Surveillance: Stocks Rally as Omicron Fears Ease

keep up or run the how difficult it is. Can you run me through that? Nat Tony, I'll think of last Well, first of all, thanks for having me here today. Um, think of the unemployment rate at least Friday in the United States four point two percent. What is full employment? It's there's a question mark about that. The Federal Reserve and it's summary of economic projections in September said the longer run full employment rate is four So it seems

around the cost of reaching full environment. Perhaps we're there because of a large outflow of people are retiring, and this brings about a so called late cycle dynamic, which is what we're all talking about. Which is an acceleration and inflation of reduction in monetary accommodation through reduction in on purchases and of course potential for rate increases. This is what you get in the late cycle part of the cycle, the late portion of the cycle, and something

that investors have a think about. Two. The final comment is that the job was rate. Next year most project will be somewhere in the threes, probably three and a half percent, matching the low pre prodemic, and so that's a different type of investment scenario. Tony, you're one of the most qualified people in the world for this question. Do you perceive smooth functions, smooth movements of yield, movements

of price, or should we genuinely fear jump conditions? You probably should not fear jump conditions, in partly because the fettlers are over full years. Is built up an enormous amount of respect for its ability to reign in inflation. That hard one credibility is something it is not likely

to give up, and it can use its words. Ben Bonanki famously said that monetary policies two percent action communication with a few words, and think of Mario Dravi in two thousand twelve with its so called butterfly speech, when he said whatever it takes that that set Europe off

to the races, so to speak. It turned it around so with a few words, because of built up credibility, the idea of jump risks with worries about inflation is low, and we see finally, final comment is that inflation expectations broadly look for detame And final final comment is isn't this what the Federals are sought after the global financial prices to get rid of that disinflation deflationary mindset. It's a huge success, hasn't gone too far? Probably not, because

again it has forty years of success to build on. Tony. There's a jump condition, indicated by rhetoric from the Federal Reserve. There's also a jump condition from liquidity, especially as if FED stopped soaking up as much of the off the run Treasury is not to get all geeky, but a lot of people have pointed to a lack of liquidity and some of the distortions that we're seeing. How much can we get a clear read on the yield curve, on some of the dynamics in a bond market beset

by all of these liquidity issues. It's a great question, Lisa, and it's important question to be thinking about this decade because it's a lot different than other decades. The so called principal agent model is broken, which is to say that it's difficult in the bond markets finded into mediary to transfer risk, whether that be to to gain it or to to lose it. Here's one quick example of the primary dealers, those that are the in goo between

the intermediaries, large investment firms. They held three billion of corporate bonds at two seven. Today they hold less than ten billion, despite that that corporate bondom market doubling in size. In other words, uh, the intermediaries aren't willing or able to hold inventories like a game of hot potato every day.

And during periods of stress, it's even worse. And so this is an issue that that the Federal Reserve and others that that that constructs the architecture of the bondom market probably wants to think about should think about, because it's it makes things difficult again, especially in times of stress. It's any love catching on with you said this morning to thank you. We begin equity covers today with that yard Danny joining in a bit Lizien Saunders now with

Charles Schwab. She's had the courage to be in the market and informs all of us every morning with her team with absolutely brilliant charts sometimes Bloomberg charts out on Twitter as well. Listen buy on the DIP. I guess it's once more in order. The cliche of Tina. What's

the most dangerous cliche right now? I don't know if it's a cliche, but I think the notion that the market has been so resilient throughout the year and the face of all the risks that are very well known um simply suggests that you're not even peeling the first

layer of the onion back on. You know. One of these off posted charts on on Twitter that I put as the draw down table looking at the index level declines, which whether it's the SMP, Nastac or Russell have been somewhat limited five percent in the case of the SMP, only ten percent in the case of the other two. But the average maximum draw down at some point this year across all stocks in the SMP is minus nineteen. It's minus forty two in the case of the Nazdac.

