Vídeo: o pior ficou para trás?

0:48 hello good morning everybody we're just waiting a little bit for our 0:55 guests to to get in the room we're a little bit late 1:01 but just a little bit more 1:09 today 1:31 okay so let's start i think people will get in as we go 1:36 so good morning everybody let me introduce myself i am daniela fortuna 1:41 uh head of the international teams from the our global private bank 1:47 uh today with me here i have my my friend roberto martinez head of the 1:52 global wealth solutions international and my dear friend paul marson 1:57 he is our head global macro strategist for the private bank also and it's a 2:02 pleasure to be here with you both today to talk a little bit about this difficult march market that we are going 2:10 through by now and uh and i would really like to start actually with the 2:17 the subject from our live today which is the is the worst behind and i'm gonna 2:23 i'm gonna launch this question for both of you so i'm not sure if paul or roberto you 2:29 want to start but i think this is the best start that we can have we are all a little bit worried uh lit or a lot 2:37 worried about what's going on and what's going to come next so this is the big 2:43 questions that we have in our minds oh fire away 2:48 am i how am i with falling knives okay right to be honest it's an incredibly 2:54 difficult question and it's very hard to answer because you need a metric against which 3:00 you measure starting and end points i mean are we sort of nearly through the bear market is it nearly over well we 3:06 started at all-time high valuation levels we started at levels of valuation in 3:11 terms of market cap to gross value added price to sales price to forwardings whatever metric you want to look at 3:17 we're in the upper percentile of valuation over decades of data valuations have clearly declined that's 3:24 because the price of the market is declined and naturally when the price moves but the denominator the earnings or the 3:30 sales or the gross value added don't move then the market's going to look cheap 3:35 so i think the place to look is not necessarily in valuation i don't think bear markets end because suddenly you 3:42 hit a miraculous level at which the market is cheap i think that's kind of wishful thinking the idea that you get into a bear market 3:49 and the price of the equity market goes down suddenly the price versus ford earnings hits a level which looks cheap 3:56 however you might define cheap and that's the level at which everyone comes in and buys and the bear market is over 4:01 i think that's just wishful thinking when i look at bear markets and being above sort of a an older vintage 4:08 the many i've been through many bear markets and in my experience bear markets are not a point-to-point process 4:15 they are a continuous process a bear market is a series of events it's a sequence of 4:21 occurrences frankly and i think it starts with the declining price 4:27 it doesn't start with a recession interestingly enough because as we've argued many times before 4:32 in six of the last eight recessions in the post-war period the equity market fell before the economy went into 4:38 recession the simple fact is that the market causes recessions recessions don't cause 4:45 bear markets so let's keep that in mind at the start so it's a sequence of events that need 4:51 to be observed and once you've seen that sequence of events play out i think you can then safely say we're kind of there 4:58 it's it's all over it's safe to go back into the water and i see the sequence of events in the following way and i 5:03 highlighted this in my piece for our globe publication this week because i think it is 5:08 important so if people want to see the sort of detail of the background of the process you can read it there 5:14 but the way i think it works is the initial stage is that is the shock to price and that because you that's because you 5:20 get some kind of exogenous shock either through inflation or productivity which causes a re-evaluation of the discount 5:27 rate and then an adjustment downwards in prices 5:32 the next stage is that as a consequence of that the economy starts to weaken and 5:37 you know we are seeing the economy weaken i don't think anybody disagrees with that notion first quarter gdp was negative but for 5:43 technical reasons second quarter is looking like it could be negative the economy is clearly weakened and as a 5:49 consequence of that you see actual realized reported earnings weekend 5:56 and that's the second stage and we're just going through that stage now where we're seeing companies report actual 6:01 weaknesses in earnings so that's phase two of this sequence of events that i see to the cleanup in a bear market 6:08 what that then does is that then feeds into expectations and you say it's priced in when 6:15 expectations have adjusted to a new equilibrium or new reality when you look at analysts 6:21 expectations for earnings which go into their valuation estimates how do they form their expectations for 6:27 earnings well they don't have a magical crystal ball they don't have this wonderful forecasting model at none of 6:32 ourselves none of us have all they do when you look at the data interestingly is they take the highest 6:39 level of historical reported earnings and they mark it up by a certain amount 6:45 and historically they've tended to take record historical earnings and they've said okay we'll mark it up by about 13 6:52 and so therefore forward earnings are 13 above trailing historical peak earnings and we'll look 6:58 at the price relative to that and therefore the market is cheap well 7:04 that's interesting you know they have a markup process they form their markup on historical 7:09 earnings as a function of how far current earnings are below 7:15 the historical peak and how far the unemployment rate is from its historical average so a measure 7:21 of the economy and a measure of earnings if you look at every bear market 7:27 what happens is that analysts expectations need to adjust downwards after we've seen the price drop we've 7:32 seen earnings drop you need analysts expectations to drop as sort of phase three of the process 7:39 and what happens is if you look at that markup that they apply to historical earnings 7:44 in terms of telling you what they expect going forward it's always positive except in bear markets 7:50 well right now at the end of june that markup from historical peak reported earnings 7:55 to forward expected earnings by equity analysts was 25 8:00 that was close to the peak of the entire post-war period so the end of june equity analysts were 8:07 pretty much as bullish as they've been in the last 70 years so bear that in mind that in itself 8:13 would tell you you were not there yet we haven't gone through this sequence of events we haven't completed the process 8:19 whereby expectations are just downwards now the markup is always at its bottom 8:25 at the bottom of the market to sort of use a phrase so at the bottom of the 1991 recession 8:31 stroke bear market the forward markup was 0.95 so they 8:36 expected earnings one year forward at the bottom of the market to be 95 of what they'd historically 8:42 been at their peak so there