Bond Buyer Managing Editor Gary Siegel speaks with Matt Miskin of John Hancock about the just completed Federal Open Market Committee meeting and what to expect from the FOMC and the economy going forward.
Gary Siegel: (
Hi, welcome to another Bond Buyer Leaders event. I'm your host Bond Buyer Managing Editor Gary Siegel. Today we're going to discuss yesterday's Federal Open Market Committee meeting with my guest, Matt Miskin, John Hancock investment management co-chief investment strategist. Matt, welcome, and thank you for joining us.
Matt Miskin: (
Thanks for having me, Gary.
Gary Siegel: (
So was there anything in the post-meeting statement or Fed Chair Jerome Powell's press conference that surprised you or grabbed your attention?
Matt Miskin: (
Yeah, I think he stuck to the script in the first part of the press conference. And then when the Q&A hit, I think really when the questions came about recession, he dodged them in a way that said growth, slowdown, economic growth, slowdown, was necessary. And further said that there would be likely weakness or softening of the labor market. And the way that he put it was basically saying that he needed to slow down growth to bring down inflation and the Fed needed to do that. And while that is true, I think that what jumped out to us was that he didn't give much credence to a potential recession. He didn't have a recession as a major risk. And to us, that's gonna be something that he's gonna have to grapple with with, and the Fed's gonna have to grapple with as we get in the back half of this year, as growth continues to slow.
Gary Siegel: (
Well, we'll talk about recession in a little bit. Powell said that he doesn't believe we're in recession, even though he said that today's GDP might be negative. He said he doesn't believe that we're in recession yet. What do you feel about that? Are we in recession yet?
Matt Miskin: (
Growth is likely stagnating at best. I understand the component that he's looking at, the labor market, the labor market typically is more of a lagging indicator. And we could talk about leading versus lagging economic indicators. We really focus on leading economic indicators, but you know, I get the labor market's okay. But you know, growth is stagnating in our view. Growth is likely to slow even further from here, you're raising interest rates by 75 basis points. That is a big rate hike. You're also doing about they're gonna do about $95 billion. They're gonna cap it on that, but they're gonna do quantitative tightening starting in September. That's a significant runoff in the balance sheet. So you're tightening aggressively in the starting point for growth of the economy was basically flat in our view. That's gonna make the economy hurt more, slow down, further in the months to come. And so, our view is that he's gonna have a little bit of time to recalibrate those answers he just gave yesterday. He's gonna have more information at the next meeting in September. You're gonna have Jackson Hole here in August, but that the tune is likely gonna change pretty significantly in the back half of this year, relative to what he said yesterday.
Gary Siegel: (
Well, Powell didn't want to comment on forward guidance for September. The past two meetings he basically told us what was coming. What does that suggest to you that he wouldn't give forward guidance about September?
Matt Miskin: (
I mean, he danced around it. You know, he said something like we could need to do another significant rate hike, which either gives credence to the bond market's pricing in of a 50 basis point rate hike at this time at that September meeting, he also said, hey, the Summary of Economic Projections at the June meeting would be kind of what we leverage. I think that's a good way to manage the question. See, Powell is a lawyer by nature. Before he was a Fed Chairman or on the FOMC. And you can just tell the way he answers these questions he's a lawyer. He knows how to say it in a way that doesn't get him in trouble. He walks the line and he's very cool and collected. And I mean, he's a great Fed chairman for that, but in a way, you know, he said, we'll probably see another decent rate hike at that point.
Matt Miskin: (
But I think what he wanted to have was a bit more cover that he's got a couple months here and the data's changing fast. He kept alluding to, there is a growth slowdown developing in the second quarter. He sees that, but he's not willing to say that that's gonna continue over the next two months. I think in most economists' views, the answer is, yes, that's gonna continue because you're raising rates into it. But I think what they're saying is we wanna make sure that the door is shutting on inflation before we make that jump, or that leap of faith that the economy is slowing or leap of whatever it is. And so I think that's why he wasn't more outright with it in that forward guidance.
Gary Siegel: (
He did point to the June SEP, which would suggest a 50 basis point hike in September and then 25 each in November and December.
