Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg now Madonna higher across asset reporter with Bloomberg at this week on the show, Well, as you may have heard, both the stock and bond markets have gotten off to a rip roaring start this year, and that meant that basically everyone and their dog was predicting that Fed Chair Jerome Pow would come out to the podium this week and ruin all the fun for everyone. But he didn't quite do that, and stock prices continue to rip higher, bond yields continue there to sent back to Earth. So what's the deal? What's going on? Doesn't the Fed still want to tighten financial conditions? We'll get into it with a chief investment officer from a firm I think you've probably heard of, but Vildonna. Before that, I've got play a little word association with you. If I say to you the song remains the same, what's the first thing that pops into your head? Jerome Paul Jerome pal is the first thing that pops into your head? All right? How about if I say the end is near? What pops into your head. Um, I don't know some apocalyptic movies. I'm really bad at this. Okay, I'm really bad at this, so well, to me, it's my old record collection, because I think the sweet guest has a similar record collection. To mind, the song remains the same, is of course led Zeppelin song album and movie I total, I believe, and I'm not sure, but I think he was referring to Sinatra with the End is Near, but we'll have to find out. Okay, you're just dating our guests. Basically I'm dating myself a little bit too. And you just showed off you're too young to know who led Zeppelin is. You didn't have a gene jacket in the eighties with the led Zeppelin huge led Zeppelin patch on the back obviously not did I you're asking me? No, I was born in Hello, Okay, so let's see if if our guess is um mad at being dated by you. But it's Jim Karen. He's co chief investment Officer of Global Balance Funds at Morgan Stanley Investment Management. And Jim, thank you so much for joining us and apologies for for Mike's comments. No, no, my pleasure. I'm glad. He got the references. Those are exactly the references. And I did have a gene jacket in the seventies and also in the eighties, I did have like the little pins on the gene jacket. And part of the reference to is that that the record label for led Zeppelin was Swan signed. So the other reference is that this is also a Swan sign for the rate hiking psychos. There's a lot of references that are going on multi layer there, all right, I do understand this finance stuff after all, the don I I clearly, I clearly don't. This stuff should be on the CFA exam for sure. But it's funny though, you know, uh strategists realized they'll get a lot of readers of a certain age to to you know, read their stuff when they throw in those classic rock references. So I I applaud you, Jim. I definitely want to get into the markets talk. But I was I was just going through your background. And it's funny because I have this recurring dream where I'm back in college for a second bachelor's degree and everyone's like, what are you doing getting a second batrilo's degree. I'm like, I don't know. It just it just felt right. But I find it fascinating your education. So bachelor's in physics UH from Bowden then and other bachelor's UH in Aeronautical engineering from Californy Institute of Technology. Very interesting background, and it's always fascinating to me the different paths people take to Wall Street. A lot of times it is that physics or engineering background. So what were you thinking back then where you It sounds like you wanted to be a rocket scientist when you're when you're a kid. Yeah, that's that's probably correct. So I was on a program what was called a three two programs, So I spent three years of Bowden, got a physics degree, and then went to cal Tech to do engineering. And I always loved the markets, and I always thought of the markets as as almost like a financial engineering experience. That plus the fact that I was graduating during the time where there was a big recession, a big piece dividend was being paid. UM, the Berlin Wall had come down, a lot of the engineering work was going into the defense sector, which was being you know, eliminated pretty much. So UM, I really started to get interested in the markets, and that's where it led me and I loved all of the math and the complexity that was going through at the time. And it was actually when actually Bloomberg in some ways was it. It was in its infancy and today people take it as a as a granted, but I used to do a lot of my calculations on a calculator called him Monroe, and we would and that was the Bloomberg of the time. That was the high technology of the time. It was one of those big hand calculators. So I really have an appreciation for how things get done, how things come together, how things actually work. And I think of the broader markets is almost like a machine or or or an engine in some ways where everything needs to be just right for for it to run smoothly. So so that's the association that I have between the engineering and science background versus what's going on in markets today. I really like that and I like your description of it, and um, it's a perfect segue into what is going on in markets today. Because we did hear from the FED. The tone of the press conference was very different from what investors had been expecting. So maybe just like layout for our listeners, what do we get from the FED? UH and what your main takeaways were from from the pressor so. I think it's very interesting to the extent that how is really trying to walk a very very fine line, to the extent that