Surveillance: Pick Value, Inker Says

the need to consider value among raging tech growth. Ben, thank you for joining us. You've got a quarterly letter out. I love the detail you go into. There's no consultants here telling you what to do. What is the number one message that we get wrong? As we put in

the next buy ticket for Apple and Amazon. Uh, the number one thing that I think people get wrong is if you buy a market, if you buy a company, if you buy a situation where things are about as good as they have ever been, Uh, You're probably not going to get a great return going forward. Uh. You get the best returns when you're buying at not the best times. This has been a wonderful time for big tech.

This has been a wonderful time for the S and P. You really want to be looking for the places where this hasn't been quite as wonderful. Where are they? Where where is the mean reversion going constructively back to the mean? So what we see is value stocks generally, and I think you want to be smart about how you're defining value stocks, but honestly, any way you define value stocks,

they look really cheap relative to history um. And what we think is, if you're looking intelligently at the valuations of the stocks that have been left behind, they're training at some of the biggest discounts to the market we have ever seen. Uh, And there doesn't seem to be a really good economic reason for it. So sooner or later you're gonna get a really good return out. And there's a reason why some of the big tech stocks have done so well, and it comes from the cash

that they are generated. It comes from the fact that they are somewhat independent of some of the price pressures because they don't have as many employees relative to their overall cash flow. It also comes from the fact that they are on the vanguard of a shift technological shift in the community that was frankly accelerated during the pandemic. How do you sort of counteract all of those forces and say, look, that's all baked in. These other stocks

are going to benefit as we revert to a normal economy. Well, I'd say a couple of things. One is, there's a lot of craziness going on in the economy. We do see some stocks trading and utterly looney valuations. Big tech is not the core of that. Right. You can say, hey, Google has been on a great run. You can say Apple has been on a great run. They don't look cheap,

but they don't look stupid. Um, there's any of stuff in the market that does look pretty stupid like and the um you know, the the Tesla's, the a m c s, the meme. Stocks are trading at valuations where you have to assume utterly extraordinary things to get a decent return. A quarter of the market right now is trading at more than ten times sales, which is utterly crazy. Stocks trading at ten times sales or more historically have underperformed the market profoundly. Um And today a quarter of

the market is trading at that huge multiple. But ben some people would argue if you try to go to, say the Russell two thousand as a value proposition, because they tend to be less loved, you end up buying a lot of AMC, a lot of Game Stop, which suddenly account for a big proportion of these indexes. How do you get around that? Well, I think buying buying the industries right now is a tough thing, right, because whenever you're buying the industries, you are buying those stocks

which have very high market caps. In the case of you know, Apple and Amazon and stuff, they are legitimately huge companies. For some of these companies, a mc is is a wonderful example. The company isn't huge, just the market cap has exploded, um, And I think you want to be careful doing anything that assumes that that market cap is correct. Right. The Russell has had a heck of a run since the lows of last year. It

is not cheap either. I'm not making the argument that the S and D is expensive by the Russell too. I'm saying growth has been on a great run. Growth is expensive by value, Benn and Kurt. Value is founded on certain bibles. One of them is Graham, Dot and Coddle. You and I read it cover to cover ages ago. You guys have led the charge on growth. The growthiness that we've got now is unusual. All of that is based UNFED and central banks blowing out their balance sheets.

How do you perceive market it's reacting when they finally have to pull in their balance sheets or at least stabilize them. You know, I really wish I knew. You know, it's not just that what the FED has done in the aftermath of of COVID has been unprecedented, and even insofar as we have precedents, we saw what happened in the GFC. Man, it's really hard to truly disentangle the impact of quantitative using from the impact of very low interest rates. I mean, yes, we had a taper tantrum,

but it was a pretty short term phenomenon. The FED has this belief that balance sheet expansion is the equivalent of of a of a further drop in interest rates. Um that belief is not really backed by strong empirical evidence. I don't know what impact the FED balance sheet and the expansion of the FED balance sheet has had um it it seems it would be the kind of thing that would push people more into risky assets. But when we've tried to crunch the data, we don't see an

obvious smoking gun. For Here's how that that impacted the market before, Here's how undoing it is going to impact the market now. Ben valuable inside this morning. We appreciate it. Ben into that f g M the head of US Allocation right now to continue our discussion of now what for Central Asia? Robert Harmatz joins us. He's the title and advisors that barely describes a cross party public service

to this nation. Yes, working with Secretary Clinton, but long ago and far away, working for others and driving the hundred and forty eight miles from Cobble to the Khaiber Pass. Bob Hormetts, you're one of the few people with real boots on the ground experience over there. How does the United States now manage the Western Pakistan tribal regions? How

does the United States manage a new relationship with Pakistan? Well, it's going to be a challenge because we've seen the Taliban as our enemy for so long, and now we find that we're working with them to help get people out of the country. And I suspect that over a period of time we're gonna have to have something of a dialogue with the Caliban. The other point is that the bigger threat of the United States is really ISIS or isis K, and the Caliban is their arch enemies.

