Give us a sense of equity because we started the week really at record levels and then the inflation numbers hit. But then they
came back up at the end of the week. Yes they did. The inflation genie seems to be out of the bottle.
And markets have to digest that. The technology stocks many of them seem to have such significant market shares or competitive
positioning. The market is giving them credit for being able to price this inflation. Pass it on to consumers. But there are
many in both industries and sectors according to our team where that won't necessarily be the case. And that's really the job of
the fundamental research analyst is to determine whether or not a business say its consumer staples and food beverage. Can they
pass on their increased cost of raw materials on into their final product. Because if they can't that means margin squeeze
and that means earnings will. All those things being equal will decline which is not good for markets. So Greg when we see
inflation numbers like this we automatically think about what it does to bonds and perhaps most important what it says to the Fed
and how they might react. What did you make of this week. Yeah I think that's the story. What it makes what it tells you
about the Fed and central bank action ultimately. And so there's been this this response in the bond market really before the CPI
print that inflation is picking up and more importantly that the Fed is going to be much more aggressive and central banks
globally much more aggressive than initially anticipated. So I think that is the story in the marketplace. The two year yield
and then equally I mean this is a volatile market in fixed income that has been largely isolated in fixed income. So what
you're seeing is this disconnect and volatility in fixed income and equities. And yes it does make some sense for sure as the as
the earnings coming out are quite strong margins all time high. The the micro story is is quite supportive. But at some point
the volatility that we're seeing and fixed income markets have just start to infiltrate other markets and risk markets if it
doesn't settle down. But at the same time how much is the Fed sort of putting a blanket on that volatility even given what
we've seen. Because certainly they've made it pretty clear they're not in a rush to change course. You just heard Mary
Daily say well we're not going to change course right away. Yeah but they changed their rhetoric quite substantially since
the summer. And if you look at the bond market yield into two year and even inflation it it's been commensurate with the
change in their tone. So I don't know. I I'm really worrying about the Fed here moving too fast too soon particularly when
you think about the constructive inflation that it's largely outside of the Fed control. So the Fed raising rates isn't going
to help offset the supply chain issues. It's not going to have those kind of facts like it normally does. That's a really
important point. No matter what the issues are it's not going to help the supply chain right now. So what about over on the
equity side. If you're looking at equities are you more concerned about what the Fed might do in terms of interest rates
or are you more concerned with what you were talking about which is really pressure on margins just because prices are going so
high. Well we're concerned about both our team because we are looking at both what could affect earnings and and also to what
degree if the Fed does react prematurely is that going to be a depressant on markets overall. We just think about market
sensitivity or based on which stocks have it which don't and how to be positioned in this kind of environment. But the cry we
hear from companies and we interview hundreds of companies is that they don't have the labor they need. This seems to be this
chronic labor shortage which is something we haven't seen. Normally we talk about slack and that doesn't appear to be the
case. And it's not like the labor isn't there somewhere. It doesn't seem to want to work in many of these jobs. And that
ultimately may lead to a solution in automation or types of some labor replacement. But in the interim that means that the wage
has to rise in order to attract the labor that's needed to make for example packaging. And and how high does it have to go. And
then once it's there is an intractable or likely. I mean people don't very easily accept wage cuts. They want increases and it
ratchets upward. That in our view was a wage price spiral and the Fed should react. That is the concern that wages tend to be
stickier than other sorts of prices. No question about it. At the same time if in the short to medium term they have to raise
wages it puts pressure on margins. Sara how do you differentiate who can raise their prices. You talked
earlier about pricing power. Is that by categories or is that company by company depending on their brands. It's bulls. But
thinking about let's let's stay within technology because it's been such a hot area of all markets and looking where there are
few competitors an area that we like now are semiconductors particularly memory and really only three Micron Samsung and
High next. In the latter two in South Korea they have such significant scale advantages over all their competitors that
they can. There's have to be a shortage of their product. But to the degree they have price pressures themselves they should
build a pass those on because there aren't alternatives. And where there aren't alternatives there is some flexibility. But
that only goes so far. There's something called the substitution effect that happens when prices rise for and maybe not for the
essential semiconductor but other other goods that are used in manufacturing. There may be substitution which could be quite
damaging. So really the question is how long will this go on. Because that's the determinant what the outcome is for
companies. So Greg Sarah says on the equity side maybe some areas like semiconductors on the tech side might be good
investments. What about the bond side. You're investing bonds right now. How do you invest. It sounds like you configure the
policy error of moving too fast in terms of raising rates rather than too slowly. So what does that say to you as a bond
investor. Yes. So I what. I think one of the worse areas to invest in the
bond market right now is in the inflation market. I think what's being priced in in inflation and chips is just too much to be
brutally frank. So that is one area that it would not look to invest. We still see value in U.S. treasuries actually. I know
it's crazy to say but but we think the long term interest rate from where we are today is lower not higher. And there is a
multitude of reasons for that in part because there's too much debt in the world
and the inflation story and end growth story gets pulled down by that tremendous amount of debt. But within credit we still see
value. So I still see value in the high yield market. It's clearly not what it used to be. That's for sure. But I still
think that you're in this environment with strong M and a strong earnings that really benefits the high yield bond market. So
those are just some ideas. But we still see value in fixed income and we still see value in credit. So give us a sense a
duration whether it is treasuries or whether it is credit where do you see the greater opportunities Paul Sweeney given your
concerns about volatility in the bond market. Yeah. So I mean we always bifurcate the rest of the duration and
the spread rests separately but but we're not scared of duration right. What I think the back end of the curve in Treasuries has
some real value and then quite frankly the front end and credit has a tremendous amount of value. It's its risk remote. We think
it has really positive attributes. So we see kind of value across the curve. But our bottom line message PJM fixed income
is we do not fear duration. For sure. We think it's an important part of any asset allocation decision.