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00:00Do you think markets are less. Do you think equity markets have capitulated enough and is there a bottom that you see forming right now. Short term I think you equity and markets in the US at least are definitely the haves and the have nots. So you've seen a huge sector rotation and a lot of divergence between different themes whether it's growth versus value. I think a lot of investors have been chasing some of the inflation sensitive sectors and I think it's a time for investors really to be looking at correlations and kind of what could potentially help really diversified outside of just U.S. equities. What would that be. Well I do think looking at the Asian markets is very appropriate. When when everybody gets scared and runs away. I think it's a good time to be looking at adding you know Warren Buffett always says see you make your money when you buy an asset not when you sell it. So looking for cheaply valued assets especially stocks outside the US I think is attractive especially because the US is so hawkish with their their forward guidance. And do you think well that goes into your other point do you think the Fed can actually control this type of inflation problem Nancy. Well the Fed is definitely trying to damper the demand side of the equation. They've been very very hawkish with their commentary. Jay Powell is just sworn in by the Senate last week. So he has a four year four years more lease on life. He got the job that has been kind of an unknown. Now that he has it and the rate hikes are priced in I think the question is whether it's going to make a difference on the supply side of the equation. And not a lot of the supply side shocks are a result of the pandemic and the geopolitical risks around the world. And I don't really think the Fed hiking policy rates are going to change the supply side. Right. And I guess indirectly what you're saying is this time twelve months from now the worst case for markets is we get the rate hikes but we don't get inflation coming down. If that's the economic reality the trade is what. Well just as a lead into your your your show. Stagflation is. Is that outcome where you have low growth but higher prices. And I think that's one of the challenges that central banks are facing is so much of the inflationary shock is not necessarily a result of the level of interest rates and other reasons that are pandemic related. So it's a really challenging time to try to thread the needle. And I think that's why we're encouraging investors just to be very diversified look for non correlated assets look for things that are not all going to go up or down together because we just don't know what what uncertain times especially with the Fed adding into the equation quantitative tightening which they've announced is going to start in June. So we've been recipients of all this bond buying in the market. The taper just stopped on March 9th. Now we're going to see what it looks like to actually have the balance sheet potentially rolling off. Nancy here's the plug. But there's a reason for it. I want to talk about. I believe. Yes. You've discussed previously what this does in an inflation scenario. What happens when it comes off inflation. What am I buying. If I'm buying this I'm all is mostly U.S. Treasuries. It's inflation protected. Treasuries is about 85 percent of the portfolio. But then we add fully funding to options that benefit from the spread. And the spread is a key interest rate. So that's either less Fed hikes and that typically happens in an equity risk off credit spread widening scenario or higher long term rates. And I think the or the or is a really key part of this equation because you don't have to make a bet about the level of interest rates. All you're expressing is that inflation expectations will move higher or the Fed will hike less. So it's not just inflation. I think that's one of the neat things about the strategy. If you look at 2020 to a lot of times when the U.S. equity market is down I've all tends to be up on those days. And that low correlation is because we can also do well with higher implied volatility in the US interest rate markets which is potentially a good thing to own especially going into the balance sheet unwind as well as less fed hike expectations. So the Fed's only hiked 75 basis points but we have another hundred and seventy nine basis points. You can see that on your Bloomberg terminal priced in already.

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Quadratic Capital Nancy Davis on Fed, Inflation

Quadratic Capital Management Founder and CIO Nancy Davis says the market is way too optimistic about the Fed's ability to tame inflation. Davis is also Portfolio Manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF, IVOL, which invests in TIPS and fixed income options. She speaks to David Ingles on "Bloomberg Markets: China Open". (Source: Bloomberg)

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