was a 15 discount rather than a 13 premium apply 8:49 low behold that was the bottom of the market at the bottom of the market in late 2001 8:54 there was a 20 discount implied at the bottom of the market in march 2009 there was a 46 discount so they 9:03 expected earnings to be 50 percent lower one year forward than they were at their peak behind us 9:08 that's expectations adjusting so that's the sign that information is incoming is 9:13 being processed and a new reality is being priced at the bottom of the market in 2020 9:19 there was a 90 percent discount being applied there was armageddon being forecast so 9:25 you see a clear picture here it's not difficult what happens is that pessimism reigns at 9:30 the bottom of markets equity analysts look at it and think oh lord it's grim earnings have been 9:36 dreadful for the last 12 months that means they're going to be dreadful for the next 12 months 9:42 depression and gloom become all pervasive and that's the point i think where you can say yes it's priced in you say it's 9:50 priced in when analysts have priced it into their forward earning expectations 9:55 so as i said you know there was a five percent discount in 91 at 20 discount in 10:00 2001 a close on 50 discount in 09 and a 90 10:05 discount in 2020. right now we're at a 25 premium still 10:12 so the economy has slid equity prices have slid 10:17 actual reported earnings are beginning to slide but analysts in terms of their forward 10:22 expectations haven't even remotely begun to adjust those expectations 10:28 and so i think the next stage here which is part of this sequence is the next stage 10:34 is that we will see a swathe of analyst earnings revision 10:39 so as we go into say the third quarter i would expect analysts to be revising down their expectations aggressively 10:46 because they will have seen second quarter actual earnings coming down and as is always the case they just look 10:52 backwards and say oh lord it's bad let's make it bad going forward so i would expect a whole swathe of 10:58 downward revisions to expectations in the third quarter and what goes with that of course is you 11:04 typically see that credit markets respond to that so in a typical sort of bear market recession type regime 11:11 price moves earnings move expectations move credit responds to the diminishing expectations 11:18 for cash flows so credit starts to have have problems and then once that's all happened 11:25 that's when you get to the point where you say yes it's priced in yes we are there 11:31 so if i had to pin myself down to saying yeah is it over are we there i would say no it's not over no we're not there 11:38 we will be over in my mind i think if there's one thing that you should look at one thing you should follow 11:44 is that that discount in terms of the markup that analysts apply to historical earnings when forming their expectations 11:51 when analysts forward expectations are at a discount i'll think yes it's begun to be priced 11:57 in but i won't think it's priced in when the analyst forward expectation is for earnings to be 25 above their highest 12:04 historical level ever as the economy is is sort of sliding into a weaker phase 12:10 and of course the end game that comes from all that is that's when you get into the cleanup phase once you've seen 12:16 asset prices marked down once you've seen credit respond to weaker earnings and cash flow expectations 12:22 you start to get a an environment whereby there are good cheap credits around things start to blow up 12:28 you have a disaster here you have a blow up there you have a catastrophe over here that's when opportunities start to throw 12:33 up and that's i think when these things end so it is a sequence of process of 12:38 events rather than just price was that price is this it's all over i don't think price really is 12:45 anything other than an accelerant and when the market starts at record levels evaluation it just means that 12:51 when you get a shock the pace of the decline in the market is more aggressive than it would be if 12:57 prices were at very depressed levels so it acts like an accelerant in a chemical reaction rather than anything yeah 13:02 rather than anything more interesting than that frankly so that's a long round way of saying and if you want to see it they 13:08 can see it in the globe this week a way of saying look it's a process it's not here to there it's over and we're only 13:16 part way through the process in my view 13:22 so the expectation to have all this uh third-party uh analysts uh dramatically 13:29 seeing their uh predictions uh uh this is a kind of uh 13:35 worries a little bit but also puts us in the reality that we are uh facing by now 13:41 so you think well yeah we are there we are there but the 13:48 numbers and and analysts and reports they are not showing us what we are going through 13:54 exactly this is what you do we would like it to be different you would like it to be better but the 14:01 the the fact is that it's priced in when it's reflected in expectations 14:08 and at the moment expectations for earnings are just simply far far too high 14:13 you know they can't be realized because in this process of earnings coming down margins start to get eaten into and 14:20 margins are coming off of record levels as well so you see margins getting squeezed you see earnings weakening that 14:26 then leads to a re-evaluation in terms of expectations you price in a new reality and then you say look yes we're 14:32 there that could happen at valuation levels which are way above historical levels it could very well happen at 14:38 valuation levels which would be extreme but it happens once you've had that 14:43 process of expectations adjusted it's not a function of price it's a function of expectations 14:49 okay bobby i think you want to say something yeah 14:55 i would you know i don't want to repeat um probably i wouldn't do as 15:00 as well as paul did uh to the detail but the way i see this and probably gonna you know go over the same concept but 15:08 the price of an asset and the question is the worst behind meaning are the price of assets today at a level that 15:15 they won't fall anymore right they won't go up for now and the answer is most likely not 15:20 because the price of an asset today is a combination of how many dollars expect 15:27 to receive in the future and a discount rate you know how much a value a dollar in the future 15:33 what we saw in the first part of the year was how much a dollar in the future is worth coming down a lot right that's why all 15:41 assets came down but we did not see much change in how many dollars expect to receive in the 15:47 future that's what paul is referring to and that's typically um a second part of a bear market 15:56 now do we necessarily need to go through this uh there's a lot of debate today about 16:03 um if there is a recession and and the question of this is important recession is not a common thing 16:10 to have a recession after two years will be relatively unheard of 16:16 so i wouldn't play all the cards in a recession but the probabilities are high now 16:21 so if even if there's no recession i mean and we go just into a slowdown here 16:27 or a contraction um paul is right