Matt Miskin: (
Yeah. So I mean, that's right with the bond market's pricing in. As of now, they have, you know, they've done exactly what the bond market said. They've done exactly what the Summary of Economic Projections said. It is interesting, you know, in some ways you're like, oh my God, they're doing exactly what they're saying they're doing. And you should be a little shocked because this is not how this usually works. And I know you would think that they say they're gonna do something, they do something. If you look at the Fed over the last decade, two decades, more often than not, they say they're gonna do something and then something happens and they change course, they pivot, they pivot here, they pivot there. And you know, that's just part of being, you know, in the Fed. There's different data they get, they analyze it, they make a new decision.
Matt Miskin: (
But what we've seen is that this year they've been pretty much spot on saying what they're gonna do and doing it, the bond market's priced it in, but I wouldn't rely on that happening all the time. And I wouldn't get kind of in that sense of security that they're gonna do what they're gonna say they're gonna do. And the bond market's always right. Because if you think about it, the bond market's pricing in rate cuts next year. The Summary of Economic Projections is not saying that, that's the big wedge. Right now, the Summary Economic Projections in 2023 is saying they're raising rates more, the bond market's saying they're cutting rates. So there's gonna be this crossroads where they're gonna have to decide, and obviously we'll have more data, but you know, things could change as it relates to saying what you're gonna do from the Fed in the next couple meetings.
Gary Siegel: (
Well, part of the reason that the bond market's pricing in cuts next year is that they're moving quite quickly. And now everyone's talking about how monetary policy works with a lag and the first cuts even haven't made their full impact on the economy yet.
Matt Miskin: (
It's absolutely right. And you know, I think about this, you know, the monetary policy is like a tanker. It's not a speed ship. It's not a speed boat, you know, a tanker when it wants adjust something, it's gotta very slowly move and it's gotta be very deliberate. And that's what monetary policy is because it's a blunt instrument, you know, raising rates, it's not very focused. It's not pinpointing something in the economy. You're just putting that out there as everybody has higher borrowing costs or quantitative tightening. I mean, that does not, it's not a very precise tool. It's a blunt instrument and it's a very large and methodical thing to move around. And right now from COVID, you've had this whipsawing of the economy where you shut it down, you reopen it and you needed almost a speed ship to do this from a monetary policy standpoint, you needed to almost raise rates quickly.
Matt Miskin: (
And then probably now start to put the remove your foot from the brake is almost what you need to do right now, but they're keeping the foot on the brake because in essence, they're seeing this data behind them suggesting it's still high inflation. They're not, they didn't move fast enough on the first part of this. And so, unfortunately it's just not built for that, but you gotta think about it as an investor. Okay. Well, if that's the way it is, how do I position given that? And these high bond yields are actually looking pretty attractive for investors. The Fed's pushed up these rates giving high-quality bonds pretty attractive income into an economic slowdown. Plus that's an opportunity.
Gary Siegel: (
Well, obviously the Fed waited too long to start tightening policy. Are they moving too quickly now, given that monetary policy works with lag?
Matt Miskin: (
Yeah, we do think that they are raising rates too aggressively right now. And you know, he said that we're at the neutral rate yesterday. Some are saying, that's why the market is rallying. You know, the equity market is rallying on it because he's like, hey, we're at the neutral rate from here we might go slower. And you know, you look at the bond market over the last 40 years, really since the early 1980s and every single fed funds rate terminal rate, meaning kind of the high point of the cycle is usually lower than the one before. So in the eighties, it was like 20%.
Matt Miskin: (
And then it came down and now it's the same as it was in the last cycle two and a half percent. But you know, I think from here if he raised rates too much more, which you're overweighting is cyclical dynamics. The fact that we put all this stimulus in the economy, you had all this supply chain disruptions, you've got this Russian Ukraine war, all this stuff is lifting inflation, but eventually structural dynamics come back and structural dynamics are aging demographics, productivity being the most important driver of growth, which is disinflationary and what you're raising rates into because you're raising rates in our view too quickly now is this economic slow down. And so our view is that eventually you gotta go back to the zero bound, meaning interest rates are gonna come back down in a year or two, and you're gonna be at a lower, at a similar level you were at before this.
Gary Siegel: (
So is it going to take a recession for the rates to go back down or are they going to go back down for other reasons?
