Surveillance: Shorter, Faster Cycle, Says Sheets

get caught up on the finance of the moment. There's no one better to do that with an Andrew Sheets with Morgan Stanley and their chief cross at assets strategist Andrew. Good morning to you. The mill you here is a boom American economy. How does your view change on allocation given the strength of the American locomotive. Well, I think that that's a great place to start. The growth backdrop

appears incredibly strong. Our economists of Morgan Stanley have continued death hold and above consensus view on on both US and global growth. So we're certainly in that strong growth camp.

But I also think we have to acknowledge that this unusually fast recovery could mean we also have an unusually fast cycle and unusually short cycle, and thus it's time for investors to start moving out of many of the strategies may of the sectors that often work in that early cycle right after a recession period into things that tend to work better when conditions get a little bit more mid cycle, when that recovery is a little bit more mature. And so those are the rotations that we're

starting to make. Um switching out of small caps into large caps, moving into more quality stocks. I think that's going to be an important theme as Yes, growth is very strong, but I think we could be facing a cycle that looks much hotter and much faster than those that were used to and I want to get to build on that because I think it's lost on some paper still. You've been pushing this story now full the best pound of a cup of months. I think the

Shoulta holt To cycle. What are the signposts you're using right now to suggest that this cycle will be Sholta it will be hot up? Yeah? Great. So I think it's it's fascinating because it's really kind of three overlapping cycles. There's economic conditions, there are business confidence conditions, and then there are market conditions. And if we think about the cycle, that kind of cyclical movement in very simple terms, it's about going from the low depressed levels to high elevated levels.

And for the economy, it's about how quickly do you go back above trended inflation? How quickly are you below average? And unemployment? Well, those things I think will happen unusually fast. That's that's the view of Ellen Zentner, our chief US economist. For businesses, it's about moving from caution to aggression. It's about high corporate confidence coming back. Well, you know, you see this in business confidence surveys that those are rapidly improving,

and we think they'll continue to improve. And on markets, you're seeing it invaluations, where you know, market valuations have have already returned to kind of cyclical peaks, in many cases unusually fast. So I think those are just some of the signposts that we're watching. But I think all of that is consistent with a progression that's happening much faster than what investors have been used to over the

last thirty years. Andrew of equities have risk assets already priced in the peak of this hotter and shorter cycle. In some cases they have, I think. And so if you look at you know, what we're forecasting for the SMP five you know, my colleague Mike Wilson has a thirty target for the end of this year, so we're above that. I think it's it's fair to say we think US equities have priced in a lot of good news.

UM credit spreads are kind of near cyclical tights near near our forecasts again for the end of the year. So again a market that we think is priced in a lot. And on the interest right front, you know, we think that you know, inflation break evens have generally hit our team's targets. We had been more optimistic that those break evens have of higher, and we now think that that is that needs to pause. So there are

some key movements there. I would say one market that we think has not priced in UM you know, whether it is still risk premium is an e M local debt if one its hedges it. That's a market we've recently upgraded on the emerging market side, and that's one area where I still think there's some value. Andrew Shaate, Sam Morgan Stanley with us this morning as we await comments opening remarks from the President of the United States

at a global climate change summit. The Vice President Common House speaking right now, and let me just turn to the domestic story in America. You're looking at pay growth in the United States. Does that mean one thing for the equity market and something else for the bond market.

Do those two asset classes read into that differently? Well, I think there's potentially, because I do think the bond market is directly linked or will be heavily influenced by what the Federal Reserve does, where I think the equity market will be influenced by both the Fed but also the progression of earnings and a number of other factors. And you know, I think the key issue on the

equity side. You know, this was a opponent of of my colleague Mike Wilson's downgrade of the small cat market is, you know, just concerned that the margin pure picture is going to start to get more complicated. That um, you have costs, they're rising in the supply chain, and those costs are not going to be equally easy to pass on and UH and customers, and we think will be harder for some of those kind of smaller, lower quality

companies to do so. So now I think of the bond market side, you've seen a bond market that's already pricing in a near term path that we think is more hawkish than what Fied would like to do. And so that's so much different picture. Andrew shaates that of Morgan Stanley. How do you approach this market, Honey to add joint us now kind of coll genuity, Chief Markets String just Tony we Stile. But you say the parent

