Apart from the center bank and central bank and apart from the jobs news, what
are the things that you're looking at right now that could affect investors?
Well, I think that's a very good clip to go to because that's a reminder of the
era when the Fed declared victory on inflation too soon and then had to go
back and raise rates again. And for us, that's the biggest risk that
that happens again. We're looking at a number of things.
I think the one most recently that's occurred is China is reopening and
suddenly you're going to have a billion for consumers out there consuming.
That's twice the size of the US in Europe put together.
That could create a lot of pressure on the price of goods and services.
The other thing out there that we're very mindful of is that the U.S.
and Europe got away with a very mild winter and that kept energy prices low,
as did releasing the Strategic Petroleum Reserve.
What happens when we get into the summer and perhaps everyone's driving around?
You've got a cool place as you're using a lot more energy and the Strategic
Petroleum Reserve is being rebuilt. That could put a lot of upward pressure
on inflation. So what about those are two very
interesting risks. One is that inflation is not going away.
The Fed will actually have to keep raising or after pausing, have to raise
again, maybe because of China. How big a risk is China in terms of
inflation? I think that China, with respect to
global inflation and particularly developed market inflation, is actually
going to be quite small. The way that we think about it from a
growth perspective, it probably has about a point two percentage point
increase to U.S. growth and maybe point 3 percent
increase to European growth just because of the trade effects and pretty similar
impact to inflation, albeit potentially even a little bit smaller than those
impacts. And that's because, you know, typically
in an environment where you see China growth really rebounding, those tend to
be the typical effects to growth and inflation, to global developed market
GDP and inflation. This time around, it could be even a
little bit smaller given the fact that the reflation story and the growth story
in China is going to be really centered in domestic growth drivers and more
service reopening drivers rather than what you typically see, which tends to
be more investment in infrastructure led.
So this time it's going to be really focused on travel.
Getting back to work, getting back to know typical service oriented economy,
which is very domestic. China focused.
It probably has a bigger impact in to the region than the region and sort of
the countries closest to China rather than to the US and into Europe, into
more developed market economies in the Western world.
And so I think that the effects are going to be good for.
For China, good for maybe Korea, for Thailand to Singapore to Hong Kong, but
not as strong as a driver for growth and inflation in the US or in Europe.
Well, although we did see the price of copper shoot up pretty smartly once
China started to reopen. So they're out there competing for the
same resources that the Western world is now.
That's inflationary pressure. But more broadly, what did you take into
account emerging markets in your decisions about bond investing?
We're gonna have a sure shot on a few minutes.
You're talking about India. Is that a factor in making investment
decisions, Bob? It's it's an enormous factor as we look
across bond markets. We've been very impressed with the
emerging markets. We like to track the cumulative number
of rate hikes since the start of 2021. The developed markets have done close to
4000 basis points. The emerging markets have done over
22000 basis points of rate hikes. They got in front of this.
They raised rates. Real yields are high.
They see slower growth and inflationary pressures.
We can go into those markets, get high real yields.
And you know what? We do think the dollar has top.
It will come down over the balance of the year.
That's a pretty nice tailwind to local emerging market debt here.
And I think I cut you off. No, what I was going to say was the
biggest driver for deflation, particularly in the US from a commodity
perspective, tends to be energy. And we've seen even since the China
re-opening, which started early in early October, we've seen energy prices come
down fairly significantly and gas prices also fall pretty precipitously as well.
So while typically you would think that if it was going to have a significant
commodity impact from China reopening, you would see that occur in energy
costs. We've actually seen the opposite occur,
which is why I don't think, you know, just looking at the data and looking at
what's transpired and looking at how China is reopening and the the sectors
that's going to be impacted. It's why I don't think you're going to
see a huge sort of impact to inflation from China reopening.
I hope that's right. I hope the Fed engineers a soft landing.
But China is going to be out there consuming and spending.
And we also have to look at Europe. Europe did not go through the pain that
we all feared over the last several months.
That's put them in a much better position to consume as well.