Webinar Replay

The Global Edge: Volatility Quotient Takes Center Stage

December 1, 2022

On this Office Hours replay, Kevin Flanagan (Head of Fixed Income Strategy), Jeff Weniger (Head of Equity Strategy), Aneeka Gupta (Director, Macroeconomic Research), and Nitesh Shah (Head of Commodities & Macroeconomic Research) look at increasing volatility in the financial markets. The focus of their discussion centers on central bank policy, global bond yields, inflation & commodities as well as developments within the equity arena.


This discussion can be supplemented with the latest Global Edge publication.


Hi everyone. Thank you for joining today's Office Hour session titled, The Global Edge: The Volatility Potent Takes Center Stage, where you'll hear from Wisdom Trees, Kevin Flanagan, Head of Fixed Income Strategy; Jeff Weniger, Head of Equity Strategy; Aneeka Gupta, Director of Macroeconomic Research; and Nitesh Shah, Head of Commodities and Macroeconomic Research.

So with that, let me turn it over to Kevin for some opening remarks.


Kevin Flanagan:

Good morning, good afternoon, good evening, wherever you are watching this Office Hours. Thanks for coming on and joining us here for the next 50 minutes.

One thing that I wanted to do on my housekeeping end was just to reiterate, we like to have this kind of a free flowing conversation with you, the audience with us. We encourage you, discuss questions as we're going on.

This isn't just, we're going to talk for 45 minutes and then do five minutes Q&A after. Please throw your questions in as we're talking. We'll get to them, I promise you.

And it makes for a lot of fun, a lot of good discussion here. If you're going to take macroeconomics in the market and make it fun, that's what we're going to try to do for the next 50 minutes.

So with that, I'm going to turn it over to Jeff for a couple of opening comments as well, and then Nitesh and Aneeka some brief comments. But in the meantime, Irene, if you could call up that first polling question, we'll get this underway.


Jeff Weniger:

Okay. Well, I see the polling question number one popping up on my screen. And I think what we'll do is we'll address this and then Nitesh or Aneeka, let's hit the one that came in on gold, silver, and commodities that came in ahead of the call.

Let's make an attempt on this call to discuss every central bank that of importance or that the audience would care about equity valuation, fixed income forecasts, the like.

Okay, so let see here. Poll number one: do you think global central banks are overreacting? And this is an A or B situation. A, no, inflation needed to be brought down. Or B, yes, they should pause to see the economic impact of their aggressive rate hikes.

Okay, I'll tell you what. Let's do this, Aneeka. Before we get over the agricultural commodities and the gold and silver question that was over here on the right hand side, let's take this to this issue of we are now at 4% on the top end of the range here with the Fed.

The ECB tagging along here, despite the fact that we have evidence, let me minimize this thing, that most of the global economy, certainly in the developed world is either in or entering recession, I would hypothesize. Is that correct?


Aneeka Gupta:

Yes, absolutely. Here in Germany, we are in a recession and technically in eurozone we will be entering one by the end of Q4. Clearly, our situation looks slightly... is improving on the upside.

And the reason I say that is be it the recent PMI numbers, be it the ZEW survey, forward looking indicators, be it the recent consumer confidence numbers, they're all indicating one clear fact. We do have a recession priced in for the next six months, but that recession is looking a lot shallower than we previously projected.

I think one factor that is aiding that rebound, which is likely to be a lot faster, is the fact that we've been able to secure these energy supplies for this harsh winter ahead.

And that's brought about a bit more relief on the side of European equities. So I think for now, our viewpoint is the recession in the Eurozone is likely to be a lot shorter in terms of duration and the rebound is likely to be a lot faster ahead going forward.


Nitesh Shah:

Yeah. I'd add to that we've had a bit of relief on the energy side. The storage levels of natural gas across Europe has been quite strong because the wind has been quite mild. So it hasn't been a huge draw on that, but weather can change quite drastically. So you never know how that will shape out.

But one thing we saw in the data releases of the past week is actually inflation numbers in Europe actually came in below expectations. That's a big break from the past. So about 27 months of inflation numbers coming above expectations, that's just been broken this week.


Kevin Flanagan:

I think let's take it over here on the other side of the pond here in the US, Jeff. What I find interesting, we got GDP yesterday, it was actually revised upward for the third quarter, just a little bit under 3% now.

And this morning we got personal spending numbers for the month of October. So a little sneak peek here into the first month of the final quarter of the year. And it was relatively robust also on the income side of the equation.

And what I've seen, sell side research, people upping their ante here for fourth quarter growth in the US maybe up to around 2%, which is interesting.

