Today we may have inflation but we haven't really seen a downturn in corporate profits at least yet. Much less a weaker
dollar. We've seen just the reverse effect. Rebecca Patterson of Bridgewater and Sarah co-editor of Causeway Capital have stayed
with us. So Sarah let me go to you on the equities question. We had a lot of earnings out this week. It went both ways. But I
think sort of overall earnings came in pretty well so far. They have and I think both Rebecca and I have commented on that
and what's happened in the past is initially reflective of the future. In other words there are so many challenges ahead in a
persistent inflationary environment for companies in terms of cost increases not to mention a consumer that's deliberately
being reined in. And this just may be a really tough next several quarters of
reporting. How tough. Hard to say but unlikely to be buoyant. And that's to the point that and we've seen multiple derailing
now we may very well see earnings fall too. And that's typically what happens in market pullbacks both multiples and earnings
fall. And that again is a phenomena that likely occur globally. So Rebecca you have a little bit of money at Bridgewater. Do you
have to put to work every once in a while. What about the question particularly of debt versus equity. You mentioned
before the question of when stocks are attractive. We had that Bank of America fund managers were coming and saying look you're
better off right now going into bonds. And we don't see bonds as attractive at this point in the US but also in places like
Europe with you know with the Fed still tightening with the Fed demand for bonds now gone it's going the other way. Banks were
huge buyers of bonds last year. They're gone. We think there's going to be a greater challenge for demand to meet supply there.
But there was there was another great point just made when we were referencing nineteen seventy five there which was this fall
in the dollar and this move into gold. And and it's so interesting to compare what was happening then versus now. And
and back then we saw the dollar fall in part because people thought that inflation expectations were un anchored and high
inflation was going to undermine the value of currency. And as you just said it's the opposite. Right now we've seen a strong
dollar as the U.S. has looked like the nicest house in a bad neighborhood. What I would say though as we think about earnings
and equities and bonds and people's portfolios is that we're in a world that's so different from the last decade when it comes
to currency markets. Volatility is picking up. And as we have inflation surprises monetary policy surprises and a huge cone of
uncertainty we should expect that affects volatility to continue and it flows through to companies. I think two big ways. One
just if the companies themselves are hedging that risk or not. So we are seeing multinationals underperforming more domestic
companies by wide margins just year to date. We think that is likely to continue as these kind of relatively wild moves
continue in currencies. And then more broadly if you're thinking about your portfolio what currency are you denominated and what
currency risk are you taking. And it can make a very big difference to your performance. I mean just year to date if you
think about if you hedged a foreign currency equity or didn't hedge it could be the difference in 10 percentage points in
performance for those stocks. And we think that's going to continue and possibly escalate. So I would just say as we think
about equities we think about bonds and earnings. I would also make sure not to ignore currencies as part of that equation for
your total return. So Sarah take all and put it together. I think you're seeing is real. Look at the particular kind of
value investor. You look for good value in terms of low valuations buying at the bottom moving up with it. What's
attractive to you right now. They go where the currencies have been the weakest where there's
potential for a a return to some sort of more normal currency valuation. And the euro might be a good place to start. The euro
is off about twelve percent versus the dollar year to date and maybe 15 of the last 12 months. So yes it's on sale. And
it has been painful having stocks denominated in euro less. They were dollar earners. But this does present an opportunity
because likely the euro zone will go into some sort of pullback as energy becomes scarce particularly this winter natural gas in
particular. But out of that is the recovery especially given the amount spending that the eurozone has in mind in order to
revitalize their economies. And Jim you know work for the U.S. is likely to work for the Eurozone. So there are stocks that
companies now buying back large portions of their outstanding market cap. That's really interesting. You can if they're that
confident the future and they know a whole lot more about it than we do in terms of their own companies. There are a number
of European banks. UniCredit in Italy is one example. Now are they buying back 14 percent of their stock. They have a six
percent dividend yield. That's like 20 percent payout. You know that's fantastic on on 40 percent of tangible book value. You
may think that funds terrify. Who wants to be in Italy right now. There's political uncertainty but that's exactly when you
want to buy because the next stage is to get back to 60 or 70 percent of tangible book and you've doubled your money. And I
guess I would contrast that. You might be seeing great opportunities in specific companies. But when we look at Europe
overall from our perspective we are still bearish. Now there might be a timing element Sarah between what you're saying and
I'm saying but agree that they're doing some fiscal stimulus. I think with the
potential for them to lose more energy supply in the winter it will be important to see if the governments take those losses
off the companies and onto the government balance sheets just like we saw the U.S. do for some U.S. companies during Covid.
Will Europe do that as well. That would certainly be a positive for European equities if that move happens in the absence of
that. I do think you have to reckon with the ECB tightening and what is an incredibly challenging environment. So the European
Central Bank slowing growth even worse than what we're seeing in the United States so far and very high multi decade high
inflation. So they're stuck between a rock and a hard place. And you mentioned Italy. You know look Italy tends to go through
governments roughly every 18 months going back to World War 2. So this is not that unusual. However Italy right now desperately
needs these fiscal transfers from the European Union. And if this this government which isn't as cohesive today is unable to
pass reforms the fiscal tap gets turned off. And if the fiscal tap gets turned off while the ECB is tightening I think European
equities are really going to struggle. So at the risk of being hurt here at a whole nother level of complexity China you're
talking about somebody who's going through a bit of a rough patch right now in terms of growth. Covid-19 Covid zero policy
things that other any attractive potentials actually over there sir.
China is very complicated at the moment to your point because been a draconian lockdowns and back to Europe. Mean so many
European multinationals have business in China. Do you have some sort of trade arrangement. So it's been tough for them. They're
all kinds of these supply side shock problems. Central banks don't really do anything about that. They're all about the
demand side. So that's one the reasons why Europe's likely recover because they don't need to engage in massive tightening
to offset inflation. Good part of that is supply related. And some of it's coming from China. And how long the Chinese
government intends to strangle their economy is the big debate because they can't go too far because the pact is we rule with
an autocratic arm and you have prosperity. They take away that if the government takes away prosperity the autocracy may be in
danger. And that's what makes China so fascinating potentially combustible at the moment. And just adding to that you know I
think one of the things we got out of the Politburo meeting this week was we're going to stay focused on infrastructure stimulus
and China. We're not going to increase the focus on consumption. And so when we think about how the different levers of Chinese
growth flow through to multinational companies it's important to understand that nuance. If it's infrastructure led that's going
to have a different spillover effect to other companies around the world commodity related companies companies that are
servicing that infrastructure versus the consumer. But you know to the fragility of China today if you go to the youth
unemployment rate in China I'm sure you've reported that that's a big deal. Unemployment almost double what we have in the
United States close to 20 percent. That's something China can't tolerate. And so I would expect over the coming months we're
going to see more and more steps for them to try to make sure these young adults have jobs whether they're with the state
owned enterprises through some of these. Infrastructure projects etc. But I am concerned that growth in China isn't going to
recover that quickly in the second half of the year which again folds into this bigger global growth picture. Europe slowing
China slowing the US is slowing. How do we see stocks rallying. Sustainably in that environment.