PGIM Alts Forum: Art or Science? Asset Valuation in a Long/Short World
PGIM recently brought together a panel of experts to discuss the opportunity set in liquid alts.
In the wake of the COVID-19 economic and market shutdowns, the avalanche of stimulus — both monetary and fiscal — has successfully bridged the world economy from the depths of the shutdown to the vaccine and rapid growth recovery stage. As the impact of the virus wanes in many parts of the world, there are already ample signs of an uptick in inflation. But will it last? That’s one of the key questions we posed to PGIM experts in our latest webinar. The following are just a few highlights of the discussion.
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>> Welcome, everyone. Thank you for joining us for today's webinar. The regime change. Low for longer or the return of inflation? Against the backdrop of COVID 19, the pandemic, economic and market shutdowns, we've had an avalanche of stimulus from central banks. It's probably high time we explore our current inflation levels. It's on everybody's mind. It's in every newspaper. It's on TV now. They're transitory. Or if pent up demand and increased economic activity that's going to push inflation persistently higher, what does this mean for your portfolio? And we've got two great experts to help us answer those questions. I'm Cameron Lochhead and I'm going to be your moderator for today's discussion. Well, let's get started. I'd like to take a moment to introduce our two panelists. With us today we have Robert Tipp. Robert, wave your hand so we know where you are. Chief investment strategist and head of global bonds at PGIM fixed income, Robert is well known in the industry for his long term and correct conviction on lower for longer interest rates, especially at the long end of it. So Robert, great to have you here. Also we have from London Sushil Wadhwani, chief investment officer at QMAW who is also well known in our markets, especially from his former role before he got in to the money management business as a central banker at the Bank of England. Today we're going to cover the yield curve. We're going to look at the labor market. Everyone's got their eye on that, don't they? And then how much inflation heat the central bankers can tolerate before they make a change. We have two very different perspectives from two very accomplished financial veterans here at PGIM and I hope you're as excited about what's to come as I am. Let's try to keep it interactive, and we'll try to keep it popping through. Let's start with a question on everyone's mind which is this. U.S inflation has recently been exceeding expectations, and yields on treasuries have ticked higher. Robert, first question to you. Is higher inflation here to stay? Or is this a blip in what is a secular downward trend? What do you think, Robert?
>> I think inflation has been relatively stable. It's been range bound for a couple decades in developed economies after coming down after the '70s and '80s. Central banks have had rates under good control. The rate of inflation that is. And they've been guiding down nominal interest rates I think in an effort to get better growth outcomes and fine tune the economy. But there have been a number of times when inflation has briefly spiked up, and some of those, you know, lasting a year or two or three. The last one happening in the boom 2004 through 2006. This one that we're going through right now is incredible. The COVID crash. The whole COVID phenomena has been incredible, and now it has surging demand. We have bottlenecks. There aren't enough semiconductor chips. There's not enough water in Taiwan for them to make all these amazing [inaudible] systems so, you know, it could go on for a bit longer. But I think in the end, you know, two, three, four years down the road you'll be back to the secular environment that we're in. Relatively low and moderate inflation. Central banks probably trapped at their effective lower bounds. So I would say temporary.
>> That's interesting. Sushil, you might have a slightly different take on the inflation backdrop. What's on your mind right now?
>> Thank you. I think a lot of what Robert says of course makes a huge amount of sense. It's also quite close to what the Fed is saying. And of course there are some very important transient components in what's happening to headline inflation at the moment. However the key difference for me at the moment is that the central bank in the U.S has changed the way it's operated. It seems to me that the principal reason that inflation has remained within a narrow range over the last 25 years in many developed countries is that we had independent central banks who were preemptive, and who were clearly committed to a very simple inflation target or something very close to it. And that helped anchor inflation expectations. What's happened in the U.S is worrying in the sense that that clarity has disappeared. No one quite knows what the Fed is doing in the sense that the Fed talks about maximizing [inaudible] and it also talks about being reactive rather than preemptive. So we are in a new world, and we are in a new world where we've got plenty of risk. You haven't had macroeconomic policy settings at such an expansionary level for a very, very long time. And this is coupled with supply shocks. And if inflation remains high, and it looks to ordinary people that it's persistent, they will change their behavior, and therefore there must be a risk that inflation expectations move up and that inflation terms are to be more persistent than either the Fed or Robert think.