So it may turn out that if isis K starts threatening its neighbors or US over the longer run, we're gonna have to work with the Taliban who try to suppress them. In fact, in the earlier agreement they said that they would not allow terrorists to operate from their territory. But I want you to take a broader picture here, which only you can do. You know, you're darkened the door toughs a few years ago. You can do this.

I want you to take us back to John Kenneth Galbraith is Ambassador to India, and we had to manage India, Pakistan and Afghanistan. What do we do now. We don't have Robert Hormats, we don't have j KG. What do we do now to manage that that strange relationship. Well, it is gonna be difficult. The Indians themselves now, who have regarded Pakistan of course as a threat, are worried

about several things. They're worried about the fact that there may be Johadas elements based in Afghanistan who move over into Pakistan or the disputed territories or Kashmir and UH pose threats to India. So what India is now doing already we've just learned, is they been having UH secret meetings with Taliban authorities to try to make sure that the Taliban can control these forces in the country and elsewhere. Bob, you know we talked to John Bolton about this yesterday. Bob,

you're the expert at this. Should Lincoln be on the next plane to Delhi? Well, I do think we need to have a lot of cooperation with Deli, and I would certainly if I were Tony b Lincoln be working with the with the Indians UM on how we deal with the Taliban and how we controlled ISIS and ISIS groups that are in that are in Pakistan that could cause lots of destructions both in India, UH and UH and the areas around it, and certainly could play a

disruptive role in Kashmir. The other interesting thing is that we may have a lot of interests in common with the Chinese and the Russians. They're concerned about ISIS and ISIS, and they want to be able to work with in China, of course as a border with Afghanistan, so they want to work with the Afghanis to try to control these movements that could base themselves in Afghanistan but could be

disruptive to the region itself. Bob taking a step back, there is a concern that President Biden talks in a much nicer tone toward the Allies, toward Europe in particular, but doesn't necessarily act that differently than the Trump administration when it comes to policies and the way that things are carried out. And that's one thing that people have argued has just been perpetuated with the Afghanistani exit. How much do you think that they are actually changing the

dynamic post Trump versus just continuing it. Well, this particular incident is going to have an impact because the Allies were concerned, they work consulted in advance, and now, of course the Germans are having elections and ref of Geez from Afghanistan are going to be one issue. Do the Germans take them? Do they how much they trust the

United States. I think we're gonna see, in part as a result of this, a much closer set of ties and consultations between the United States and many of our allies in many countries that are not allies about how to deal with the Taliban, and particularly how to deal with this refugee issue. This is going to be a very big issue in American politics, and we have just

begun to recognize this there now in temporary quarters. But we've got to find long term homes for a lot of these people, and we're gonna have to work with the allies to do it. So I think the lack of real preconsultations in the eyes of some of these countries is going to mean we're gonna spend a lot more time working with the allies on a multitude of post um takeover Taliban issues. Ambassador hermits, thank you so

much for joining us today with Taman advisors. It is not to be understood that we invented this out of thin air. Long ago, Paul and far away, there was a plan, and off the back of an envelope. The plan, I had a beverage of my choice at my left hand, was well, wait a minute, Richard Edelman says this, and I can't convey to all listening nationwide and around the world the importance of the Edelman Trust Barometer and launching me.

It's breathtaking. Richard Edelman joins us four years on through a Pandemic to tell us about the trust barometer of our institutions. As always, Richard Edelman, thank you so much for joining. What have you learned in the pandemic? Tom? The most important finding of this study is the rise of belief driven employees. And the employee is no longer willing just to work for pay and advancement. He or she wants flexible work hours and also wants to work

for a company that is dedicated to improving society. And the amazing thing, Tom is somewhere between. Depending on the country of employees say that they're going to quit in the next six months. They've gotten through the pandemic and they want something new. By two to one, the reason for quitting is societal ambition of their employer. They don't agree with the values of the company. Said that only

say it's because of cash, compensation or advancement. Come on, you're not Tony, I mean, I get what you're saying, Richard. The bottom the bottom line is is they want to be paid more and find a social belief in their CEO. You're telling me, No, I'm telling you that table stakes is the wages and upside in their career and the additional aspects of flexibility on hybrid work or um you know, for example, a staggered ship for a manufacturing company so that you don't have to be there at seven am

on the GM line. You could be there at eight if you're a mom or dad dropping a kid at school, but then you still could work the eight hours. We were going to have to figure this out, that there's a new social contract that we're going to have to create, and it can't just be for the white collar worker. And well, that's the unfairness of it all. What's so important, Paul,

