right, so you know, in fact it's it's the single biggest component of of services and cp I. Uh. And that is one area where again we've we've been talking about this for for months and months that you would see this this this sort of floor put underneath inflation because of real estate, right, because of all of the sort of price games that

we've seen that ultimately bleed into rentals. Um, that would put a floor underneath inflation in and look, it's it's been more or less happening um. And I think again that will take a little bit more time for that to really start to um uh sort of feed through so or of feeds into price games that we see from an inflation perspective feed into the rental component with a bit of a lag. Um. So it's something that

will persist, we think, for many months to come. How concerned are you about the idea of a high cp I print in a low retail print, this sort of combo reading into this whole stag inflationary debate in a bad way. Yeah. Yeah, Look, I'm I'm you know, I don't know famous least words writing. I don't want to just say, I don't want to outright dismiss it, but I but I sort of do like the stag flat. The stagflation part of this conversation to me is um

a tricky one. I believe in the flation part of it, right because again we've been talking about there'll be more persistent inflation than than was appreciated. It's the stag part of of it that I have a hard time with. The consumers in such fantastic shape right now. Uh you know, they're they're sitting on a mountain of cash. Uh. You know, you can look at it through the lens of excess saving, you can look at it through the lens of um,

you know, liquid assets, um. But by really almost any measure, the consumers looking in really fine shape. So so my word of caution is defined stagflation more precisely because if you're just talking about growth going from six percent, which is roughly what we're gonna have this year, you know, down to like three or four percent, which was what we expect next year? Is that stagg Is that really growth stagnating wildly above potential growth? So um, So I

have a hard time with that part of it. And that's all fair, right, And you sort of put aside the controversy over the word and how it's being used,

And there is this conundrum. You said that the consumers are in such a good place, they have so much money to spend, and yet consumer sentiment has been declining and pretty steadily, and this has raised some concerns and the likes of Danny blanche Flower who says this is one of the most predictive elements of recession about eighteen months before no one else is really talking about recession. But how much can you really dismiss consumer sentiment which

seems to be on a downward trend? Yes, Lisa, what I would suggest is in this and you have better access to this than me, look at that, Look at the languor um confidence measure, right, it actually comes out on your Bloomberg is the only place I've ever seen. And I think actually Bloomberg may have sort of been involved with it at one point, but I think they've they've since um um push it off to this, this other company Langer. If you look at so again, this

is what we're talking about inflation measures. I think you can look at different confidence measures too. Um. So if you look at the University of Michigan, the University of Michigan measure is really going to be more influenced by things like prices, and so that's down much more prices are elevated. People are obviously really feeling the pinch of that. If you look at the Conference Boards measure, the Conference

Boards measure is sort of hanging in there a bit better. Again, it's also down a bit, there's no question about that, but that's more focused on labor um, so that's remained a little bit more buoyant. And then you have something like the languor measure um, which is actually done pretty well over the course of the last several weeks and months. So again it's you know, which measure of of of

confidence do you really want to look at. I think that they're all sort of telling you a story of Look, there is some caution out there, there's no question about that. I think prices are certainly eroding some element of confidence. I think the consumers lack of ability to really go out and buy what they want because of lack of inventory.

I think that's certainly hurting. But if you think about the labor backdrop, which is ultimately what is one of the key drivers from a confidence perspective, it continues to perform pretty pretty well. The words stan inflation, I think is just a massive distraction right now, investors an economistic they're speaking past each because Tom, you can easily just

prove that it's not stagflation. I think what market participants are looking at, and you know from daddy conversations, they're focused on the balance of risks around growth, the balance of risk around inflation. They see upside risk to inflation and downside risk to growth. And so I guess my question is to you next year, how those balance of risks evolve as the year grows older. Next year, what are you looking for? Yes, so we're looking for slower growth.