he wants to signal that the rate hiking cycle is coming to an end. And he even made reference to that, and he said, we're talking about a couple of more hikes. Well, a couple to me means to possibly too. But at the same time, he doesn't want to let financial conditions become very very easy, have stock markets go up at credit spreads tightened very quickly, and all of a sudden bring in those inflationary pressures again, and that would really work against him. So in one sense, he wants to say, I'm slowing the pace of rate hikes and I might be coming towards the end, but the terminal policy rate has not yet been determined. Now, obviously, if you say we have a couple of more hikes to do, or we're you know, coming towards the end of this, you know, we can all do the math and say, well, then the fens either done in March with the next bases point rate hike, or or they're done on May three, which is their meeting after the March meeting with so they're either done at five or five point to five. And I think that is essentially what the market started a key off of if we think back to what the December Summary of Economic projections were, so the big meeting before this meeting that we had on Wednesday, it basically told us that the terminal policy rate was going to be somewhere between five and five point five. And now it seems like that's even coming down to a more truncated five to five point to five. But let's just say by by the end of the second quarter the FETE is done. Um, probably by the beginning of the second quarter, the FETE is going to be done. And I think the markets are taking some solace in that, and you're seeing interest rates come down and you're seeing equity prices move up as a result. Yeah, And it's interesting and he even refer to the past where they would you know, high creates every other meeting almost you know, perhaps signaling that that's a possibility that maybe they'll pause, pause in March and then come again in maybe What's I find fascinating, Jim, is you know, all of Wall Street, the financial world watching Pal's press press conference on one screen and on their their other screen, they've got the markets, you know, whether Bloomberg terminal or I don't know, there's something else other people use. But is there anything else? I don't know, I don't know, But you know, I almost wish Pal had the benefit of having a terminal in front of him when he's speaking, because you don't quite you know, it's the question is always you know, did he sort of not get the intended message that he wants out? You know, is there going to be some hawkish commentary coming from some of the other speakers in the next few weeks and from him himself to sort of walk back this loosening in financial conditions that we have to. I mean, we really quite loose all year, and looser after the press conference in terms of you know, stocks ripping, higher yields and spreads coming in. Do you think we'll get a little bit of that, a reminder that hey, you know, we're still going to keep these rates high, We're not gonna cut this year. You know, is is there sort of a whiplashed to expect in the coming weeks? You know, there was whiplash during the press conference, so so so Yes, I think, Look, I think this is a great question, because this is one of the risks that I think that we have coming up over the next few weeks, is that if the intended market reaction, if there even was one, doesn't match what the intended statement was supposed to convey, then, as is typical, there's going to be some walking back of this. And I want to really highlight this because I think it's extremely extremely important. What Powell said in the statement was viewed as relatively hawkish, right, and then all of a sudden, he starts his uh, he starts his his press conference, and he basically says the exact same thing that he said back in December. It was almost a carbon copy of of of the issues. First one was that labor markets remain tight, which is keeping inflation risks elevated. Second point that he made was he started to call out, you know, despite the decline and CPI and wageing for sation, it's still too high to be consistent with inflation becoming um anchored at at target levels. So he's still worried about it. And then he goes further and he starts to talk about again exactly what he talked about in December, the service sector inflation versus the goods sector inflation. And he said, look, we know why inflation is coming down. Durable goods, supply chains, all of these things are are certainly coming down, but service sector inflation is not coming down as fast as they like. And then he even went further up the anti on that even more, and he said that in fact, the service sector and inflation, if we look at it core services x housing again, core services x housing, that's what he's looking at, and that's what we should all be looking at. He said, hasn't even started to fall. So as I'm listening to this, this is a guy who's worried about inflation. This is somebody who's not done tightening by any stretch of the imagination. And and then he said that that was about percent or the majority of or a large part of the core PC in the index, which is what the FEDS favorite gauge of of inflation is. So if the core services X housing isn't hasn't even begun to fall yet and they look at core that the core PC index, um, he still believes it's going to be elevated. Then he went on even further to say wouldn't it be a shame if just when we had inflation on the brink of being, you know, a solved problem, that we didn't tighten enough, and then all of a sudden it started to resurge later on. That would be That