Surveillance: Market Divergence With Chandler

thank you so much for joining us. What does strong dollars signal for the equity market and for the fixed income market? Yeah, it's been some ways, Tom, I think that they both are all reflecting the same kind of thing. And that is as Lisa was saying, is this incredible divergence between what's happening in the United States and what's happening in the other major in Dutch life countries and

in emerging markets. And I think nobody, no other country has the political will or the wherewithal to use to do what the US is doing fiscally, and the Federal Reserve is more aggressive than other central banks and continue to buy US bonds. Mark Chandler's diversions tradeable. I mean, do you want convergence or divergence to get alpha? Well, I think that in the short run, and we're still in that short run is divergence is still the theme.

And we're gonna see this play out when we get the final p m I readings from Europe starting later this week. But the whole host of data, including that Friday's US jobs data, I think that the key thing here that that so far I haven't heard you at least to speak about, and that is that even that the bottom line here is a market is pushing back against Fed ideas that they're not going to raise rates until twenty until after after that jobs data before the weekend.

The euro dollar future is looking at the December is already tried to get at least one hike, and you can see this as well in the FED funds futures. So I think this is an important thing, the market pushing back against the feds more doubash views, and this is what I think helping pick the dollar higher. And this whole idea about UH stronger US growth continue to be revised up, I think is really the key to the US equity market. Well, do you get on this trademark.

Do you say that, yes, the Fed's gonna have to capitulate to the market's view, or do you say, don't fight the Fed and perhaps bet against this stronger, taller trade. Well, I think it's a bit a little bit early to bet against the dollar trade. But here's where I think is gonna happen. I think that the Fed has given us a uh sort of the bar for when they're gonna begin tapering, and they say when there's significant progress towards its goals. We had almost a one million jobs

being created last month. The early call for the April report, which we don't get until early next month, is for another million jobs. So that means by the time the Federal Reserve meets in June, the US economy would have created something on the magnitude of two to two and a half million jobs. I think that could meet the fence UH litmus test. And by that time we're gonna get inflation above two percent as the base effect from

last year's deflation drops out of the year over year comparisons. Wait, so you're saying that you do think that the federal actually have to high grates before when they say they are going to high grates for the first time and they're gonna start tapering, which raises a question, how disruptive is this for the rest of the world. How much

does this create outflows from particularly the developing world. Well, on one hand, you're right that that that the US bond yield increase in stort of dragging other interest rates higher. On the other hand, the strength of the US economy. We're gonna see this in the I M S forecast tomorrow, like the O E C D S forecast, They're gonna advise up world growth primarily because of what's happening in

the US. Secondly, what's happening in China. Stronger US growth, it's gonna it's going to help fuel growth in the US trading partners like Canada, Mexico, and well as countries in East Asia, with the US imports a lot of consumer goods from so I want to break down down emerging markets. And while rising yields hurts the and the shorter dollar hurts, the strength of the US economy overrides that. In the short term. News breaking right now widely expected

game stop. And of course this is with the chewy management really driving forward the theme they're gonna offer three point five millions shares. The stock was down nine point one percentage, which would be what you'd expect with the share announcement, maybe down three, down four percent. Uh. This is an at the market equity offering program, and Mark Chandler, I want to fold that in to the great underestimation using foreign exchanges a litmus paper. Is it corporations adjust?

How will corporations? How will American corporations adjust to the superior divergence the excellence of the American economic experiment. Well, in the short one, I think it's obviously positive. But in the medium to longer term, this divergence is not gonna last forever. We're not talking really about about canceling recovery in Europe or recovery in parts of Asia. We're really talking about postponing, delaying that until maybe the second half.

