Surveillance: Sustained Expansion With Wieting

chief investment strategist and chief economist at City Global Wealth Investment. Steve, I want to start with a quote from Cathy Wood. The team and I were talking about this about five minutes ago, but Rita's follows. In our view, fears of inflation will give way to confusion and fears of recession during the next three to six months. If so, the

rapid growth rates of truly innovative companies should be rewarded handsomely. Steve, your thoughts on that quote, Well, look, I think we're going to have some growth fears, which we should when we have faced a real threat, which is inflation. But I think it will come down and if it does, it's likely to help the expansion be sustained. It will be at a slower pace. We will not see a repeat of what we had in the last two years.

You're all talking about these great returns. The COVID shock itself was extremely narrow and severe, and the policy medicine was incredibly widespread. It was destined to get us a powerful return in markets. It's been consistent with record high corporate profits for large firms. So therefore share prices did what they did. Uh, And when we look going forward,

it's going to be a different environment. It's going to be an environment where we're trying to restrain all of the stimulus, and consequently, I think equity returns will slow as well. So the question will be both innovative companies um be rewarded in that environment, and they probably will over a longer period of time. But we're probably most importantly going to see investors need to focus in on

generating income in portfolios. And that means again some of the more higher quality stable companies were not saying to take out any of the innovation portfolios, but definitely put in um a little bit of caution with inequity portfolios.

How do you define quality, Steve Well, this would be earning stability, dived in growth, consistent income flows the firms again that are not necessarily taking moon shots, but have very very steady cash flows that they pay out to investors at a higher premium return than bond market deals. So not a lot of growth or do you think you can get quality growth as well? So I don't really think for example, growth and value metrics have been

really really good ways to drive portfolios. We've really needed to look at cyclicals and defenses and what we wanted to do. You know, after having a period in which many of the cyclical shares have outperformed by double digits, where we think that we're at peak cyclical momentum, we're actually passing it, with factory orders, for example, near the highest levels we've ever seen. That. You want again think about some of the more stable industries. Our largest overweights

are in healthcare shares. We think that consumer staples, which suffered the rise in commodity prices over the past year, will start to see that uh negative drag EBB, and they can catch up some in performance while paying some high dividends. Now, if we take a look beneath the surface again, we do think that there are unstoppable trends

that have suffered from the rebound in cyclicals. In terms of relative performance, we think about alternative energy, or fintech or cyber security, these really long term performers which have a good performance over a few years, but weren't for example, energies or energy or banks in one which had the down effect that some of those shares again will probably outperform well, particularly if you can look at it in

a five year return window. Steve, you're thinking about, you'll converis your onnication exposure across the industries, focus through how you're thinking about exposed aroundication across regions, geographies beyond the United States. Well, at the moment it's a bit more overweight the US than other regions, and that's partly because of FED tightening. Now, I would contrast that a little bit with where we were in two thousand thirteen through

two thousand eighteen. That period again with the onset of the end of QE FED tightening from two thousand fifteen explicitly at rate hikes nine rate hikes from fifteen to eighteen, that was a period in which the US dollar was extremely weak. At the starting point oil petroleum hundred dollars from many years while the US double oil output. We subsequently had a six dropping oil surgeon the dollar of

the course of two thousand fourteen. That dynamic we think is not going to be as severe this time, partly because the dollar is much higher on a trade weighted basis, on an inflation adjusted basis, both against emerging markets currencies as well as UH developed markets currencies. Um if we take a look at China, for example, its emputy market was soaring into the start of FED tight. This time it's down at its low point as the FED begins tight.

So it's a different set up here. I think that international non US dollar assets will hold it a little bit better, but we still biased ourselves a little bit here with the defensive growth industries within the US market. Well, Steve talking about FED policy, and we just ran through some f X commodities and of course equities as well. In the bond market, Can you take your assumptions about what the FED will do next year, where you think inflation or growth are going and make a call with

conviction on where you think the tenure will endo. No, not with much conviction, but it's at a level, at a rate level that is offer ring negative real returnment's probably out for the decade. You can just take a look at the treasure inflation protected securities market. We do think that ten year average consumer price inflation will be on the order of two and a half percent. We're

not really disagreeing with the bond market. The rise in inflation expectation that we've seen, we think is very realistic. The Federal Reserve and other central banks are not going to try to knock down the trend inflation rate by using recession again to opportunistically push down inflation. But even then we think that the rate of inflation will come down, that there were some unusual aspects to both demand and supply, stimulus and distortions in the past two years particularly, and

some of that can come off. So in other words, we think that we can see modestly rising real yields, but this is not compelling enough to get us to really move into safer fixed income. We do have an overweight in tips. We've contemplated reducing it's um uh. It's really been well positioned to get these upward inflation surprises, but now the tips market is at a high valuation. Steve got to leave it there as always, buddy, thank you, thank for everything. This year and the Small Night Steve