>> Let's think about root causes that are causing the levels to rise. Obviously we had a big spike last week in CPI and it's no secret that this stimuli -- and not just from Biden's new administration, but also from the central banks around the world -- are playing big roles. And obviously here in the U.S and other economies the vaccine roll outs [inaudible] pace, but what are some of the other contributing factors that may not be as obvious? I'm going to go to Robert on this one. You know, on the flip side, what are some of the larger longer term forces that are exerting downward pressure on rates that you see, Robert? What would you -- what are people not seeing?
>> Right. Yeah. So I think there is a lot of pricing power. So, for example, right now you know there's a lot of demand. If somebody wants to go to Disney World, they're going to pay for that ticket. Right? If they want a car, they're going to pay for that. And, you know, multinationals are very large. They have this pricing control. But on the other side of that, they're hiring back fewer workers than they fired. And so in the end you end up with a shift in the share of income and an ongoing increase in growing inequality. And this is not an ESG comment. This is a comment on knowing -- seeing and developing a hypothesis on what's going on. And so what we're seeing is, you know, pretty good pricing power at these types of points in the economy. But in the end you don't have that high of a demand for capital. And if you think back say to the 1970s, the 1980s, when the top marginal tax bracket in developed economies was uniformly between 60 and 95%, top marginal tax bracket, interest was deductible. Passive losses were deductible. You were in an environment where the after tax cost of borrowing was very low relative to inflation, and now it's very high. And so these kinds of reasons are causing the long term rates to follow the central banks lower. They're not using their forecasts. They're backward looking. You know, inflation, going back for centuries in the absence of say a major world war, in developed economies has generally been very low. And especially in periods where you have an aging demographic. So I think the pricing power is good, but your bottom line inflation results are a little bit below where the central banks want those inflation numbers to be. They're guiding down the short rates. The long rates are following. And you're not getting the incredible private sector borrowing that you might expect at low interest rates because capital is still expensive relative to opportunities and relative to the amount of capital the producers and the economically active private sector elements would find attractive to borrow. I think that's kind of the constellation.
>> Yeah. That's -- that's a lot to take in, Robert. And you're looking at markets -- how many markets do you follow on your team? When you think about the countries in your -- the economies in your universe, how many countries do you follow on your team?
>> A few dozen.
>> Right? I mean you've got a big portfolio. And so does Sushil. You know, I want to go to Sushil as a former central banker who's been inside. You talked about the changes at the Fed and, you know, a lot of people are, you know, wondering does the Fed have, you know, better information or different information than the public. You know, some people have said, you know, are Powell and his Fed governors in denial? Are they -- is there a war going on inside the FOMC? You know, what do you think the tipping point is? You know, yesterday I was preparing for this and I saw the "Wall Street Journal" had a piece which many people on this call may have read. James Mackintosh wrote the story about 4% inflation rate could be the magic number. And the fact that he puts on the table is that correlation of stock and bond prices are at their lowest point in more than 15 years, and if you look to the 4% number, if we do get there, in fact, since 1957 U.S inflation has risen past 2 and past 4% nine times. And eight of those cases, in eight of the nine cases, stocks got hammered three months later. Sushil, what do you see as the tipping point for the central banks and specifically the Fed before they get up and take action?
