Listen to Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, discuss the impact of rising interest rates on the financial markets and the economy during his interview on KGO 810 AM Radio in San Francisco with host Mark Thompson.
Read below for a full transcript of the conversation.
Mark:
He’s a guy that we like to check in with occasionally. We call him the Wolfe of Montgomery Street. Yeah. He’s Christopher J. Wolfe, everybody. Hello, sir.
Chris:
Hello, Mark. How are you?
Mark:
I’m
Chris:
Well, Mark, appreciate that. I guess it all comes down from my perspective to really: the expectations that the market has versus what the central bank is gonna do. And right now that good economic data is leading people to think a couple of things. Number one, inflation’s gonna stay around longer and be higher. And because of number one, number two is, “Hey, the Fed, you’ve gotta move faster!” Because inflation, we all know what it’s like from the 1970s and ’80s: that’s really bad. So that’s the market expectations: “Fed do something fast, now!” The Fed has come out and said, “Yes, things are good. Chances of a recession are very low. The economy’s in good shape. And we’re gonna move slow.” So what that means really is there’s a disconnect between what the Fed’s saying they’re gonna do and what the market and the economy are expecting. And that disconnect is just putting a lot of turbulence in markets, cuz investors are unsure how, how far, how fast the central bank is gonna raise rates and make the cost of a lot of things more expensive this year.
Mark:
Yeah. It’s interesting that you put it that way. It makes total sense. We talk about that all the time that, you know, investors like a, a solid kind of, uh, piece of data that they can then plan on. And when there isn’t solidity about the data, uh, it becomes a little tougher. What, what is the reality on the inflation? I always really had the understanding, at least on this inflationary spike that it was associated with the supply chain and it was associated with pent-up demand. And then of course oil prices. Uh, these are things that I didn’t think were really related to money supply and, and that, uh, Fed moves could particularly control.
Chris:
Yep. You are making a great point, Mark. All three of those things are contributors to the inflation story in 2022. And because there’s three things — in fact, there’s a few more — inflation’s gonna be harder to get under control in some ways, because it’s not one thing that you can just hit with a magic bullet called higher interest rates. And in some ways, as you mentioned, oil prices are a bit out of the Fed’s control. So here’s the challenge. I think it comes down to, with inflation, with those many features contributing to higher inflation. Energy’s probably the toughest one. Uh, there’s a lot of other concerns out there: Russia invading Ukraine, uh, that kind of thing. Higher energy prices feed into so many other parts of the economy. Just think about food prices. Higher energy prices mean higher fertilizer costs means more expensive to run the tractors, to catch the grain, and move it around the country from one place to another. So the idea here that energy prices have a, um, sticky effect to the system is a very important one. That’s hard for the Fed to control. It’s why I think that expectation story I mentioned earlier stays around for a while with the Fed going slow, and inflation just kind of printing high numbers or higher than people want for the remainder of the year.
Mark:
We’re talking to Christopher J. Wolfe, the Chief Investment Officer of First Republic Private Wealth Management here in San Francisco. I wanna ask you about the psychology of the economy as well. In fact, I got a, an email just this morning, I’ve received a lot of positive letters. It’s KGOradiomark@gmail.com. “High, Mark. Here’s something for your show.” It was, uh, this is all related to the fact that the economy’s actually good under Biden, but that the media, it doesn’t play up the good news. The headline “Biden Boom Hits New Heights — Press Buries the Good News” and this is what I was talking about last week; you know, that the, uh, uh, the economies growing at the fastest rate nearly 40 years, that the, uh, growth numbers, you saw the GDP numbers of 5.7% GDP growth. Um, under Trump, it never got, uh, above 3%. And then, uh, the article goes on and the, uh, emailer goes on to say, “Hey, the media never plays this up.” Now I would suggest it’s not a political agenda. Maybe there’s some who would say that it is, but I think the media likes bad news: Bad news gets clicks; bad news gets attention. And so they play up the dire nature of the economy more than they do some of these positive numbers. What are your thoughts?