would be really bad. And to me, that is my core risk. If somebody asks me, what's the risk that keeps you up at night? Aside from all the geopolitical potential risks, the risk that keeps me up at night is that we get this decline in inflation in the first half of the year, which we know is happening, but all of a sudden we realize in the second half of the year that it's not anchored. It comes down, but then all of a sudden starts to show signs and it may start to bubble up in four and beyond, and then they have to come back in and start hiking again from an already high base. The markets do not have this priced in. Everybody's talking about the pivot and FED funds and the expectation for rates to come down and what have you. It would be a significant surprise and really bad per house of prices if in fact that this all got turned on its head, and all of a sudden, the FED said, no, we actually have to start restart our hiking cycle, or we started to price that back in if that were to happen, if inflation became unanchored. And he again he mentioned this, so this is this is him saying this, So this does not sound like a person that is UM is ending their inflation fighting plight. UM. But then in the second part of the press conference he went on to say, yeah, but you know what, we're probably just talking about a couple of more hikes, and then he became a lot more devish in the market just seized on that. So I do think over the next couple of weeks we're going to see other FED officials come out and try to rebalance that statement so that there's two sided risk in the market that it shouldn't be taken according to the Fed as a done deal, that they're done, that that there may still be more to go. And I think this is really the key here, which is creating confusion. But you know, obviously in March there's gonna be a new summary of economic projections, their forecasts for the next quarter um or not just for the next quarter, but for the next few years, they redo their forecasts and we'll have a better understanding as to what they see in terms of inflation expectations and policy expectations. So I wonder, you know that risk that's keeping you up at night, how do you categorize it is at a tail risk? Or do you think that's something we're really got to worry about? And what would cause that sort of resurgence in inflation? Would we need some sort of exogenous event, oil price shock or something like that. Where is it just a matter of look, you know, uh, this is unchartered water, and inflation can can be unpredictable. Yeah, So so let me split the difference on the level of risk, and I'll say it's a fat tail risk. Right, So it's a tail risk, but it's a fat tail meaning that it has a higher than ordinary probability for um uh for the event to occur. And I would even subjectively put that as high as right, which is to me, that's you know, we can debate as a tail risk, right, I mean, it's it's a reasonable risk, but it's not to me, it's not in the majority. So so what creates that? Well, certainly energy prices could do that right. Certainly, that is um something that's out there. We know that there's been you know, not enough productive production relative to the demand, and we know all of the different factors. Their energy has come down for various reasons. In the second half of two it's started to come down, and it's it's still staying relatively low. But to me, that's not really the main issue here. The main issue is the labor market. The labor market is what's perplexing everybody, and everybody has different theories and different views on it, and there's one thing in common is that it really most models really just haven't worked in terms of trying to predict labor. And the issue that we have right now is that there's that there's a lot of tightness still in the labor market. Look, we got a Jolts survey that came out you know, this past week, and essentially it showed eleven million job openings, right, so the job opening is actually ticked up. They haven't been going down as as expected, again baffling most people's forecasts. The other is that the vacancy to unemployment rate, so the number of jobs open for every unemployed person is sitting at about one point nine to one. Let's call that two to one, So there are two jobs open for every unemployed person. So while consumer confidence is coming down because we're hearing about layoffs in the tech sector and in these big gargangea win numbers that are being thrown out there, the reality is is that when we look at all this claims, when we look at the unemployment rate um, and when we look at the BLS, UH surveys and statistics, what we're finding is that these people who are being laid off in the tech sector are finding jobs in other areas. Now, the nuance here is that the jobs that they're finding are lower pain. So now I want to be very very clear about this because I think this is an important point to make. Foreree is going to feel worse to Main Street and better to Wall Street. Felt worse for Wall Street and better for Main Street. So look, if we look at what we saw was inflation going to forty years highs, we'd have to go back to the eighties and the seventies to see the levels of inflation that we had. We had gas prices going up to sky high levels and all of these various things, but what we also had was job creation people were employed. The jobs market was still very, very strong and had our's weakened. So even though higher prices were coming into the economy, what people realized is that, well, they had a job, they could pay the higher prices. They would still go out to eat at restaurants and spend time at hotels