>> Thank you. There are at least two or three questions embedded in that. So if I take them in turn, in terms of the Fed obviously one has enormous respect for them. You know, you have some of the best people in the profession at the Fed. And of course they do have access to better information than many of us, you know, essentially through their contacts. And it was chairman Greenspan who initiated this connectivity with the private sector in terms of getting a lot of higher frequency information. Now, having said that, I think this particular federal reserve is doing something that, from the outside, looks dangerous to me. When I was first appointed as a central banker, the late Eddie George who was the governor of the Bank of England at the time, the first time he met me he said, "The single most important attribute as a central banker is to recognize what you don't know." It's to know what you don't know. And to therefore always maintain flexibility in terms of policy and in terms of how you're thinking about the world. And what's dangerous to me is that the Fed has committed itself to this new monetary framework where it's going to be reactive at exactly the wrong time. And it's doing that coupled with this stubbornness of continually telling us that inflation is going to be transitory. It's much, much better in their situation to remain flexible and to stick to the simple mantra of saying, you know, "We're watching. If things get out of hand, we will react." That's a much better way of ensuring that inflation expectations don't get dislodged. What they're doing currently is incredibly risky, and it's risky because it could dislodge expectations. It's also risky in terms of markets. So to take your question about 4% being a tipping point, I don't, you know, know whether that -- you know, there's a redline at 4% -- but it's certainly well known for a long time that higher inflation is very poisonous for equity multiples. So many people will recall the late professor Franco Modigliani's famous article in 1979 about the link between inflation and equity multiples. And certainly if you look at the history across countries there's little doubt that when inflation gets higher, it does tend to be subversive of multiples. And given where the markets are now, this is especially dangerous.
>> Yes. Well, investors demand a premium, and yet we -- to take risk. And yet we've seen corporate bond spreads, high yield spreads, tighten. Robert, I'm curious. You know, what do institutional investors, institutional buyers and bonds, you know, when are they going to start demanding higher coupons on longer dated paper?
>> Right. And let me say, you know, putting this together with the comment on equities and the 4% tripwire, I would wager that what happened in the past when you went over 4% and you ended up with bad equity returns, you probably had the central bank have to go stamp out the fire. Right. So that's the thing that's very brutal for equities is if they need to do that. And in this case you could add if they need to panic, change course, and stamp out the fire. And if they overdo it obviously, and they knock you in to a recession, you know that's the fear, but you have that reality. That was, you know, part of what was so damning about the mid '70s. And an entire lost decade in the stock market even though -- and the bond market even though growth was very high in the end on average over the '70s. In the U.S, at least. So in this case, you know, like Sushil said, you have to acknowledge what you don't know. And we don't know whether there's going to transient inflation or whether this is the beginning of the end and we're going to have a wave of inflation. And I'm keeping an open mind. But what I've seen, you know, ever since I started in this business in the '80s was that whatever interest rates were, they were too low. In the mid '80s I can remember FASB 87 was coming and rates were seen as too low, and you know investors did not -- you [inaudible] from a 15% ten year treasury to 7%, you know, by '86 thirty year treasury. And people did not want to dedicate. And the same, you know, continued until where we are now. In the '90s even though debt levels had been rising in the United States, in Japan, you know for -- in to the middle of the '90s at any rate in the U.S, but you know people continued to be concerned that rising debt levels were going to push up yields, were going to push up inflation. It didn't happen. Then we started with the first QE experiment with the Japanese. They've been doing [inaudible] operations since the '90s. Spent most of the last 25 years at 0. And people early on were, you know, "This is going to create inflation." And it didn't. And then the theories came up of why Japan was exceptional, but then we saw it all again after the financial crisis. And we saw it -- I mean frankly we saw it in the United States when the Fed went to a zero interest rate at the end of '92. We saw it when they went to 0 nominal rates, you know, in the mid 2000s, and when they went to 1% in 2003, and when they started with the QE along with the rest of the world after the financial crisis. But we haven't seen it. And so I'm not an economist, but I'm just trying to pay attention to what's going on, acknowledge what I don't know, and what I've seen around the world is rising debt to GDP ratios, aging demographics which are now getting worse at an accelerated pace in [inaudible] in China, in Europe, and slowing in the U.S as well and the rest of the DM. And that has coincided with this dropping inflation outlook, and there's only one silver lining on this. It's that the central banks have been able to guide down the term structure. The bond market is having nothing to do with believing that this is permanent. Keeps the term structure positive. And the silver lining is that this has continued to be a positive investment backdrop in equities, in bonds, and at this point in the cycle will remain so in credit as well. So, you know, very confusing environment. Definitely keeping an open mind, but this feels a lot like a lot of these points that we've seen in the past where you get the commodity spike. You know, concerns about the inflation wave. The central banks are going nuts providing liquidity [inaudible] money supply, debt, and so on. It will take a while. It could either be another 6 to 12, maybe 18, months, but my guess is that over that time period your credit spreads remain pretty tight. The Fed is going to end up, you know, in some kind of a very, you know, low rate environment on the far side of this. But, you know, we'll have to keep an open mind.
