We had two hawkish comments not only From jim bullard but from esther george Is this a timeline problem so if you Want to make sure that actually you can Work with interest rates tapering needs To come soon no matter really what Happens with inflation Well i think the important thing is you As you talk about interest rates and the Fed is recognizing how different the World we're in today than the world We've mostly experienced and when you Think about interest rates It's really not the private sector Driving interest rates reflecting Economic conditions it's much more what Policy Do central bankers want to have happen Even so they move from controlling short Rates to controlling short rates and to Some degree controlling long rates and Also to some degree controlling Corporate spreads so when you think About the policy they're trying to drive The big thing that's going to Drive bond yields is when This mp what we call d3 policy the Fusion of monetary and fiscal policy Creates outcomes that the central bank No longer desires and that's where we Sort of are right now they can control The interest rate and through fiscal Policy in a sense control nominal gdp Um but there are consequences and the
Consequences are higher inflation the Consequences are bubbles and the Consequences are eventually currency Risk and you're two out of three there's Certainly some bubble activities in Different areas um of financial markets There's certainly Inflation well above their target and we Think it will continue to accelerate if If the fed doesn't move Um And the third thing eventually as you Get these types of policies you'll see More currency volatility so that's i Think what the fed will be watching That's certainly what we're watching and As a result of that we expect the Tapering to be faster than markets are Currently expecting rates to actually Rise faster than markets are currently Expecting Because the economy is going to pull the Fed so despite the fact that fed's going To be record easy yeah The economy is going to pull the fed Gradually okay so in that case what do You need to be buying in equities um i Was struck in 13f filings the recent Additions were all the safety guys j and J procter and gamble pepsi coke um Relate the two together for me Yeah well i think the biggest Arbitrage you can sort of take in the World right now is take what the policy
Makers are giving you they're giving you Incredibly low interest rates Relative to high nominal gdp growth and So if you can Hedge that if you can essentially Take in cash flows that will move Something like nominal gdp And Hedge being short treasuries or other Instruments that allow you to hedge the Risk the main risk is that the fed has To tighten faster than people expect That the liquidity that has supported Asset markets and created bubbles um Will have to be withdrawn now some Equities the equities that really have Cash flows and earnings driven by Nominal gdp should be okay the econ the Assets that require constant liquidity Infusion because they don't actually but They're not profitable they're not Themselves able to support create the Cash flows to support the asset prices But require more and more liquidity and Financial markets to hold those asset Prices that's where we'd be nervous About those equities and more bullish on The equities whose cash flows will be Driven with the continued strength in Nominal gdp Greg how do you look at the delta Variant right so we're monitoring Closely i'm sure the fed is but if the Delta variant gets worse can the fed
Still withdraw liquidity without Derailing the economy Yeah well this certainly slows the time Line down to a certain degree Um i think overall we monitor and i Think the the the data on mobility Suggests that that many economic Participants are willing to get on with Their lives and are still moving around It is a negative it does slow the Timetable you're seeing it to a certain Extent in the economic stats But the bigger picture direction Appears clear that one way or the other We're going to live with the virus the Vaccines are are working to lower the Death rate the economies across the World are coming back online the u.s is Leading because its fiscal policy has Been so extreme but the rest of the World is lagging and following um and That's occurring despite The difficulties that the delta Variant and probably future variants Will cause so it matters it certainly Affects the timeline of these decisions But it's not um in our view changing the Fate and the likely direction so greg That kind of leads me in directly to China because china seems to have Adopted a zero tolerance policy which Has really put the government in Somewhat of a bind and we saw today in One of the papers that sort of fronts
What the government says that they're Going to keep pumping credit into the Economy to help support it as they have This zero tolerance policy that's one Hand on the other hand you have this Regulatory crackdown in big tech and Other sectors as well how do you play China with those two things in mind Yeah well i think when you watch china When we watch china what we see is them Balancing Several very important things common Prosperity The fact that they want to change the Distribution of income at the same time They're trying to build their financial Markets and want global investors they Recognize to be a superpower you must Have Viable financial markets so it looks From an outside perspective often like Oh they're moving away from the desire To shift towards um financial markets But it's more balancing multiple goals Simultaneously and when you look at Their history they've generally Successfully multiplied you know handled Multiple goals simultaneously and we Expect that's the most likely scenario Today Um but the um And with the variant i think it's Important across the world to say if the Variant gets worse what will happen with
Policy just like you mentioned the china Case but this is true in the u.s or Whatever that you know what will happen There'll be easier monetary policy and Fiscal support if the virus gets worse So actually the biggest risk to markets Is less that a downturn because we know How policymakers will respond to that It's much more that inflation And bubbles create a need for the Central bank to tighten faster than People are expecting that's actually a Much more significant risk that needs to Be hedged because policymakers will ease If necessary with respect to the virus Is greg is there anything actually in The china space right now chinese Equities that you would be buying Yeah overall i mean Uh the the big thing in chinese equities Is we think so many people are Underexposed that the reverse is Basically the problem we see the most Which is everybody is overexposed to u.s Assets u.s assets are the most expensive Probably face some of the most Biggest challenges Around the liquidity policy being Withdrawn the quickest And um and inflation challenges so when You look at that And you look at how essentially 60 of Global investors portfolios are in u.s Equities that make up something like 20
The us makes up about 25 Of the global economy you reverse that And see global investors have something Like 5 Of their assets in china where china Makes up almost an equivalent amount of The economy there is this huge mismatch That we do expect a decade from now Will be reconciled one way or the other Um and that um That in the short term of course there's All these challenges um in the Relationship between the us and china And that will be ongoing as well but the Big deal is the difference in asset Prices reflect the risks in china we Think the asset prices in the us Actually reflect very very low risk Premiums so probably a little bit more Dangerous than assets outside of the us