the this second part 16:33 is still about to come and they usually come relatively late 16:39 so the only thing i would add from what paul said is it seems to me and this is just a 16:45 hypothesis that this process of how much a dollar is worth in the future is relatively behind 16:52 us it doesn't seem i mean the interest rates have stabilized now 16:57 um we even see market expecting now the fed to cut rates in 2023 which seems 17:03 um a little strange to me but in any case it seems that this big shot that we had 17:09 that caused all assets to go down aggressively in parallel 17:14 this process seems to be either over or very close to the end 17:19 now we need to bottom up and really fasten the ship out for expectations about how many dollars 17:26 we're gonna get in the future that's a big question um expectations are undoubtedly 17:33 very high um but i'm not sure subscribe to the idea that 17:39 we have a disaster ahead of us i think there's some adjustment that needs to be made um 17:45 but there are signs as well that maybe there are some 17:50 characteristics of the economy right now they're you know make maybe the downside a little bit more limited it seems at 17:57 least famous last words right a lot of times people try to rationalize but 18:03 you wouldn't be completely unheard of that we go now in a period of relatively stable prices 18:09 um maybe during the summer if you remember a lot of the crisis in the u.s start labor day 18:15 september first week first monday of september because people come from summer um 18:21 and and maybe that's when we we're gonna start to realize that you know earnings were not that great in the in the second 18:28 quarter we're starting to look already for third quarter earnings uh and then 18:33 maybe this process that paul is talking about will develop we have no visibility to you know to get 18:40 this precise to say you know the market is going to go sideways and it's going to drop in september but to answer your question danny 18:47 unfortunately no it doesn't seem that the worst is behind us um 18:53 now how much worse he could get it's a different question and i think reasonable people would disagree here 18:59 but i think it'll be a mistake for anyone to take any possible rally we we could 19:05 have a rally here we could have the market stable to think that okay now it's time to be aggressive again 19:12 that's not our recommendation this moment and i think would be a mistake to get too excited about any possible 19:19 lack of news or maybe a short rally here i'll stop here and i can i just add to 19:25 that you know we're kind of focusing in a way here on u.s equities but if we broadened it out i think you 19:31 could reasonably say that yes yeah we'll through the worst of it in some other asset classes 19:36 so for example the big issue here in my mind and roberto has heard me talk about this for years i think the dollar is all 19:42 that matters you tell me where the dollar is going and i'll tell you where everything else sits the dollar is really a wrecking 19:48 ball for the global economy when the dollar goes up hard it switches off lending in terms of dollar funding to 19:54 dollar borrowers around the world and there's 14 trillion dollars worth of credit on balance sheets outside of the 20:00 u.s non-financial balance sheets so it's huge and it's the dollar really that matters 20:05 here the dollar has surged over several years now 20:10 i've been positive on the dollar as you know for for the last year and i remain reasonably positive on the dollar here now but i think most of the move of the 20:17 dollar is gone and so therefore if you were to say to me is the worst behind us for dollar 20:23 sensitive assets i would say yes there's more of a case for that so if you look at emerging market credit for instance it's a bloodbath i would 20:30 say yes the worst is probably behind us for things like emerging market credit where you've you've seen a bloodbath on 20:36 a par with what happened in in the spring of 2020 when the global system was switching off 20:41 if you would say to me well emerging market equities well look at the underperformance emerging equities are down in dollar 20:47 terms what 20 year today if you look at the rolling under performance for several years now in this period of 20:53 relative dollar spring i would say yes the the worst of it is behind us for that as well 21:00 so let's not sort of come away with the view that look everything is terrible and dreadful and the worst is 21:06 in front of us you have to be selective in terms of asset classes and i think what has done a lot of the damage here 21:12 is the stronger dollar and where the dollar has left its trail of damage is where you need to be looking hard 21:18 where it's still yet to leave a trail of damage is where you want to kind of be a little bit wary and where it's left its 21:24 trail of damage is in things like emerging market credit and emerging market debt generally in emerging market 21:30 equities so on a relative basis yes i think the worst is behind for those asset clusters 21:36 it hasn't interestingly sorry danny it hasn't interestingly it hasn't interestingly done that yet for commodities 21:42 because typically the other dollar sensitive dollar beta asset is commodities typically if you look back historically 21:48 in in strong dollar regimes commodities are a disaster you don't want to go near them this time 21:53 around the dollar has been strong and commodities have been strong that's really unusual now that's probably 21:58 because of some kind of reopening post covid also effects coming from ukraine 22:04 russia war and so on and so far but you know even there you're beginning to see it i mean metals have had a 40 22:10 drawdown commodities have got a 20 drawdown oils in 20 drawdown now so it's 22:15 starting to have its effect through the last remaining parts of the commodity um regime but the bits that have been hit 22:22 hardest hit earliest would be emerging credit in emerging equities 22:27 yeah we do have this kind of perfect storm that uh that put it all together and after so many years of only good 22:35 returns and a kind of uh kong market if we could say calm uh 22:43 but looking looking back a little bit we did have a very unusual uh pandemic uh 22:50 period and now post pandemic period and uh with now the inflation with the with 22:55 the war and uh maybe the the government's not not uh uh 23:01 ready to react and what are the measurements that they can take kind of to avoid what we are going through 23:08 do you think the this third party which i mean the the fed and all the governments they they can react somehow 23:15 to help because uh it's not the the the issue of inflation and all those 23:20 problems working by themselves we do have this third party trying to to to help or trying to react or trying to uh 23:29 to anticipate what what's going to come next and then they they can do also measures to to 23:35 to succeed or to to avoid does it make sense not 23:40 or not yeah i mean i think english by themselves like a train going uh 23:46 without uh without a destiny something like that we they do have the controls 23:52 yeah i mean there's a q and a thing by the inflation which is kind