>> An optimist in the room. Robert, thank you. You laid that out very clearly. Let's go back to Sushil for a minute. Let's go to the economist. Our colleague Nathan Sheets, our chief economist at PGIM fixed income, has us looking at both commodity prices and also the labor market. And, you know, if we look at labor cost inflation facts, you look at the fact that you've got 8 plus million jobs in the U.S that are begging to be filled. It feels like there's a supply demand imbalance at so many levels, certainly here in the U.S. Won't employers be pressed to boost wages and maybe [inaudible] at some point, Sushil? And when does this become a spiral? What do you see on labor market pressures? And how important are they to your forecast right now?
>> Thank you. I agree with actually quite a lot of what Robert said. But, like him, I'm going to watch. I've learned as a portfolio manager that the key thing is to monitor and to change your mind when the facts change. But in terms of the facts you're pointing to, I do find them worrisome. And I find them more worrisome than at any point, you know [inaudible] inflation for about 30 years. So I look first at the commodity markets, and I see that more than half the commodity markets that I trade are in backwardation, and they're in backwardation already just before we're going to see a much bigger demand supply gap. And we're going to see a demand supply gap not only because the global economy's going to roll back in the next six to nine months, but in some of the specific commodities we're going to see a demand supply gap for a while to come because of the green agenda. And we know that in commodity markets, in some of them, it takes a long time to sort of grow supply. And therefore I can see commodities providing sort of upside support to headline inflation for some time to come. And then you correctly draw attention to the labor market, and it seems to me there are several things going on in the labor market. So the first step are these transient factors. So, you know, essentially some of the labor shortages are because schools aren't open yet or because unemployment benefits are temporarily high. So that presumably in the U.S sort of goes away by the autumn. However there are some more worrying signs, and you pointed to the labor market mismatch. That is the coexistence of vacancies in some sectors and unemployed people in the wrong geography or the wrong skill set. That we know from history can take a considerable period to put right. And I think the pandemic has played an important role in contributing to that labor market mismatch, and that may well turn out to be persistent. And that may well give you a wage pressure. You're seeing it also in my own little country, the U.K. We have incredible labor market shortages. In our case it's compounded by Brexit and everyone having gone back home to Europe in terms of labor supply. And then there's the third reason. And this -- I'm going to sound old fashioned, you know, like a sociologist or a psychologist now for a minute, but I think one shouldn't underestimate the role of norms in labor markets. And even though your president didn't manage to get the federal minimum wage through, I think it's not insignificant that this narrative of being fairer to people at the lower end of the wage distribution has attracted a lot of attention. So you've got several well known companies aspiring to the $15 minimum wage and sort of granting wage increases. You've had some states adopt it. And I think that combination is actually quite important. If I look back at my 35 years of watching labor markets, 40 years in fact, it's when norms change that you tend to get wage inflation. And admittedly I'm sitting afar, but it seems to me that norms are changing in the U.S labor market. And if you combine that with everything else I said, if I were a central banker in the U.S I would be very vigilant about wage inflation at this point. And I would certainly be talking tough in terms of how I would respond. But the central bank sadly is doing the opposite at the moment.