Wanting of City Global Wealth Investments. We're talking about this virus a lot. Let's do continue to do that with Debora Fuller, Professor of microbiology at the University of Washington School of Medicine. Deborah, since we last spoke, we have seen a change in guidance from the CDC from a ten day isolation period to five isolation days five days after that wearing a mask. That's if you yourself have

tested positive. But for families across the country who have just gathered over the holidays, now no, they may have had direct exposure with someone who was positive, or are living in the same house as one and they don't test positive themselves. What does the science say that those people should do. Right? It really depends on if your vaccine needed or not. So there's two different sort of levels. Isolation really means if you did test positive, then you

need to self isolate for five days. So say that family member comes home and and they start to feel sick and go get tested and they become positive for COVID nineteen, they should self isolate within your home for five days and then after five days, uh, they can come out with their mask on and hang out with you that way. Now, if the rest of the family members are vaccinated, that means that you know, you were

just exposed to somebody. Uh. If you're vaccinated, you do not need to quarantine, okay, but you do need to go around. If you go out and about, you need to wear your masks for a minimum of ten days. So that's that's sort of the recommendation. Now, if you become positive, now you are in the same boat of your as your family member and you need to self isolate well, and some of the other confusing messaging we've

gotten out of the CDC. Rochelle Wallinski, who heads up that agency, was speaking yesterday saying that there isn't necessarily the science doesn't tell us exactly whether positive tests actually indicates your ability to transmit the virus, saying people shouldn't get PCR tests after they've test positive because it may tell you that you're still positive for weeks to come. What do we actually know about the connection between positivity and then giving that to other people, especially with a

macron that is more contagious. Right. The PCR test is a test that actually measures the sequences of the virus. UH, and what can happen is that even after you have cleared the virus from your body, you can still have those sequences stick around for quite some time. And so what's happening is a PCR can potentially measure dead virus, so you can potentially come up positive by PCR for

for weeks even after you have cleared it. UH. The energy and test is a little bit more specific in terms of it only comes up if you're really shedding some virus. But the difficulty there is that is not necessarily a sensitive as a PCR test. However, with the self home testing, if you can take that on say a daily basis, the repeated testing of it UH and repeated say coming up positive or coming up negative, that's going to provide much more assurance and confidence of whether

you're positive or negative. It seems to me you should just use conservative common sense and then we'll all be okay. I mean, obviously exactly exactly, just spent the holiday season with somebody who tested positive. You should chill out for a while and probably wear a mask when you're out. And about I wonder about long COVID, Deborah, what do we know about people who UM suffer you know, infections or or or or or disease that might indicate infections

that have gone beyond the respiratory system exactly. Yeah, this is the big unknown right now. There's just there is a lot of research going on right now to understand better what are the causes, what are the mechanisms underlying long covid. We do know that a virus infection does cause uh inflammation, and sometimes inflammation even long after the virus has cleared, the body can persist and can sort of has a feedback loop that can continue to cause

uh inflammatory responses in any part of your body. Uh. And to some extent, we believe that that is related. Long covid may be late related to this durable inflammatory response, but we really don't know for sure. Uh. And so that's really an area of ongoing study and we're gonna learn more and more about it. And certainly, uh, you know, one of the big reasons why I tell people you really do not want to get this virus. It's something that you don't know long term how that's going to

impact your body. Although isn't it likely that we all are going to get this virus? I mean, especially now that we're seeing numbers approaching two million new affections globally in a single day. And we've seen that now three days in a row. Are we not all gonna get most of us going to get this? I mean I'm America, I remember and not only was she the Chancellor of Germany but also um a PhD In chemistry At the very beginning of said seventy percent of the population is

going to get this? Yeah, yeah, especially with a macron being so widespread and and and uh so massively transmissible. Uh, there is an expectation the majority of us we'll get exposed. Uh will we all come up positive, I'll get COVID. Really, to a great extent, vaccination is going to make a huge difference there. We've seen that you know, when you get vaccinated, uh, that you're able to recover much more quickly. Uh, that there are a lot to higher chance of having

uh if you're come a positive asymptomatic infection. So vaccination really does help to more effect to really clear that virus from the body and control that inflammatory response that typically arises in response to the infection. All right, Deborah Fuller, University of Washington School of Medicine, Thank you so much for sharing some time with us this morning. Jonas Now on the geopolitics as President Biden, President Pudina said to hold a phone call a little bit later today, Tina Fordham.