of links into this i mean inflation is a big issue here for central banks the central 23:58 banks have have set themselves the inflation targets and they've turned themselves into one-trick ponies for 24:03 those who don't know i i'm a central banker by background i used to be an economist at the bank of england 24:08 and so it's an area where i kind of think i have a little bit of inside understanding central bankers have sort 24:13 of backed themselves into a corner by setting these targets and in order to achieve these targets it 24:18 doesn't take in take on board other elements and other factors and so central banks here 24:24 have backed themselves into this corner whereby they need to respond to higher inflation they need to raise 24:30 the discount rate and of course every single asset price is just a series of cash flows discounted by the present 24:36 value and if the discount rate rises the price of everything goes down so in a 24:41 sense when you're thinking about investing here i think you need to think about two things 24:46 you need to think about your sensitivity to the market overall so when the market 24:51 overall goes up and down how much market beaters do you have but also your sensitivity to movements in real 24:57 interest rates or movements in the discount rate that basically affect asset prices so i 25:02 think in this kind of environment you know looking at asset classes like emerging credit emerging equity they've 25:08 kind of left been left in the trail of damage is one thing but start looking at relative value you start focusing on relative 25:15 evaluation because one thing you find in their markets is that they tend to be pretty indiscriminate people throw 25:21 things here there and everywhere and it's times like this when the best opportunities arise 25:26 really it is like this for someone with patience this is the best possible regime to be 25:34 in because this is when you can buy things more cheaply and you know from history that when you buy things more cheaply 25:40 you make more money than if you buy things very expensively look at the brazilian experience of buying equities you know many years back when they were 25:46 at very high levels emerging markets back in 2006 seven things looked great but it wasn't a great time to be to be an investor 25:54 so if you don't want the market beta which comes from the repricing of the discount rate as central banks fight 26:00 inflation i think excessively and unnecessarily personally then start focusing on some relative value uh 26:06 aspects here because you'll see a lot of a lot of stress between different sectors in asset markets different 26:13 markets different asset classes so now is the time to really start thinking about relative value long short type of 26:19 strategies in my view yeah bobby if i can direct well one this 26:26 one uh this one for you uh again uh looking ahead and this is why we are here now to to to kind of uh predict 26:34 what's going to come and knowing that we did have a very unusual uh first first 26:40 semester how unusual was it for you in the perspective of building portfolios 26:47 and what can we do next very unusual very frustrating i have shown charts to people 26:55 um if you take the first six months of the year and you look at how many asset classes 27:02 have negative return each month we have 13 asset classes in our portfolio i mean this is you know a 27:08 number that we chose it could be 14 15 but we have 13. in five of six months 12 27:14 of them were negative i hate to use this term but we're sitting ducks i mean in a regime like 27:20 this is is you know you can only choose how much you're going to lose but you know there's no place to hide unless you 27:27 want to become uh want to use you know derivatives and things like that but most of the time 27:33 are not appropriate for clients so uh it was highly news in that sense that 27:38 the correlation was absolutely high for all asset classes but the magnitude was 27:45 um tremendously unusual as well as well as the speed if we put in perspective um 27:52 the draw down right so the difference between the highest point and the lowest point for let's get a 27:59 portfolio a balance per fifty percent accurate fifty percent bonds not even getting anything crazy 28:07 we saw portfolio like this fall fifteen percent in six months uh this would be a relatively 28:14 moderate or conservative portfolio for some people but that's not all 15 by itself is the second largest 28:22 drawdown since vocal years and is the ninth largest draw drawdown 28:28 ever since we started measuring so that tells us something really extreme happened 28:33 but the speed that which happened most of the drawdowns with sigma similar magnitude 28:39 um took to three years to take uh uh to take effect this was done in four or five months 28:47 i'm sure i'm telling people things that people know already everyone felt this if you look at your statements you know it's there 28:53 but um i also empathize with the fact that some of our clients are starting to invest 28:59 international markets now some of the people may be in the call have not seen or follow international 29:05 markets for many years and they may be asking is this what it you know 29:11 is this what i'm gonna look um you know every year at my portfolio absolutely not this is something extremely 29:16 extremely unusual um if you want to measure for those who like statistics this was a two and a 29:23 half uh standard deviation event it should happen uh once every 30 or 40 years 29:29 um so it's important to put in perspective because um i know also a lot of people 29:35 saying wow you fail so much you cannot fall more i wouldn't go that far you know you can never say that 29:42 but um it is just to say that of course we empathize and uh we did uh we did raise cash in 29:50 our portfolios we were as we were as defensive 29:55 uh in the beginning of the year as we were in the pandemic just to give an idea of how defensive the committee was 30:00 and clearly wasn't enough to protect lines from negative returns it was really no place to hide so to answer a 30:06 question highly unusual very difficult to anticipate um 30:11 but we believe that something that doesn't happen often 30:17 bobby i will link this with uh with another uh thought here because i know that to 30:23 always uh bring up that week in a moment like this looking at losses 30:29 and numbers that came from this year of course who is there for more time for three four five years they do have uh 30:36 they do have a kind of uh space for for a drawdown as we are 30:42 seeing now but you always say that we we need to separate temporary loss from permanent 30:49 loss and this is something that i would like you to also uh uh speak a little bit about 30:56 absolutely um i think this is a central concept here for decision making 31:02 um and i know a lot of clients maybe everyone who joined here come on tell me what i should do here but it's important 31:09 that you you take in consideration this concept of permanent versus uh temporary loss 31:17 let me give you some examples of permanent losses and as the name says those are the worst ones you know there 31:22 be they go and there's nothing you can do