And so I think that this divergence will more morph into convergence, but where maybe three months away from that mark. Just to wrap everything up, I want to bring some news. Berkshire Hathaway borrowing money in the Japanese bond market for the third year in a row. As they say that they're going to be making investments in Japanese companies? Is this smart? Do you see other investment firms doing this, basically levering up basically free costs based on where barring

rates are in Japan and then investing in companies there. Well, I think that this isn't really about a currency view as much as it's really about matching your assets and liabilities. So oftentimes when a corporation is buying a foreign asset, they can they can acquire that currency by buying the couragency, or if you're large enough, like Berkshire hath the way they can borrow that currency and thereby not taking having

a currency mismatch. So I think this is really just about running a balanced book and avoiding misalignments between your revenues and your expenditures. Mark Chandler, we have to leave it there. On a Monday morning, March Chandler with prospective from Bannockburn, their chief market strategists. Anahan joins us she's with Wells Fargo equity strategist. But that barely describes her mathematics, acuity and addressing the stock market. And I want to

go to nerd alert right now. What is the mathematically or dynamically distinctive feature of this bull market. Well, what's interesting in this bull market is what was leading the market a year ago is not necessarily the momented trade that's happening right now. And I think that's been a big change. And that's not to say that the market overall can't go higher. But when the leaders start to change, you also start seeing certain styles play out differently, like

the value, like the cyclical trade now against growth. Do you sell those fancy stocks from a year ago or do you hold them and just take additional cash into these new stocks well right now rather than sell them. It's a question of what goes up faster, what goes up higher? Where can you get that bang for your book?

And that's that value and cyclical trade you're seeing. But you know, frankly, the real early cyclical place have run pretty hot, and Tom, you know, it's hard for me to sit here and tell you to get into that game now, um, but you know we like the more mid cycle place. So that's why we're up on that consumer services industry. Now that the economy is starting to reopen,

people have the cash to spend. It's the things that they can spend on when they can go on that travel they haven't been able to do now as vaccines get rolled out, nearly forty of US adults are vaccinated. I'm going to be eligible next week, you know. I know I'm ready and excited to travel. So these are the kind of things we're thinking about, and those are the places that we think really are worth playing right now. And good luck. We wish you the best in your vaccination.

And there's a question about game Stop, which came out this morning and said it's offering three and a half up to three and a half million dollars of a million shares about a billion dollars maximum of shares, a sort of add on equity offering that we've been expecting for a long time, given how much their share prices have run up. Is it too late for a game Stop as retail investors start to bow out of the market.

I wouldn't say it's too late. In fact, what it looks like these kind of companies who have seen their valuation search, whether it's because a retail flow came into it, or you know, perhaps because of their cyclical nature that they were able to run hot. They're taking advantage of that by doing issuance, and the issuance for them is an opportunistic moment and for us, the way we see it is, okay, do that issue once and right now.

It's not so concerning where we think it's going to stress the credit markets, but it does come into question. You know, as you see these opportunities play out, it's because the backdrop is improving. It's because there's risk appetite as the economy improves. All right. The reason why I ask is because Tom was planning to get in on this, and he's been really aggressive on game stop and bit dog as he calls it, and all the aspects of

the market these days. There's a question though about the retail investor, the marginal buyer, and there have been a number of stories about how there's been a pullback there. How much does that affect the meme stock? How much does this affect some of the momentum names that have gotten a boost from people who are stuck at home trading stocks. But when you see momentum names, it's interesting is you are seeing that the retail flow has ability

to affect the momentum and play a momentum trade. But largely speaking, the momentum trade is really more focused on

the institutional funds um. You know, we have growth be the momentum trade coming into the year in and now you look at it, the moment in trade is transforming into this value nature, you know, economically sensitive thing that's a little different from the momentum trade that retail traders play, where it's really just price appreciation and a little more i would say, short term looking than you say, look on in twelvemonth or nine months framework that US institutional

players are used to looking at. And I'm looking for Catharsis here and I don't see it would be if you're negative on the market, you need some Catharsis up to go the other way. Give us the dynamics now of this bull market, whether it's SPX or I'll let you pick whichever index you want to look at. But where's the gamma? Where's the convexity? Now? Where's that momentum

bet that gets people in trouble? Well, when you talk about convexity, it's sort of like you're asking what's acceleration towards the upside that we could or maybe won't see. What do we need to get it? To get that next umph up and for us it becomes expectations. You know, you've heard me see this before, Tom. Earnings expectations go higher as things get better, and the higher that bar goes, you really got to do more than the same one trick, pony uh to to really impressed towards the upside, and

that gets harder and harder. So for now, look that economic backdrop of GDP growth looking above six percent, unemployment dropping below five percent this year. These are the things pushing the market higher. But to really get that acceleration upward, we need to see earnings show up, alright, So that earnings show up to to justify expectations. How about a place where the expectations have already been diminished like Europe.