is still what do you mean by that? So when you when you think about an air show, you know just about everybody's gone to an air show and they see a plane screaming across the runway horizontal, and all of a sudden it pulls up and it goes straight up, and the powers on engines are cooking, and all of a sudden it gets up to a certain part and it just stops going up. No matter how much power is added to it, you just lose lift. And that's kind of our that's our call for and it's our

analogy for what could happen in the market. We know that the fundamental backdrop is very positive. You know how optimistic I have been and continue to be on the macro backdrop of excess liquidity fueling a strong global recovery. That's not gonna change. But that's also so well known, the markets are so overbought, enthusiasm is so high that I think we're approaching that stall speed for a little while. Tony, I want to give you a major shout out. You've

had the courage to be in the market. I put GENA. Martin out in Bloomberg in that campus. Others as well, David Constant and Goldman has been quite good. But Tony, you link it right into economics. Aren't we as far from recession as we've ever been? Well? I think again, Tom we we all is try to paint Each environment is unique, and of course the reason you go into a recession is unique, and it creates a credit crisis,

and it creates a FED thatics is extraordinarily accommodative. So where we are economically is sort of where we were in two thousand and four and two tho ten, coming out of those kind of never before seeing recessions where you get this economic lift that creates uncertainty in the interest rate environment. What the Fed's gonna do? Are are they gonna um do what Canada did yesterday and pull back a little bit un quantitative easing? So this isn't unique.

Things are good. We're at the beginning of an economic and market cycle. But in that process you can have periods of a stall and that that's all we're talking about here, is not an economic catastrophe by any stretch, just a little bit of a market pause. The stall speed is very much having to do with markets, not economic data which has actually come out better than expected, notwithstanding perhaps the claims that number that comes out and

about any minutes time, that's the expectation. Anyway, what are you looking for? What are markets looking for to resume that lift, that turbo charged to climb into the sky, to use your analogy terribly, um, in order to go back into the market, I really think so you need to reset expectations. The next leg higher I think has to come from a place where people look around and say,

I'm not invested enough. I think most of the data suggest um that everybody's overly invested, and there's been some deterioration under in the small cap world and in the Nasdaq stocks. So again, think about it this way. About six weeks ago, we we downgraded the financials, which we

had been very positive on. You know, our banks and tanks call got a lot of attention, but we dowtgrated the financials because we thought interest rates had seen a peek and people were saying, how could you think that rates are going to come down on the long end with inflation xt tectations picking up and almost a million

jobs being created. But that's what happened. Sometimes those fundamental factors are discounted in the market and to create the next leg of higher which I think will happen in rate, which I think will happen in stocks, you just need that pause that refreshes, that resets expectations to a more normal level. Tony, always great to get your perspective. You're always drying the drama. Tony to our kind of co

genity chief market strategist and is welcome, sir. Right now on that point of clarity, let us migrate to James Anthony Aberdeen Standards Senior investment Manager. And what's so important here, James as you write it up as well on the poor communication? Who is poorly communicating around Christine Lagarde? Uh God, morning, Tom. Can I give you a virtual high five first? Because

I kind of agree on the mumbo jumbo point. I think I think centro bunk communication in general and ECB community aations specifically has become really a parody because it's apparently, you know, the theory behind this is that it's transparent communication of one's reaction functions so that markets can smooth the transition between policy changes. And that's not what we get here at all. I mean the focus you know, John, you're talking about the pace of purchases. We have to

argue over the semantics of what significantly means. You don't think tem per cent is significant. Maybe the ECB does, But what purpose is this really serving? I just think now it creates more distortions and creates bigger problems than it solves in in any way, shape or form. So who's communicating poorly? Well, the institution. I don't think Madame Legarde has necessarily settled down as quickly as would have

been hoped. She's had several communication missteps. But more importantly, and again, Tom, you've made this point brilliantly already, this is this is sort of institutional within the ECB because of the very nature of you know, the people around the table and the fact that they come from sovereign nations which are not sort of formally bound together in the same way that the state of the US are, so you have different people with different domestic economic situations