they're behind us and you need to live with the fact 31:27 if you lived in argentina or even brazil and you saw your currency devalued by 50 percent 31:35 um it's not like the currency became cheaper and now it's a good time to buy because it will revert to the mean 31:42 it's not it doesn't work like that you know typically these things they adjust and they don't come back 31:48 or worse if you go through war and you have destruction of property right or if you have a confiscation 31:57 um brazilians know what it was to be you know in the early days of the color 32:03 um uh presidency when uh everyone's money was confiscated eventually part of it 32:09 came back but never distinguished these are permanent losses these are things that unfortunately you cannot recover 32:16 unexpected inflation is permanent laws as well typically what we saw in the first part of this 32:23 year was mostly temporary loss because if you go back to what 32:30 and if i need to um use the example that i use the price of assets is how much money you expect to 32:36 receive in the future versus and you need to adjust that by the price of a dollar in the future 32:42 versus the price of dollar now permanent losses usually when you have a impairment of future cash flows right 32:50 you don't expect to receive the cash flow back that's not what happened what happened was an adjustment of the price 32:57 of future dollars to put this um i usually don't use lights but let me use let me show one 33:04 slide here if you allow me danny uh that i think 33:11 exemplifies what i'm trying to say here um 33:17 and it's this light here first of all let me make sure that people understand that this is 33:23 um more schematic than you know precise but 33:29 to address the point of why most of what we saw was temporary laws coming mostly from valuation imagine you're in 33:36 1st of january of 2022 and it had one dollar 33:42 and he invested in a balanced portfolio or we call here a model portfolio just to give an example 33:48 to the best of our knowledge that portfolio was expected to grow at 2.9 33:54 per year for the next five years 33:59 so you know what happened after that the dollar that we had is no longer dollars 34:04 now 85 cents unfortunately you know let's assume we 34:09 we capture all the loss and now we start from a much lower point however because valuations came down 34:16 interest rates went up you now have a steeper 34:22 um uh expected growth of the portfolio now the same portfolio 34:27 is expected to grow instead of 2.9 5.3 by the way we expect this portfol to 34:33 grow about four percent in normal times so in reality what you had here is exactly what we had in a bond a lot of 34:40 our clients understand bonds they buy bonds if you buy a bonded bar at a hundred and interest rates rise all of a 34:47 sudden you receive a statement says your bond is no longer worth a dollar or a hundred dollars worth 85 dollars 34:54 but you know that now this bond will return you know we have a better return because 35:00 you eventually end up apart the exact same thing happened here of course you know this is not a fixed income 35:05 portfolio we don't have a guarantee to receive 100 in the future but this concept that most of the 35:12 drop that we saw is temporary comes from the fact that now we expect of course you know the 35:18 portfolio can drop even more but to the extent that most of the losses came from 35:23 adjustment of valuation we get this back in the future so i could almost say 35:30 and this may sound strange to some people that 35:36 in five years from now or maybe a little longer six years looking back and imagine you know that 35:41 portfolio drops falling it stops falling you wouldn't have really an impact in 35:48 portfolio your future expected wealth at this moment has not been paired 35:54 that's what i mean by temporary loss we changed the path we dropped a lot and we expect to grow 36:00 faster now but that is not what concerns me i know it's painful 36:06 nobody likes to lose 15 percent uh in such short period of time 36:12 but this is not impactful in the long term of your expected wealth what is 36:18 impactful is what paul was referring to and what i was referring to that 36:23 maybe we expect to receive less dollars from now on or if we get in the recession in our 36:30 clients you know like to have investing bonds for example and this bond defaults we should have defaults in a 36:37 recession cycle and we should have companies diluting themselves issuing 36:42 more equity so these are permanent losses so i hate to tell you that unfortunately 36:49 even though it was a very dramatic first um first half of the year 36:55 that is not something permanent you know i expect to get almost everything back what comes next could be a lot more in 37:02 fact impactful for the long term because depending on the way you navigate a recession you could certainly have 37:09 permanent losses and that's what we're gonna try to avoid um and help our clients navigate 37:15 becoming large coming months i'll stop here 37:20 i don't know if paul wanna say wanna add something here no no 37:26 very clear no no because i like bobby brought a uh uh 37:31 a picture uh looking forward a little bit so uh this is a kind of bringing for you what 37:37 should investors uh expect looking forward uh and also 37:42 expect from us in our committees looking forward you participate as a voter in uh 37:48 uh in our you you do have a chair in our committee uh and and how do you how do you see the 37:54 bank preparing uh we are preparing ourselves for this uh uh i think 37:59 turbulent moments that we are gonna see in the second semester and what should investors expect 38:06 there's a question here how serious is inflation problem maybe you can address that together right yeah and also it's 38:13 good too bobby very good to remind that we do have a q a uh if you do have any questions from 38:19 hobart or paul please uh put the question there and we can bring to them 38:25 maybe if i address the the inflation one first of all because it this is i think you know the thing that 38:31 i get probably most questions about if you if you look at let's say two years ago let's say 2020 38:38 stroke 21 what happened well we switched the economy off because of covid we had a massive adverse demand 38:45 shock and really an adverse supply shock and adverse everything shock so what happened is that basically we 38:51 had a huge shock to output so we had a significant shortage of 38:57 inventory a shortage of supply central banks eased aggressively then behind that they pushed in enormous 39:03 amounts of physical stimulus so we had a surge in demand relative to a very constrained very elastic supply 39:10 curve and you've got inflation no real surprise there wasn't any inflation in the prior years but no surprise that 39:16 inflation can be located to have started at the point where we had an adverse supply shock which was offset by an 39:22 enormous positive demand boost from fiscal policy and monetary stroke liquidity policy 39:28 if we then look at what happened we ended up in a situation whereby real incomes were elevated relative to trend 39:35 and supply or inventories were depressed relative to trend and no surprise