And Jonathan, I think that you've framed it the right way. I just forget about these words, right like transitory and and stagna. I mean, this is all these words are a massive distraction. And so what I would simply say is if you're if you're, if you're sort of question is simply is growth going to slow next year? The answer to that is a resounding yes. I mean, you cannot maintain six percent growth. But I think where you're going from and where you're going to is critical to

the conversation. So if you're going to remain north of potential growth, which is what we expect, I mean, look, I know that you know some uh, there was some big down grade of growth or I haven't seen. Just someone send me a message at it on it. I don't care who downgrades growth. I don't want to know where it's going from and where it's going to. Our growth is we're looking for just about slightly us than four percent growth. I mean, you know, I don't know what.

I don't know what more to say about that. That That is just slowing from what we're witnessing this year next year, Is your vector moved down from four percent to something lower something your potential? We haven't really yeah, no, we haven't really moved our numbers all that much. I mean, look, we're always sort of fine tuning our estimates, but we haven't made some like wholesale adjustment. I mean we know, you know, these are all tents or two on either

side of what has been our baseline. So no, it's not like we're looking for some you know, sort of materials slowing. And again, I think it's really hard to make the case. Look you have I'll say one more time, the consumer setting all that cash. That's great, um, But I think you have to keep in mind too, if you look at sort of the state of the consumer

balance sheet, it's in pristine shape. So when when people go knocking on the door of banks which are going to do ultimate right, because if you look at the loans depository issue in the United States, it's it's it's collapsed. But at some point people are going to go knocking on those doors and guess where they're going to and guess what banks are going to find people with really

really good balance sheets. Right. So I think that that's another leg of the conversation, and I think it's being completely missed an old the noise of stagnation and transitory and all this other nonsense that I think do distract I think Jonathan hit the nail on the head. So Tom, we are getting a number of analysts coming out including Golden Sacks, is Jon Hattias and downgrading the expectation, and we're hearing increasingly. The input data shows that some of

the supply chain disruptions have lasted longer. Why has that not materially changed your view? Well, we we expected that they would linger for longer. I mean, that's the thing. It's like, maybe so I look, we had a pretty good call on this, I think for a while now. And so again you could to our research anyway you

want to read it. I mean, we've been saying that these issues would linger for longer, so we we never really had so we we had it built into our numbers, so we never really had to take down our numbers in any material way. I mean, it's that's as simple as that. You know. For those of you on radio, we have Thomas Purcelli today from the offices of RBC and John I mean, I'm sorry, this is a Percelli different. This is a PERSONI focused without the distractions of children

and or dog. I mean, yes, I am back in the office. It feels, it feels good to be here. For you didn't bring the children with the dog with you to the office. I didn't and my kids have been very upset by this. And actually I think the dog is actually taking it worse because you walk in and like he looks like a little down, like no one's around all day now, Tom, you know a freedom as he cashed out that long masknack position. So that's what matters a kids. The dog is suffering. Hello pressed

and who is still long Banessa kid stains. Thank you great to have that energy on the writing flowback in New York City with humble study that of obvious Canada markets. What I want to do right now is a little bit of a window into the adult nous of the pros we talked to on COVID. We asked media questions, they're Germaine to what you believe or worried about it

that on this terrible pandemic. I'm much adulge is it v A Pittsburgh among other hospitals with the Johns Hopkins Center for Health Security, and back in October, he and a team of people went into the trenches of antibiotic consumption wrapped around no sacomial infection, which is infection in a hospital and the overlay of that on a viral pandemic. We never talked about this stuff. I'm at Dolgia thinks

about it and publishes on a pro level. I'm sure our our, our our hospitals gonna get back to north normal or does the linkage of virus and bacteria, I mean, our hospitals are forever changed. Hospitals are probably forever changed.

