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00:00No it's definitely not fully priced. If you look at consensus today it's got US CPI going back to two point three percent by the end of the year next year and obviously 7 percent CPI. What we saw this morning. That's not likely to stick around. But even if inflation moderates you have to think about the components. What are each of those doing. And two of the most important ones in our view wages and housing including rents those are going to be sticky and they in our view have a lot of upside risk. So we think inflation is likely to be significantly above what's discounted. And of course the Fed's target unless they decide they're going to hike a lot more aggressively than what's priced. Rebecca good morning and Happy New Year. So how are you positioned for that. Well you know it comes down to Happy New Year to you. It comes down to how much is the Fed going to tighten. If they want to get two percent inflation their target over a reasonable timeframe they're going to have to tighten more than it's expected. If they don't want to do that because they're worried about undermining the recovery then they will still tighten but they're not going to tighten as much as needed. So you have two possible outcomes higher than expected inflation or more than expected tightening. And the amount of each you get is going to depend on exactly what the Fed does. So we're positioning for both because we can't read the Fed's mind sadly. So we're looking for higher U.S. bond yields. I think the median forecast for the end of this year is around 2 percent. We think the bias risk there is clearly higher. We're looking for inflation sensitive assets like broad diversified baskets of commodities to protect us against inflation. We're looking at equity markets that are going to be less sensitive to changes in liquidity if the Fed has to pull back liquidity faster than expected. And so we're trying to position for either of those outcomes in our portfolio. So where does that leave you in tech. I mean we've seen a lot of hedge funds in in December start to sell there at some of our tech holdings. And clearly the last eight days of this year have been quite tumultuous. I mean obviously there's some longer term supports under the tech sector. You've got tech cap ex which continues to be very very strong. You have buybacks obviously helping that sector. These companies are extremely cash rich. But at the same time to your point you've got high valuations. You've got people extrapolating the growth of these companies going forward over the next decade. Some companies may hit that mark. They may meet expectations but we think the bulk of them probably won't. So if you have those that pricing and now you have the Fed removing liquidity these are very liquidity sensitive assets long duration cash flows. And so they are going to be vulnerable in our view. The question is how much given those offsetting supports I mentioned. But we think that is one reason that you want to look overseas with equities you know places that are going to benefit from strong nominal global growth less sensitive to the liquidity pullback and probably offering much much better valuations. Places like Japan that would be a place we're looking at now in equities. It is that value you're looking for. I'm assuming that it probably is. And if so how much more does value have to go. Is this a trade. Is this a theme. Is this something that has legs. Well you know the value play if you will and I would say is is going to be dependent to a degree on what goes on with the global economy. This year we think the U.S. is going to have nominal growth. That's still very much above consensus expectations. And even with our high inflation expectation real growth is still going to be quite a bit above potential. So the U.S. economy is moderating but still quite strong. I think a big question to think about how how far value can go is China. China obviously slowed a lot last year and now we're seeing increasing albeit more fine tuned easing steps to support growth. Can China get its economy back up to that five five and a half percent growth pace this year. I think if you had both of these big economic engines coming in in 2022 that would make me a lot more confident that this cyclical lag or value lag if you will is going to have sustained lag. So I wouldn't just watch the US. I would keep an eye on China too given its importance for all of these growth sensitive stocks. Growth in economic growth terms is a little bit of a narrative that since they saw their inflation data come down a little bit they maybe did a little bit more room to ease there. Does that thesis extend to Europe. Because most individuals we talk to say if you're going to play to value trade it's Europe over us. Do you buy into that. Well I think you do see a lot of investors who want a certain U.S. exposure just rotate within the market. So I don't necessarily think there's an exodus from the US. So I think you'll see a rotation within the U.S. But I also think Europe is pretty interesting right now. The European Central Bank even though they're also seeing high inflation so far seems more in the transitory camp and they're likely to lag economic conditions there and let monetary policy stay quite easy. So different from the Fed fiscal stimulus. There is continuing to roll out thanks to the EU recovery plan. And so that's another support for growth if you also have a decent global backdrop. I think Europe is going to be a huge beneficiary of this combination of factors. So I do think there's some upside on European stocks of recent years. We've really just seen these large luxury brands the multinationals benefiting. I think this year the thing to look for is could you see that stimulus backdrop. Plus a little bit of an improvement in China and a still strong America helps some of those domestic sectors as well. Rebecca put this all together for me. What kind of rates of return do you think you're going to be penciling in at the end of the year. Well it's I think it's going to be a bumpier year when you consider that the Fed is going to be feeling its way a little bit it knows it needs to tighten. But how much and in what shape is it rate hikes. Is that quantitative tightening. What is the data telling us. What's happening with the pandemic. I think that is going to create air pockets along the way. So we are going to see bouts of volatility this year because of the pandemic and how the Fed is going to navigate this. I think you want to make sure you're positioning for higher yields either through the bond market itself or thinking about OK if I have a long only portfolio what assets are going to protect me against higher yields. Equity markets I think are still well-supported. But some of those big measures of support the fiscal the monetary stimulus we had over the last two years those are starting to fade. So I think you're going to be looking at lower equity returns this year. It seems like a pretty easy thing to say after the returns we got last year in one market. I would look at if we do get and again this is where diversification is so important. You know if China is in a different place in its cycle world tightening removing liquidity they're adding liquidity to their market. They're trying to support growth. Yes we've got the regulatory clamp down in China as they deepen their regulatory ecosystem. But you also have some some really attractive valuations there and easing conditions. So being long Chinese bonds looking for opportunities to be long Chinese equities you know there's a lot of differentiation in the global economy today. So even if returns overall for equities are lower I think there's going to be some really interesting opportunities out there. You just have to dig around a bit.

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Is Hot Inflation Fully Priced?

Alix Steel and Guy Johnson, the hosts of "Bloomberg Markets: America" have picked their question of the day: Is hot inflation fully priced? That is the question they posed to Rebecca Patterson, Bridgewater Associates Director of Investment Research. (Source: Bloomberg)

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