and go on airplanes and do all these various things. So even though yes, all of that bad economic stuff was happening, and certainly the bond market took notice of that, bond yields rose quite a bit. Certainly equities took notice of that, and you know, we all know what the performance of equity prices were. But the consumer felt, Okay, now what we're seeing is the we're coming to the end of this inflation cycle. At least for now, it's starting to come down. We're coming to the end of this rate hiking cycle. So rates are coming down, equities are responding positively, bonds are responding positively. If you ask people on Wall Street, hey, look, things are pretty good. If you ask people on Main Street, they're saying the exact opposite thing. Now, why this now, all of a sudden becomes a lot more important. Is that in going into four starts the year of the political cycle of a presidential election. So all of these discussions around how do we control inflation? And I always think it's very informative that every press conference that Pal has started going back about you know, almost a year now, he starts off by apologizing to the American people. He says, listen, you know, we're sensitive to everybody's paying. We know that there's the unemployment rate. The employment situation may get worse in the future, but we think it's a necessary thing to do to control inflation. The reality is at the unemployment rate has stayed relatively low, with the jobs market has stayed relatively tight. So what that tells us is that if we do get into a situation where, um, where we do get a slowing in the economy, but the jobs market stays relatively robust, people still have uh you know, consumers still have dollars to spend um and consumption is GDP, that we could all of a sudden start to get a resurgence in demand. Now, remember when the Fed heights interest rates, what they're trying to do is push down demand. But if we get through this soft patch, this corrective patch of Fed policy, inflation and everything else, and we come through this with a soft landing or maybe a mild recession, then we're going to come out of that like wild horses, right, and that wage inflation, that inflation could then go on to create what what Powell calls and what the central bankers call the wage price spiral inflation. And he always says, look, there's no evidence of it yet, but as soon as we see it, game is already over right, So you never want to get to that point. And so that's why that's the risk that keeps me up is that I think that there could be some underpinnings to say, well, let's slow down the hikes right now, because you know, we need to be sensitive to you know, politically and everything else. But it doesn't do the inflation fighting job, and then we have a worse problem a year later, eleven million job openings out there. So it's so, you know, it's it's that labor market is still red hot. So so, Jim, what did you make of um Powell almost taking a victory lap when he said, this is the first time that the Fed can actually admit we are seeing disinflation, which was a common that really struck me. I think he wishes that he could take that word back, because that as soon as he said that, the markets took off like a rocket. I mean you could time it to that statement, and it was only he was only referring to goods prices too, you know. Specifically. I think, well, we'll see, now you were paying attention. Other people just heard the word, you know, disinflation, and they hit the buy button and they just left the finger on the button until all their orders were filled. Well, that's right, you know, And I think that's going to be part of the walk back is to say, well, what I said disinflation, what I really meant was goods disinflation, and that should be a good You know, he's getting too nuanced in these things, right, you have to really be a professional listening to this. I think most people are kind of listening to it out of one ear and and then they're trading in the markets, you know, um at the same time. So yeah, I think that he's correct in saying that about goods prices. I wish he framed it differently because I think it just creates more volatility markets. Yeah, can I can? I also ask you then, just to go back to the financial discussion about financial conditions because obviously the FED doesn't want looser financial conditions, but and we already mentioned this, they are looser because of the value we've seen in the stock market, etcetera. Powell said that they've tightened significantly, that the FED is looking at financial conditions in a longer term versus a shorter term time frame. And then the discussion on Twitter was like, Okay, where is he looking Like what models is he looking at? Because you know, even if we look at the there's a Bloomberg financial conditions um in next that has just loosened significantly since when they started hikes last March. Like, what do you what do you make of this discussion? What might Paul be referring to? I? I love that you're asking this question. It's a question that most people use the words financial conditions and they don't quite understand what that is um And it's actually questions that I've I've actually gotten I've gotten this question exactly because people are there are various ways to calculate financial conditions, and and let me just start from the top and just say financial conditions are really a measure of how the how market prices are reflecting central bank policy. So then it becomes okay, well, what market prices, what market indicators are you looking at? Because in theory, if you increase policy rates, you should get a weakening