that that will generate inflation primarily 39:40 in goods so we had rampant runaway goods inflation as a consequence of that 39:46 well if you look at it now in terms of going forward and in a sense inflation today reflects the echoed lagged effects 39:52 of that what you see in inflation today is a consequence of what was happening six nine 12 months ago it's the past we 40:00 need to look forward from here what's likely to be the marginal rate of change going forward from here and that will be 40:06 determined by processes which happening now not happening 12 18 months ago 40:11 and so if we look at it now if we look at real retail sales say in the last six 40:16 months annualized they've dropped almost 10 annualized real retail inventories have risen 40:22 almost 31 32 percent annualized so think of it demand has weakened and supply has 40:29 exploded so it's the mirror image of what we saw what gave us inflation was a massive 40:35 shortfall of supply and a surge in demand now we're seeing an incredible surge in 40:41 supply and a shortfall in demand so we're seeing the exact mirror image of what we saw back then 40:47 if you look at commodity prices they surged higher because of the production issues 40:52 as i said metals prices are 35 to 40 in drawdown oil 20 percent in drawdown 40:58 commodities in aggregate close to 20 in drawdown that's the mirror image of what we saw 41:04 back then if you look at delivery issues if you look at the balance between 41:09 forward expected deliveries where people say deliveries are going to be slower versus faster 41:15 the net balance is that they will be significantly faster than they have been and the net difference between faster 41:21 versus slower deliveries on a forward basis is at the widest in decades it's the widest in four decades of the 41:27 surveys that produce this data so the supply chain is is opening up very clearly 41:33 the economy is slowing the economy is below trend not above trend 41:39 fiscal policy is tightening we're looking at a fiscal policy tightening this year 41:44 where spending federal spending declines by the equivalent of five percent of gdp this is enormous this is almost 41:50 unprecedented fiscal headwind the fed is tightening liquidity the dollar rising 41:57 is tightening liquidity fiscal policy is tightening that's all the exact opposite of what we saw in the early 70s when you 42:03 had an oil shock driven inflation at that point they were the oil shock happened into an economy 42:09 which was above trend where fiscal policy was stimulatory right now the economy is below trend and fiscal policy 42:16 an enormous headwind monetary and liquidity policy stronger dollar switching off global liquidity fiscal 42:23 policy tightening put that on top of the supply story that i talked about 42:28 this is not an environment which is inflationary this is an intensely disinflationary environment it's the 42:34 mirror image of what we saw 18 months ago and it's interesting when i was talking about inflation at the back end of 2020 42:41 people weren't really very excited or very interested now now i'm talking about disinflation 42:47 people aren't very interested in that either now because i think people are focused on the past and not the sort of the 42:53 marginal change in terms of the direction of travel so everything that's a forward-looking 42:59 indicator inflation is moderating the labor market the one that people come back to be then is they say ah paul 43:04 you've missed the labor market uh gotcha the unemployment rates 43:10 because i still see the labor market in the u.s very very very people always come back 43:15 and say gotcha the labor market's tight yeah the unemployment rate's low no question at all but you know the the 43:22 relationship between the unemployment rate and inflation is pretty much non-existent in the historical data set 43:28 i mean if someone could prove to me otherwise in the post-war period i would love to see the data but i don't simply 43:33 believe it's there you can't see it any of the data when you look at it if you look at wages 43:38 wage inflation average hourly earnings are running at 5.1 percent year-over-year they were running at 5.6 43:44 last october they've moderated the marginal rate of change has turned the wage inflation that we've been seeing 43:50 has been concentrated in two stroke three sectors one was leisure and hospitality where you couldn't go back 43:56 into a restaurant or a bar because there were nobody to serve you you know they were desperately short of staff so they were hiking wages well wage inflation 44:03 was running at 13 and a half percent there the later part of last year is now running at nine and decelerating rapidly 44:10 in a straight line so at the margin that sector is disinflating 44:15 if you look at um the construction sector we know the housing market we know the building 44:20 sector the construction sector is slowing wage inflation there is rolling over if we look at education and health 44:27 it's peaking and rolling over so all the sectors with the exception probably of transportation and warehousing all the 44:34 sectors of wage inflation are beginning to roll over and even in transportation and warehousing if you look at freight 44:39 rates transportation rates they're dropping like a rock this is a system which is a wash with supply if you're a truck driver asking 44:46 for a pay rise in a system which is the workforce supply you're not going to have a great deal of success so all of 44:52 the forward-looking factors here are pointing towards an economy which is going to be disinflationary going 44:58 forward and so at the margin the forward rate of change of growth is negative the 45:04 forward rate of change of inflation is negative in that phase of any economic cycle 45:09 when the fed tightens into that it doesn't look pretty one consequence is the dollar goes on an 45:16 absolute tear and this is what we're seeing one of the reasons why i think we're seeing the dollar on a tear is because the market just can't believe 45:23 the fed is going to be aggressive into that regime and in fact it's now started to pricing rate cuts in 2023 quite 45:29 rightly as we get into that disinflationary phase so i think yeah in a year's time we'll 45:34 be sitting here saying well the inflation scare oh that was interesting i hadn't seen one of those for a while i wonder when i'll see 45:40 another one of those because in order for inflation to structurally take hold here 45:47 i think you need to see several things first of all as i said in the early 70s when we had the oil shock in the early 45:53 70s it was inflationary for the very simple reason that the economy was running hot above trend and fiscal 46:00 policy was net stimulatory so the government was creating liabilities that's the exact opposite of now so you 46:07 don't have that as a structural factor in inflation the the other issue is that if we look 46:13 at what gave us decades of disinflation prior to covid it was very very simple it was because 46:20 the world was awash with productive capacity the investment share of gdp 46:25 globally hit the highest level in four decades pre-coping largely because of southeast asia and 46:31 china in the developed