>> We're going to need to pass that along to chairman Powell. Thank you for that.
>> I comment on the chairman. Yeah. I agree, but I think you know the Fed and the whole point of the exercise is to create what is the central banking policy, the fiscal policy, that creates the best increase in welfare. And obviously that comes from productivity, but will manifest itself in employees earning a rise in real wage. And so I think the Fed has been very careful the last 10 years to pivot their commentary from wages being the enemy to recognizing that I think some of the academic literature tends to show that even wage price spirals, they don't tend to come from wage. They tend to come from inflation to wages, not from wages to inflation. And so I think that, you know, what we saw in the U.S, even the period of the greatest union power, and probably in other DM countries as well in the '70s -- right? Because we had no unions in the 1900s, turn of that century. By the time we got to the '70s we're probably approaching 25% of unionization in the U.S workforce, and what's critical there is that there was wage indexation to CPI and CPI blasted higher with the oil price hikes from the OPEC embargo. And the result of that was the rust belt. Right? So you can do whatever you want. You can charge higher wages. But if you're not competitive, your economy's going to go down. But I don't -- I think the point is well taken that a policy shifts to steadily rising minimum income. Then you're positioning DM economies, if that's an aggressive increase. So, for example, let's say everyone in the United States or a DM country became entitled to a $35,000 minimum income every year, and that that would rise every year at 5%. You know, then you are going to -- you're switching places with some of the EM countries. Like in Argentina 100 years ago which was a top economy, but through various policy problems that's the kind of monetization that can bring you inflation on a sustained long term basis, vicious spiral of rising financing costs. So probably about all of the DM countries have been retaining their class in industrious mines as VM economies relative [inaudible] stability. Long term rates remaining low. And they haven't hopped that wire in to an aggressive rising minimum income or some other kind of policy configuration that would turn you in to a Venezuela, Zimbabwe, and so on. But I think that's -- it's definitely something to watch, but so far we're definitely -- haven't hopped that line from a market economy, you know, to something that's in a vicious spiral.
>> Right. Wow. Way to lay it out there, Robert. We're going to be careful to watch that wire. I think before we pivot to guest questions I think we want to bring it home to portfolios and asset allocation. We have two questions related to the money you both run. And maybe a couple of best ideas or over weights or under weights that you see. But before then there's a really interesting question posed to an institutional investor on a call I was on a few weeks ago, and it was this. And like maybe Sushil can answer this question first, then Robert take a shot at it. Will bonds in the future continue to provide institutional portfolios with, A, ballast in the broader portfolio, and B, positive returns?
>> So it's certainly a question that we've been worrying about for a while. It's an excellent question. And, you know, if you go back to March 2020 what was interesting was how if -- you know, within the sort of multi country portfolios, you know, German bonds and Japanese JGBs did hardly anything for you. And it was the impact of this, you know [inaudible] factor effective lower bound in terms of yields. So we -- obviously we had equities fall massively in Germany and Japan in March 2020. And you got hardly any diversification benefit from holding bonds in those two countries. And with U.S yields much lower, if you had another big correction and, you know, obviously the diversification benefits associated with U.S bonds would be relatively limited, and for that reason certainly within our portfolios we have for some years now been looking for equity risk mitigation in other ways. So we have, for example, devised strategies using safe haven currencies, and then the issue there is about, you know, which safe haven currencies are the best and most optimal at a given moment of time in terms of minimizing the cost of that hedge. Or we've had strategies built around equity sectors or we've even done vanilla things like just trend following strategies. So the key thing is to build a whole set of equity risk mitigation strategies that don't depend on [inaudible] especially at the point when, for what it's worth, our models think that, you know, on a six month, one year, three year view, five year view, bonds are likely to be a very poor prospect in terms of returns. You know, certainly starting at this level of real rates and with the risks around inflation we don't think bonds are a particularly good place to be.
