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Bloomberg Audio Studios. Podcasts, radio, news. After four days of losses on the S&P 500, Richard Bernstein of Bernstein Advisors writing, the Fed is caught between a rock and a hard place. GDP forecasts are being revised downward, but inflation expectations seem poised to accelerate. Richard joins us now for more. Richard, welcome to the program. You put it in your note. Everyone's got a plan until they get punched in the face. That famous strategist on Wall Street, Mike Tyson. How strong is that punch this morning?
I think the punch is a real – it's not a jab. It's a real roundhouse punch. And I think, John, look, you've been talking a lot about all the different uncertainties and all the different things that are going on. That's fine, but I think one also has to realize that we entered the year with investors historically confident.
So this has a magnified effect on investors' confidence that they're being shaken. So that was my point about that everybody has a plan until they get punched in the mouth because everybody had a plan. They thought it was easy. They thought this was like, oh, you know, let's just buy an index fund or let's buy the MAG-7. And all of a sudden they're realizing that was the unusual period. And now we're going back to something that's much more uncertain. And they're getting punched in the mouth.
Richard, Scott Besson, Treasurer Secretary, speaking with Anne-Marie, our own here, and saying that this then is not necessarily a MAGA problem, it's a MAG-7 problem. Do you agree? Is that basically what you're seeing right now is the unwind of an overvaluation of a crowded trade at the end of the last year, beginning of this one?
Well, Lisa, I understand where he's going with that question, but my response would be, why is the Russell 2000 underperforming so dramatically here? If it were just a Mag 7 point, why are the most domestically focused companies in America, smaller companies, are underperforming? So how is this just a large-cap MAGA effect? It's clearly not.
or Mag7 effect, sorry. It's clearly not. I think this is a comment the markets are making a comment on the broad economy in the United States. And I think also the notion that this is an orderly process, that's fine. I would agree with that. But the process is not a positive one. The markets are not giving a positive verdict on that. And that's kind of what I think people are still sort of missing here.
Richard, how do you navigate a situation like this where the rules of the road may be called into question over a longer period of time and asset allocation potentially could look very different if the trends that we're seeing in markets today would hold? So how are you thinking about not just short-term investing, but the one year, two year, five years ahead?
Right. So, Lisa, I think in the short term, you know, you're using the word uncertainty. Everybody's using the word uncertainty. I shouldn't personalize it like that. Everybody's using the word uncertainty. So what that means is the scarcity in the marketplace is certainty. That's what will command a premium through time is certainty. What does that mean?
that means quality that means more certain cash flows it means dividends it means near you know really kinda focusing on near-term fundamentals as opposed to long-term growth stories the second thing is um you know what do you do for three years five years ten years two years whatever and i think look the goal of what's going on a returning industrial processing back to the united states and manufacturing back the united states i think that's a that's a
great goal. In fact, we've been talking about it at my firm at Richard Bernstein Advisors for 10 years. I wrote an op-ed in 2011 in the Financial Times about this topic and how important it was. The goal is real. However, the method that they're choosing to try and get to that goal, well, personal opinion here for a second, is incredibly ham-handed.
There are many better ways to do it that do not place a tax on the U.S. consumer. Richard, we heard from one ECB official earlier on this morning that said there's no reason for a rate cut right now. I think he referred to 50 basis point cuts as ridiculous. Mary Daly, the San Francisco Fed president, putting out a post on LinkedIn saying we have the time and space to deliberate our next moves. Lisa, that's what's different about this moment.
These officials at these central banks aren't rushing to race in, rushing to step in and provide support like maybe they would have done a number of years ago. And for the correct reasons, which is this is a very different type of crisis that is not of the credit markets making. This is about policy uncertainty and the potential stagflationary shock that comes along with inflation. If you take a look at two-year break-even rates, they've actually hit the highest level going back to 2002 earlier this morning. It's shifting around, incredibly volatile markets.
But the signal is not so clear in terms of how they should act, let alone if. Richard, are you thinking about where pockets of leverage might be? This has been a really unusual cycle here in the United States and worldwide because of the support that was offered through the pandemic and through the recovery as well. When you think about where pockets of leverage might be this time around, how do you answer that question?
So, John, it's related to what you and Lisa were just talking about. The Fed was spoiled for many, many years, decade, two, three decades by globalization. Globalization was a massive disinflationary force on the US economy. Why? Because we were just increasing competition. And we all know when you increase competition, you put downward pressure on prices. So the Fed could play the hero and ride in on the white horse and save the day.
Now, what we're seeing is deglobalization. That whole disinflationary process is now being reversed, so it's now an inflationary process. That ties the Fed's hands, and the Fed can't play the hero anymore. And I think that's one of the things that's happening. So where is the pocket of leverage? I don't really know. You know, one could argue that it's in the private market somewhere.
because I think that a lot of their returns have been boosted by by leverage and and and the ability to bar cheaply to make acquisitions maybe that's where it is I'm you know certainly a you know not gonna be I would argue it's unlikely to be in the big banks the big banks
for all their whining about over-regulation. Big bank balance sheets are pretty strong. It looks like the regulation has worked. But where is that leverage? It's in things like private debt and all of that. So the risk hasn't gone away. It's just moved, I think, from the public markets to the private markets. It's an interesting monetary and fiscal question is that if there is some kind of problem in the private markets, they're supposed to be private, will they come to the rescue? I would think they'd be very hesitant to do that.
The Treasury Secretary this morning is saying really nothing to see here. I feel like I'm going to sound like Lisa, but how do you think this bond auction is going to go today for the 10-year? Well, a little outside my area of expertise. I just don't think – I think what we are seeing is a complete repricing of U.S. assets with a higher risk premium.
If you think about it, we've taken about five, maybe six multiple points off the S&P despite good earnings. We're seeing in a very short period of time the 10-year sell-off. But certainly bond volatility has gone up, whether you agree with my statement about the risk-free market. Certainly bond volatility has gone up. And I think what's happening is U.S. assets are being repriced. You mentioned before about are we a safe haven anymore?
Maybe not. And that's kind of what we're seeing. I spy the Tottenham emblem right behind you as well, Richard. Super depressing stuff for you, eh? Appreciate the time, as always. Rough, rough season. Thank you, sir. Richard Bernstein of Richard Bernstein Advisors. Thank you very much.