of financial asset prices. That's just the way these things work. But now we have to create um financial conditions is actually an index, right, So now we have to create a and I know Bloomberg has an index of financial conditions as well. It has a lot of different variables in it. The five principal components of financial conditions, meaning that the five factors that drive financial conditions the most. Where you're gonna get the information is going to come from five things. Number one, short term interest rates. That could be three month T bill rates. That could be policy rates. You know, let's call it three month TI bill rates, because that's something that we can measure in the markets, right, that's something that we can watch. The second would be intermediate term treasury rates, and that would be called that the tenure treasury yield, again, another market measurable item that we can use to reflect central bank policy. The third is going to be triple be credit spreads. So that tells us something about the credit conditions in the markets. The fourth is going to be the equity market, so let's call that the S and P five hundred broadly. The fifth is going to be the trade weighted value of the US dollar. Those five are the big five. Those matter the most. Now you could say, well, what about home prices, and how about oil or how about that. We could throw a hundred different things in there. The problem statistically when you do that is that you end up like losing the information. So those five if you did a pc a principal component analysis on financial conditions and reflected that to central bank policy, those five are the ones that matter the most. So it's an index, meaning that there's a waiting that gets attached to each one of those uh five variables or five five components, and then you come up with a number, right, and that becomes your index. It's just like a typical it's like calculating any any old index, and that's what you measured. So when we look at financial conditions, I would say that financial conditions you have become easier, but they've also tightened the lot. Just look at what happened last year. Credit spreads wide, end um interest rates rose, the dollar got very strong, so a stronger dollar is weaker for financial conditions. If you have UM, it just makes your exports more expensive and it's harder for you know, your companies to make money in that sense. Obviously, higher interest rates, higher cost of capital, higher credit spreads, tighter credit spreads are weaker for financial conditions, weaker equity prices, all of those things. So financial conditions actually tightened quite a bit recently with the decline and interest rates, the decline in the dollar, the decline and credit spreads, the increase in equity prices. Those have now recently started to ease financial conditions, but only after they've tightened a lot. But they're not easier today than where they were a year ago. There's still a lot tighter than where they were a year ago. But there has been an easing of financial conditions over the past say four or five weeks, just given the market. So when Pile saying I'm not concerned about short term financial conditions, I'm really more learned about longer term. I think what he's basically saying is like, look as I come to an end of the rate hiking cycle, UM and people start to price in more stable interest rates and possibly even lower interest rates at some point. Of course, in the near term you're going to get an easing of financial conditions because I'm not tightening anymore, um. But longer term, these are the long and variable legs. The fact that they may keep the policy rate at five percent, let's say, for an extended period of time, might actually tighten financial conditions because they're just going to keep the cost of capital, keep the costs of credit higher for a longer period of time. So he's just saying, look, I'm not trying to micro manage the markets by looking at financial conditions. We have to think about what our policy decision and keeping our policy decision in place is going to do for the longer term. And that's essentially what he's saying. Jim, if I'm remembering your resume correctly, you were rate strategist for a long time, right and uh now co chief investment of the Global balance funds at Morgan Stanley Investment Management. This is how I segue into the part of the podcast I call it the just tell me what to do with my money already element of the podcast. You know, obviously from from a balanced fund perspective, last year nothing work, you know, sixty forty was you know, just a nightmare this year. I gotta think back from the dead for sixty forty or whatever your preferred ratio is. To some degree, I'm curious how you're thinking about it. You know, whatever your allotment is to, if it's not six to socks and bonds, are you tweaking that ratio at all? Do you think maybe in favor of bonds and specifically in fixed income? Um, well, at totally. There's a lot of bankruptcy talk swelling around. You know, if these rates stay higher for longer, are are you worried about credit spreads? Are you leaning more towards just safe, safe treasuries in that fixed income bucket? So how are you thinking about portfolio composition as a whole? I guess is the to boil it down? So this is the key. This is a key issue here for this year, and not only just for this year, but even over the past few years. It's really about the portfolio construction. So what a global balanced strategy does is it tries to look across multiple assets fixed income, equities, commodities, currencies, and tries to put together a balance of risks