Are getting on that train saying that there can only be out performance in a place where the expectations have been pushed down to such a degree as in the Eurozone. Well, I won't say that there's only upside because when you

have that uncertainty brewing, you know it can spiral downwards. Now, so far, it looks like, you know, the path forward is you know, sunnier, and it looks like it's going to get better as vaccine distribution gets a little more familiar, and as always, every day you know a little more about the situation. But for now, that's why we're keeping our money in the States. That's why we like the US equity play because we're seeing less certain to hear

domestically and we're more comfortable the opportunities here. And thank you so much, greatly appreciated today with well as Fargo Securities and Equity strategist here within a great grade bullmarket. Terry Haynes joins US which with Pangea. Right now, Terry, this is where political rhetoric runs up again, blunt reality. I mean, all this talk about infrastructure and fiscal policy runs up against the political emotions of the constituencies. How

does Ireland? How does Ireland adjust to a call for global corporate minimum tax? Oh? How they how they respond to it? Tom is uh giving at the back of their hand or inviting you into the pub for a drink. And meanwhile, very soon you'll be talking about something anything other than that. You're quite right that yuh that it's

firstly and secondly, you know Yellen's uh. Yellan's not an independent chair of the FED here, she's the Secretary of the Treasury, so a general in the Biden Army trying to figure out some way to provide additional money for additional stimulus and infrastructure spending isn't exactly news, but that's not gonna get it done. How do we pay for infrastructure if there's a genuine pushback to individual taxes and shock corporate taxes as well, well, that's gonna The short

answer is, I don't know, but it's gonna be. It's gonna be a negotiation between between the Congress, particularly the Senate uh and the White House, and they're gonna have to get both sides are gonna have to get serious. I mean, one thing we're gonna have We're gonna find out pretty soon is whether the President is serious about wanting to do actual infrastructure improvements or whether this is

whether this is mostly for show. Uh if if if the President wants to do that, there are a lot of Republicans out there, not just Roy Blunt on the Sunday shows, but Shelley Moore, Capital of West Virginia, and many others saying, look, we have a history here of doing bipartisan and coming up in the last couple of years with bipartisan solutions on infrastructure, water, all kinds of

other things. If the President wants to involve in existing Senate discussions already, Uh, they can do that, but in order to do that, they're gonna have to stop identifying everything is infrastructure and get down to what you know, the general usage actually is Rhodes Bridges, water and that sort of thing, Terry, based on what you've actually seen so far, which is Joe Biden saying we want bipartisan support. Realistically,

we're willing to go it alone. What do you see as the likely price tag, the likely timeline of something that could actually get done at this point. Well, at first I'd cautioned the markets that it's going to take months and months to do this. Lisa, I I bogie did at a at a at a fourth quarter calendar year twenty one. I think it takes a long time

to do that. Just negotiating the politics of the Democratic Party between centrists who would be happy to go with kind of the meat and potatoes approach and progressives who think this is far too little money. Uh. The Biden people have already essentially made a decision. They're gonna let the progressives try to figure that out on their own without involving the White House too much. But I'd look at it much more as a one and a half

trillion to two trillion number. Uh, And I think the White House can probably get something like that, but over ten years, but it's gonna take quite a while. There might be a little bit uh, a little bit of corporate tax in there, there might be a bunch of other solutions. UH. So that's number one. Number two, much much smaller point. You'll know if the administrations can't get it serious, if they are willing to accept ideas on how to ramp up UH and and make more effective

infrastructure decisions. If this is about fixing Pennsylvania's roads quickly and well of the general public will be in Pennsylvania, for example, will be enthusiastic about that. But if this is simply shoveling more money to the state agency that has given Pennsylvania UH, Pennsylvanians the joke for generations that what's going on here is UH is putting together more orange cones, which is the joke is that that's the

state flower. UM. If you know, if that's all this is about, it's not going to be received very enthusiastically at all. So the administration is going to have to make qualitative and quantitative decisions about what they want. I assume that they want something terry. This is a really important point the process of getting this done, not just the headline number, not just the goals, but the process of who does it and how they do it to prevent sort of a d m V type situation from emerging.

