AFMC - Brad Simpson On The Fed Inflation And Portfolio Management
2023-09-22 23:50:00 ET
Summary
- The Fed holds steady, now what?
- The case for bonds, even after a difficult year.
- The resilience of the U.S. economy.
Brad Simpson, Chief Wealth Strategist at TD Wealth, speaks with Greg Bonnell about the latest U.S. Federal Reserve interest rate decision, the state of the economy, and the implications for markets.
Transcript
Greg Bonnell: The US Federal Reserve has signaled that it may be keeping rates higher for longer. So how should we be positioning ourselves in this kind of a market environment? Joining us now to discuss, Brad Simpson, Chief Wealth Strategist at TD Wealth. Brad, great to have you back on the program.
Brad Simpson: Thank you. It's great to be here.
Greg Bonnell: I'm really interested to get your take on everything that we got from Jerome. Let's start off with the fact that we had a hold. They did not move on rates. But the market is looking through other aspects of it, and it seems to be a bit nervous. What's your takeaway?
Brad Simpson: At first, I was sitting here thinking - imagine if I was on this show 20 years ago. And that - I mean you must have just said "Fed" 10 times. Yeah, Fed, Fed, Fed, Fed, Fed, Fed, Fed. Do you know what I mean?
Ten years ago, you might - or 20 years ago, you might somewhere in a in a discussion about markets, go [INAUDIBLE]... And the Federal Reserve - is there anything new from them? But, basically, there's one thing that we discuss now, and it's-- what's the Federal Reserve Board going to do? And everything else is superfluous, which is really quite remarkable.
So I think, if we looked at what has transpired over the last 24 hours, say, and then try to put it into the greater context, and maybe start out with - every quarter, we publish an investment quarterly. And we think of a theme that's going to frame our thinking for a certain period of time in the three months. And right now it's "Soundproof," which we published in July.
And, basically, what we've said there was that, with all this monetary policy and then this generational change in fiscal policy, that that has created this massive distortion - that is, a distortion that is an awful lot like an electric guitar.
And trying to figure out what is that sound and, in the middle of that distortion, find something. So you fast-forward to yesterday. And, basically, I think there's two groups of people that look at what the Federal Reserve Board is going to do.
And the first one is really a numerate people, people who just absolutely love numbers, think everything comes down to numbers. And we'll look at this and look at their expectations and go, OK, well, Fed came out and said there's going to be no increase. And that's it.
5 and 1/2% is where we're at, and we'll see where we are down the road. And so these folks sit there and look at this and try to go, OK, well, what is that going to mean next, and how can I - and these very numerate folks, if you look at over the last 18 months, have really consistently been wrong at the pace of what the economy is doing.
And the reason for that is that it's very, very difficult because there's lots of noise. The other group are like Jerome Powell. So [INAUDIBLE] remember is his background, really, is that as a lawyer. So I think people dig down and they rip through absolutely everything that...
Greg Bonnell: Every word that changes. And to to, yeah.
Brad Simpson: They go, what is this? And so I think if you pull back and you go - maybe I'm going to go somewhere in the middle of these two. And I'm going to look at it and I'm going to basically say this. What did they do? They didn't raise. And they said that we're going to stay put.
Then they basically came out and said - the reality of this is - is that we don't know. And he was really clear on that. This is an economy - he didn't use my word, but [INAUDIBLE] - that has a lot of distortion in it. A lot of our measures are really out of whack right now, and so we're going to continue down this road.
So then we go to the market where we are today. And you had the market, which is - always remember markets are a pricing mechanism, but are a pricing mechanism that is either super, super happy and excited about stuff, or the opposite's true.
So being the optimistic part of the market was - well, there's going to be four rate cuts as we enter 2024. That's what the market was expecting. Then your more dour economist friend walks in the room, and they're a little more grumpier, and they go, well, maybe you're too optimistic.
Greg Bonnell: Maybe you get two. Maybe you get two next year.
Brad Simpson: Three. Consensus is three. Is it still three? Consensus economists were three. And now you're basically coming out and saying - and the Fed came out and said at the end, hey, it's probably going to be two, and left. And I think that if you look at that and go, OK, then what did he really say?
If you boil it down in a really crazy way, just literally look and read what he said, and then if you summarized it all - well, we see that unemployment, which is the thing - you and I talk about all the time here. Unemployment-- the employment is getting better. That we see - so check.
That's a really good sign. When we look at inflation, remember, a year ago, 10% to 8%. Today, let's call it around 3%. Core inflation - PCE, the one they really look at - he said, we feel pretty good about where that is right now. And what he really drew out, I would say, is to say, we're going to have a perfect landing.
I'm not saying we're going to have a perfect landing, but I'm not quite [INAUDIBLE] what folks would like to have him said. Because I think, at the end of the day, if you say employment's under control, PCE, inflation's out of control, which is the consumer - it's spending.