that creates an optimal risk adjusted return, and that's what our strategy effectively does. And the the idea right now or the problem that we have right now is not a new problem, and this is something that I I so I'm glad, I'm glad, I'm glad you're asking this question because this is this is an important issue for us, which is that we have a high correlation in markets right now. So if we go back to two thousand and eighteen, we had high correlation markets there where fixed income and equity didn't work so well together. So the sixty forty didn't work. Two thousand and nineteen, the sixty forty portfolio worked well because all of a sudden, you know, equities and fixed income went up. Two thousand twenty was an odd year. It was the year of the pandemic. But ultimately, by the end of the year, the sixty forty portfolio did well because equities went up in price and bonds went up in price. So so so far, going back to what I've highlighted is that we've been in a high correlation market. In nineteen and now as we go to one, we also had a very high correlation market. We had fixed income and equity doing poorly, and people tend to notice high correlations when fixed income and equity do poorly. And now here we are in three, we also have a high correlation market. Both fixed income and equities are doing well. People ignore high correlation risks when both assets are doing well, but they tend to notice them greatly when both assets are doing poorly. The point that I'd like to make is that we were, we've been in a high correlation market for the past several years, and I think this really puts a lot of stress and pressure on the sixty portfolio. So to answer your question, you know, more directly after that preface is you know, so what do we do is what we need to do is we need to balance a portfolio. We need to think about how we balance the risks, meaning that um, how we look at equity risk, how we look at fixed income risk. If they're both going to be highly correlated, your traditional sixty forty isn't really going to work the way that it did in the past. Because what we have to remember is the reason the sixty forty portfolio works so well having six equity bonds was because the bond market fell you know, basically performed well in thirty six out of the last forty years except for last year, right, So we had a bullmarket in bonds for forty years just about and and essentially the bonds were a good hedge for anything. But now as we get to a point in the economic environment and the structure of the economy where risk free rates are going to be higher, I think we're gonna have inflation issues and risks for the foreseeable future for the next five or seven ten years, and you're gonna have more variability in interest rates. So now, all of a sudden, the sixty forty portfolio doesn't work as well as having a static allocation. So what we have to think about in terms of hedging and creating a more dynamic, better portfolio that optimizes risk adjusted returns is trying to manage the volatility. So, in other words, if what the sixty forty portfolio was supposed to do for you was give you a stable return profile, what I'm saying is that in that static sixty forty portfolio, you're not going to get that anymore. You haven't been getting it since. But what you need to do is target of volatility. What you have to say is, if I want to get pick a number. I want a seven percent return, right, But I want a seven percent return, but I want that within a range I don't want to I don't want to take on too much volatility to get that seven return. So I want my volatility to be in a range between say four and ten percent. Right, I'll accept that as an acceptable range from my return volatility. So really what we have to start thinking about today is not the static six forty portfolio, but really trying to target the volatility of the portfolio so that you you can manage your return profile in a more stable range. And what that allows you to do. The big benefit there is it allows you to compound your returns over time in a more stable manner. That's what the sixty portfolio was able to provide for like like since and what we've seen since is that that sixty forty hasn't been working as advertised, and that that's what I would say is start thinking about strategies, you know, like the one that I manage effectively that thinks about stabilizing the volatility of returns to have a more balanced portfolio. But Jim, you mentioned you expect inflation to be an issue for the next five, seven, ten, years. So where do you see? What do you see happening with inflation? Because we've had some guests on the podcast the last couple of weeks who have said they don't see they sort of see inflation, um, the downturn and inflation topping out at around five percent maybe and staying around five percent. So what do you see? Well, you know, even if the downturn in inflation tops out of five percent, that's way above the fed's target of two. Right. So so now we have to we have to think structurally about what's going on um from a very macro perspective. Right, So when we think about why inflation started to fall and when did it really start to fall, precipit this league. I mean, obviously it peaked in the in the early eighties under Vulcar he killed inflation hydrates a lot um. But then all of a sudden we had a big change in policy under President Reagan. He moved more towards the supply side economics UM type of a solution. And what he did was he deregulated and essentially what he did in the supply side economics is he increased the productive capacity of corporations to make supply meet demand and bring down