They had a global political strategy Avon Hearst and Tina picking up on your line. The geopolitical trifecta of Russia, Ukraine, China, Taiwan and Iran all the more volatile given the perceived weakness of the West. Can you talk to me about that weakness? Tina, yes, absolutely well from where putting a

sitting and engaging. They look at the West's response to the pandemic, very high death tools, um, the the vaccine skepticism, the kind of internal tensions and polarization, and have concluded that their pre existing pre pandemic narrative of a Western

decline has been accelerated. And I think this is something that global investors have failed to appreciate, that there was this existing narrative that the West was in a kind of a slow decline, and that the pandemic as a as a crisis accelerating existing trends, has just sped that up. And so what I the point I want to make is that that possibly changes their political calculus when it comes to making mischief in geopolitics. When we talk about

the West, Tina, are we primarily talking about the United States? Well, I mean, we used to have this term the international community in the olden days. Nobody talks about that so much anymore. But you know, we can say that G seven, that the advanced democracies UM and the notion that these countries, you know, even as recently as the global financial crisis got together in times of crisis and developed policy tools,

we haven't had that in the pandemic. Many people might try to blame President Trump for this, but in fact, uh, this erosion of you know, working together on collective action problems predates Trump. UM. But it means that there is an opportunity, if you are a rogue or a challenger actor to try to UM test boundaries and when it comes to a military response or other ways of challenging

the international status quo. You know, I look at your research and I see on your wall of worry slide supply chain and fuel price crisis right in the upper left corner. That's been the biggest problem for markets. That's been the biggest problem for UM. The economies of the world due to COVID. Do you see any recovery there? Well? So, I think inflation, supply chain issues and and the fuel price crises are clearly the main drivers of risk in markets.

And the point that I want to make there is that there are also huge problems for incumbent governments and are going to cause a range of attempted policy responses and maybe even poor policy responses. And most investors haven't been in a situation of managing through this combination of factors, and I want to put geopolitical risks on top of it. Um, I'm not sure that I'm expecting resolution anytime soon because in many ways it it suits UM some of these

challenger actors to have these levers. And that's where the Russia Ukraine UM crisis comes in, with troops massing on that border. Ultimately is that going to be about nord Stream too and fuel supplies to Europe? But that's certainly a big part of what's going on. Yeah, I always go back to that. I can't remember what network had a series called Occupied where I think Russia takes over Norway because Europe wants to keep the gas flowing. How

strong is that lever? I mean, how much leverage does Vladimir Putin have in that he's supplying um, one of the most important civilizations in the world with natural gas. That's indispensable. Sure, well, I think we can. You know, we can characterize Russia's capacity in one word, and that is that it's a It's a spoiler and a disruptor. Right, Russia has many levers. Uh, the gas supply one is

the most significant one for markets. But what I think people tend to forget is that all of these smaller things that are happening around the margins, like the weaponization of refugees coming from from Belarus, to the tensions with the Baltic States, Poland, et cetera, these are also about undermining European unity. And we can see that the new German government has in fact not signed off on nord Stream too, even though mercles government was was very much

behind it. So you know, this, this ramping up of tensions with Ukraine you mentioned the phone call today between Biden and Putin is also a way of saying of Moscow saying, we have ways of making your lives difficult. We are forced to be reckoned with. We have real leverage in these discussions and don't forget about us. Atina. Wonderful to catch up with you through much of this year, and thank you for your contribution, not just this morning but through the forum there of Avon Hurst. Thank you

very much. We're talking about whether or not monetary policy is going to get tighter, what that actually means, but what will the read through be to the equity markets. Amy, we still from an equity derivative star to just an RBC Capital Markets joining us now. Amy, we focus a lot on how easier money means kind of subdued volatility. In theory, that would mean that once you start to

see that being pulled back, volatility will remain elevated. You see it instead normalizing though in two even further Why yeah, you know it's interesting. I'll just give you one data point. In two thousand and eight, we hit essentially the same volatility backs levels that we did during the pandemic. It took us four more years to normalize back the pre

two thousand eight levels. We've already done it, Kaylee. Between there's been a five realized volatiley point drop in the averages we're seeing as this year closes, and I think that continues because even though we get pockets of realized volatility, the volatility market is essentially already gotten used to this new normal. And also we've seen this year and this comes back to easy money buying. The dip has worked every single time. It has been the can sistants behavior?