world the investment was declining in the developing world it was rising but the 46:36 simple fact is that global productive capacity was at the highest rate in 40 years so the supply curve was incredibly 46:43 elastic as world trade grew and production expanded the greater growth of capacity and production 46:50 exceeded the rate of growth of trade there was just goods everywhere rate of growth the trade exceeded it rather the other way around so the supply curve was 46:57 horizontal you used to have demand shocks but there was no inflation as such other than inflation in asset 47:03 prices i don't think that's fundamentally changed yes new supply chains might shorten because of covid 47:10 but now when i look at china i see china where last year they had the lowest rate 47:16 of net birth since the great famine in the 60s the population is estimated to fall 47:22 pretty much by 40 over the next generation now china has no choice but to produce 47:29 it doesn't have the domestic population growth and the domestic demand growth to absorb all of that production from that 47:34 vast overhang of capacity where is it going to send those goods it's got to send them internationally so i don't 47:41 think the global supply chain is anything other than as elastic as it was previously what we're seeing here is a cyclical 47:48 supply shock and i think central banks are making a fundamental mistake by confusing a cyclical supply shock with a 47:56 fundamental demand shock now if the supply curve was vertical here and supply was inelastic yes i'd think 48:03 there was a structural inflationary problem but that simply isn't the case when the global investment the gdp ratio 48:09 is at a four decade high so i think once we get through all of this echo effects of covid because you 48:16 know we had this surge higher in inflation as demand exceeded supply we're now seeing supply exceeding demand 48:22 in the other direction so 20 22 23 will look like the mirror image of 2020 48:28 stroke 21. you just flip it on its head it looks the mirror image and i think you'll see the same issue in terms of 48:35 inflation so i don't think inflation is a structural problem in the global economy at all i think it's a cyclical problem and the 48:42 very danger is here if central banks get very aggressive because remember fiscal 48:47 policy is tightening inflation is depressing real wages and depressing demand inflation is tightening on its 48:54 own demand conditions if central banks go overboard and add to that the danger is 49:01 that they create severe economic stress and that creates more problems than it than they're trying to stall frank 49:08 someone is asking here uh how about the the fed uh put 49:14 the yeah i can comment on that and i also 49:20 want to comment on a question that came in my cell phone here um so the fed put for those who don't know 49:25 what that is is this idea that when equity markets get in trouble when 49:32 they start to fall too much because usually what the fed has caused um 49:37 the fatty usually stops let's remember something important uh the the 49:43 us central bank has a dual mandate which is is not very common outside of the u.s 49:50 so they they need to aim for full employment and uh low inflation 49:56 and so for in the absence of inflation for many years they really had the mandate 50:01 of unemployment and uh and in many times we signed the past in the years especially of of 50:08 greenspan we saw many times the fed react to drops in the equity market 50:14 and reverse policy and that was called the fed put you know a put option is one that protects you 50:21 from from polymorph um there are two fundamental problems with 50:26 this idea right now the first one is there is inflation now even if um 50:32 the expectations that eventually it will stabilize you open the newspaper and it's everywhere right 50:39 um it becomes a a liability and i asked paul the other day can jay 50:45 powell go down history as the word central bank in the us and he said no he's second to allen 50:51 greenspan but that's uh that's uh some of the conversations i have with paul's enzymes 50:56 but um to go back to your point the first problem with the put option is um 51:03 is that you have um the existence of inflation at least you know for now so that becomes very 51:10 hard to um um to to make the case that that 51:16 they would put anything here the second is um it and and this is always exists is 51:23 the so-called moral hazard right um this has existed for some from some time 51:29 and even in the presence of this idea um still we saw fed but and moral hazard 51:35 is nothing more than to say that when you protect bad behavior or you don't punish 51:42 bad behavior you just extend the incentive so 51:47 the u.s or you know the society has become a lot more um sensitive to 51:53 the idea that you know central banks are helping the the wealthy so i think the 51:59 second problem is one that all existed but given the polarization that we see in politics today i think it's even more 52:06 prevalent that is just to say that i wouldn't count on a fed but now um i 52:11 think it's very likely we're going to see one i i just add to that is it you know on the fed put it is not the job of a 52:18 central bank to preserve the wealth of the wealthy is the job of the central bank to 52:24 preserve the integrity of the currency and the liquidity and solvency of the financial system 52:29 i think that's that's the important thing i think people have become used to the notion of the central bank riding to the rescue to support asset prices and 52:36 in doing so in a sense all they do is they make the problem bigger and roll it forward the fed put in 2000 to bail out the tech 52:43 bubble created a huge so a fed put to protect the 52:48 corporate sector deficit which was behind the tech bubble in 2000 that facilitated and fueled and 52:55 precipitated the housing bubble in 2006 and seven as mortgage borrowing 53:01 went on a boom and the housing household sector ran large financial deficits and inflated asset prices and crashed the 53:07 banking system so every time you have a fed put all you do is you just roll a crisis from one 53:13 sector to another you just create a series of rolling crises and central central banking 53:20 becomes a process of crisis management rather than maintaining the integrity of the currency that equity insolvency of 53:26 the financial system so i i think if if anything that that jay powell could do that would help 53:33 his reputation it would be to sort of sort of disavow this this notion of a of a fed put they need to put that one 53:40 to bed i think because that's what's created many of the problems they've had that's created the kind of excesses of 53:45 the investment spending and behavior that they've had to deal with repeatedly in the last 20 years 53:52 then if you allow me originally i was going to say that we are reaching the end here i still want to have this 53:57 question about looking forward what we are what should our investor expect but 54:02 you said you received a question in your phone yeah very quickly just 30 seconds we um 54:08 about permanent losses right and the question that comes is okay i understand how can i avoid permanent