>> Yeah. Yep. It feels like a lot of asymmetric risk. So let's go to the -- let's go to the man Robert Tipp who -- for whom the developed market fixed income world is his sandbox, his playground. Robert, you can go anywhere. How do you answer the question, "Will bonds continue to provide ballast in a portfolio for --" particularly for fiduciary portfolios. Pension funds. Insurance companies. And will they continue to provide a positive return to investors?
>> Yeah. So obviously I don't know, but generally the correlation between stocks and bonds is negative. I would say 80% of the time. And the 20% of the time that it isn't is when you're at a starting point where rates are too low. So in the second half of 2013 taper tantrum. Or from March 2020 when you're at 40 basis points on the 10 year treasury. You know, those are the points where you've got a surge in yield, and you're at risk of that correlation working against you. Now at this point cash rates are low. You're at 0 on the Fed funds rate, but the curve is very steep. The real yield curve, you know, is steeply positively sloped from the five year on out. So in our view a decent term premium in the real curve. And the inflation market -- so inflation swaps, break evens, those have had a surge from -- you know, depending upon the country and what have you, 0 to a half percent up to above average levels. And in the past all of these surges in expected inflation have coincided with peeks in nominal interest rates. So, you know, my guess is that it sounds pretty boring to buy a bond here. You know, a 10 year treasury at yielding less than 2%. But if you're looking at spread sectors whether it's investment grade or high yield corporates or higher or lower quality emerging markets, structure products, you're looking at the incremental spread, the fact that you're in an economic expansion which will be supportive of credit quality, that you're going to be rolling down the yield curve, if and as the central banks end up hiking less than what's priced in. And right now in Europe and the United States we're priced to go back to a 2018/2019 kind of world. And I don't think we're going back there. We're going to have a hot year or two, and then it's going to be an okay economy, but it is going to be an economy where most DM economies are trying to reduce their debt to GDP levels so they're going to go in to fiscal retrenchment. And even in the most aggressive economies like the U.S, they will not be providing the same level of fiscal stimulus. You'll be going sequentially negative, and so I think as a result again you're likely to end up with a market where bonds outperform cash, stocks presumably outperform bonds, and you get some negative correlation. I would just want to add one thing, though. On the commodity prices that, you know, they are in short supply. It's been a supportive market for that. But we've seen this any number of times over the last few decades. And you get some short term [inaudible] in to inflation, but I don't think the strong commodity backdrop out there, you know, negates the fact that you're generally going to end up in a low and stable inflation backdrop.
>> I'm tempted to go to the audience questions, but I still think our audience would be very interested in one last thought from you two on portfolio construction. You know, in terms of strong high conviction over weights, high conviction under weights, let's start with Sushil. When you look around the planet, what trades either short term or secular positions do you like or would avoid?
>> So thank you for that. [Inaudible] everything I do is short term because I know that there are a lot of unknowns out there which might derail any position I have. And therefore we pride ourselves on being agile. But in the short term we like commodities. We particularly like some of the metals where you've got two themes. Essentially you're playing the inflation theme and you're playing the green theme. And also in that category we like carbon emission permit futures. And the -- in terms of the other position, we are still looking for a yield curve steepening, and we're looking for this particularly in Europe where we think there's a decent chance that the greens are a part of the government. And we believe that markets are underestimating the impact that the greens will, you know, through various channels ultimately have on the European yield curve. I better stop there.
>> Very interesting. Thank you, Sushil. How about you, Robert?