I called up GDP. Now, for those of you not familiar, that comes from the Atlanta Fed. Its track record is no better, no worse than anybody else out there. But I had to click on it a couple times because I saw their fourth quarter number is 4% for US GDP. And that kind of stuck out at me here. So it's interesting.

I know Jeff, you and I had done an Office Hours domestically a couple of days ago and we were talking about a double dip recession. So it's if...we went negative first and second quarter, second half of the year looks to be pretty good from a broader economic setting. Now I know you know, could talk about housing and some of these other areas that are falling off the cliff, but what was interesting is to see from a broader perspective some of these numbers coming in.

And I think that is what Chairman Powell was kind of looking at yesterday. And we can't begin this conversation without really mentioning Powell's appearance yesterday because it ended up resulting in a huge rally in the Treasury market and obviously bringing other global sovereign rates with it.

And I was sitting there for the life of me all yesterday afternoon. Yes, that's what I was doing. I was not decorating for Christmas or the holidays.

I was sitting there trying to figure out what did Powell say that the 10 year Treasury could go from almost 380 down to 360, a 15 to 20 basis points reversal.

And even when I was looking at the headlines that was reporting on it, they were like, "Oh, Powell just reiterating the comments he made at the press conference," but I guess it's in market interpretation. And that we keep hearing about this pivot from 75 to 50, which he seemed to, I think clarify that's coming in less than two weeks.

But he continued to talk about, I think higher for longer. He did mention that they are looking at potential risks or imbalances from raising rates and monetary policy lag. And I think that's what the market was really hanging on to at this stage of the game.

So I think it's going to be interesting. I'm a big believer that the market's a lot smarter than me. So you don't question these things. But throughout my career anyway, many times I've seen Fed comments misinterpreted and I'd be very curious to see that we're going into the blackout period here for the Fed.

But if there's going to be some pushback, because what has occurred since the last Fed meeting is something very important that Powell and company are looking at, and that's financial conditions.

And financial conditions which have been tightening throughout the summer and early fall since we had that better than expected, let's call it the cooling off number for CPI here in the US accompanied with the market reaction in Treasuries yesterday, financial conditions have eased up a lot.

And I think when Powell went home last night and was cooking up his dinner, putting his mac and cheese in the microwave, he was probably saying, "I don't think that's what I meant to have react to this," that, "I really was trying to be even keel, provide no new impetus here to what the Fed is thinking."

So I'm really curious to see in a couple of weeks how Powell and the Fed sort of bring a new frame of reference here, and then I'd like to throw it back to you guys over there on the other side of the Atlantic. I mean, is there any messaging issues you think coming from ECB President Lagarde?

Has she been spot on here you think with the markets? Or do you think we could come up with a Powell like... Maybe you have to be a little bit more careful what you're saying.

Has there been any kind of misinterpretations that you've seen up to this point or you think the ECB has been very clear in their messaging?


Aneeka Gupta:

So it's quite interesting, Kevin, the reaction that we saw last night after Powell's speech. Interestingly, we've had a number of speakers at the ECB also reiterate their view on the trajectory of interest rates.

And the ECB has itself said that the recession in the Eurozone is likely to be a lot shorter in duration and hence due to the shortness of its intensity, it's likely to have less of an impact on bringing down inflation.

So we've heard influential members like Villeroy actually state that the ECB will need to continue raising rates until we see core inflation coming down.

We believe that's unlikely to be the case. In fact, we've just had a 75 basis points rate hike. Our view looking ahead will be that we're likely to see another 50 basis points rate hike at the next meeting in December, followed by another 50 basis points and then two 25 basis points increases.

And I think from that point on, that would take us to spring where we would see the depository rise to 3%. And from then I would expect the ECB to actually begin reducing its high bond holdings by the spring of 2023.


Kevin Flanagan:

3% administered rates in Europe. Jeff, is that something you would've even imagined just a few months ago? I mean, it is fascinating. We've talked about it here in the US, this normalcy of where rates are going, but 3%, right?

I mean Europe was always talked about as being the king of the zero interest rate policy and negative rates. Nitesh, I mean, looking at that, does that surprise you now?

When you sit here on December 1st and you think about 3% next year for the ECB rate, I mean, is that something that anybody was thinking about say six, nine months ago?


Nitesh Shah:

Absolutely not. Nobody was imagining this six months ago, a year ago. We are in a brand new territory, but the key question is even 3%, the terminal rate will be lower than where the Fed goes.

And I guess the thing is that we've... In this period that we've been the last year with the Fed having a lot more reason to raise rates faster and to a higher terminal rate, the dollar has appreciated.

Now, we've seen a bit of that going to reverse at the last week or so. The question is, if ECB ends up landing a lot lower than the Fed, do we go back to dollar appreciation?