losses 54:15 the first advice is don't go crazy if you need to be very active or very passive now i prefer 54:22 it to be very passive to the extent that you hold your breath nobody dies because of a recession we 54:29 had 41 recessions since the mid of the 19th century uh this is 54:34 not going to be different you will emerge in the other side maybe you know a little um 54:40 uh blemished but you know there's life after recession so being out of the market is probably the 54:47 worst thing they could do um the second one is just to be very careful with credit 54:52 right credit is an environment and as we know you know one mistaken credit 54:58 clients who buy individual bonds especially with leverage so it's it's a time to be 55:03 um very very careful with credit the last one i think is more long-term we 55:08 can think of this more after um we go through the recession which is the composition of your 55:15 your investments right you may need if inflation comes down but it stays a 55:20 little bit higher than normal inflation could be a permanent loss so you may need mechanisms in your portfolio such 55:27 as certain types of equities that protect you well against inflation we write constantly about this and 55:33 you're certainly gonna hear more from us when the time comes but first and foremost 55:38 uh try to resist the temptation of freaking out selling everything and go into cash that is the easiest way of 55:44 achieving permanent loss i just had one thing dania i think the key thing is is that 55:50 if we could all look back and change what we did historically we would all have said okay 55:57 when things felt grim and look bad when the economy looked bad and looked awful and there was recession 56:03 i wish i'd bought that's when i really could have i should have bought if i'd only had a degree of patience i could 56:10 have bought and and i think that's the thing to bear in mind here second thing is that i always think 56:17 coming from that you should run toward the fire history tells you you should run toward 56:22 the fire when you have recessions and you have bear markets opportunities come up it's 56:28 not a time to be fearful it's a time to be opportunistic because there are opportunities that throw themselves up here so let me give 56:34 you just a couple of very quick ones because we're running short of time no people like people like private 56:40 equity some people love private equity when you look at the data historically private equity hasn't really delivered 56:46 spectacular returns it's just delivered a lot of illiquidity hasn't really beaten listed markets in 56:52 any great way or form but private equity returns if you like private equity 56:57 and you want to get private equity like returns a very good proxy for private equity like returns is small cap 57:03 equities so if you look at small caps here if you're asking are we most of the way 57:08 through i think we probably are for small caps because they've been beaten through a pulp in the last 12 to 18 months 57:14 small cap growth has been battered the drawdown is is eye popping so if you like private equity take a 57:20 look at small cap growth there's a fabulous opportunity there in a 40 draw down if you don't like small 57:28 cap growth and you do like private equity and you don't like small cap growth after a 40 draw down you really 57:34 need to think whether you should be buying that kind of stuff at all have a look at emerging market credit as 57:40 i said where there's been a bonfire now have a look at the relative underperformance of emerging market equity where the the underperformance is 57:46 absolutely enormous so then yeah there are opportunities that's three i could list others but 57:53 there are opportunities that get thrown up here you know this this is an opportune opportunistic time not a 57:58 pessimistic time yeah i really recommend for the ones that i did not read the weekly globe of 58:04 this week that paul is talking a little bit about uh the bear markets the opportunities and everything and even 58:10 behavior so i really recommend our our guests here and our teams that are 58:15 participating to read because it's an amazing amazing paper and also i think 58:22 it's very good you did have a very good uh meeting with our teams on monday uh i 58:27 received a lot of very good feedbacks so i'm gonna prepare uh for us to have the same meeting with our clients talking a 58:34 little bit about those curves and the permanent losses and and everything that we are going through uh but to end here 58:40 i would like to for you to answer what should our investors expect looking 58:46 forward from our behavior as portfolio managers 58:51 um i'll answer very quick and i transferred to paul um discipline that's the only thing i know that works that's 58:59 the only thing that through time has proven itself at times we're gonna look like idiots 59:04 because we didn't do more we did less um more and more i'm more convinced that 59:11 investment is is not about getting things right necessarily is 59:17 avoiding mistakes and the biggest mistake now that you could make is getting out of your discipline a 59:23 discipline of you know rebalancing your portfolio controlling your risk understanding 59:28 there are adjustments that need to be made during recession no doubt about that but 59:34 uh changing strategy in the middle of this sounds like a very bad idea to me and 59:40 you shouldn't expect that from us yeah and i just in terms of what we're looking at 59:46 i talked to the beginning and i'll end with where i started i talked in the beginning about a process of event a 59:52 sequence of events and i talked about the third stage of that process or sequence of events 59:57 being the material downward revision in future expectations for earnings and cash flows when that happens 1:00:03 is when it will look darkest and at that point i am fairly confident we will be adding 1:00:09 risk to portfolios any and a lot of people will look at us and think well you're crazy you're mad this is the darkest most grim time 1:00:17 so people are going to think we're a bit a bit crazy but you know that historically has been shown to be the best time to be adding 1:00:23 risk we want to be adding risk when risk is cheap we don't want to be adding risk when risk is expensive so once we get 1:00:29 into that third stage we're really seriously going to be looking for opportunities to add risk in assets that 1:00:34 are that have been put on sale okay so thank you very much for your 1:00:39 vote job paul it was very good uh not the the amazing news that we want to listen 1:00:46 but again this is what we are going through and we are prepared as a team to be with our clients and to be doing the 1:00:52 rebalances of the portfolios and looking forward bringing out the predictions that we have and all the information 1:00:58 that we have from the market so thank you very much for both of you and thank you for our guests so reach out to your 1:01:05 banker to your investor they do have all the information uh if you want to have meetings with paul with roberto and all 1:01:12 our teams we're here for you guys okay so have a great end of week thank you 1:01:17 very much thanks danny thank you