Now that's a pretty benign way to go through a corrective phase via the process of rotation. I think we'd all prefer that over the bottom falling out all at once, but it does make for a more treacherous environment trying to trade around those rotational core actions. Luziens John Farrell hasn't treatment a coffee table book called draw Down Meditation, which is about the sleepiness of the market. Are we guilty right now, liz Enne Saunders of draw down Meditation,

or we've just become benumbed by this great bull market? Well, I think there had been and notice emphasis on had a tremendous amount of complacency. We were seeing speculative fraud kicked back in even in some of the lower quality areas that had dominated trading in the early part of

this year. But the volatility that started on you know, Bleak Friday with the Amicron news really brought a shift in behavioral measures of sentiment, and I think that has been a factor in why the market is finding a lift, because that complacency, that speculative fraud got rung out pretty quickly, both in attitudinal measures survey based out like AII, but also positioning with a Pook call ratio or other metrics that actually look at what certain cohorts of shorter term

traders are doing, so that's not a bad set up. More recently, is that quick reversal in sentiment conditions, Lausanna, This is not a time for complacency, as you said, however, a very difficult time to hedge given the inflationary expectations given the FED. What's your top hedge for potential volatility at this point? I don't know that I would call it a hedge. I know that term often gets you

somewhat generically, even when applied to disciplines like diversification. I mean, I think true hedging, a lot of that might be able to be done in the bixed futures market or the options market, but there's no blanket recommendation because it depends on what it is you're trying to hedge in

terms of just trying to protect some downside. In addition to the disciplines of diversification, I think one of the strategies to consider employing, taking into consideration the increased turnover and thing like text implications, is maybe more periodic rebalancing, especially for investors that might have taken just a calendar based rebalancing approach. They might do it at you're in,

they might do it at quarter end. Instead, take advantage of the swift rotations and maybe up the pace of rebalancing so you're more frequently trimming into strength taking profits where profits are given to you in some cases very significant profits and very condensed period of times, and dealing with that flip clop. You're also adding into positions maybe that have had short term underperformance. So that's probably the best strategy to approach a much more volatile period like now.

What's interesting to me, Lausanne, is that you don't talk about compositional shifts on sort of a broader scale, whether it's increasing two bonds or increasing the duration or necessarily anything that's a typical hedge. And I wonder if that's new for you or if this has always been your recommendation. Basically, the idea that if inflation really is the main threat that's going to be a problem for a sixty portfolio,

that's going to be a problem for traditional balancing. Well, the key there in terms of things like the sixty portfolio is watching the correlation between bond yields and stock prices. We went for about thirty years from the mid sixties until the late nineties where that correlation was pretty persistently negative, and that's really when a sixty type strategy struggled a bit more. It was also an environment that had many

more supply shocks. Then fast forward to the twenty years up until this year, it has been almost exclusively a positive correlation environment and an environment where inflation was quite low and we were more subjected to demand shocks and we were supply shocks. When we first saw the eruption inflation in the middle part of this year, that correlation

dipped back into negative territory popped back out. But to me, that is a key to watch heading into two is if we move back into negative correlation on a sustained basis, I think that suggests we're shifting into a more secular

inflationary backdrop. That doesn't mean perpetually rising in plation doesn't necessarily need stagflation, but to your point, leads a very different environment in terms of how to add that diversification and what to do on the fixed income side of portfolios, which of course is your friend and my friend and

colleague Kathy Jones is Baileywick. I wonder though, at what point people take a look at the behavior of the bottom market over the past couple of weeks, they say, look at the tenure way back down one point for three percent, and that sell off, that negative correlation just isn't going to happen, because any kind of turmoil is going to lead people back into the long end of the treasury curve. Can we make that assumption or is

it too premature? I think it's premature. We also know that throughout the course of the past year, both when we saw that ten years spike up too close to one in March and then they equally swift retreat back down into the one, A lot of that was was positioning and short covering, and I think you have to sort of take with a grain of salt to some degree the messaging back to the what the market in areas like that, that doesn't mean disregard what's happening in

the tenure. I think really key will be elsewhere in the credit markets what we see happen out the risk spectrum in terms of spreads. I think that's going to be a more important tell if and when we ever get to a point where we're spreads are signaling a more dire message. I think that is the message for sure that equity investors want to heat. But I think you have to take that short term positioning into consideration when looking at moves really across the treasury curve all