What processes would you like to see the Biden administration implement alongside a plan like this to make sure the efficiency of this use of cash. Well, what they're gonna have to what they're gonna have to do is UH is essentially put a lot of strings on it. UH. They're gonna have to incent state governments to prioritize projects. They're gonna have to send them to get it done quickly. And one thing Republicans will want to see is they'll

want to see at the very least timelines. And you know, it's been potentially even some waivers of of environmental restrictions. And I don't mean getting rid of the environmental restrictions, I mean just the idea that environmental decisions can't take

a decade to process, uh, which tends to happen a lot. Uh, if they're willing to streamline a process and make sure that the states are actually doing something rather aggressively to to implement infrastructure of all kinds, whether it be Rhodes bridges, broadband whatever. Uh. You know, there you'll see some more bipartisan receptivity. But if not, if this is all, if this is really all about same old, same old, then I think things will fall apart. Terry, thank you so much,

Terry Hannes with Pengia with us today right now. This is a really really important conversation because not just Dana Peterson, but the Conference Board is where she is employed the Conference Board as their chief economists. Of Conference Board has thousands and thousands thousands of corporations is their clients, and it is a pulse and understanding of what corporate America and corporate globally is doing. Dana Peterson, how are corporations

doing and what are their expectations? Well, um, CEOs are actually pretty happy. Our latest reading on CEO confidence is at a seventeen year high, and certainly when we talk to many of our members, they are actually quite excited about what's going on. However, they are very concerned about inflationary pressures. Um. You see that there are issues in terms of supply chain backlogs. Um. It's certainly uh. Energy prices are rising, so that's really a concern for members.

What about fighting the last inflation war? I mean, there's anyone we can go back to the War of the sixties, the War the seventies, or the inflation East as failures over the last fifteen years. What's the war look like right now on inflation? Well, when you look at the core PC deflator, it looks like we've killed inflation. I mean, we're not seeing any inflationary pressures on the consumer side overall. However,

there are definitely pockets of inflation. Um Our own measure of one year inflation expectations has been ticking up in line with gasoline prices. But when you look at other measures of longer term inflation expectations, they still appear to be pretty well anchored, all right, Which has to do with wages and this idea that until wages really start to increase, you're not going to see inflation rise in the way that the Federal Reserve would like to see it.

We are seeing more of a push from the Biden administration for unionization or for some sort of minimum wage. You know that that vote for the Amazon workers will be coming out in terms of the results this week. Do you think that those efforts will lead to wage inflation beyond what people are currently expecting? Well, certainly, not only at the federal government level, but lots of state and local governments have been raising minimum wages. And certainly

you will see some inflationary pressures for certain industries. For example, hotels and restaurants nearly six of their workers are actually minimum wage workers. And certainly some states, especially in the South, will see some inflationary pressures. Um. But upsetting that could be the rise and remote work, where many businesses can hire workers that are in lower cost jurisdictions or even

from abroad. Um. So you're gonna see some push and pull there in terms of those different pressures that with respect to inflation, Dana, how long will it take to determine the sea change under way of working from home and the shifts in the locations of some of these jobs. Have we already started to see that in the data? Well, I mean it's it's a little tough to see, certainly.

I mean, we do have surveys where we've asked businesses about out our remote work, and many businesses are saying, hey, there's going to be a hybrid model going forward where uh, some workers are going to be working remotely permanently, some are going to be in the office, and some we're going to be going back and forth between remote work and in uh in person work. And so this is

something that is not going to change. We're going to continue to see this and certainly there are going to be implications in terms of productivity as well as with

respect to inflation data. I want to focus on I've really never done this with you, Dana, but I really think the dynamics and the history of the Conference Board, going back to the Triangle disaster in New York City in about nineteen fifteen, nineteen sixteen, this relationship of unions CEOs and a president who's extremely comfortable with the union movement.