Matt Miskin: (
You know, I think it is a recession. And that's the biggest counter argument to this higher structural inflation, which is, you know, I think investors out there and Fed followers are saying, look, we're gonna be at a higher structural inflation rate. The bond bull market we've seen over the last 40 years is done. You know, that's what some are saying right now. And we would take the other side of that argument, that there is a lot of cyclical stuff that are three standard deviation events. You'd just a global pandemic. Everything we've seen hadn't really happened much or ever in the last a hundred years. And you go back to a more normal world in the next several years and lo and behold, it's gonna be more like we were before the pandemic. And that was a period of basically zero interest rate policy, meaning they were stuck at the low end and it was a disinflationary environment.
Matt Miskin: (
And so once this recession comes in and basically we're getting the recession, we probably should have had in 2020 in essence of 2020, we papered over a recession. We paid, we've just dumped money in the system. We had a 10 year economic cycle before that, but now we're, we're taking that recession on. But after the recession, we don't see the same stimulus we had before. We don't see the government giving away nearly 5 trillion after the next recession. That's what they did in 2020. There was just rounds of stimulus. After 2008, they only did about 700, 800 billion worth of stimulus. This time they did five times that the next recession coming out of it, we don't seem that much stimulus. Therefore we see the Fed more likely to be nearer to the, the lower end of that interest rate policy they've been at. And, um, that you're not gonna see a higher high really in the terminal rate going forward.
Gary Siegel: (
Well, technically we're in recession because this morning GDP was negative for the second quarter in a row yesterday, Chairman Powell preemptively wrote this off and said, we're not in a recession. The second quarter GDP seems to be more troubling than the first quarter because first quarter they say inventories was skewed things the wrong way. Is this a red flag?
Matt Miskin: (
Absolutely. Andthe red flags just keep going up. You know, I just, you look at the ISM index in new orders. That's one of our favorite leading economic, again, leading verse lagging, gotta focus on the leading. ISM index new orders survey to all the manufacturing companies across the United States. They're asking, "Hey, do you have new orders? You know, how's the pipeline looking?" And it's sub 50, meaning below 50 is contraction above 50 is expansion. And even the employment index is now below 50. So we're getting this leading economic indicators that say, not only have we stagnated in growth, which is a red flag, but also that growth's stalling even further. So, you know, again, it's, I didn't see the pivot yesterday. I know that the markets are, you know, rallying on it, you know, risk assets doing great. And you would think that that means that Powell pivoted and that the Fed said, you know, we're gonna be basically done. I didn't see that. He seemed like he walked the line on hawkishness, but I think the market is saying that bad news could be good news because eventually the Fed can't raise rates through a recession. It's just not gonna work. And we can talk about the dual mandate, but that's, that's another thing.
Gary Siegel: (
Let's talk about indicators a little bit more. These indicators aren't exactly current, you know, the information they get in this kind of stale.
Matt Miskin: (
Yes. Yeah. And this is what I struggle with most. So, you know, the Fed uses lagging. That is really what happened over the last 12 months. You know? So we used the Conference Board, which is a third-party think tank that just does business cycle research. We're business cycle nuts at John Hancock Investment management. Nuts is the wrong way to say it like fanatic. We just love this stuff, right? And we love watching this cycle because we think this cycle's a really good input to investing. It's great for risk management. It's great for trends and there's lagging data. The number one lagging economic indicator, according to the Conference Board is inflation. And it's exactly what the Fed looks at: core PCE. And not only is it a lagging economic indicator, it comes out with a month lag. I don't know why. I mean, the Bureau of Economic Analysis is who puts it out, but it takes them longer than the BLS, the Bureau of Labor Statistics that does CPI.
Matt Miskin: (
And they choose the core PCE one, which is even longer lag data. Now, most times you could say this lag data, it's not that big of a deal, right? There's trends in the economy, we're in a normal economy, blah, blah. This time it matters a ton. Because again, this cycle is moving really fast. We went from an early cycle out of 2020, mid-cycle in 2021, late cycle in 2022 and likely in a recession in 2023, this will be the fastest cycle ever. And so when you're using this lagging data to make forward-looking monetary policy decisions, it's bound to lead you the wrong way. And again, we think that's not the way to do it. It can lead to investment opportunities. You just gotta lean against that and realize that in your portfolio positioning.