But yes, we are in a completely different environment, what the ECB has done, breaking away from zero or negative interest rates, and obviously we've got the quantitative tightening to come as well. That's all going to add to much tight financial conditions.


Jeff Weniger:

Well, on the matter of the dollars for anything, oh here, we've got basically a coin toss result here, 51% to 49% on the central bank's overreacting.

It's interesting. Myself started to enter more of a team transitory of late. I was more of a structural inflationist maybe six, 12 months ago. Now, I'm starting to believe that a lot of the inflation data will be coming down and that yes, they are overreacting and that we can't have Lagarde and Powell go as aggressively as some of-


Kevin Flanagan:

Jeff did you just say the T word transitory? I thought we retired that last year.


Jeff Weniger:

Well, the transitory people were incorrect, but now it's time to get onto a potentially transitory thesis. In my mind, I mean, look, the fact that James Bullard came out and was jawboning a 7% Fed funds rate, call that five or six days ago, seems a bit irresponsible to me, amid what is pretty clear to me to be waning economic data on the U.S. front. Inside of the last week, I don't remember which days I saw these data points being released, but the Philly Fed Report was ugly. That was four or five days ago, the Philly Fed came out and it was ugly. The new orders data was absolutely tumbling. It's indicating recession.

Perhaps some sort of scenario, Kevin, as to what you were maybe ruminating on five or 10 minutes ago where we had a recession in the U.S. in the first and second quarter and now we're like out of it maybe. And then maybe we re-dip almost very Volcker-esque with a double dip recession, which is what we had in the early 1980s. That the bull case is coming out of that, we entered a bull market that by and large, was uninterrupted from 1982 to 2000. Now granted, that was after a very, very choppy era from, call it, '66 to '82, where the market didn't really do anything as opposed to what we just came off of from 2009 to 2021, which was a raging bull market of epic proportions.

Now, we also had the Chicago PMI barometer falling out of bed. I believe that was yesterday's data or the day before. It's corroborating that. And we keep coming back to this issue of the labor market. And this is one where I don't think of the four of us, any of us have the answer on these various concepts that have been tossed around in the last 12, 24 months. How many Americans, since I'm speaking to American data, have long COVID? Does anybody have the answer? We don't know. We just don't... Nobody knows.

How many Americans, Germans, or Brits or French, it doesn't matter, retired early after they saw their portfolio melt up? They were 62, 63 years old. They thought that they were maybe going to work another year or two. They retired early and never came back into the labor force. All of these various concepts.

And we now have, in the U.S. we have an unemployment rate of 3.7. And many on the street, though I would point out that there are some like the B of A's of the world that are saying, year end 2023 will witness U.S. unemployment at 5.5. So a very sober view from B of A. Kevin, Goldman saying unemployment here in this country, 4.2 year end next year, I believe. The Fed's saying 4.4. Conference board is in the low fours. Philly Fed forecast of strategists like ourselves in the low fours.

How much does the stock market or risk asset care about the labor market, which we all know to be a lagging indicator? Well, if everybody's suspecting it'll be 4.2 to 4.4 on U.S. unemployment, which would seemingly drag everyone else's unemployment along with it, and we do get a five handle in the third quarter or fourth quarter, what are the implications for consumer discretionary? I think the implications are bearish for consumer discretionary relative to broad beta for example. So, I think that's one of the postures that's necessary in '23, thinking defensively about equity allocations, defensive value, these types of concepts.


Kevin Flanagan:

Jeff, I think what you were talking about here is an important concept. And I'll mention something here on the U.S. and then I want to throw it back to Aneeka and Nitesh for the views on the European side is, I know we've had internal discussions about this year it was all about the inflation data. And does that change? Okay? If you get the sense here that we have peaked, inflation coming down Nitesh, like you said, after 20 something reports and we're seeing it today.

Today we got the Fed's favorite or preferred core PCE, personal consumption expenditure price index came down. People were a little bit excited. I threw a chart out there that said, "Okay, it's gone from 5.4 To 5, let's like not pop open the champagne quite yet." But certainly, we're headed in the right direction. And I wonder though, based upon Powell's comments yesterday that he was really bringing the discussion along a lot on the labor market front that the decision making process is, okay, yeah. We want to see inflation come down.

But it's almost as if they're really focusing on what they want to see in the employment numbers, which by the way, here in the U.S., we get an 8:30 AM Eastern time. And if you look at consensus forecasts, it's another roughly 3.7% job list rate up 200,000 non-farm payrolls. That's not a number that's going to make, I think, the Fed happy, that they would like to see some further slowing than those kind of numbers. And I find it interesting, is that the focus? Is that where we're going to turn the calendar to when we focus next year, that it's going to be the real time? The macroeconomic numbers are going to play the more pivotal role, if in fact inflation of its own accord basically begins to come down from the peak levels. Does it then become just really, what are the economic numbers doing?

