What do you make of what the markets did this week. I mean inflation looks like it's here to stay. It appears right now it
does. And I think the markets actually were fairly well behaved against the backdrop of rising interest rates rising nominal
yields. I think you know this is a year where the discount rate for equities has demonstrably increased and we've seen that play
through to stocks. The risk of equities right now and especially the S&P 500 and the NASDAQ are that these are very long duration
benchmarks. There's a lot of growth promised way out in the future for these benchmarks. And we think that that's going to
be a continued challenge if we see those discount rates rise as we've seen so far this year. So Sonali Basak talk challenges I
should say fixed income has a few challenges of its own. It looks like the Fed is going to have to be raising rate hiking
for some time to come. What do you make of what's going on in the bond market. So you know I'd just say that we have gone up
almost 40 basis points in about 10 days on U.S. tenures. This is the deepest most liquid market in the world. And I'm just
looking at this and this level of volatility. It can't be anything that any central bank would welcome. I do think that
unfortunately we are going to see more of the same and it's not going to be a nice grind upwards. We're going to see volatility
but inevitably the Fed is actually going to need to do more. I think that in the last after the last Fed meeting what Fed Chair
Powell delivered was a dovish hike. I think what we're going to need to see next week is a hawkish hike. So a promise to follow
that the Fed is going to do everything it needs to do. But without it being limited to a couple of more months a 50 basis
point hikes for example it's a all I'm not going to ask you to guess at what the Fed will do next week going forward. But if
you were advising the Fed would you say it's a matter of when you raise rates or how much you raise. And that is to say is
this matter. Let's get there faster. But the ultimate number we're getting to is nothing much higher. Or do these numbers
suggest actually you're going to end up higher. No I think you might need to get it higher but that's the reality because you
know I did see some something which has baffled me about the Fed dot plot from
March. And that's actually almost as interesting as the actual meeting next week is that the Fed essentially had inflation
coming down almost by itself. There was in the sense that you had massively negative rates even as inflation was collapsing in
those dot plots. I don't think that's realistic. Not in the least. Therefore I will be looking for some added layer of sober
realism in what the Fed shows us next week. And to your question is it how much or is it when. I think it's actually both. It's
probably going to need to be higher rates and they need to be. We need to get there faster. It's smarter to get there faster
because let's put it this way. We had a full year of inflation being above 7 percent. We've had two years of inflation being
actually above 6 percent. So when do expectations start catching up with this.
You know I think that that's a great point. And you know one of the things that we're seeing is that the multiple on the market
is still really out of whack with where inflation is right now. So when you think about the relationship between the P E ratio
of the S&P and inflation rates usually when inflation rises P E ratios come down. Granted we've seen the multiple come down with
the sell off in the market but we're still at a fairly high and elevated levels level of valuation for where we are on an
inflationary basis. So I think you know when we look at the data there are some pockets that suggest we're seeing an alleviation
in the pricing pressure. So for example we look at our credit card data Bank of America and we found that the shift in
spending has moved from big ticket items to services. So at some level one could argue that that may serve as some moderation in
the inflation of raw materials that are used for goods like metals lumber cotton et cetera. But I think the the the demand
for energy and for oil from flying and hotels and and all of the activities that we have pent up demand for is going through the
roof. And energy is going to continue to be a point of pain for for investors and consumers. So now what we see in some peak
inflation in some pockets. Yes I do agree with Soviet there to some point in it. To some extent I'd say that. Yeah. We we also
see pockets where we've probably peaked. But I think we're also seeing a little bit of broadening out actually because. Some
extent we are seeing the impact of the fact that people still have reserves from two different sources. One is the savings
which which came in the post Covid period. People do they have banked a certain amount of savings. Those savings will get used
no doubt quicker now than we would have anticipated at the end of last year prior to the energy shock. But we still think that
we've probably got enough by way of savings to take us through probably the better part of the first quarter of next year. But
even above that even above the issue of just savings people are actually going out and using those savings. And consumers are
entering this phase of the cycle with some of the healthiest balance sheets that we have seen consumers have. They are in a
position to actually rack up credit card debt. And historically the U.S. consumer has done that. It might be a first in the post
GFC period but I wouldn't be surprised if we started seeing that debt track. So now is anything going to stop this runaway
inflation. Short of a recession. You know so one thing I would note I don't think it's runaway
inflation. I should just note that I think that it's more like pretty high inflation and way too high to be comfortable for the
Fed. And I don't know whether you're going to get an outright recession but I think you all going to need significant cooling
off of the labor market. And the problem is timing. I don't think it's going to cool off quickly enough to prevent us from
having quite a lot of inflation bust. So. So no I'm just curious your views because you know I remember before the pandemic we
were all talking about disruption and demographics and all these sources of disinflationary pressure that were long term secular
forces in some of those are still in play. So you know I think that there could be some kind of natural suppressants. As you
say maybe this isn't runaway inflation because we still have some kind of ceilings or pressures on on inflationary forces
from just that. Those themes that have been in place for for you know the last decade or so. What do you suggest. So actually you
know we've always talked about demographics as always being in one direction and that's off the back of Japan. And every case
is a special case right. Yeah. But if I look at China there's been some very decent academic work which actually has said that
demographics are going to play in the opposite direction. In the case of China separately I would say that there are new trends
which have come out almost as a result of Covid one of which is insourcing or local sourcing. Yeah I mean remember the reason
people outsource in the first place was to reduce costs. You bring that back closer to shore. It's going to raise raise
costs. And we haven't even started talking about issues like green inflation which I think is a real thing. No NYSE separate
from. And so I think there are new secular forces of the which actually add to those original ones. So I am uncomfortable today
with the entire idea that we have you know some kind of a long term destiny towards low low rates and deflation. I just don't
think it's that.