Gary Siegel: (
So what is your outlook for the Fed? What do you see coming up this year? Do you see them cutting rates next year?
Matt Miskin: (
Yeah. So, you know, this 75 basis point hike was a big one, and I think that's the last 75 basis points. And people are saying that, and it's, it's pretty well telegraphed that that's the case and the bond market isn't pricing in anymore 75 basis points. But we think after September, they're done. And you know, that again will be 50 basis points above neutral. Um, that'll put the fed funds rate, uh, right around 3% at the higher end of the range, which, we don't think is right in essence. But given that they're looking back at inflation and they've gotta act in a way they do that, they're probably gonna go ahead with it. Even though they're gonna see economic growth really slowing into the fall. But after that, we think they're done. Now, they're gonna have the balance sheet unraveling in September, they're gonna literally start that right as the economy's probably gonna be going into a recession.
Matt Miskin: (
Now I know technically we're in a recession now, but I'm talking more like the type of the recession where the unemployment rate rises. You know, I, we see initial jobless claims actually going up from here, they've gone well off their lows, and they're starting to tick up this this week. You know, they're still kind of level on a week, over week basis, but they're well off their lows. And we think, you know, I mean, you listen to corporate we're in corporate earning season. All these CEOs CFOs all these heads of these companies are saying we're not hiring anymore. Or if we are hiring, we're being very selective and it's certain departments. Some are saying we're laying off about 10% of our workforce, but most are just at this point saying we're done hiring and you fast forward
Matt Miskin: (
this, that's usually the first thing that comes out in earnings. And so I, you know, again, I don't want to get overly bearish or dire and, you know, say these kind of things, but I also wanna be realistic. And we we're all about just helping our investors, our clients position the best they can. And you want higher quality businesses in these kind of slowdowns. You want more income on higher quality stuff than more equity risk. And again, that's, that's positioning more, uh, for us in higher quality bonds as it relates to the outlook for Fed policy.
Gary Siegel: (
So let's shift the conversation to inflation. Everyone is saying that the spending that was done when the COVID shutdowns came, played a big part in the inflationary picture. There have been some movements yesterday where the government has passed, well, the House has agreed to the Inflation Reduction Act, which spends more money. Is that going to make inflation worse?
Matt Miskin: (
So the bill, now, this is all, I mean, literally in the last 24 hours made a huge leap because originally this bill was dead in the water. It was Build Back Better and there was just no back and forth on this, no compromise, no agreement, but Manchin and Schumer did come to some preliminary agreements last night on this. In looking at it from our political strategist, it looks like it's not gonna be net, it's not gonna increase the deficit. Actually, it might actually decrease the deficit because Manchin wouldn't agree to it if it increased the deficit now, how do you do that? Well, you gotta think of ways there's gonna be less tax loopholes. They're looking to take away some of the tax breaks in some things. Um, so that's, you know, kind of built into it. And then what they're looking to spend on is in energy infrastructure, you know, whether it's permits for oil and gas, or if it's actually alternative energy and alternative energy is seeing another bid on life as it relates to some add-on valuing.
Matt Miskin: (
Some of that, you know, I think for us, it's, it's hard to have the government really do this because, you know, and in essence influence inflation, it's just, this is free markets. This is the stuff that government-wise, you can't control it because once you go down that path, you're gonna want to control it too much. And it's just that doesn't work either. That's not capitalism. And so the free markets are gonna eventually have to make this their way through this energy policy that is positive, I'm talking about more fossil fuel oil, gas. Um, if that can even just mitigate some of the Russia-Ukraine headwinds and supply shock, I think that would be beneficial in terms of this bill overall, it's gonna be hard to do much. Really at the end of the day, the Fed's gonna have to be responsible for this and the Fed, again, they only have that blunt instrument and it's gonna have to take down demand to get us there, which unfortunately leaves us back at square one.
Gary Siegel: (
Yeah. Back at square one is not the best position to be, Matt.
Matt Miskin: (
No.
Gary Siegel: (
So again, they have this extra spending while they're trying to, while the Fed is trying to control inflation, right. How does one play against the other?