to deal with and different bond markets more importantly to to report back to, and of course that means that they have a very different view of what the appropriate path of policy is. James, you're making a couple of points there, and they're all important ones. I think that the e CP has a credibility issue around the semantics right now. Don't think it matters so much at a

time of stress. You need real credibility. And if they can't define what significantly frontloading actually is and what it means, and if it is ten percent above the average of the first quarter, then the next time they come out and there's real stress on say the peripher and they say we'll frontload, and this market looks at that and says, well, we've heard this before and front loading means x y Z,

then you've got a problem. So the credibitability issue right now might not be a problem, but it could be in the near term. You also brought up the ECP president Christine the Guard. I've spoken to so many people on background, off the record who have got an opinion on this but don't want to talk about it on the record, James, So let's talk about it on the

record right now. Why is she finding it so difficult to communicate with this market A And why is she finding it so difficult to get the governing Council to come along with her and not talk behind the scenes and not make leaks and not do all these kind of things. What is she struggling with specifically? So, I think the first problem from the e CBS perspective is that there's so far monetary policy and the leavers that they're pulling, the policies that they're implementing, are just so

far from monetary policy. Really, it's untrue. You know, this has become very much managing financial markets first and foremost. The purported transmission from actions into inflation outcomes or growth outcomes has long since been forgotten. There's not even a pretense that this is a traditional transmission of economic policy from you know, central banker's words to the man in the streets actions. Nobody is even pretending that's what's going

on anymore. So the policy talk has become very big, very unwieldy. The problem being dealt with is huge because trying to keep financial markets under wraps when the economy is structurally weak, but then goes through the sort of cyclical weakness that we all experienced in in Q one t Q two of last year. Of course incredibly incredibly difficult.

And I think when you get into that technical tool care, the fact that that Madame Legard's background is not, you know, from a sort of theoretical economics perspective, is not a career central banker. Obviously that means that she has to come up the learning curve a little and obviously she's doing that and she I think she's getting better through time. But in trying to say nothing, to not give the market anything to go on, which I think is what

she aims to do. In most press conferences, she quite often confused is more than she clarifies. And we've seen this this pattern of the Chief Economist Philip Lane issuing these these blog posts in the day after the meeting, I think to try and find, tune and clarify some of that message. Do you think we need a little bit more structure in the communication, James, What is it

that we need? What we have seen from the Federal Reserve is a shift in the reaction function, a new framework, and whether you think that's the right or wrong thing. What it has done is it's forced pretty much every single member of the FMC right now to sing from the same hymn sheet. You don't get that in Europe. We didn't get that into our tenure either. Do you need more structure? You know? My honest answer to this,

John is we need less, not more. I think interested in go back forty years and there was no announcement, There was no statement, There was nothing. There was a few few men in a smoky room, and then you had to look at money markets to work out what decision have been made, if any at all. Now that's one extreme. I think we're way at the other end

of the spectrum. I think ultimately central bankers need to understand that they cannot manage every short term gyration of financial markets, and to the extent that they do, they are creating as many problems for themselves when they try and exit policy as they're solving as the implement policy. And I think this is one of the things we're

about to experience here. This is something that Richard Coup wrote about many years ago and has been very consistent on, and he's been very accurate and understanding and describing the world post post the GFC, the queue trap, and this this is the point that is very easy to wratch it and up the amount of policy that's implemented to deal with every every whips or every decline in economic activity.

But actually it's much more difficult to then try and deal with financial markets overreacting, over extrapolating when you come to exit the policy. And I think central banks possibly and possibly this includes the ECB, certainly the Hawks. They're just trying not to dig themselves into a deeper hole just yet, not until they absolutely have to. James, as an investor, what could happen in today's press cut friends, that could actually make you change the way you invest

or what you decide to buy. I mean, yeah, I'm a tactical time horizon, Lisa. Obviously that can be portfolio changes as a result of things that you hear. I wouldn't expect that to be the case today. What I might expect is that some prices might change that become more attractive to change investments. Um. I think you know,

broadly speak being bond yields are under pressure everywhere. I think the next phase of the sort of bond market, economic cycle, bond market transition, if you like, is for the rest of the world, the non US, non China world, to play some economic catch up, and I think that probably sees yields outside of the US underperforming relative to the the US. I think when you see yields rising, I don't think that's a great place for Italy to be,

