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00:00Hi I'm Anna Edwards. I'm very pleased to be joined today by the CEO of the Hedge Fund Man Group. That is Luke Ellis. He joins us to think about the year ahead. Really good to have you with us. Thanks so much for joining us. If we look at the year ahead let's say let's try and take this sort of a longer term view about where we are in markets and what you expect to see if we start our conversation thinking about inflation and bond yields and the Fed. That seems to be where a lot of the market attention is at the moment. And we see yields going up pretty fast at the start of 2022 as we look ahead out into the rest of the year. Are you alarmed at all that the pace of the means that we're seeing. No. I think what we're going to have all year is something of a fight between inflation is here. Even the Fed now accepts that we have significant inflation. All the central banks recognize even Japan is talking about worrying about how high inflation. So we know we've got inflation. So then what you've got is central banks wanting to tighten financial conditions in order to try to dampen out the growth which will get rid of the inflation. That's one side of the equation. The other side of the equation is whether they will push hard enough to actually make it happen. I suspect we're going to have a series of sort of fits and starts this year where the market has a period we've just been through the last couple of weeks where they think the Fed is serious. That pushes rates up at the back end but has been flattening that they're succeeding more and pushing them up front end. And that starts to impact market conditions. The thing is. Unless the Fed moves quicker. You know the rate back up. We've seen so far hasn't actually tighten financial conditions at all because of what's been happening with it with inflation. Money is still incredibly tight. So the Fed is going to need to be more aggressive in order to actually cause some sort of reduction in falling inflation expectations. They need to dampen growth. Now will they do that. Will they move quickly enough to do that. I think that's going to be the tradeoff for years. And with that in mind we're seeing a number of voices then coming out saying maybe we need to see something a little more dramatic from the Fed. Do you see arguments around the need for some sort of shock therapy for markets and shock and awe in the shape of larger interest rate hikes and perhaps will become used to in recent rate hiking cycles. Well this is one of those things where the market is secondary to the economy now and maybe it should always be secondary to the economy. But as we know a lot of the time the market is leading what everybody is thinking. Here we've got the Fed says and I think everybody would recognize they need to do something about inflation. An awful lot of people have forgotten the transmission mechanism. Raising rates doesn't get rid of inflation on its own accord. The point about raising rates you go back to Volcker I'm old enough to have been around when he was doing his thing and to spend time with him. And you know the point was he moved rates far enough to cause a significant contraction. That's how you get rid of inflation. The increase in rates causes the contraction. The contraction is what reduces forward looking inflation. So the question this year is going to be a constant sort of tradeoff between whether the market believes that the Fed and the other central banks have really got the gumption to raise rates aggressively enough to actually reduce forward demand forward and therefore forward inflation. My own guess is you're going to get a series of these windows where the Fed is giving strong messages. The market gets sort of caught up in the idea oh you get a push up in rates. And then what happens is you get a sell off in equities and then you'll suddenly find that they're not sounding quite as punchy as they used to. And suddenly you get a bit of backing off and then things will feel OK. And you're going to get this sort of stop start to how aggressive the Fed is getting rid of inflation. They would have to be a lot more aggressive than they've shown any sign. And given the nature of central bankers and politicians these days it would be a surprise if they're really aggressive. OK. That's interesting. I apologize for interrupting. I mean it would be a surprise to you if they were really aggressive enough. And might some of the caution come from the way that inflation has been created as is being driven by perhaps supply chain. Also supply chain disruptions as so maybe there are questions about whether a more aggressive Fed would actually have the impact that you describe it having in previous decades. Look I think that's there's definitely a lot of question about where it came from where it started and whether a Fed moves would have done anything about the initial supply constraints. But the reality is the transmission mechanism that takes it from whatever caused the original event in to the employment market and particularly wages that then leads to persistent inflation is visibly happening. Right. Wage inflation is significant. We see it in every industry. We've been in arms. And what that is doing is that will drive forward inflation expectations which drives forward wage demands. You get into the negative spiral that we've had in the 70s and the 80s and people have forgotten about it. You know it can come back very quickly once you've got tight labor tight labor markets and people demanding pay rises. Are we in worrying territory when it comes to managing the macro economy globally I suppose. I'm thinking about it when it comes to the levels of inflation that we're seeing. I mean we had Jeffrey Good Black cautioning places where recession rebuild a recessionary pressure building in the US economy. You've just described a wage situation which is not just limited perhaps to some pockets of the economy but sounds what you said to be more broad