Ailman: We'll See Spots and Spikes of Inflation in 2024

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Bloomberg Jan 2 02:08 · 8930 Views

Chris Ailman, CalSTRS CIO shares why he expects spikes in inflation in the new year. He also explains how increased geopolitical risks and climate change could affect the economy and markets in 2024.

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Transcript

  • 00:00 Chris, yeah, I have to say, you've put me to shame here, that dashing tuxedo, your black tie and your champagne, boy, Happy New Year to you.
  • 00:06 Oh,
  • 00:08 apple cider.
  • 00:09 But that's OK.
  • 00:10 Happy New Year to you, David.
  • 00:11 And it it really, it's a year that deserves a toast.
  • 00:14 I'm right there with Larry.
  • 00:15 I mean, I expected a recession,
  • 00:18 but we certainly didn't have one.
  • 00:19 And it's a spectacular year of 20, double digits, 20%,
  • 00:23 just amazing.
  • 00:24 So what about on the equity side, up over 20% or even up over 40% on the NASDAQ.
  • 00:30 How much of that was just the anticipation of Fed cuts?
  • 00:34 Well, you know
  • 00:35 it, it all happened in the last quarter of the year because really when you look at the equally weighted S&P 500 that was actually negative back at Halloween and then had a huge rally here at the end.
  • 00:47 It was really those seven magnificent stocks.
  • 00:49 And on the NASDAQ that really shows up
  • 00:52 best year since 99.
  • 00:54 Now that's a lot to celebrate.
  • 00:55 But wait a minute, think about 1999.
  • 00:58 For those of us that were in the market,
  • 00:59 you can't forget 2001 too.
  • 01:02 So
  • 01:03 it was a difficult time.
  • 01:04 We'll see how this carries through.
  • 01:06 But what an incredible year for equities.
  • 01:09 I was wrong.
  • 01:09 I predicted, David, that the markets would be down this year because,
  • 01:13 well, Gee, the Fed raised interest rates 525%.
  • 01:17 Should have had a rough market.
  • 01:19 And let's be clear, the Fed hasn't eased rates, but the bond market has done it for them.
  • 01:24 You pointed out it's right back where it started the year, But my goodness,
  • 01:28 the long bond dropped almost 100 basis points since the Fed pivot.
  • 01:32 That's amazing in such a short period of time.
  • 01:35 So what does that say to set up next year, 2024 for you?
  • 01:38 You have a lot of money at work.
  • 01:40 How are you taking a look at 2024?
  • 01:42 How are you positioning yourself?
  • 01:44 Well, first I'm celebrating because thanks to this market
  • 01:47 all time record high for our fund $327 billion.
  • 01:51 But I have to tell you
  • 01:53 there are certainly dark clouds on the horizon.
  • 01:55 I think
  • 01:56 the Fed has pulled off the soft landing,
  • 01:58 but we still have a lot of risks that we have to get through.
  • 02:01 And
  • 02:02 you know, hope
  • 02:03 does triumph over experience.
  • 02:05 I know
  • 02:06 Larry Summers likes to say that it shouldn't, but sometimes it does.
  • 02:09 And right now I'm hopeful.
  • 02:11 I think the feds pulled it off, but
  • 02:13 when you step back and look at this market we've now created a double top in the S&P 500 in December of 21 and now in 23
  • 02:22 as a as an old time technician that makes me a bit worried.
  • 02:26 That doesn't mean we should have a bear market, but I think
  • 02:29 a president's election cycle we know in history is at best
  • 02:34 a low single digit return in the S&P 500.
  • 02:37 I would expect you know the like the elves barely positive
  • 02:42 to
  • 02:43 some of our forecasts that we've looked at are slightly negative.
  • 02:46 So
  • 02:46 right now people's expectations are certainly damped down in the next year.
  • 02:51 I hope the public and the private markets finally open back up
  • 02:56 because private equity and real estate
  • 02:58 really had a struggle last year.
  • 03:00 The markets were almost frozen.
  • 03:02 We're starting to see a few transactions,
  • 03:05 but certainly in the commercial office market
  • 03:08 values are going to reprice down dramatically.
  • 03:12 And then in, in private equity we're starting to see merger Monday here in December, every Monday a few announcements.
  • 03:18 That's a good sign that maybe that market will open back up.
  • 03:21 So of course I don't want to look at the half empty part of the glass.
  • 03:24 I want to continue the celebration you're having there.
  • 03:27 I I endorse it.
  • 03:28 At the same time what about inflation?
  • 03:30 We're so eager to get it behind,
  • 03:31 behind us.
  • 03:32 Have we got it behind us and are there some structural factors that might bring it back again?
  • 03:37 I think so.
  • 03:38 David, I think you know the Fed has been have said pretty much they are willing to accept 3%
  • 03:44 and one of the first things I do every day is is go on the Bloomberg and look at the quantity stage
  • 03:49 and watch where oil is.
  • 03:50 Now oil isn't the only driver of inflation, but it's an interesting signal.
  • 03:54 It's been pretty calm in the 60s and 70s in here.
  • 03:57 So
  • 03:58 I think inflation is going to stay where it is and the three probably won't get to 2 and Larry Summers can criticize that, but
  • 04:05 three is good enough for the Fed,
  • 04:07 but it's going to be sticky.
  • 04:08 When I look long term over the next 10 and 20 years,
  • 04:12 I think we're going to see spots and spikes of inflation,
  • 04:16 mostly just due to climate change and disruptions.
  • 04:19 I mean, look at the Red Sea
  • 04:20 and the change there, the climate change issues for the Panama Canal.
  • 04:25 Those things affect shipping prices and that's
  • 04:27 an inflation that's embedded
  • 04:29 well above 2 and the Fed has to decide what they can tolerate.
  • 04:33 So Chris, finally given all those risks and opportunities, how do you position your fund?
  • 04:37 Well you know David, we're we're very neutral at this point to our asset allocation.
  • 04:41 Now that means we're long broke.
  • 04:43 So we like this rally in the market,
  • 04:46 but we're really not comfortable at this point in taking a big overweight
  • 04:50 into equities.
  • 04:51 Non-us was spectacular last year,
  • 04:54 also
  • 04:55 high 20% returns out of non-us stocks
  • 04:59 so last year.
  • 05:00 Here was kind of a price to perfection and this year looks a little tough.
  • 05:03 There are still two wars going on.
  • 05:07 Geopolitical risk is an all time high.
  • 05:10 I'll quote Larry Summers, the world's a dangerous place.
  • 05:12 And so that's got me concerned about taking a lot of excess risk.
  • 05:17 And I think that while we are at an all time high, I have a tough time seeing this market having legs.
  • 05:23 The Magnificent 7 will do what they'll do,
  • 05:26 but I think even they've gotten ahead of themselves and the bond market has overpriced.
  • 05:30 I think that Fed rate cut it's it's not as aggressive as they expect
  • 05:35 in March and May.