And I'm curious to see in Europe, in the UK, and Japan, if you want to go there too, you guys, I mean, is there much discussion about that? I mean, Aneeka, you mentioned that looking at shallow recessions now, is all that already priced in? I mean, I can make that case here in the U.S. that a 360, 370 10 year high yield spreads where they're at, it seems like a shallow type of recession is factored in. So what if the numbers... Let's just go the other way. What if the economic numbers actually hold in better than expected? Is that something people, advisors, investors are talking about?


Aneeka Gupta:

From my standpoint, Kevin, I definitely believe that's priced in. I mean, we've heard it from the mouth of the ECB themselves saying that the recession's going to be a lot shallow and hence that pass through to bringing down inflation would be a lot more muted. And the reason I say that this has been priced in is because over the last four weeks, we've seen European equities outpace performance of U.S. equities, part in parcel I would say that was due to a better earnings performance by European equities.

And in addition, I think the reason for that is we haven't seen European companies actually transfer that cost push that they've benefited from down to the consumer. And I think looking ahead, what the Eurozone economy is going to be faced with is a brief jump in employment rates. Because if you look at advertisements by companies for European job roles, you are looking at the wages being offered now at a 5% higher than the year ago.

So, I think that is definitely not being priced in. The shallower recession, we've seen that equity performance, our performance actually play out. And I think this rise in wages that the Eurozone hasn't really enjoyed for a very long time is what's going to be an event that is not yet priced in markets. And hence, I believe owing to that, having that selective bias of value over growth, at least within the European equity realm, would be a lot more prudent. We've also observed, if you look at earnings per shared performance or value versus growth, and plot that against the underlying performance of the [MSCI] European Value Index and the [MSCI] European Growth Index, you can see them moving in lockstep with each other.


Jeff Weniger:

Nitesh, can you hit this one on agricultural commodities and gold and silver?


Nitesh Shah:

Absolutely. Yeah. Maybe just a quick comment on what we were just discussing though. First, I mean, I don't think we're fully out the woods here in the sense that, yes, there is a bit of prospects for growth. But going back to the inflation question, while a lot of the things that drove inflation up were supply size shocks, I think it's not prudent to consider them to be transitory going back to that T word, because these shocks can be persistent. And I think that's what we're going to face, that the energy prices actually could go back up again. And because there's a big group of people out there called, OPEC, that don't like low energy prices. They don't like low oil prices and so they're cutting back on production as a result. So I think that hurts Europe in particular, given its natural gas shortage and its pursuit of using other energy sources to wean off Russian supplies of gas.

So, I think there could be a couple of more shocks along the road coming up this year. But agriculture, and the gold and silver question, I think are great. So, let me take gold and silver first and then we'll go to ags, and maybe Aneeka, you can comment on ags as well.

So gold, I guess a big thing to think about gold is, a lot of people just view it as, "Wow, wasn't that a disappointing year for gold?" We've lived in a period of such high inflation and gold was supposed to be that hedge against inflation. What happened? Well, two key things. If you look at the implosion in the bond market, so bond yields have risen massively and the dollar had appreciated massively, they've acted as massive headwinds against gold.

And the way I look at gold is, you have to look at every component in combination, not just looking at these things individually. And my models, when I take everything in combination, feels that gold is held up extremely well under these pressures. Normally based on historic trends, when you had a bond news rise so much and dollar appreciate so much, gold prices should have been falling in the region of 20%. Yeah, it's only falling less than 5%. And we're actually seeing a bit of rise there now as well.

Gold as a defensive asset should do well, if these recessionary scenarios unfold during the course of this year. And one of the key measures is the bond yield curve has inverted. The 10 and two had been inverted for a while, but briefly yesterday, you saw three month rise above the two year, briefly. So, that's further indications that we could see economic weakness, and that could be something quite positive for gold.

So, gold I think could have some strength coming into 2023. The question is, how would it fare relative to silver? So, a lot of people look at gold relative to silver or gold to silver ratio. And that had been elevated more than two standard deviations above historic normal about a month ago, is gone to about one standard deviation above historic normal, meaning that gold is still doing better than silver, because silver had a little bit of a rally.