I gotta paint the picture for you. I mean, Davos and Lionel Barber would have as Wednesday opening Ft Edelman Trust Barometers soire and they would invite me and you know, be Richard Edelman in my Moses and you know, Julie Andrews singing in the background. Richard, You've done this year after year. Is this about corporations and the new belief? Or is it about the failure of government? Is an institution? As always, Tom, it's a little of both. Government has

disappointed us. I mean the most recent is what are we supposed to be doing about vaccinations as employers were left on our own? You know, do we mandate them? Do we say you have to have a vaccine before you come to the office, Do we wear masks? I mean, all of this has a bitten limbo. So business is stepping into the void left by government, and that's increasingly

true on pay, on benefits, on even vaccination. So it is true, though, interestingly, that if a employer has high trust from its employees, it drags up all the institutions and trust. It's one of the shockers in this study is, you know, if you have an nine or above on a sent scale level of trust in your employer, all the other institutions um from media to business get much higher scores. And if it's only a level five, then

we're in trouble of trust in institutions. Richard, I wonder how much of this is a function of the fact that pre pandemic, we're at full employment now coming out of the pandemic, despite the delta variant. You know, there's a lots of employers that need lots of employees, so there's some leverage for the employee. How much it is

that or how much is it again? Like as you're suggesting a real fundamental change in the construct between employer and employee, I think in the back of every employee's head is still I'm afraid of being fired on the basis of UH artificial intelligence or or other attack. Um people say that still today, and so there is thinking. Look, also, I've just seen my mom die. Americans actually had a person they knew passed away or be sick from COVID.

That that that's a big shock to the system. So, um, you know, we're having traumatic stress syndrome a little bit, and we're reevaluating who we are and what we want to be. And that's why I think it's a tripod. Now it's pay and upside, it's flexible work conditions, and I want to work for an employer. I want to succeed. You know, it's really important to have all three. Richard Edleman, thank you so much for your support of our effort

over the years. And folks, I can't say enough about the Edelman Trust parameter and the other social studies that Edelman and company do. Richard Edelman, the founder of Edelman and Company. Let's catch up with Roadleshawi Capital you can always found it and Shairman and the author of a book The Death of Inflation that was the mid niceties. Rogie joined us. Now it's one And Roger, if you wrote that book today, what would the title be. I'm not sure. I think I might be tempted to call

it the Rebirth of Inflation. I probably adopt a completely different title. The title, you know, at the time n I published it caused fantastic argument the Bundas Bank, in particular, We're very angry with me inflation, they said, comp possibly, I'm worried about inflation researching now, Roger Buda. We had Jeff Lacker on the other day, the former president Richmond fed and he was extremely articulate about a need for preemptive central banks. And I asked him where the inflation

east has got wrong? And at the same time I talked to Geea gopinath Off Jackson Hall about modern monetary theory. In the last ten years, have we simply moved our inflation dynamic, our price dynamic over to a balance sheet dynamic, whether it's fiscal policy or it's all this debt build up we see out there. I don't think either of those things really. I think what's happened is a combination

of two things. First of all, we've continued to have various supply factors which have been bearing down on inflation, and those are the things that I identified in the middle Night is they've been continuing. And then, of course, for a variety of reasons, we've had a relatively weak demand. And in key countries like the US, I think those two conditions are now are now changing, and the US

economy is surging. You've got this massive stimulus from policy at a time when I don't think there's quite the same downward pressure on prices from various supply factors, and in many cases, of course there's upward pressure on prices. As for M M T, I think it's just quite frankly, profoundly misguided. Roger. Can we get sustained increases in inflation without more wage inflation? And and b somewhere we are wage inflation that we're not seeing. Well, you can in

some circumstances, and I think a pretty unlikely. I mean, you've got to have either a very very marked shift towards profits or big increases in external costs which are pushing inflation for a considerable time. In the end, of course, that will come to an end. No, I think you know, in really to continue with high inflation for quite a while, we're gonna need wage inflation. At the moment. There are some signs of that depends where you look, but in

some countries wages and going up quite a lot. But you know, the whole thing about inflationary process. This is what makes it so difficult to forecast, to set policy is the answers aren't always obvious to you. Aren't given you on a plate. You don't suddenly see the whole process and form immediately. It happens over time, gradually. Right, You're one final question very important here. You can literally be lined up right now working at the Bank of