Matt Miskin: (
Yeah, no. I mean, I think that at the end of the day, the Fed's gonna overwhelm that. And, I think this spending isn't gonna be that, that robust, but, you know, we look at inflation and we break it down into components. And at the end of the day, housing-related, you know, owner's equivalent, which rents right now were still going up. But eventually I think that's gonna have to fade, but the housing market is under a lot of pressure right now. I mean, we get real-time housing data, and it is, I mean, housing prices are likely gonna be going down n a month over-month-basis. Um, and they need to, I mean, they were up 20% annualized over the last two years or so. I mean, the rate of growth year has just been insane, but that's gonna slow down inflation.
Matt Miskin: (
Once you, you see housing go and you see all the building stuff go and you see the, you know, the durables and the stuff you'd buy for your house, which we build. We bought all this stuff during COVID we bought a bunch of new stuff, goods, everything we needed for our house, because we thought we'd be living in our house more and we'd be doing stuff more. But you know, and in services eventually, you know, get hit there because it's just, you know, if your wealth effect that's in your house and you had a home equity loan or something like that, and that was leveraged against your house, lo behold, you're gonna have to eventually stop spending as much. And overall what we're seeing is consumers are using credit right now. Uh, credit card debt is increasing, uh, significantly.
Matt Miskin: (
That's how they're keeping up with spending and eventually that doesn't work. Um, and then that slows demand that slows spending that filters into lower inflation. So you've got this stimulus, I wouldn't overplay this, the political side of this and the stimulus. The Fed's gonna be the biggest driver here and there's already stuff, you know, inflation did peak on a year-over-year basis, just over 6% on core CPI in March. It's down. But the problem is it's going down like an inch at a time and it needs to be going down a lot more right now. I think you could have, if you have housing start to turn, I think those other things will domino down and that'll create lower inflation into 2023.
Gary Siegel: (
Should we be worried about stagflation?
Matt Miskin: (
It's been worrisome because we just lived it. You know, I mean, for the most part, I don't wanna get too technical on the economic definitions of the stuff like with stagflation typically you see a higher unemployment rate. And so when Powell yesterday saying, well the unemployment rate's still low. So then technically that that's like another technicality where it's like, oh, that's not stagflation, but at the same time, we've had negative, real GDP growth for two quarters and 9% inflation headline. Like that's about as stagflation as you get. High inflation and lower growth. But we've had it for basically six months. And what has it meant? It meant stocks down, bonds down oil up and cash has basically been your best thing, which is, it's a tough investment environment to go through. But again, that's a lagging data point. We would look at leading data points and the leading data points tell you growth and inflation likely are coming down. Now they have to. The Fed's again, they're using this blunt tool, but that's, what's causing both of 'em to come down at the same time. But what happens when inflation there's disinflation or real GDP growth actually slows more, bonds are your best friend. Again I go back to how much we like high quality bonds here.
Gary Siegel: (
We like bonds too.
Matt Miskin: (
So
Gary Siegel: (
What are the chances of the Fed pulling off a soft landing?
Matt Miskin: (
You know, it goes back to, I think Powell basically said that it's not gonna happen. You know, he basically said the growth slowdown was necessary and you know, he is like GDP, we've gotta make growth go below potential. You know, these are things you don't just say if, if growth is gonna slow down. So I, we think a hard landing, you know, we put about a 70, 80% probability of that. Um, again, your starting point is stagnant growth before the Fed's raising rates simply that creates a hard landing. The only thing, you know, when we look at this and we're like, okay, what kind of recession could we be entering? What we don't see is a lot of the stuff that caused the last couple of recessions. We don't see the tech bubble. You know, these companies, these technology companies are still making money.
Matt Miskin: (
I mean, they're not just making money, they're making good money, it's high free cash flow businesses. This isn't dot com bubble stuff. And then we don't see financials leveraged 30 to one in the 2007, 2008 collapse, the financials were leveraged 30 to one. They didn't have the regulation they have today. And so the financials don't look nearly as leveraged as that. Now there's cryptocurrencies. There's other things, you know, overall there's been the housing market needs to cool down, but to us it could be an average recession or hard landing. And that typically on average is 12 months, profits decline about 20, 25%, the S&P 500 usually goes down about 34% and bonds usually rally, high quality bonds. So when we look at what does an average recession gets you, in our view, again, there's select opportunities in the higher quality bond market, but it can be a bit of a turn relative to what we've seen thus far,
Gary Siegel: (
How much more difficult does the continuing Russia-Ukraine war make the Fed's job?