based. I think it is broad based. And I think the economy is in a difficult place where we haven't had to get rid of inflation for a very long time. The whole sort of financial markets are premised on the idea that really inflation is being cured type of thing. If the inflation is persistent then that will create an sorry. If the inflation is persistent and the central banks trying to do something about it that will create significantly different financial environments and would create a significant. So I think the thing that I'm saying is I'm not sure that I see the sort of commitment in the central bankers to actually do enough to actually cause that effect. So I suspect we're likely to see volatile sort of lumpy air pockets going through the year but something where the central banks are not willing to allow a significant sell off in equities. That would be a requirement if you're getting a significant increase in interest rates. And so we get this sort of you know actually loose financial conditions even as the central banks are saying sort of hawkish type of things but not quickly enough to tighten financial conditions. And why do you think central bankers are not more willing to make those bold calls. Is it because they're mindful of the feedback loop between equities and the real economy or is it for other reasons. Well it's partly about that feedback loop but it's it's a lot of it is about if we've lived in an easy money world for a long time that's led to politicians believing that they can keep printing money in one form or another or the central bank will do it for them. And the central bankers has had a pretty easy ride of it. And so we've ended up with a situation where the you know I don't think Volcker could get elected as chair of the Fed today. I mean I'm not literally him but somebody like him. It was a pretty severe character. And you know he was quite happy to talk about the need for unemployment in order to get inflation down. I don't see any central bankers or politicians being willing today to talk about if you want to get that inflation out what you've got to do is create a significant reduction in demand which is really about creating a recession which would be bad for equities. But you know we're sort of stuck in likely a version of kicking the can down. And he said OK we have we all moved on from the Vulcan years and have more maybe a of a social conscience. Is that is that's OK that we're in that situation or is that to monetary policy makers taking their eye off the ball. Look I think it's a good thing we've got more of a social conscience today than people had in the 80s. I think there was a lot in the 80s to dislike. Is it okay. Well that's an interesting question right. I mean I think we're likely to see persistent inflation for some time to come and that's likely to require paying down the road to deal with it. Yeah we'd be very very lucky. There is a scenario you could create where you have so much wasted due to supply side shocks and actually you get more flexibility and labor forces and technology comes and remarkably saves us from the problem. But actually personally I think that's a very unlikely scenario. It's possible. So we're much more likely to be building up future issues through persistent inflation but that doesn't mean we get a market problem this year. OK. And one of the areas that we have seen a lot of market focused is yields have gone high has been technology stocks of course in 2010 when they started of course at the end of last year as well. And how will you be keeping the right side of technology trades then as we go through 2020. So given how stretched valuations circled some areas but also the pivotal role that tech names play in our economy these days. Sure. I think one has to avoid confusion between tech and forward earnings companies. So you know if you look at Apple it's a tech stock but they own a lot of money today. And the present value of the cash flows from Apple doesn't look very different. If you've got interest rates at 10 years at 1 percent or you've got 10 years a 3 percent looks a bit different but not that different. The real thing you've got is we've been through a world when interest rates have been so low that a cash flow today is worth a CEO has been valued. Basically the same as a cash flow in 10 years time that if you've got a company that only starts earning interesting profits five seven eight years away is a very significant thing. And I think we're seeing that unwind. Now know what that does is mean there is more of a focus on earnings. I'm not sure we've seen a little bump where it's anti growth pro value. I think over time once the sort of froth is out of that you get to something that's more about quality. It's more about consistency of earnings which is what's likely to be the thing. But we're going to get significant factor rotations while we try and work out new leadership. OK. Putting value center stage in 2022 would that be too simplistic. From what you just said you don't think it is a bit too simplistic. I think we've had a very significant shift in value in the first two or three weeks of the year and that has used up a lot of the froth. That was the sort of undervaluation of some of the value names. I think it will depend what actually happens on rates. And also then depends on where you're looking within within the thing. So you know clearly higher rates will be good for traditional banking stocks as we've seen the last few days in earnings from from the investment banks. It's not particularly good for the investment banks where they have a lot of their earnings from trading. And bear markets are not good for trading in simple terms. Similarly you could see in other areas what we are seeing is you know a lot of weighing value. Looks like it's done well as energy companies really a value play. It's you know it's much more being an energy play. But it's it's come through in that same thing. So I think it's better to think about value about quality this