Now if we're going into 2023, it's a recession that keeps gold higher, then I think gold will continue to outperform silver. But if we do see a pickup in economic activity and we see the energy transition that we're in pickup pace, and silver is very important for the energy transition... It's used for a lot of wiring, which for electrification and for solar panels. We could see quite a sizable pickup for silver network could support prices. Silver's already in a supply deficit. So if that gets recognizing prices, that could prop the silver price up. But if it is recession that's dominating the markets, gold will probably do better.


Jeff Weniger:

Agricultural commodities.


Nitesh Shah:

Yeah, so agricultural commodities, we talked a little bit of energy before. Agriculture is almost an energy derivative, right? To grow crop, you need to put fertilizer in the ground. Fertilizer is petrochemical product made from natural gas or oil products. With high energy prices, you're going to get high agricultural prices, if cost price pass through. If farmers thrift on fertilizer, you're going to get lower crop yields. Once again, pushing up prices. So our outlook for agricultural commodities is generally higher because of the high energy prices. But on top of that, we've got weather disruptions as well. So we're in a La Nina weather pattern. What that means is that a body of water in the Pacific, when it cools below a certain level, it changes trade wind patterns around the world. That means that some places that should be drier or wetter and places that should be wetter could be drier or cooler. And that just messes up the yields of crops. And that is likely to keep prices higher as supply is hurt.

But we have our resident expert in agriculture here, so I don't know if you have anything else to add, Aneeka?


Aneeka Gupta:

No, that was brilliant. You've really summarized it in a nutshell, Nitesh. I would just add that we're also over and above that. The trajectory is headed higher and that's, as Nitesh mentioned, largely predicated on the fact that we do expect energy prices to move higher.

But right now what we are seeing is a bifurcation in the market. So within agriculture, if you look, you have the grains on one end, which are comprised of wheat, corn, and soybean, and on the other side you have the soft commodities, which are cocoa, coffee, cotton, and sugar. And these commodities, you see the bifurcation taking place where the grains are holding up slightly better than the soft commodities because the soft commodities tend to be more cyclically oriented. And so since we've been getting more concerns of recession, those rising recessionary fears have been weighing on demand as opposed to bringing out the realization that we have a shortfall in supply amongst a number of these commodities. So I think that's worth highlighting as well. And yeah, those are interesting points.

And just further, if you look closer on the ground, a number of countries globally are facing very high food prices. So even though we've seen agricultural commodity prices correct, the price of inflation is rising in a number of countries, even in the UK, because of the cost pressure that you're seeing from higher food pricing, and that's really affecting households locally.


Jeff Weniger:

I want to ask Kevin, hold on, Kevin, ask you about one of the themes that I've heard you say many times, which is vol. But just really quickly for the viewers, if you were one of the US-based viewers, you could find a weekly writeup that Kevin and I do called Minds on the Markets. That's for the US viewers. For global viewers here, we have blogs on the various websites. Some are written by Aneeka, some are written by Nitesh, the two of us here in the US. That is on the WisdomTree blog. The four of us also wrote a piece recently called The Global Edge. This is a recurring piece, where we are hypothesizing on the concept that I'd like you to hit, Kevin.

We started this year, the first digit on a 10-year T-note in the US was a one. It was 1.6 or something. And then two months or so ago, suddenly we were at 4.25. And our society has not been used to fixed income vol like this since the 70s, since the Volcker years. We just had this great moderation that was essentially going on there for 40 years. And so the question I pose to you, Kevin, I don't know if we have the answer, I think we have the answer, is 2023 going to also be characterized by this kind of annoyance of vol in fixed income like we just had to live through in 2022?


Kevin Flanagan:

Jeff, you and I have been doing far too many of these things. You read my mind. This is exactly where I was going to turn the conversation to. The name of this office hours and the piece, what's the one constant that I think we can say going forward for next year? And that's volatility. In my opinion, I'm just a bond guy, so I see it there. But I think you all could probably make the argument we'll probably see volatility in other arenas as well.

And I think a lot of it has to do, in the US we talk about Fed-induced volatility. I mean, let's broaden it. Central bank-induced volatility seems to be, I think, where we're going next year. And the last 12 hours of trading here in the bond market is just proof positive of where we may be going as the markets try to figure out where is central bank policy going to land and for how long?

For us, it's never been about 50 or 75. It's where's the terminal rate going to, how long is it going to stay there, and when do we start thinking about the Fed signaling, the ECB signaling, the Bank of England signaling rate cuts, when are they coming on the horizon? And I think if you look at those big three central banks, we're all kind of in the same boat. And that's where I think we all believe this volatility is here to stay.