Matt Miskin: (
Very. I mean, it's a human crisis it's terrible. And you know, it just, it's so sad to see on so many levels. And I just think what, what it's doing though, is in the way that Russia is pursuing this. And the way that other countries have retaliated, it's made oil and energy, a tool basically in this war. And, you know, if oil prices stay elevated, then that's gonna keep inflation elevated, and then that's gonna keep the Fed raising rates. And, you know, that's just a tough sequence because it hurts everybody in a way. And so it's one of these things where if it did dissipate, if you woke up tomorrow and the war was somehow done, and somehow they were in cease fire or something, I mean, oil could collapse and commodity prices in general could collapse food prices could go down and it's not just on a global basis, this stuff, you know, the price skyrocketing, there was a time
Matt Miskin: (
it was the first week in March, commodity prices this is the S&P or the GSE, the Goldman Sachs commodity index was just two-thirds energy, it was up 20% in a week, not a month, not a year, a week. That was the biggest weekly gain in commodity prices in history. The prior highest weekly gain was about 12%. So when we talk about exogenous shocks and their impact on markets, this one is massive. And it's at a time where inflation was supposed to be dissipating in February or March. That's where the comps were starting to come down. Meaning the comps for last year were, that's where inflation started to rise. We're lapping that, Hey, inflation could come down and then you had this, this massive shock to this. And so it's, it's been brutal. And it's something that we really hope we can get through soon.
Gary Siegel: (
Have all the pandemic issues played out in the economy? Have we learned how to deal with the pandemic, or are we still seeing issues because of the pandemic?
Matt Miskin: (
I think we're still dealing with it. I mean, you listen to the CEOs or the corporate earnings for some of these companies, I mean, they've got an inventory problem. Six months ago, they had no inventory. Now they have an inventory problem. So what you've seen and some would call this the bull whip, but it's this last season at this time everybody was already thinking about Christmas. It's like, we've gotta order stuff in advance because there's these supply chain disruptions. And it's like, of course, actually, if you tell everybody this, then you're gonna create the supply chain issue because you're feeding that into their psyche. But what you saw was everybody bought in advance. The companies were like, oh my God, I need more inventory. Lo and behold, they bought forward all this demand, and now they've got too much inventory.
Matt Miskin: (
So we're still working through that. And I think it's something there's gonna be legacy impacts of this. I think working from home more, there's gonna be actually productivity gains. I don't get it on the oil demand side, how this isn't factored in that we're not all jumping in our cars every day to commute to work. And I think actually there'll be lower fossil fuel demand from this, but regardless oil's at $97 a barrel. But also the inventory story. So I think there's cyclical stuff we're gonna work through. And then there's structural stuff that we're gonna feel for years. I think the structural stuff will be disinflationary and better for economic productivity, which is gonna be the only way we grow from here. But we still are working through some of the cyclical stuff, which is it's whipsawing everything. It's making it difficult for the Fed. It's making difficult for markets, corporations all the way down.
Gary Siegel: (
So Matt, do you see any other risks to the economy, other than the ones that are currently known? Any coming risks?
Matt Miskin: (
A lot. Well, so I remember in 2019, so 2019, uh, we had this, you know, in '18 we had this growth scare, but growth wasn't that bad. It was just more of a scare. Powell was still getting familiar with the job. And that was when he kinda said we're far away from neutral rate and S&P 500 went down 20%. And, but '19, what happened was it was a global economic slowdown. So he was saying, the U.S. is actually fine right now. But he is like, are you looking at China? You look at Europe, they're on the brink of a recession. And he was kind of saying, we might actually cut rates and they did, they cut rates even before COVID because they saw a global economic slowdown. Now the Fed is not just the central bank of the U.S.