prices so you can have higher growth and lower prices. And that was really the miracle of the eighties that then spilled over into the nineties. By two thousand and one, we had another big event China joined the w t O. And you know, China was a factor in the nineties as well, but really started to come online, you know, starting in two thousand and one. Now we had globalization and offshoring of production in all of these various factors, and that was it for inflation. We didn't worry about it, you know until two right inflation just came came write down. So now what do we know that's going on? Well, globalization is now in the globalization effectively, we're not offshoring production, we're on shoring production. Energy costs are are a lot higher, um, there are a lot of various for good reasons. Climate change initiatives that you know is constraining some of the production of energy, so so that's something that's out there as well. Energy and we also have to remember feeds into fertilizer prices, food prices, and everything else, so that all of a sudden really starts to bring inflation and prices of a lot of goods and consumables like food also also a lot higher. And we're not we're not at a point structurally where we're increasing the productive capacity to meet that demand. So that structurally where we are, we are at a structural change in the markets today. On top of that, we had this awful pandemic, you know, sadly, you know, many people left the workforce and um and aren't coming back, and that's created a lot of constraint in terms of labor. So so now labor is really in charge, not capital so much, and labor being in charge, are going to demand higher wages. You get higher wages, you get higher inflation. Structurally, that's where we are. Nothing's turning that around. Look, there are arguments that we've been in this period of secular stagnation for a long time and it's only been interrupted and it might reassert itself. I'll take that on board as as certainly a possibility, but so far I'm not seeing any real evidence of that. So I'm much more concerned about the fact that we are structurally moving into an onshoring, deglobalization, higher cost of productivity situation. Now, the only thing that solves this problem. Is a is higher business productivity, you know, capex, business investment. Productivity is output per hours work. Right, So if you can be rely on technology robotics AI to do the work of people that you can't find and higher, then that will bring down you know, wages, you know, essentially. But that's the measure that we're looking at right now. And that's and that's why I think that inflation is going to be with us for a while. It takes a long time for companies to become a lot more productive. Do need a supply side response, which means that you need and that's a fiscal policy. Fiscal policy creates a supply side response, that's taxes, regulation, you know, to to generate capex and productivity and things like that. We are nowhere near sending a message to the American people saying, I know everybody is suffering right now with higher wages and sorry, higher inflation and what have you. And the answer to that is to cut taxes for corporations, right, because that's the way the narrative will be spun. It's wrong, that's not that's not exactly true, but but that but that's the way the narrative will be spun and it's gonna be hard to get that supply side response. Until we get that supply side response where the abductive capacity of the economy is increased to make supply meet demand and bring down prices more durably, we're going to have an inflation problem. That's how it was solved in the eighties. That's how it will be solved again. It's just a matter of when, and I don't think it's any time soon. Great stuff, We really appreciate your time. We cannot let you go though, until we hear the craziest thing you've seen in markets this week data as always, Why don't you get us started? Okay, I have one with that I chose with you in mind, and I really hope you haven't seen it yet, so it's a nice surprise. Okay. A Porsche dealership in China has the ring bells. No, you haven't seen this? No? And why a Porsche dealership in China made you think of me? I I'm dying of Okay, listen, Okay, a Porsche dealership in China they put up an online ad for a I don't know this car, but maybe people do Panamera, a Panama a type of Porsche, I guess, but they accidentally put it up for eighteen thousand dollars instead of the starting price of a hundred and forty eight thousands. Oh my gosh, did they actually have to sell any at that price? So I guess hundreds of people immediately put in bids for it or try to buy it or however this process works, and they had to apologize and pulled the whole thing. But Porsche did say that they got in touch with the very first person who made the online reservation and they quote negotiated an agreeable outcomes. Still, you can't even get a used car for eighteen thousand. Used China's CPI would have gone negative for the quarter. If that there's if there's sales went through. That's pretty good. That's pretty good, thank you. Although I still don't know how Porsche made you think of me. I'm I'm like a Volkswagen Beetles because so just the listeners, No, Mike has, Mike has four Porsches now, because I knew you would like the you know posted for eighteen was supposed to I like a good a good fat finger train exactly, all right, that's a good one, Bill Don I'll hand it to you, Jim. How about you. You see anything crazy recently in markets? Well, you know, I don't have anything to compete with a eighteen thousand dollar Panama Porsche