Chris:
Well, you know, on that topic, there’s a lot in the social sciences about humans reacting to bad news, or, you know, kind of the old, uh, in finance, prospect theory, and how humans feel pain, uh, at some multiple of how they feel joy, particularly with respect to financial losses. So, I tend to agree with you that negative news sells clicks. But I think on the positive front, if you listen to the president’s comments last week, um, you have lots of, uh, figures that I think are indicative of things being relatively good: not just GDP — you have employment numbers relatively good; there’s lots of people moving around the country (mobility is pretty good). And yeah, the jobs are plentiful. This is one of the first times in the, I guess the last 40 years, I think, that we have more jobs open than we have people to fill them. And that’s a combination of things that have happened, but that’s a stunning statistic that I think indicates how good things really are.
Mark:
What about then the, uh, the doomsayers (I’ll call them that). But hey, look, just cuz they’re doomsayers doesn’t mean we’re not doomed, okay?
Chris:
So there are some pieces out there. It’s a great question. I think people are worried about — this is the bad news, uh, you know, gets more clicks — worried about the idea that, uh, everything is a bubble. And by some metrics, uh, that’s actually accurate. I think the challenge though, is the following — and why “Everything’s going to crash tomorrow” is probably a bad answer. Um, for the folks that are talking about everything is an extreme right now, what I think they often overlook are three things. Number one, U.S. corporate profit margins are at high and durable levels, mostly because companies are using more technology where they can to squeeze more margin out of their revenues. Number two, we’re in a place where U.S. economic growth is now, uh, fairly broad based. And, uh, I think it’s important when we talk about those jobs numbers earlier that we still have a way to go before employment is, um, satisfied. And then number three — this is, I think very important — the stock market is not the economy. The stock market is really geared towards businesses selling to other businesses, towards businesses selling towards outside the United States. And ultimately the stock market and economy can do different things. Well, the economy’s strong. The market is an asset, if you will — a financial asset that is subject to the swings and interest rate and all the other financial conditions that we could talk about. But I think to get to, um, “everything is a bubble” narrative and have to believe it, you get to a place where you’d have to shake at the average and even the professional investor’s confidence. And if you don’t have a recession on the horizon, which we don’t think, and you have very strong job markets and you have increasing consumer spending, and a Fed that is not shaking your confidence (they’re trying to instill it), it becomes very hard then to talk about, “Well, the bubble’s gonna crash.” Because ultimately, it would have to turn on a loss of confidence. And I just don’t see that.
Mark:
So when we look at this, uh, we only have another minute or so, but when we look at this economy, which does seem to be surging in some ways, and we talked a bit about the disconnect between, you know, the raw numbers and what we feel on the street and those who are being left out of the, of the economy, et cetera. But when you, when you look at, at, at all of this, and you look at housing prices, you look at stock prices, you look at these things that do seem to be super high, uh, but they’ve been super high for a while. Is it just that that leads, uh, people like, uh, you know, Grantham and these guys who are, uh, you know, those who are pointing to a bubble, to those to which you referred. Is it just that, that things are so high that they feel as though, “Hey, this is just a cycle you can’t maintain”? Is that what provokes that kind of, or, or can you just keep moving upward in all of these different indices?
Chris:
Well, you can’t keep moving upward in all indices all the time. There’s a powerful force in finance called reversion to the mean — that just means things kind of move around a general trend. And we are away from the trend at this point — there’s no doubt about that. I think that the main issue though is that, you know, when you have this much liquidity — the central banks, not just the United States, but all around the world have put so much liquidity into the system, and it didn’t have a lot of homes to go. I mean, we’ve punished savers for 12 years now, uh, with interest rates below the rate, at or below the rate of inflation. So you get to a place where the money went somewhere else. And in the ’50s it was full operation twist: Shift it more into risky assets. So I think the doomsayers look at that and say, “Well, all that money’s gonna come out.”
Chris:
And I find that hard to believe because there’s a lot of wonderful businesses that have been created. There’s a lot of corporate, um, I think margin story that remains to be told. So, could we be in for a bumpy ride? Yeah, I think so. And I think, I think we’re closer to the bottom than the top right now, but, uh, I think a bubble, um, dislocation moment is gonna be a ways away. And as I said earlier, it would require the loss of confidence in the central bank or in our political system, and I just don’t see it yet.
Mark:
I love how you boil it all down. Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management here in San Francisco. He’s the Wolfe of Montgomery street, Brett! That’s what he is, Christopher J. Wolfe. Hey, Christopher, we, uh, love talking to you. Please come by again. Christopher J. Wolfe. Good stuff, man. He, he makes it understandable to me. Yeah. From First Republic Private Wealth Management.
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