So obviously, when you're looking to put money to work and for asset allocation standpoints, certainly you should be focusing on more of the strategic, trying to get rid of some of this noise of where you think you're going. But unfortunately, for the investor, you're going to read about it. You turn on Bloomberg TV, you turn on CNBC, right? I mean, that's what you're hit with every single day. They're going to be talking about, "Oh, yields were up 20 basis points, down 20 basis points. This is what the stock market did." These wild swings back and forth seem to be unfortunately really because it does create an environment that is more of a challenge for the investor because, Jeff, to what you were saying, especially in the bond market, you're not used to this kind of volatility.

And the other thing that what are we not used to? It gets back to what I said before, a 3% handle on administered rates in Europe, a 4% going to 5% federal funds rate. We haven't had rates this high since, before the financial crisis is essentially where we're going with this. And to me that's the main theme. I think that's going to be just a recurring theme. The constant, the quotient that was mentioned in the title of where we're going with this.

And before I turn it over to you guys, we need to get to polling question number two, and then we can riff off of that as well. Thanks, Irene. So I mean, this just goes right into what we're talking about here because this is what central banks and the markets are just going to continue to watch. And when do you think inflation will finally begin to recede? And has it already started? Has it peaked? Or we're just going to flatline for a little bit? Or do we see it really come down next year or is really 2024 the year we can expect inflation, let's say, to get to central bank targets?

Nitesh, I'll throw it over to you real quick because you were mentioning, and Aneeka as well, that maybe the food and energy price declines could be reversed. So how does that impact headline inflation? We're not talking core inflation here. When you open the newspaper or you go online or any of those other things, like Twitter or CNBC or Bloomberg, when they talk about inflation, it's not excluding food and energy usually. It's what's inflation doing.

So are we setting ourselves up at all? And I want all three of you to chime in on this. Are we setting ourselves up for any kind of surprise in headline inflation that okay, we may come down, we may come. Greenspan always called looking at CPI as being akin to looking in the rear view mirror. What happens if food and energy reverse? Could we be having a conversation, say our next time we do this with the four of us three, six months from now, we're like, "Yeah, inflation came down. Guess what? It went back up again"?


Nitesh Shah:

Yeah, I think there's a sizable risk. I mean, I think right now inflation is receding. It's coming down. But are we going anywhere close to target anytime soon? That could be much, much later.

But as I mentioned, the potential for shocks, to be persistent, are huge. And one of the key risks that I see on my mind is what happens when China wakes up, right? We're getting signs of that already that it's starting to soften some of its zero COVID policies. When that happens, it will start consuming things. Chinese people will start traveling maybe one time in the near future.

When that happens, I think there'll be huge fuel shortages. We're already seeing massive shortages in metals. Even though China's got a massive real estate problem, metal demand from China hasn't fallen. If that starts to increase that demand, I think a lot of prices will start to increase. So I think the risk for upside is still pretty large.

But once again, it's not necessarily coming from the normal sources of excess demand in say the US or Europe. It's more global shocks that are causing these price increases, which will be a difficult thing for central banks to handle.


Jeff Weniger:

Aneeka, do you want to field this polling question, or not the polling question, the question that came in, did you see it?


Aneeka Gupta:

I don't have it. No, I don't have it on my screen.


Jeff Weniger:

Okay. So I'm going to read this aloud and we'll make this open-ended. We'll see if Aneeka wants to field this. What is a macro factor that you believe is not receiving appropriate attention but you believe could develop into a gray swan? And I'm going to add, or also maybe a black swan if you have something like that.

And I was kind of thinking, Nitesh, I would go directionally. If I was to field this, I'm kind of thinking a gray swan might be our Western sensibilities, not appreciating the extent to which China is unwinding its property bubble. We just don't allocate a lot to Chinese equities here in the West. There's a major disconnect between the proportion we tend to own in that stock market and the influence of that economy on the global order. That's something I would think would be one of those gray swans that perhaps Americans, Brits, Germans, and the like would not be appreciating quite enough. Let's see. Aneeka, where's your mind on this one?


Aneeka Gupta:

Well, my mind is on the fact that a lot of the subdued inflation numbers that we're getting is because of the protection that governments are giving via fiscal packages. So here in Germany, the German government's rescue package is trying to absorb that increase in the cost of energy imports.

Kevin, you mentioned Japan. Japan, again, Governor Kishida has said that we might see a rise in wage inflation up to 3.1%. And investors are tracking that very closely. But overall inflation will remain subdued at just around the target level of 2%. And the reason for that are government subsidies towards the import of energy prices.

And hence, at some point, obviously that is a big strain on public budgets. It's shielding investors, but it could also fuel aggregate demand. And up to what point can all of these different governments continue to extend the strain on public budgets? As long as they do that, could that also aggravate inflation on the upside? Because as investors would then have a lot more room to actually use that saving that they received from that burden of higher energy prices, could they also end up deploying that back into the market.