especially if there's any width of taper talk. And so if we were to see a very successful devilish message from from Madame Legarde and we see Italian yields fall and spreads Titan, that might be something I would look to lean into. Based on the fact that not a lot has changed from the headlines we've seen just now at twelve four five, I think, you know, Madame Legard again is going to hope that this this press or

is a bit of a snooze fest. But to your point, John, she's going to get she's going to get asked a lot of questions about it. In trouble for saying that once upon a time, James, James of Seed, I mean this, I'm taking notes and it's gonna be you know, we'll have it on radios. Can come back tomorrow the day after we'll do it on a weekend. I gotta be honest with you. This is the bit of the chi that I probably enjoyed the least pouring James selling the

James keep it up. You're not alone, James, You're not alone, though, James Athey, Aberdeen Standard Investment, Senior Investment Manage I say technical and tell me you're right. You call it boring. James Athey does too. And for many people that might see Francis Donald, you are expert at this. Thank you for joining for Manual Life this morning, and I want to really dovetail George Sarah Ellis note earliest morning, Sarah

Ellis is in foreign exchange. He's looking at strong Canadian dollar. Francis, you live and breathe this with Manual Life of Montreal. So we've got a wonderful nexus here of George Saravellis and Francis Donald and the Canadian US difference and the answer Francis accord into George. His Canada is creating jobs and christiph Friedland and Trudeaux have a nation getting back to real labor excellence faster than America. How long is it gonna take for America to stop replacing restaurant jobs

and get back to actual true job formation. There's about six questions in that time. I tried, I was going for seven. I failed. Let's start with what we can learn from Canada. Canada is telling us a couple of really important stories. One is that relative fiscal policy is a key global market driver. That's true between Canada and

the US, but also the US and Europe. The second is that labor market healing is going to be a key component to our forecast, and places like Canada and Europe did not experience the same drop in labor force participation rates. What matters for the United States Now, for me, the most important nona known is how fast labor supply comes back to America, because that's the key to wages.

That's the key to unlocking two and three growth. Last, but not least, we look at these two economies, we do see an important story, which is the US rely q one story. I love that A lot of very good news priced into the U S story. I talked about keep reopening in the US, replaced in the US. Where are expectations really low? Where are the hawky sh up surprises? Where the upside surprises outside the US in

places like Europe and Canada. My view is the next big move higher in the U. S. Treasury yield is not going to be US driven. It's going to be globally driven, probably Europe. Okay, But Francis, let's go on Martilly in here, folks. This is Alfred Marshall's supply and demand, you know, the little X E X thing that Francis is expert at. Is this about labor supply coming on or is it about labor demand in America? It's going

to be both. And this is one of the biggest challenges is that we have this whole list of missing inputs into our outlook, and they arranged from things like what our corporate tax is going to be, what does the infrastructure plan look like? What about the double mutant variant? Apparently we have to incorporate this now into our outlook. We do not know how fast labor is going to come back demand or supply, because we've never lived in

this before. So you hear high conviction economists and strategists who say we're fully healed, We're back to full time employment or full employment by two We just don't know. We don't have the example and critically. On top of this, the Federal Reserve has told us they're not just looking for full employment by our traditional metrics, but a broad based and inclusive employment goal. So even though we're still running, we're trying to figure out what we're doing, the goalposts

are also moving at the same time. It makes for a complicated forecast, and I really think we need to be thinking about why confidence intervals as we go through the next few months. Yeah, John, I liked it. We're complicated and that it's a nation moving in fits and starts. It's a complicated issue for the airlines too, and tiking it fits and starts domestically things if he picked up

in America for travel internationally not the story. So here's an airline with a domestic till Southwest coming down and saying they're hopeful to achieve break even by June, the first core adjusted loss coming in at around about one seventy two, the estimated loss one one seventy to the number the estimate one eight five, hopeful to achieve break even by June. LISTA, here's an airline with a domestic till A little bit later this morning, I believe we

get an American airlines earnings as well. That's an airline with an international till. Yeah, and when you look at the overall picture I had at the International Association for Airlines came out yesterday and actually said that the net loss would be substantially bigger ten billion dollars bigger this year than they had previously expected. John, because of the variance, because of the prolonged nature of this pandemic, which just