UM, which I wish I was the first person to actually see that. UM. I would say that the it's more of a it's more of a change in um in sentiment and thought where the growth sector was just so hated for so long. Nobody, anybody that you spoke to, UM, you know, going back over the past few weeks, I would say, you're you're crazy if you think that. UM. You know, look at the NASDAC, look at some of these high tech stocks and they're laying people off and the earnings are terrible, and how the earnings announcements have come down so much. But yet you looking at the markets today, it's just bewildering, maybe as much as, maybe not as bewildering as the eighteen thousand dollars, but it's just it's to me, it's it's in the same category of how in the world can this be happening with all of this bad news that's out there, so not not not as not as interesting, but but but it's my it's where it's where my mind went. Is that just a sort of a high beata reaction to this sense that the FED is going to cut this year? I mean, you know, I assume the rate these people must be assuming lower rates to be buying growth stocks like that, or is it just January mean reversion? Maybe? You know. I think it's a couple of things. And the thing I'll attribute it to is that people have a lot of cash and they're underinvested. And as I like to say, risk on is a risk and if you're under invested in the market goes up, you have a lot of explaining to do. So if so, you end up chasing the things that went up the most, and unfortunately, you know, or maybe fortunately, people are chasing these you know, these higher flying high beata names, and maybe we get silly levels at some point and it doesn't end well, but who knows. Yep, yep, Now that makes sense. Alright, Uh my turn, Viltano. Are you having a Super Bowl party this year? No? Hell, I know I'm going to have like a Super Bowl funeral. And the Bills aren't playing Eagles. I am an Eagles fan, now, yeah, I love the Eagles, flies, I have. I have an Eagle's jersey, you know, so I wore last for the last game and it brought it brought good luck. Yeah, I keep wearing it then, Yeah I will, I will. I'm not having one because that the a little too passionate, you know, the potential for violence is too great to have other uh other people around. But if you are having one, USA today as a story, some good news. Now Jim gets us to read his notes with good led Zeppelin references. The other the other thing is strategist can do is is somehow tied of football super Bowl into their research so wells Fargo. They looked at inflation on items popular at Super Bowl parties, um so. And the good news is there that there there does seem to be some disinflation, but not in everything. So I'm gonna make you guys play the little game show here the prices precise, and guess what has happened to prices of avocados over the last year. Avocados obviously super important for guacamole, and Jim, no pressure, I don't. I don't really expect you to know what what avocado inflation has done. But I'm still gonna make you play the prices precise, and guess I'm gonna say they're up for rex. I'm gonna say four x because I know, I know these things have gone up crazy because I love avocados and blackamol. You all is that close? And I'm going with the under I think avocado prices are down. I bought six avocados this week for four So I'm gonna go with yes. Am I wrong? Oh my gosh, I'm wrong? Should I redo my answer? I'm gonna say that prices went down? You buy him six? Up? Pop? You that's a lot of avocado toast. Well, I'm a millennial, that's true. That's why you broke that. Millennials. Uh, actually I agree with I was going to actually do they were, But I think it's a little mean reversion there too, because they were. They did go through the roof there for a while. But more importantly, all right, you can get uh get some vengeance here, Jim, restore your reputation here. Price of beer and even more important ingredients for a Super Bowl party. What do you think beer's done? Year over? Yere? You go first? Oh, I go first to time? Okay, well, obviously it's come up. Otherwise you wouldn't have chosen it. Um, I'll go with up up ten, up between ten and that's good. Uh, it's like psychology there. I don't know. I'm not saying it's that was the right Maybe I went reverse psychology. Jim, what you think Bear did in the last year. I want to say, let's say, yeah, I'm in that same category. So you guys are Yeah, I was in the right ballpark, Jam, Eagles are Kansas City and there's only one correct answer. Yeah, I know, I know, so. Um so. Admittedly, being from Boston, my team is a Patriots so so so they're out. But that's okay. Um So, I think it's going to be the Eagles that win. I think it's going to be a really good game. But I kind of like to see Kansas City. No, that's the wrong answer. That's the wrong answer. I know. But this podcast I said too late for that. Well, I I'm a little too emotionally invested. I'm not going to make any predictions. I don't want anything to drink anything. I hope both teams have have fun. How about that? Oh my gosh, that's the most diplomatic answer I've ever heard. I'll where my jersey all right, do you wear your jersey? Jim Karen, such a pleasure to pick your brain. I hope we can bring you back sometime and do it all again. Absolutely had a lot of fun with this. Thank you, Jim. What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts, so more listeners can find us. And you can find us on Twitter, follow me at Reaganonymous. Well, Donna Hirich is at bil Donna high Rich. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Stacy Wong. Thanks for listening, See you next time. The FO