the way out to the long end. Just an awesome saying I've schwab Kathy Jones over unfixed income, Liz An Saunders on equities Liz, and thank you for being with us today, list and Saunders that swab. I've got eight ways to go here, John. We had did this earlier with Liz and Saunders of Charles Schwab, and we're now thrilled to extend the conversation to give you global Wall Street perspective with wear Your Denny. He's founder and chief

investment strategists at Your Denny Research. Long ago high above Cayuga's waters, he knew double digit inflation and then on department at Yale University, and I thought, there we go. Thank you, good morning Cornell on radio. And I want to go to the Krugman essay last week where he destroyed monitorism and said simply it was a theory, then it's not. Now what should we do with our collective memory of the ghosts of the seventies the theories of

Milton Friedman. Well, I think he was right. Up until the pandemic. We did see a tremendous amount of quantitative easing, zero interest rates, central banks provided a tremendous amount of liquidity, and yet there were some very powerful forces that kept inflation down. This inflation was the law of the land for many, many years following the Great Inflation of the nineteen seventies. UM it was things like globalization and technological innovation, aging, demography,

and too much debt that all were fundamentally disinflationary. But the pandemic changed all that because it really put monitorism on steroids and speed in the form of modern monetary theory. We just had this unprecedented increase in government debt deficits, and all of that was to a lot extent financed

by the central banks. Help us with the distance here from Dartmouth College and David Blanche Flower Hanover, New Hampshire in the University of Cambridge and Dr l Arian they are power opposites on the inflation Guess where do you stand on that? Well? I think inflation is persistent obviously the word transitory is no longer allowed in our conversation.

According to J. Powell, so persistent. I think it's going to be four to five percent for the consumption deflator until the middle of next year, and then I think it does he's back down to three to four percent. I don't think it's going to go back to two percent anytime soon, and I will not be surprised at the Fed deals with that by raising the Fed funds rate by maybe two maybe three times. But I think they might also seriously consider raising the inflation target, moving

the goal from two percent to three percent. And a lot of people are looking at a federal reserve that is so responsive to market turmoil that basically, if they do signal that they're going to raise rates next year and there is some sort of tantrum, they'll step in and ease some of the conditions. How much is that anachronism at this point, given that there's a very different paradigm. I think it is. You're absolutely right, it's a different paradigm.

And we've had four taper tantrums since two thousand and thirteen. We had one in May two thousand thirteen, and then we had another one in early two thousand sixteen one, and right before Christmas on two thousand and eighteen, and then this one. This one is a work in progress. It's it's not clear just how it's gonna play out.

But I think that the big difference is this time around, the FED can't give the market what it wants, which would be okay, back off, back off, don't, don't, don't taper so much, uh, simply because the inflation problem is real and the FED has made it very clear that they are now concerned about it, so it's going to be pretty hard for them to back off. Although I do notice in the data there's been a real shift over the past few weeks that people are bringing down

their longer term expectations once again for inflation. It seems as if people are convinced that a federal reserve hiking rates in the near term will allow growth to revert something similar to what we've seen in the past, albeit possibly even lower based on the demographics you're talking about. Is that a reality in your perspective? Does this give them leeway to hike a couple of times, let it go and actually have a smooth exit. I hope so.

I think that's the consensus view. Maybe it's wishful thinking. Maybe you know, the pessimism about the near term is being upset by the perception that the pain now will lead to gain later. Uh. Look, first and foremost, I don't think this is gonna wind up to be like the nineteen seventies. There's some aspects of that going on right now, like a wage price firal, which is of concern, and we're already seeing some cost of living adjustments being

put into contracts. But I'm a big believer that productivity is making a huge comeback. And the reason for that is one of the huge differences between now and the seventies is there's no growth in the labor force, so that's related to demography, and the companies are just going to have to increase productivity to upset the fact that the labor shortages are not temporary, their chronic and your journy.

I want to go to your book and I want to say it is a triumph to megan decide the London School of Economics where ed Yard Danny Folks writes in Praise of Profits, and you begin with a great David Ricardo who changed how we think and this underestimation

of profits. Is the profits now for technology different than the profits of just December of two thousand, absolutely, I mean in in in two thousand, a lot of the profits and technology were based on dot com companies who had really no serious business plan, ordering technology and paying for it with credit. The big situation back then was that you had telecom companies seller financing their their customers.