Jeff Weniger:

Bank of Japan's an interesting situation because we had been, what would you say, Aneeka, maybe 90 days ago, it really, really looked like that 0.25% on a 10-year JGB might quite possibly be busted. That was and is the concept of yield curve control. Now that we've caught a bond market rally elsewhere, it appears that maybe the Bank of Japan has won.


Aneeka Gupta:



Jeff Weniger:

It was a big question mark.


Aneeka Gupta:

They've been lucky.


Jeff Weniger:

Go ahead, please.


Aneeka Gupta:

Very lucky. No, no, I agree with you.


Jeff Weniger:

Yeah, we were at yen 150 there for a while. Now I think it's something, 135, 136. Sharp rally in the yen just really since what? Mid-October or so, maybe a little bit earlier, maybe late September at this point. But it's only been 30, 40, 50 days the yen has really caught some love here. And it looked like they were going to be just vomiting up USD to try to protect it. But maybe they've been victorious.

And to the extent that the Japanese have not needed to, I don't know, go to 50 or 75 on a 10-year JGB, then that is on net inflationary, that they have been able to maintain this quarter-century-long policy at this juncture.

And yes, the number three that is being tossed around sometimes in polite circles with respect to Japanese wage inflation or even, gasp, Japanese regular inflation, that is not a rogue figure to be thrown around anymore. It is a very real possibility. The Japanese perpetuate full employment. Always a two-handle on unemployment there. So that's one of the intriguing concepts.

Now, at 43 minutes past the hour, I did make a brief allusion to China and Nitesh did also. We would be remiss if we didn't emphasize it to some extent some emerging markets. So I'm going to lay emerging markets as a concept on the table here for either of our two European colleagues to field in one second right after we read poll number two. When you think inflation, will it finally begin to recede? 39% said, "Yes, it has already started." 41% said, "It's going to do it in 2023," and 20%, about one-fifth are saying, "Inflation will begin to recede in the year 2024." Okay, let's get a little bit more color on the whole China situation. I'm fascinated by it.


Nitesh Shah:

Yeah. Well, I guess people are protesting on the streets. They not happy with zero COVID. Zero COVID is holding back economy. It's inhibiting people from going to work. There were reports that people were trapped in buildings while there's a fire going on because they couldn't get out because of zero COVID.

So mass discontent with those policies could start to change the approach to zero COVID, and that's a big test for President Xi because he is in his unusual third term. There's never been a president that's got to a third term, and he has to hold this fragile one-party politics steady. A social uprising cannot be tolerated.

So there is a big risk that China awakens and will suddenly start to demand a lot of the things that hasn't been produced in the world in the last two years. When that happens, that could, one, spur global growth, but, two, raise prices. But as you mentioned, there's probably going to be some opportunities in China if you're willing to look at some of the undervalued equities there as well.


Kevin Flanagan:

Nitesh, does that mean that if you were to have answered that inflation question... What would you have answered? 2024? Are you thinking China is awakening, that we may have an inflation surprise next year? That's right. I'm going to put you on the spot.


Nitesh Shah:

Yeah. No. I mean, the month-on-month numbers, they are receding, but there's potential for it to reignite. Getting anywhere close to target for any of the major central banks is going to take a while. So 2024 for getting to target for sure for me, but I could see prices doing as you were talking about with growth. Could you see a W-shaped growth? I can easily see a W-shaped sort of inflation trajectory as well.


Kevin Flanagan:

So we've got about five minutes left. So, Irene, do me a favor. Call up the last polling question, and we'll put a nice little bow on this.


Jeff Weniger:

Kevin, if you would field the question with respect to Fed that is in the portal also. Continue.


Kevin Flanagan:

Yeah, sure. So this is have you begun positioning your portfolio for next year? Quite simple. Yep or not quite yet? So curious to see that.

In terms of the question with respect to the Fed, is there a disconnect between money supply, the Fed funds rate, and recession? So it's interesting that when I first started doing this, we were called Fed Watchers. Every Thursday at 4:30 PM Eastern time... I'll make this quick. Don't worry. Money supply was as big of a number as the monthly Jobs Report is now.

Then the Fed themselves basically said, "We're not really looking at it." So the markets didn't really look at it. But I know, Jeff, you tweeted, I saw the tweet today, about M3. I'm going to come to you on this. If you look at what happened with the growth of money supply, it was a harbinger for inflation. And if you look at what's going on now, it's probably a harbinger maybe of dis- or deflation. So bring us up to date on what you saw with M3. I think that would be interesting in a way of answering that question.