Matt Miskin: (
I mean, and technically they are, but in a way, they're the global central bank. When they raise rates everywhere feels it because it's the U.S. It's the largest economy and the most used currency in the world. And one of the things I think is, it's also not just the U.S. is slowing, global economies, international economies are slowing even fast than the U.S. So Europe is on the brink of a recession. China's been in a recession and they're trying to get out of it, but they've got a housing market issue right now. There's a lot of emerging market countries that are in a recession or are about to be in. So, again, this is a time where usually the Fed is actually taking their foot off the brake, but they're keeping their foot on the brake. And, you know, I think that's the other risk is that you could see defaults in sovereign bonds outside the United States. I think you could see borrowing costs, currency devaluations in other parts of the world, and that can have massive ripple effect across market economies. That's bringing us more in the U.S., frankly, and we've been more of a strong dollar bull, if you will, because we see the Fed raising rates. We also see the U.S. economy holding up the best of the world right now. Um, and so that's part of our investment outlook as well.
Gary Siegel: (
What is the biggest question you get from clients?
Matt Miskin: (
Yeah, I mean, I think it's around, you know, as the bottom end on risk assets is, you know, was June that mid-June low when we were down about 23%, was that the bottom? And then kind of thinking about the bond market is that the low in the bond market? I mean, bonds and stocks were down this year, and that's for those that have relied on diversification of those two huge asset classes for a long time. That's a tough thought. I mean the only other two periods that happened was 1987 and 2008, and those were two really rough years for investors. But nonetheless, our view is that equities probably still need to wait a little bit and actually see more chop and volatility until we see economic indicators recover, really bottom out and recover, but we see bonds actually turning now, meaning a lot of the biggest declines are behind us. You're getting higher yields. So, you know, eventually we'll be looking at equities again, I think in six to nine months, we'll probably be looking at equities as something more opportunistically, but I think we still have a little bit more to go and that's kind of how we've steered or had those discussions with investors.
Gary Siegel: (
So they're basically worrying whether this is a bottom and whether this is a good time to invest.
Matt Miskin: (
Yeah. And I mean a lot of our investors are longer term investors and this is part of a longer term financial plan. And you look three to five years or 10 year window, most times are good times to invest and the market's already down 20% too. That's I mean, at one point the market was down 23% and we're like the average bear market's 34%, we're already two thirds of the way there-ish. I mean, we didn't want to go underweight. But now it's interesting because now the market's only down, I think after today only like 14% and yet the economic data's still looking pretty challenged and the Fed's raising rates still. So, we would kind of look to trim equities, rebalance into bonds for the time being, play more defense, look for quality stocks, higher, better balance sheets, higher ROE, more U.S., And just kind of wait it out here until the economy really needs this reset and recovery.
Gary Siegel: (
We probably will have time for a few questions from the audience if anyone has any, if not, I will just keep going. So what is your favorite indicator for inflation, which do you think is the best measure?
Matt Miskin: (
That is, that is a tough one. I mean, I think about it as housing is gonna be the most predictive of where inflation's gonna be. In housing data if you look at even the housing data, the price data is garbage and I'll like, it's good when it comes out, but it's so lagged, I mean, some of these indicators compiling every house price in the country takes a while. But what we look at is things like the National Association of Home Builders' survey of builders and people in the housing market. That's something that has rolled over pretty significantly. That is, or in essence a leading indicator of inflation. Housing is just such an important component of it. The housing market, some have said that is the economic cycle. You know, housing is such a huge part of this economy and it's interest rate sensitive. And it's usually the first thing to go, like in 2006, housing peaked and in the recession really didn't happen until '08, but it was the first thing to change the kind of trajectory of everything. And so housing would be my favorite leading indicator. There's lumber prices. Those have come down pretty significantly this year. That's a part of that as well that we look at. Copper and other commodities. But you know, at the end of the day, I'd say the housing market's the best.
Gary Siegel: (
We have a question from the audience. Why do you think the Fed waited so long before raising rates in the first place? Why didn't they just raise rates three years ago?
Matt Miskin: (
I'm gonna rewind because this is, I mean, you couldn't have set this up any worse, right? So this was back in the day they were like, we're gonna change our policy to average inflation target right. And they were like, you know what? It's been so hard to bring up inflation. We're gonna have to change our policy. We're gonna have to let it run hot because it's just been so long. And we, you know, COVID originally was deflationary. I mean, there was inflation in February of 2021 was 1.3%. They were like, we've gotta get inflation up in February of 2021. Right. So we've just lagged that and lo and behold, not only did they get it up, but because they were saying, oh my God, we want this inflation. They got what, you gotta be careful what you ask for.