Do you think that will change in the year ahead? I actually think it will not. I think we're going to get another you know, game stop, a mc meme slash yolo situation again this year. You know, unfortunately I cannot predict what stock will be the target, but you know, we tracked that very closely through skewing versions, looking at

these called demand levels compared to put demand levels. And I think it's going to be very correlated to what we see happen with the cryptocurrency path this coming year, especially with regulatory uh, you know, items coming down the line. What do you look back at um to help you predict? I mean, do you compare the COVID pandemic to the global financial crisis to the Internet bubble verset? How do you how do you gather the experience necessary to look forward? Yeah,

that that's exactly right. That's a big part of it. We look get seasonality changes sliced up both through realized and applied volatility levels, you know, back essentially as far as we can go even to UH. And one of the really interesting facts is during the pandemic, we hit volatility levels that actually surpassed seven as well as the

other crises you mentioned. And so the fact that we've come down to pre pandemic levels within the last two years compared to all the other situations where it took four to five years and normalize just kind of tells you how resilient the market has been overall and how that has led down into the volatility markets as well. In terms of volatility, we still have UM a lot of elevated UH indicators. For example, if I look at

UM price earnings ratios, we're still at twenty six. I think historically UM the level is around seventeen to twenty. What do you see. How long do you see this market taking to get really back to normal from the pandemic. You know, I think it happens next year. One thing I would point to is the way we're going to see disparity, particularly in options, is going to be within

the different subsectors and factors. So you know, as interest rates rise, you're going to start to see that distinction between value between growth and so I think you'll see pockets of volatility difference between an IWM or queues or a spy, But that overall level, I think when we're sitting here at the end of UM, you know, we will probably be at at a twelve where eleven handle in terms of realized volatility. It's certainly a sub twenty

level in the VIX. I mean, I want to come back to the retail investor because you mentioned game stop, and I cannot believe that that was a phenomenon that began almost an entire year ago. In some ways, it feels like it was just last month. But when I think about the factors that were driving that activity on the part of retail traders, we had had massive government stimulus, they had more money in their pockets, and you obviously

had ample liquidity provided by the Federal Reserve. If those two things are normalizing, why would retail activity not be more subdued as a result. I think that's a great question, and I think part of the answer is that probably Well, however, you know, look, the person who is on robin Hood and trading game stop options is really the same person who's also owning bitcoin and ethereum and you know that

whole suite of things. And so look, if we go into two and we get a massive rise in cryptocurrencies, you're going to see that wealth effect I think, uh spread over into the options again. You know, we know

that this investor is both savvy in both pockets. And the other thing I think is interesting is, I don't know if you recall back in November when we kind of had that volatility freak out, uh, you know, with vix kind of really ramping up plus six percent that month, you actually saw the retail cohort owning puts, which is something that they hadn't done the entire pandemic, but they're clearly capable of doing um. So it may not even

be that they're trying to own upside groupcalls. If they see this market going down, that you might actually see that put option volume really spreading as well. To let the record show retail traders can be barish on some occasions. Aimy, you mentioned to tie to with the cryptocurrencies, and we

talk a lot about active equity volatility. There was a narrative out there that crypto volatility was going to start to become, you know, much more subdued as you have institutional adoption, as you have the introduction of a kind of formal mechanisms like a crypto et F. We did get those things this year, and yet you're seen just as much volatility. Do you have any reason to expect

that that will change? I think, look in the kind of the overarching you know, decade, ten thousand foots level, sure that institutional adoption, all those themes you mentioned will eventually cause volatility to kind of normalize. I don't think we're anywhere close to that. UM. I think the large part will be regulation. The second half of next year will also be a big catalyst for the Etherorium network when they go from proof of work to proof of steak.

And you know, all these things are still really in their infancy. So I think that cryptocurrency continues to behave like a risk asset. And you know, when you just kind of say top ten biggest draw downs in crypto, what did SMP? Do you know the correlation levels over kind of a wonder two year time frame is still only thirty percent. I think that has a long way to go in terms of how that behaves as regulation

comes down the line. Herely and me, as we look back and assess the year one, it was about twelve months ago when we started the game stop mania, the main mania, people talking about the apes, etcetera, etcetera. Amy. What frustrated Tom and at the time is how many people look down their nose at some of these investors,

this so called new entrant into financial markets. I mean, what's your lesson because you talked about, just briefly then the sophistication of some of these individuals in this market, and I think, Amy, that's still overlooked twelve months later, what have you learned about that? It's been an absolutely fascinating ride for me as someone you know, look, I've been in derivatives for twenty years, and from most of

that time, it was just this niche thing. No one ever knew, you know what I did, Mom and dad, you know, thinks I'm a stock record that kind of thing. Um. And then and then you know, you look at Reddit and they're talking about gamma squeezes, which is which is something that you know, you can't really know unless you've had kind of a more savvy introduction into the industry.

You know that these investors knew that they were causing these momentum, you know, dealer based overhedging in the market, and that was causing a lot of the action that you're seeing. And that's why we actually, you know, separately track now the activity of skewing versions and something like a Tesla or game stock or AMC, and we split that up from the more I guess, you know, blue chip parts of the market because we know this activity is something that can continue to be a phenomenon. I mean,

thank you, thank you for everything this year. Amy bue Silverman, just the wonderful Amy Bluosilverman of Abbis Sake. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am 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