isn't exactly going away. I want to use that term that Tom use fits and starts Francis, this will come in waves, the reopening what happened all at once? What does that mean for you just as a market participant as well? Well? The congregated element of this is when you're an eponymous sitting in an investment team, you have to say, what's gonna happen to the economy, and then importantly how much of that is already price? A lot

of good news in this price right now. So when I hear headlines like IATA saying actually, we're gonna be a little bit less than expected, this is what worries me. The scope for downside surprises in the United States is bigger. But more problematically, I hear a lot of people saying, you know, and very bullish economy because I got on a flight to Florida and it was packed. The question through is is it still going to be packed in three You're gonna notice a lot of economists are talking

now the boom busts, the short cycle. A lot of forecasts are showing a sizeable drop in growth for three Now, that might seem very far off, but that's your fiscal impulse coming off. So fits and starts over the next three to six months. Absolutely, we're gonna have to trade those.

It's gonna be a very tactical rangebound market. But where my eye is is the strategic fits and starts, which is, do we see in the United States a pull forward of demand that's very aggressive for once two years and then are we facing a little bit more of a problem in the back half of these five year forecast period. It so you wet two hats. So let me just

address that question a little bit more specifically. When you say the scope for downside surprise, more scope for downside surprises in America, as an economist or as a market participant, oh as bold. The problem, however, is that we're looking at a market and even though I can say we've seen peak reflation, peak reopening in the United States, I cannot do short equities in this market. I absolutely you know, don't want to be long bonds, particularly after this move.

Even if there's a little bit more upside, rates are still incredibly low. If you want to make your return profile, you have to be allocating the equities, particularly with momentum still in your favor and the low rate environment. So now is the time with your sector rotations, to be adding internationally, to be focusing on country risk and country plays. That's the way we're going to make money in the next six months, as opposed to trying to make these

calls on broad risk or headline SPX. Meanwhile, for instance, this is Earth Day, and I'm wondering how much you're paying attention to some of these proposals from an investment perspective, especial Actually, as President Biden puts money behind it. Absolutely every single day, I'm often asked, what's the biggest delta on your forecast? Because change on your forecast, the transition from the Trump administration to the Biden administration, it's actually

green spending. Now importantly, when we talk about fiscal spending. People usually say this amount billions of dollars and brillions of dollars equals this amount of growth, but how it's spent is what determines the fiscal multipliers. Green spending is going to have a longer horizon with a different fiscal multiplier.

The other component of that that's really critical, as we watched green bond issuance as another big component of future ASCID allocation, a lot of first for that, so incorporating as investing, looking at green spending key component of the economic outlook, but also the investment portfolio construction for instance. I want to dovetail this idea of a green initiative with where we began this conversation, that is jobs and wages. And we have a Biden coming out and saying that

this will actually generate well paying jobs. But you've got union groups pushing back and saying that solar and wind companies haven't been really opposed unionization and opposed efforts to try to bring wages up in that way. What's the truth. The promulicated element of this is all forms of infrastructure spending, from green to highways. The i m F has plenty

of work on this. They hit the economy with a long lag, so you can announce these sorts of initiatives, but we don't see them traditionally from anywhere from three to eight years. So finding that truth and what happens in reality is not going to happen next year. The market is going to have to be patient on seeing that. And this is why I say heading into three there's gonna be a potle in the economy. I think the

market is starting to sniff that out. Knowing what you own is so difficult right now, Francis, we hear that term greenwashing. Black Rock put out a transition ETF recently, huge demand for it, loads of inflows, as you might expect. Then you go through the top holdings of this thing, Apple, Microsoft, Amazon, Alphabet and Facebook. Now maybe they are the leading companies making a transition in the United States of America. Maybe

that's the right way to benchmark the CTF. But for the people who are allocating capital to some of these stories, Francis, do you think they really know what they own right now? My focus on this is actually moving away from company specific risk, also because I'm a macro strategist, so it's not my area to the same extent, but focusing on country risk on this component and the E s G country screens that are coming through sitting up here in