So those profits were kind of phony and uh, it was a period where there was a lot of manipulation of profits. This time around, these are very real profits. They're based on very real businesses. And I think technology is, uh is the way of the future. It's it always is, but it's more so than ever. How do you respond to the cry of fifteen years that the profits are

all going to a few? Well, there there is this kind of Marxist view out there that, uh, if if a company is profitable, it might must be exploiting somebuddy, and it's probably exploiting workers and maybe exploiting consumers by not giving them the very best. But I make a distinction between two kinds of capitalism and my book, and that's entrepreneurial capitalism and chrony capitalism. I actually am and

in the same camp as a progressive socialists. When I when I say that I'm against chrony capitalism, chrony capitalism isn't capitalism. It's all about using the political system to gain the system. I'm I'm an entrepreneur myself, and I can't afford lobbyists. So I think that's really the definite distinction between an entrepreneur and a chrony is whether you can afford lobbyists or not. I can't, and I've got to compete. I've got to get customers the very best.

So in my book, I also argue that Adam Smith did a terrible job of marketing capitalism by telling us that it's all about selfishness. It's not selfishness, it's insecurity. I'm going to go out of business if I don't give my customers the very best of what I have. I'm sure that that's a harder sell that capitalism. Go

for it, because it's based but insecurity. I do wonder though, just going into the realm of trading, going into the realm of how you position in such a tenuous period, given that you do feel overly overall optimistic about productivity but a little bit concerned about the FED and how that all shakes out. Have we already priced in the dynamism and technology the productivity gains that you're expecting, or do you think that that will fuel further gains in

the headline indexes next year? Well, look, I think the best is yet to come for us in terms of prosperity, in terms of standard of living. I think technology is going to solve a lot of our problems. It is solving a lot of our problems. But yeah, I mean it's We're not going to get double digit increases in the stock market anytime soon. Earnings peaked on a year over your basis in the second quarter, and that that doesn't mean they go down, they just grow at a

slower pace. So I'm predicting that we go from forty eight hundred by year end, So I'm I'm We're getting close, but no cigar, just it and then something like dred by the end of next year and by the end of two thousand and thirty. And those are not spectacular increases, their single digits, consistent with single digit increases and earnings at looking forward to giving the book and read it's on my desk. Thanks for paying with us this morning, buddy.

I appreciate it. At Johnny of any Research and author of the Praise of Profit. He's out of Notre Dame in Michigan, and you know, it's a typical structure that you would see for an airline executive in the modern era. Can we talk about customer service? Tump in the sky right now? That relationship has just broken down between the people that work for the allies and the people to fly right now. It is broken. Our personal soap opera here that Lisa and I are living as well as

we're catching up with John Farrell. John, you've been living this for eighteen months, I'll say, and I've got a renewed respect for what you and many others flying on a heath throw of had to put up with this attention right now between the people who work for the

airlines and the people who fly on the airlines. Obviously away from the extreme stories which are absolutely ridiculous where there's been violence on the planes and the absolutely zero support from anyone for any of that, but anyone flying right now, Tom has fount that tension between the people who work on the airlines and with me personally, have found it too over the Mastertop very very aggressive over themasking and they've been putting a very unfortunate position where

clearly they feel at risk on the airline themselves, and they feel like they also have to enforce these policies too, and it just creates this natural tension. Tom fit is there. It's kind of the elephant in the room when you fly right now. It's just how delicate things seem to be between the passenger and the airline stuff the pandemic. But I'm going to say, John, this is a real

leadership exercise, and everybody's got their own anecdotes. I'll give a plus plus the delta that happens to be my experience. But we were talking about jet Blue earlier, you know, John, you and I got in at at least it was already cock ob jet Blue because she was in a three am. Well, i'll tell you the biggest misconception about Jet Blue when he decided the Atlantic and as they started that new entry into that corridor, Tom over the last few months, the misconception that they aren't like the