What is the labor and I don't want you to speak for the Conference Board and two thousand executives, but what do you see as the dynamic forward within labor unions and the CEO s or is it just noise? Well? I think the thing is that it depends on what labor unions are looking for. Certainly, when it comes to higher wages, we already see many large companies UM, certainly some of our own members that are already raising wages.

They're already trying to address the concerns of of their laborers in terms of wages, benefits, making sure that there's training an adequate number of hours. So I think that there's certainly a middle ground that can be reached here, well, the middle ground that can be released. That's great, but does bring it back to your macroeconomics. Do you fold in wage inflation for this year or not? UM, I

think there can be some wage inflation. In fact, overall, we think there's going to be consumer price inflation as well, certainly as as as consumers continue to desire certain types of goods UM, and then once people start engaging in person services, UM, that's going to be inflationary as well. All. But I think the key thing is how much inflation

and for how long? And we think that you know, even with wage inflation and and prices uh gasoline price inflation which is kind of overall, but also inflation for certain types of services rising, that we're probably not going to see runaway inflation allah of the seventies, and that the feed is probably going to remain patient and still allow some measure of inflation before it starts releasing our

removing some accommodation. Maybe not the nineteen seventies all over again, however, we are seeing prices increase, particularly we talk about the hard goods, and we talk about supply chains. They have gotten disrupted. And Tom has been asking all morning and rightly, so what are companies going to do with all of this cash that they're bringing in. How much is gonna go to fortifying their supply chains and preventing some of these disruptions from happening. Again, are you seeing those types

of investments? Well, indeed, our own survey of C suite members, especially CEOs, indicates that, uh, for the longer term, not just now, there is going to be a focus on making sure that there's resilience and supply chain. So there is going to be investment to make sure that there's diversification um uh, and also that you don't have these disruptions and supply chains that we've seen over the last year. But indeed, some of it is just kind of unavoidable

even before the pandemic. We had a shortage in UH container ships, um, sorry, the containers that you actually put on ships, and so the pandemic just kind of exacerbated these things. We've also had a number of disasters and fires and all sorts of things that are piling onto

the strong demand for goods. But I would imagine that certainly, as as consumers around the world are getting vaccinated and businesses are reopening and governments are allowing mobility, that the strong demand for goods is probably going to EBB and that we're going to shift towards UH consumption of services, many of which are domestically produced. All right, So then in services, do you expect service side inflation to pick

up by the end of the year. Are we so far behind that because of the lag time, because of all the people that have to be brought back into the market and the slack currently in the labor world. Well, our thoughts are that, yes, we are going to see services in person services prices rise towards the end of

the year. When we look at the US, actually, we're actually quite fortunate to have our own vaccines that were producing and access to those vaccines, and it's broadening across many states, and indeed many businesses are starting to reopen governments or lifting restrictions. I mean, we saw that in the labor market data on Friday, where uh you saw on leisure and hospitality, especially food and services, businesses reopening.

Restaurants are opening up, bars are opening up. And so if we continue at this pace, then hopefully by the middle of this year, most people will have access to a vaccine, many people who have taken it, and many of the restrictions that are keeping the economy of under wraps will be lifted and we'll see further gains and employment. Dana, Thank you so much, Dana Peterson, where this for the conference board is hugely valuable there in some of the

dynamics of the American labor economy. Robert Murphy of Northwestern but truly expert in the history and the dynamics of infectious diseases and Dr Murphy joins us. This morning. Both you and I Dr Murphy were focused on Michigan and I want you to go over this strange v word vir lens and what we know about the waves coming viru lens is not discussed. Lead with that right now, Yeah, virulence, just how how nasty it is, how how effective it

is in actually killing the host that it's infecting. And uh, this is increased with this variant, and also the P one variant in Brazil. Uh, that variant actually somehow got up in Whistler, Canada and British Columbia on the ski resort there and they had to shut it down because of that. Very difficult to deal with. As you can see what's going on in Brazil right now, which is a catastrophe. How does the dynamic uruleans, whether it's India,