Canada as Tom and Bil to everybody. Of course, we're talking about having to do early and cheaper green transitions or fearing access to global capital markets, and I think countries who are going to be accelerating green spending in order to avoid losing capital flows. And that's the component of the macro story that has to integrate the green infrastructure component or you're gonna get the trade rock. Francis really really interesting. Final point and great to catch up

as always Francis Donald to Manulife. Always great to have Francis with this slave so often putting Tom in his place as well. Very good. Every single cover about six questions in there throw seven six questions in. We do panels together and she just crushes me on there's the headline tell connected to the story out of India Singapore to Office. It's just from India on the deteriorating situation which is just getting worse and worse, just a matter

of time until we see that from other geographies. We've seen this with the Philippines, with Brazil, as well. We're gonna have news on Golden Sex here in a moment. Stay where this Global Wall Street right now, Jennifer News. O where this Johns Hopkins Center for Health Security, And all of a sudden, our international health security is important, Jennifer News So how far are we from a humanitarian crisis in India? Oh? I mean, we're on the brink.

The stories that really worrying me the most is hearing about shortages of medical oxygen. I mean to think that, you know, you can save people's lives by supplementing their oxygen and they just don't have it oxygen something that's easy to make. That is really I think a severe tragedy. How close are we to shifting to say nine seven and the starvation of Europe, the Netherlands post World War two? Europe?

How close are we to where there will be a call for international developed nation and American responsibility to assist India? But we are there. If the call hasn't already been sounded, um, let's sound it now because there is clearly a deep, deep struggle there and they need help. And you know the United States is not going to be back to normal, um safe fully safe until we help countries end um

these very concerning surges of these cases. Based on the searches that we have seen, how much has the end of the pandemic been pushed out, Well, I mean it's it's really hard to say. I mean, we still have parts of the globe that haven't gone through this yet. And you don't want any country to go through this where you see a massive surge of cases. But any country that has not yet had a surge of cases and it's not actively vaccinating its population remains at risk

to exactly this scenario. I think earlier there were countries that maybe breathe a sigh of relief that somehow assume that they escaped the worst of this pandemic. But we're seeing um quite clearly that that's very much not the case. That many parts of the world still remain deeply at risk. So I worry about these headlines continuing for a year or more unless UH international partners get together and help share some of the vaccines that are there. We need

to absolutely make more vaccines. There's clearly a shortage of medical supplies that needs to be addressed. So a lot of work that the globe can do to help countries and to you know, try to lessen some of these hideous tolls of the pandemic has already had. We need to make more vaccine, and we need to convince people to actually get inoculated. John touched in the fact that there is a slowing pace of vaccinations in the United States.

How concerning is that it is quite concerning. I just read a study about an outbreak in a nursing home where most of the residents were protected with vaccines, but only about of the healthcare workers in the nursing home here in the US UM had been fully vaccinated. And unfortunately, one of the residents who had been vaccinated, and this can happen particularly and medically frail individuals, died. So this

is a real problem. And then of course we're hearing about states pulling back on ordering vaccine, that they are not having the kind of uptake that they had been had been having. UM. This is something that I think we have to address with much urgency. I think there are some people who are probably just trying to wait and see. I think there are some people who don't feel that they want to get vaccinated. But we need

to reach both of those people. Both of those groups of people and and convince them that you know, your time to get vaccinated is as soon as as you're able, and the faster we do this is the faster we get back to normal. What a tough moment to be a leader of this country right now and make this decision doctor, because there is so much pressure to take some the supply here and allocates it to the rest

of the world where it's needed most right now. How do you make a decision like that when some parts of your country have decided they don't want this vaccine? Sure, well, it is a tough decady, and you know every elected official their first responsibility is to the people who elected him or her. UM. In this case, though, the United States have has more vaccines than we need. Even if every single American UM work to get a vaccine, we

still have more than we need. And so I think it is important for us to consider donating at least to cover some some very high risk groups like healthcare workers that are working across the globe. They show up every day with their lives on the lines to save people's lives. We should be able to protect them. And the US has enough vaccine to be able to um to help in those efforts. Dolta, thank you. We have to leave that. Doctor. Jennifer Neo said that John's help

consents at the House security Senia Scalta. 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 and economics, finance, investment, and international relations. And subscrib right to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot Com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m