If you say those two are under control, this is a guy who's basically saying what the market has been saying is that, yeah, we're getting a lot closer to doing what we set out to do. Again, not me saying that. And I think that if that's true, and you look at that, and you said, well, we've set out - well, what did they set out to do is that create a new economic cycle.
And if you did create a new economic cycle, you're probably not going to buy everything that was late stage, which is what happened in our late stage of somewhere between two days ago or two months ago, depending on how distortions work in this world today.
But that late stage trade of the only thing I'm going to buy is tech - oops, wait a minute. And so right now, this to me is - then the reaction is going to be is - the quants go in and make their trades and make a few changes, and you see some of the sell-off we're seeing right now.
Greg Bonnell: Let's talk about that perfect landing, soft landing scenario. Sound like you had some doubts that it can be achieved, because everything just has to go right, doesn't it? Right. And, often in life, things don't always go 100% right.
Brad Simpson: And I think that - let's start there and say that, first of all, when - I think there's always two sides. Well, of course there's always two sides to a market. But on the one side is - you have what is really - is this sell side of the market that's always ultimately going to be trying to find the best of ways of looking at things.
When you're the buy side of the market, or when your role - and what my team's role is and what we do as an organization is look at it through a client's perspective and think about how are we going to allocate your capital or recommend allocating your capital.
You're going to be more inclined to think, well, some things can go wrong along the way. And the trick is - is not to get too negative as you go down this road. So the first thing I would say is that it's not a matter of me saying we're not going to have a soft landing.
Right now, we think there's about a 55% probability that it will be a soft landing, which is a lot of a move from where we were before. But there is the other side, which is 45% of it might be something very different. So then you have to determine - and I brought a chart along today. I don't know if we're going to share it up or not.
Greg Bonnell: [INAUDIBLE] up on the screen.
Brad Simpson: And long story short is we said, how about we define what that means? Let's see what that looks like. And so, really, if you wanted to look at the thing you're looking at now - jobs, employment. That's where your inflation is going to come from.
All the talk here when we're looking at all the wage settlements that are going on right now - all eyes are on what's going to happen with wages. And all this comes to employment. So when we look at - it's all we're showing is this. This is the relationship between job vacancies and unemployment.
Now, we don't need to dig into this. But you can think about - reason this out. If job vacancies start to go down and you're looking through the want ads and there's not a lot of them, you can see that there's going to - I think you could probably see there's going to be a progression that says - look at - the unemployment picture is going to change, and unemployment is going to go up.
What we're showing here is that - this is called the Beveridge curve. Now, not - [INTERPOSING VOICES] Not maybe what you're thinking. But, really, the Beveridge curve is something that central banks and economists have been using since the 1950s. And it has been one of the go-to how do I look at employment and think about employment, and then its impact on where the economy is going to go.
Because one thing that should never be lost on anybody is that the origins of the central bank from the very beginning was - one of the things was, like the major thing, was employment, making sure people have jobs, but making sure there's some slack there a little bit so things don't get too hot.
So all we're seeing here is this black line. You see the black line and all these green dots all over the place. That green line and the dots are basically, on average, that relationship working pretty closely together over for 70 years. The red line - what we're showing is, during COVID, at the height of COVID-19, it just absolutely departed [INAUDIBLE].
Right? That's what distortion looks like. That's the true form of what distortion looks like. And, really, what we're saying there is just saying that, to use this Beveridge curve and this way of looking at jobs and vacancies was so off-kilter - it's a great sign of showing this is what the economy was like.
What we're showing is this is ultimately - because we're using this landing - is that this airplane, if you will - you can look at - this is the Beveridge curve with the economy on board saying, how are we going to come back? Because it will come back to that black dotted line like a runway, and it will land.
What Jerome Powell said yesterday was basically this. As this plane comes back into getting closer to the runway, right now how we're running this - we're doing our darndest with the tools we have, of the technology and the data as we're hitting these buttons.
But when you get really close to the airport and runway, what we're doing is we're going to turn that stuff off and we're going to have to land it. And my dad's a pilot. You're going to have to land it visually. You're going to have to look out the window, and you're going to have to go, what does this economy look like right now?
And because the data will start to come together at that point - and that's when you're going to go, are we going to have a hard landing or a soft landing? And that, I think, is the key to this. So one of the things that we're using, and I've said this over and over again, is that, at this part, you're looking at the health of the consumer.
You're looking at housing because that's a big part of the consumer. We know the consumer is deteriorating. And we know that the spending is slowing down. And so what helps you feel good about keep spending is making sure you have a job.
This is, I think, a really great way to look at it. And so it's not sitting on the fence. It's saying that, as it comes closer to that runway, we're putting a 55% scenario on it. But we're in the world of managing money for people. That 45% means some stuff could go wrong. We should make sure that we are constructing portfolios in case of it isn't a soft landing.
And when it does land - folks who have ever landed in St. John's before, you know that the plane falls from the sky and hits a hard runway hard. We have to think a little bit about what happens if this airport we are landing is - it takes a hard landing, and what is that due to.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Brad Simpson On The Fed, Inflation, And Portfolio Management