year more than value. We talked in the past about ESG themes link but I would focused on the rise in energy prices that we're seeing at the start of this year and also looking at some of the comments that we've seen from some some other investors recently talking about how there's a lack of investments in the fossil fuel space. And as we try to transition perhaps that is a dangerous place to be. Are you concerned as we look ahead to to 2022 that that could be a thing that creates tension. It certainly has created tension. And that's why we've got very high oil prices. Why we end up last year had super high gas prices. And with the lack of investment we're more likely to see squeezes in those commodity prices higher. Does it lead to permanently higher prices. No I doubt it because what you get is the substitutes ability. But it definitely leads to these squeezes. You know it's supposed to be a transition. It's not supposed to be a term. One thing of create the next thing immediately. It's going to take years not months to create that transition. You talked about how forward earnings companies maybe have been overvalued a little bit with the loose Fed policy. Perhaps the same can or perhaps other assets have also been pushed up by the loose Fed policy. I'm thinking in particular about crypto. How do you see crypto playing a role in 2022. Have we answered the question about whether it is an inflation hedge or is a risk assets. Well if you look at the way if you look at the average day it looks like it's uncorrelated to everything. If you look at any day with a significant even a sort of 2 percent selloff in equity markets it looks 100 percent like a risk asset. I think that gives you a sense about who owns it. You know for us crypto are an interesting trading instrument. I'm going to take a case on the easiest side of this sort of religion about whether it's going to replace everything or disappear entirely. For us it's a trading opportunity. There's liquidity. There's interesting things to do from. Point of view and I'll leave the religious stuff to other people. Okay. Colleagues have been reporting that you'll considering whether to silence a dedicated fund to provide clients with crypto exposure. And we've talked about your you know what you think about crypto previously and we talked about how the way you do and don't deal with crypto at this point. But is that type of product for clients something that you're considering. Well as you reported it's something we're considering but but it's not a case of if there's an awful lot of ways of just sitting passively on crypto you could just come by the underlying you can. There's all sorts of RTX and so on. We're not going to do something like that. That's not you know we're not in the beta provision game. I think there is interesting opportunity to apply our risk management skills to the crypto space to to rather than to be hamstrung by the volatility. You require you to shut your eyes and hope to use this sort of risk management techniques we've developed over 30 years. We've got to actually provide a source of risk controls version of crypto which we know that there's an interest from a number of companies. And when we talked in the past they talked about how a lot of investors is worried about anything but worried about what's going on in bond markets. I wonder and you've said that you talked to him about the alternatives that might be available to them. Is there a crypto demand in that context or is it other alternatives that that's what more than its other alternatives are talking about. I mean the institutional thing on crypto is everybody is talking about it in one form or another. A lot of cases they're really not sure whether it does or doesn't have a place in their asset management and their asset allocation picture. But they really worry about the idea that they allocate X percent and then it goes to X over 2 percent. And that creates this sort of political job risk for them. So you know I think we see that as being something that people are intrigued by but not taking into account yet. We've taken for about 17 minutes and I'm not sure we've mentioned the pandemic Covid-19 or the crash and says it comes as a nice surprise to me. I was reading that even the boss of Pfizer is saying that we will soon be able to resume a normal life. Is that as we look ahead to NYSE pencils or is that what you see ahead what you're preparing the business for. Yeah I hope so. I hope so. Look I mean you can see I'm in the office. I've been on a business trip to the Middle East last week. You know I'm trying to get back to as much a business as normal as I can given the environment. You know the good news is we and lots of other people invested in significant upgrades in the air conditioning in the building in ultraviolet treatment of the air as it passes through that. That means you know when we look at the stats people coming into the office have been you know infinite well a pretty but remarkably less likely to catch Covid than if they just go and buy a newspaper at the end of the road. Now you know somewhere along the way we will have to live with this. Hopefully. Now the UK is certainly moving that way. I don't think it's going to feel like business as usual in Asia this year. So if I look at my business travels a year I suspect I would be going to the states regularly. Europe regularly. And I hope daily I get to Japan because we have very important clients there. And I'm also a grandson or granddaughter being born in the next month in Japan. I'm very worried we won't get you. Link thank you so much. Good to speak to you. Thanks for spending time with us in the room. President.

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Man Group CEO Ellis on Year Ahead in Finance

Luke Ellis, CEO, Man Group speaks with Anna Edwards, Anchor, Bloomberg Television at the Bloomberg Year Ahead virtual summit about what he sees ahead for 2022. (Source: Bloomberg)

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