Michigan or Brazil, fold into the wave analysis that's happening worldwide. Yeah, well, it's probably the reason why we're having this wave. It's probably it's one of the main reasons why we're having the wave. And that when we've had these uh troughs where the case the numbers have gone down, they have always plateaued and there's always been plenty of virus replicating

before we have the next peak. We've never been able to get in Europe or the North America the case is really down to rock bottom like they do in Asia and also in Australia and New Zealand where they

get the numbers down into like the dozens. Are we going to Are we going to see the US get there pretty soon, given how quickly we're ramping up vaccinations in the United States, Or do you see that as becoming further and further away because of the predominance of the B one one seven strain of some of these variants that are more contagious and more virulent. Yeah, no,

it's you hit the nail on the head there. The rate right now is to get these vaccines out so that we stop we uh stop the transmission or at least reduce the transmission significantly so that the whole numbers start to go down. Uh. The m RNA vaccines, the MODERNA and the fiser worked fairly well against the B one one seven, The other ones less so, but they all work a little bit. And all the companies now are working on a booster shot that will actually impact

the variants better. So you know you're gonna see this uh go on in the next few months as the variants take over, You're gonna have a new booster shot that's going to protect you from these variants. Dr Murphy, there's a real challenge here for health professionals and politicians because on one hand, if we all just stayed home and stayed away from other people for a couple of weeks, everybody in the whole world, it could potentially bring down

the cases dramatically. On the other hand, people are lonely, people are depressed, children that need to get educated. This has been going on for more than a year, and people are sick of it. How do you pair the reality of the need for more caution with the optimism which is also just as needed for people who are really battered after more than a year of this social isolation. Well, how can they do it in Australia, New Zealand and in many other Asian countries? And how come we can't

do it? Uh? You know, that's the question that I asked myself. How hard is it to wear a mask every day? How hard is it to stay three to six feet away from other people? How hard is it to limit medium and large sized groups but keep keep meeting with smaller groups. It's just not that hard, but it does take a group effort, uh. And everybody's got to be on the same page. And the enemy is the virus. The enemy is not other people or I don't believe in this or the state is that it.

We gotta get all on the same page together and the vaccines will help, and that's gonna really take us. It's gonna be the driver here, especially in the United States. Dr Murphy, how do you respond then, to the Texas Rangers really pushing to get people in the stands. They're

not there yet full disclosure, but they're trying. Or even yesterday with the Pirates Cubs ten thousand, three forty three at Wrigley Field, I mean, do you support everybody's effort to try to get back within the good news in America or not? Well, you know, I mean we all want to go to the Cubs game, all right? Uh? And uh you know, you know ten thousand is a fraction of what that stadium holds. Uh. And you know, if people are wearing masks, they supposedly what we're wearing masks,

and they're spread out through the stadium and it's outside. Uh. You know, some of these situations, you know, are tenable. We can do them. If this peak continues, that's all going to end. Well, they're already talking about banning indoor dining again here in the Chicago area, and you know, all the venues all shut down again if if we don't get ahold of this thing. So Dr Murphy, I just want to dress one thing you were saying. You're

saying it's not that hard to all wear masks. Perhaps it's not that hard to remain three to six feet away from one another. That gets more difficult for people who have to get back to work and have children at home and need to figure out what childcare situations are going to have, or if they need to have a job where they need to engage with somebody else. What's okay and what's not okay in the list of things that are getting reopened right now. Well, it's the

same thing, though. It's wearing the masks and socially distancing and taking the vaccine. We've got to get these vaccines out there, because that is gonna that will slow the whole thing down. You know, they're not a but it's going to be you know better, you know. So you know that's a huge number. Uh. And you know that that's all we have to do. We don't have much more than that. Uh. And I don't think it's really too much to ask, but we all got to be

on the same page. Robert Murphy Thank you so much. Dr Murphy with Northwestern University and Infectious Diseases. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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