ryanair of American airlines. And I don't think that's Ryan. I think that misconception also exists to some degree in the United States. Tom, I don't see them as a bunch of airline per se. I think they're mint offering the mint camping. It's been absolutely fantastic value off of Bloomberg surveillance. Hoolene Becker with us a few days ago from Cowen with a real great interest in United airlines. We are united in the value and I'm a Sodalgio

has given us. He senior scholar JOHNS. Hopkins and truly in the trenches on this pandemic. Ms I began the show by suggesting that the lift in the market two days in a row, there's this, this, this, this, this, this, and it's one single news article that says, I'm acron tilts towards being a cold. What say you about the present research on a macron? It would be great if it tilts towards being a cold, But I don't think

we can say that with certainty yet. I think there's a possibility that that may be the case, based on some of the early case series that are coming from South Africa, that we're not seeing as many people being hospitalized as not many people, not as many people needing ICU beds or needing oxygen, and a lot of people getting picked up incidentally when they're in the hospital for other reasons. That's all reassuring, but we need more data

to be able to say that with certainty. And we also need to see what happens when we extrapolate South Africa's experience two countries that are older like the US. And it's also the case that the US has more vaccination, so this would be a great thing. I think all of us are cautiously optimistic it would be. It's interesting because it's all seems to be converging upon this consensus, and that's a good thing because we're not seeing outliers

of severe disease yet. I suspect we will, but hopefully this is that this is kind of the step that the virus takes to become something that we deal with more frequently on an annual basis that has the ability to get around our immunity but not make us too sick. But I think we still have to wait for a

more time. Is you're waiting to the calendar, to the fact that there are waves to the autumn and in the winter, whether it's a cold, the flu that we would amateurs would call it, what's the waiting of the seasonality versus all our other fears. Well, I do think that coronaviruses are going to ultimately end up becoming seasonal because all of the other ones do. This one just takes some time to get to seasonality because there's not

enough immunity in the population. But I do think we will see intensification of spread when it gets colder, when people move indoors, and when spread of the virus is more efficient. It's just going to take some time to see complete that that complete stark seasonality. Right now, we do see some seasonality, but there's still transmission going on in the summer because there's too much to too many

people that were not immune. Given what we know about omicron and what it can do getting around certain immunizations, whether it's vaccinated individuals or people have been previously infected, what does it mean to be fully vaccinated? Does it mean a booster shot as well? Well? I think you have to remember the vaccines are not all are all or nothing. It's not an an off switch. There's a spectrum of protection that they provide. And even if O macron is able to get around some of the immunity,

which is what likely the case. It's not able to get around what matters protection against serious disease, hospitalization, and death. And when you think about boosters, to me, the threshold has always been preventing serious illness, hospitalization, and death. And that's why I'm somebody who thinks boosters belong to people that are above the age of sixty five, high risk conditions,

those who got the J and J vaccine. For the healthy population, it's a little bit unclear whether they're needed or not, even though the CDC updated their recommendations and there is some controversy in the field. There may be a need with omicron to make an omicron specific booster, and then that's a little bit different. But these first generation boosters, I think in a healthy population you're just really pushing off a breakthrough infection sometime in the future.

You're not really giving a great amount of protection in terms of what it actually gives you. But if you're older or have a high risk condition, yes, it's definitely clear, clear thing, clear benefits there, Doctor ADLTA. Before we let you go, i'd love you to weigh in on the mandate in New York City now that all private sector employees get vaccinated. Is this the course of travel that you expect not only in New York City but around the country and around the world. I think it's going

to be certain cities that try and do this. It's it's interesting because New York City already has one of the highest vaccination rates in the country. It would be great if that was going on in parts of the

South where the vaccination rates are low. But what we'll find probably is some states that aren't already highly vaccinated are going to become more boosted and more highly vaccinated, while the rest of the country kind of language is at that lower rate of vaccination, like West Virginia fully vaccinated. So I think we're kind of still in that two track pandemic. But I think that because the Ocean mandate predictably got tied up in courts, you're going to see

local municipalities and states try the same thing. Thank you, Suh. Always enjoy catching I'm and even find me love it as downy of Jones Help Kids. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm 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 subscribe 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.