Because of COVID nineteen. We've not seen an infectious disease outbreak really impinge hospital capacity for this long, probably since since night, and now hospitals have really reconfigured themselves to be able to deal with COVID plus, so COVID plus heart attacks, COVID plus strokes, COVID plus all the other bacterial infections that we see. So there is been really

a reconfiguration of how hospitals are. Everything from personal protective equipment to visiting hours, all of that has been changed, and hospitals are now just much more tuned to the threat of infectious diseases because in the past they never really cared so much about them because it was kind of an afterthought. They were really interested in secretive surgeries. And now they realize that that they have to be

resilient to infectious diseases. I mean microbiology one on one on this is stephylacoccus and the worry about you know, antibiotics and you know losing the value of antibiotics. How does that change within and after a viral pandemic. Well, what we what we've seen is that there is still a lot of inappropriate antibiotic used for COVID nineteen. So somebody might come into the hospital and have pneumonia from COVID nineteen, they often get antibiotics started even though they're

not necessary. So we have seen increases in resistance amongst people with COVID nineteen in terms of the bacteria that live in their lungs, live on their body because people are inappropriately prescribing antibiotics. So when you look at the long term public health infectious disease threats, antibiotic resistance is probably the biggest one that we face because it threatens

to pull us to a pre penicillin era. And I think that's something that's really important that we that we we not take the take our eye off of the long game and infectious disease, and there I think bacterial resistance has to be considered probably the the top priority if there is another pandemic, which a lot of people expect there to be. And I know that you particularly focus on plague any Buller and all these other issues

that are percolating around the world. Our hospitals prepared for that now, based on the COVID run we've just had, they're better prepared than they were in the past. But I think this really showed how unprepared they are in general. When you look at hospital preparedness, it's something that's often an afterthought, something that they do to check a box so that they meet their CMS requirement or their Joint

Commission requirement. And they often focus on mass casualty accidents like a shooting or or a fire or something like that, not so much on pandemics, not so much on things that are a sustained surge of sustained change in the way they operate, and that I think has to change. You have to have the C suite executives talking to the emergency managers. It shouldn't be some kind of afterthought that that there that they kind of they basically have

no communication. This has to be integrated into hospital operations if we're going to be prepared even for a for a severe flu season in the future. Meanwhile, at the state of play right now, a lot of people are discounting COVID in terms of the ongoing backdrop it will fade. People are counting on that. However, it still is used as an explanation for some of the labor market frictions

that we've seen people saying. Long COVID perhaps or fear of COVID is people keeping people out of labor market. What's been your experience with the various side effects of COVID and how that sort of impinges in people's ability to work. There is definitely a small subset of people who have a case of COVID and haven't quite got back to their baseline. I'm kind of excluding the people that were in the ICU because those people are going to have post i cu sin their mits, going to

take them sometime to get to their baseline. But there is some group that had mild infection that can't get back to it. We don't quite know a lot about this other than it happens in older people. It happens more likely to happen in females, people with other co morbid conditions. But we have bad definitions. We don't know exactly what fits into that criteria because some people may not have gotten their taste and smell back, whereas other

people can't walk up the stairs now. So we've got to do a lot of science to try and pair this down to actually know what's going on, to be able to define it and study it and come up with treatments. And there are some people coming up with treatments, but it's gonna be sometime before we get our hands all around long COVID and how likely it is to occur, on what treatments may work. Let's get back to the

mundane doctor adolgef very simply, where are we unmasks? Well, we know now during this pandemic that we that masks do work, that they do play a major role, especially when you're talking about an unvaccinated population. To me, I think mask wearing for the for the vaccinated has very marginal benefits, maybe for some people who are very risk averse, but for the unvaccinated they clearly work, and they also

work for other respiratory viruses other than COVID nineteen. That's why people didn't have that many common colds or didn't have influenza. So we may see that become part of the culture, not because there's a government recommendation or mandate, because people say I'm on a subway or I'm in a crowd of congregated place. This is something that I think we can um use to blunt in to blunt any other respiratory viruses that we may we encounter. Don't

we have to leave it there. Thank you as always, don't hamish it down to that of Jones Helpkins on the pandemic. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern on Bloomberg Radio and 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 Keane and this is Bloomberg