Matt Miskin: (
And at that time too, things have happened pretty fast. They were begging Congress for money. Basically. They were saying, we need fiscal stimulus. We can't do this ourselves. We need fiscal stimulus. And there was a lack of patience of, you know, let's just let the economy come back. Let's just, you know, kind of give this. And it, it was COVID. So in a way, you know, you gotta give them some credit. That's saying, look, if they didn't do anything, if you know, there was no government stimulus. So if the Fed didn't help. We'd probably be in a depression right now. And I know that's, you know, hard to say in hindsight, because you've got the vaccine and you've had all these things, but you got, I mean, the unemployment rate spiked to something like 20%.
Matt Miskin: (
And you know, so at the end of the day, they turned too hard, one direction, right before a pivot point where inflation exploded higher. And then they just got crushed because they had to backpedal and they got defensive and they said, it's transitory. And, you know, even if the inflation does come down, transitory is not, it wasn't the right word. It just isn't the right word. You know, it just, if it's over a year, you can't say that. And so I think it's something where everything in this business, it's like a pendulum, one second, you think it's all this way, and then the next second, it turns on you and goes the other way. And, there's always this, it's almost like physics or something where there's things that push one direction and then they just gotta be this counter push the other direction. And right now, unfortunately that's what's happening. And the pendulum shifted all the way to the other side. But the question is, where does it go from here? You know, so now the Fed has made this mistake and they always try to fix the last mistake they did instead of looking forward and say, what am I gonna, what is my next mistake gonna be? They try to fix the one they just did. And so I think they're actually gonna fix it. It's just gonna be painful to do
Gary Siegel: (
Okay. We have time for one last question from the audience. Someone wants to know, what are your thoughts on inflation outside of the U.S.? What are the implications for global growth and multinational corporations?
Matt Miskin: (
Yeah. So inflation outside of the U.S. is just as stubbornly high, if not higher for most of the outside the United States. But I'll tell you this in China, inflation, isn't so bad and it's mind boggling. They come out with a CPI and it's like 2%, not even, it's like one and a half, 2%. And you're like, how is it that we have inflation of headline's 9%? And they've got two. And, you know, I mean, you could say maybe there's a little bit of a reporting discrepancy there, and I think that's fair, but what is happening in China? Their real estate market is down something like 40, 50% on a year-over-year. So if you look at their inflation, they've got actually a growth issue with their real estate market, which is keeping down prices. And you know what that means though, in terms of these multinationals and what's going on is China's actually able to stimulate, while the rest of the world puts the brakes on China's pressing on the gas.
Matt Miskin: (
And so, that's something that could be an opportunity there to us, deflation is not good either. It's like the three little bears or something where, you don't want it too hot. You don't want it too cold. You want right in between. But, you know, I think for us, it's like the, most of the developed world it's there is inflation, the central banks are raising rates in terms of multinationals there's currency wars that are still going on. But they're almost like the other way around because they want a stronger currency because that's actually deflationary for your own country, but the U.S. dollar's doing it. And so that's helping those multinationals outside the U.S. actually probably benefit from a currency adjustment basis. But then as a U.S. investor, if you go abroad, then you're getting hit on the currency devaluation.
Matt Miskin: (
So one way to look at that maybe is hedging it to us. It doesn't really end up being that beneficial because you want those currencies to work with you. So I guess to answer that it's complex. I would focus on China as one of the growth engines that can actually have stimulus in this higher inflation environment because they have low inflation. But overall, in terms of multinationals, I think it's gonna be a mixed picture. It's gonna depend on where your revenues are generated, your currency exposure, so on and so forth. At the end of the day, you know, we just, we gotta do our homework. Find those companies, portfolios, opportunities, cross markets.
Gary Siegel: (
I'd like to thank my guest, Matt Miskin co-chief investment strategist, John Hancock investment management. Thank you, Matt. And I'd like to thank our audience.
Matt Miskin: (
Thanks.