Jeff Weniger:

Sure. We remember that we stopped reporting M3 years ago, but the OECD does continue to tab M3 among every major economy that you would care about back to 1959. Six-month rate of change in that through September was -1.09%. Six-month rate of change in that in October is -1.06%. Those are the sharpest declines in M3 on record on these half-yearly timeframes because a lot of it kind of peaked out on this money supply stuff March, April, May. A lot of the aggregates tended to do that.

The issue at hand on the pro-inflation upside surprise camp is, "Well, yeah, sure, Jeff down 1% over the last six months, but did you happen to see what happened in the 24 months prior to that? It just went through the sky on that." So that is the issue there.

Now, we got... This one came in here on the rail strike. I don't know how much this issue has resonated outside of the United States. We had a major, major issue with... We're not used to industrial action here, not only in the United States, but the world over in the year 2022.

One of the themes that some of us have hypothesized in the last few years in trying to get a gauge for this would be that maybe there would be some sort of return of the 1970s rolling industrial action. We've seen the power of, for example, the trucking associations here in the US during COVID, in Canada during COVID, I've got a paramedic going by, so I apologize, and, of course, now the rail workers. We also saw the likes of the British and the Californian dock workers in 2021 really, really holding a strong hand in terms of labor versus capital.

And to the questioner here, Jack, I don't know that I have very many insights on the last 24 to 48 hours with this rail issue, but it is extremely topical, at least in the US news cycle. I don't know that it's going to go away. There are demands for better working conditions, better wages on account of we have a three handle in unemployment. I don't know if the two counterparts in Britain had a view on that.


Nitesh Shah:

Well, here in the UK, there's strikes going on pretty much every day. You've got barristers on strike, nurses on strike, millworkers on strike. It's chaotic, so-


Kevin Flanagan:

Nitesh, what about macro strategists? When do you go on strike?


Nitesh Shah:



Aneeka Gupta:



Nitesh Shah:

I'm unsatisfied with my pay. No, but that's the root cause of things. We've got inflation in double-digit numbers, but nobody's wages are going up by that much. People believe they've taken a lot of hardship during the worst of the COVID years, and they expect to be remunerated. It's not going to happen because, obviously, it just feeds into this inflation problem. If people are given those higher wages, you'll just get the inflation problem escalating.

So that is difficult, but what it does... It dents economic growth, right? For everyday people aren't doing their productive things, economic growth is suffering. So it is a bit of a tricky situation over here. The only way to really control it, I think, is for central banks to have that success in bringing inflation down. Then demand for wages will actually follow suit. I don't know if you had any other comments to add, Aneeka.


Aneeka Gupta:

No, I absolutely agree with that. Yeah, I think the macro strategists should be going on strike soon as well, Kevin.


Kevin Flanagan:



Jeff Weniger:

Is it probably-


Kevin Flanagan:

We'll pretend we didn't hear that. All right, you guys? That'll be a secret-


Jeff Weniger:

Aneeka, references to the 1970s industrial action, are they overblown or are they accurate? Are we entering some sort of era like that, or am I just kind of... I don't know. I don't think we are, but I think it's something to be respected. What do you think?


Aneeka Gupta:

Yeah, I would agree with that. I think it's still at a very nascent stage. In an economy like the UK where we're already in a recession, you're seeing those voices getting louder and louder from all sectors as Nitesh highlighted. All sectors of the economy are beginning to protest. So it does shed a light on things to come.


Jeff Weniger:

Hopefully, no three-day work week and rolling brownouts. All right. Poll question number three, have you begun portfolio positioning? Okay, it looks like about two-thirds, 67% said, "Yes." The other 33%, you might want to get around to it. It's December 1st. So we'll see how that ends up going.

Okay, now here we are at 52 minutes past the hour. I think, yes, we did get to all the Q&A. Not many left in there. Kevin, do you want to go ahead and wrap this up?


Kevin Flanagan:

Yeah, sure. I just want to thank Aneeka, and Nitesh, Jeff, for coming on. This is our global office hours. We're looking to do this on a more regular basis, timing it with the piece Jeff mentioned that the four of us co-author, our Global Edge piece. So be on the lookout. Hopefully, during maybe early February, we'll be back at this again to see what, if anything, has changed.

But back to the title of this, one thing I don't think is going to change is that volatility. So I'm going to sign off from there. On behalf of everybody on here and our audience, thanks for tuning in. Hopefully, we'll see you, and have a great holiday season.




Kevin Flanagan and Jeff Weniger are representatives of Foreside Fund Services, LLC.

Nitesh Shah and Aneeka Gupta are employees of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management, Inc.'s parent company, WisdomTree Investments, Inc.