England helping Governor Bailey. Do you do you presume smooth curves in smooth reaction functions when we're finally over with the stimulus already, or do you have an angst out there about jump conditions we don't see coming. Well, I'm worried about a jump and this is one of the reasons why I would act on policy sooner rather than later in both the States actually and the UK. These current levels of interest rates are absurdly low. The monetary

stimulus is extraordinary in the course of history. We've got to move back to some sort of normality, and I would do it sooner rather than later, and do it gradually in order to avoid the thing you're referring to. Tom. That's to say that at some point or other we get a shock and the policy mat makers will react. Roger, thank you, sir. It's going to hear from you as always rot a good or their Capital Economics founder and chairman,

or perhaps the rebirth the rebirth inflation. Right now, I want to rationalize to the year end, and we do that with James Ay of Standard Charter thrill that he could join his standard investors everytheen Standard Investments, I should say, James, Ah, thank you so much for joining us. James, it's September one. Guys like you have to rerationalize till twelve one one. How much rationalization is going on right now? How much of institutional money is behind the benchmark. I mean that's

a good question. Yeah, I mean the fourth quarter brings with it it's a special set of dynamics normally, summer has tended to be a quiet period and certainly in terms of primary market activity, it's generally pretty dead. And then as we get towards the end of August, we look into the fourth quarter and think, well, there's still a heck of a lot of companies and governments out there with funding needs. They're going to come to market, So you get this kind of concession events into the

fourth quarter supply. This year it's a bit more complicated because we've got the potential for some some relatively major monetary policy changes as well. Both of those have the potential to drive bondial it's higher. But as you guys were talking about in your previous section there, thinking about

bond jeals in isolation doesn't get you very far. You have to think about what's going to happen to bondels, what's gonna happen to yield curve, what's going to happen to the dollar, and what does that mean for risk assets? And that's where it gets a bit more complicated. I'm still off the opinion that fourth quarter is going to be about flattery. You're curve in the US John Standard pours five twelve months trailing up twenty eight percent year

to day. Johanet's terrible, it's up twenty It's not bad, is It's people are behind a lot of people, And James, I think the big question right now is what dense risk appetite. We know that the equity market can go higher in a rising rate regime over the federal reserve. We know that the equity market can rally even as they pull back on QUEI what will hit risk appetite? Yeah, I mean we know all of these things until we don't. Now.

I try really hard to avoid foiling into sort of some of the basic cognitive bias traps, and the status quo bias, I think is one of the one of the strong, as we have a tendency to believe that what is true today will continue to be true tomorrow by the same token. I can see here in front of you guys week after week saying I think the equity market is fragile, and I'll end up with egg

on my face more often than not. But I think the kind of equity market that we live in now is one where you know, you get such long periods of this grinding, low volatility rally, but when it does crack it you get all of the volatility in one go. And I still think we're headed for that sort of episode. But what the phrase we use is vulnerabilities, not triggers

x ANTI. It's almost always impossible to point out a specific event or data point or or you know, happening which is going to be the trigger for things to turn around. But what you can do is you can look at the market and say, well, how vulnerable is this market, how expensive is it, how much our investors already positioned? What is investor sentiment like when you look at the equity market, how many people are buying on margin,

what sort of investors participating, what's breadth like? You know, what's the median stock doing relative to of the index itself? And when you look at beneath the hood in all of these metrics, I just see weakness and vulnerability and unsustainable drivers. So I have no idea when the equity market will crack, but I strongly believe that the fundamentals which are supposedly supporting equity prices up here on that anywhere near as supportive as as many are making out.

James getting an idea for what you don't want to own what do you want to own? Really difficult. People ask me that question, you know, outside of the industry, and say what should I do with my money? And give a big sigh and say, it's very difficult. Everything is expensive, not even just financial assets, alternative assets across the board. Some of the crazies going on in alternative places to park one's money I find terrifying in the extreme.

But for most investors, he's still owning a diversified portfolio of you know, the basic financial asset types is very sensible. What do I particularly want to own in my space? I still think that duration it has value because yes it's expensive, but it's not as expensive relative to the economic outlook as most other assets are. I think that's the biggest the biggest James, are you buying bonds right now? Are you buying you know, the longest dated notes and

developed markets? Is that basically the way that you're getting some confidence in the US? Yeah? Absolutely, that's exactly where we're positioned. So we like five sirties flatness. We like own in the long end because ultimately the long end should be the clearest and cleanest expression of the potential output of the US economy and My observation, and this goes back to again a conversation you guys are having

before about the labor market. My observation is that when policy and it's various guys steps away from the US, from any major economy, the economy literally has an art attack. So without temporary inputs from policy makers, the state, the current state of the economy is unsustainable. Therefore, we all tend to negative growth until we find some equilibrium. And

the policy that we're engaging in is completely unsustainable. And that tells me that we're still living in this unhealthy, imbalanced, over indebted economy with lots of structural weaknesses which people are trying to deal with with cyclical policy, and that really does cap that the extent to which yields can rise before it causes some sort of incident or accident. I think we've seen a little, you know, a little

episode of that already this year. But I continue to believe that that long term duration has better value than alternatives. James Athy of Aberdeen Standard Investment, Senior investment manager. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern and 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 Amino. I'm Tom keene In. This is Bloomer.