>> Yeah. And Sushil's comment reminds me of another point I wanted to make. I think the main thing as a sponsor, as a shepherd of assets, hiring manager, the main thing to look for is alpha. You know, it's a chaotic environment. There's a lot of uncertainty. And you want to know your manager's edge. And so whether you would expect this or not, book ending Sushil's comment, I'm looking at the long term. And I find that those signals, those trends, we have better odds of capturing and less so on the short term movements. And so from that perspective looking at the markets here I see this first half of 2020 is a period of where DM rates markets have gone from excessive pessimism in the world to excessive optimism. Where they're projecting this aggressive expansion persisting in to the indefinite future when in fact things are going to be a lot more subdued a couple years down the road than what's priced in right now. And so in terms of over weights and under weights in a portfolio, I think the front end of the curve you can safely under weight in the U.S. You know, the first couple years because they're assuming the Fed will remain on hold and that there will not be a scare on the Fed in the next couple years. I think treasuries are not very attractive, and the U.S has one of the world's weakest fiscal structures which is to say will be the least inclined to really seriously try to rein in its deficit [inaudible] and so on. There's no structure or inclination to do so like you have in many other countries around the world. Investment grade corporates will probably outperform. But your sectors like high yield corporates will probably outperform IG by a fair margin. Emerging markets are facing a lot of fundamental challenges on the far side of the COVID crisis here. But still I think there's likely to be -- recently the performance from both hard currency emerging markets and hedge local were -- local yield curves are incredibly steep in a lot of these countries. A lot of risks too, but there's a lot of premium in those markets. I think the structure product markets have done amazingly well. The performance of collateral, commercial and household, through this crisis and the management, you know, probably is a reaction to what happened prior to the financial crisis in L.A. They've done really well, and so there are opportunities there, different points in the capital structure across those markets. So we see a lot of opportunity in fixed income over the longer term. And generally a buoyant backdrop and one where, you know, it feels like a pretty contrarian call at this point even though rates have backed up a lot.
>> Well, you both are kids in a candy store with your tool kit. Thank you for sharing some of your best ideas. I think it's now our last few minutes. Let's dive in to a couple of audience questions. I'm going to combine two. This is related to fiscal policy. Let's pick on the U.S here for a moment, Sushil. We'll start with you. There's a question about, you know, is the U.S in a debt trap? And is the massive fiscal stimulus leading to greater government borrowing going to result in a [inaudible] of private borrowing? Or no since, you know, they're awash in capital anyway. How do you look at, you know, the government versus the private market in this kind of stressed out fiscal -- federal fiscal dilemma we're in right now?
>> I would split this question in to two separate ones. So first there is the issue of in essence whether we should expect much in the way of crowding out. I would have thought at this stage in the cycle that there isn't actually much evidence that what the public sector is doing in terms of borrowing is going to be associated with any significant degree of crowding out especially at a time when global savings ratios are so high. And therefore that would not be uppermost on my list of concerns. Of course that could change, but that certainly wouldn't be the first thing I would be worrying about at this point. In terms of the second aspect of the question as to whether the U.S and indeed other authorities are in a debt trap, so some people assert that it's going to make it difficult for central banks to raise rates in essence because public sector debt ratios are so high. Now there may in some countries be some merit to that argument at some point. I think not yet, but you know if I take a parochial view and look at the U.K, I don't think we are in the sense of an economist in a debt trap, but there may certainly be political problems associated with the Bank of England trying to raise rates under this government because this government is committed -- this is the Boris Johnson government. Is committed to not having any fiscal retrenchment. You know, they can think of 27 things they want to spend on, and they want to keep spending. And the fear I have around them would be that if the bank threatened to raise rates then you might find that the U.K government changes the marching orders of the Bank of England. You may find that the U.K government suddenly decides to give the Bank of England a nominal GDP target. And therefore in that very indirect sense the level of debt does indeed pose a threat to the inflation target. And in that sense there is a debt trap, but it's this very indirect sense. Robert.
>> On the crowding out, you know I would say that all this aggressive borrowing in EM countries and DM countries is going really well. All the government borrowing is going really well because the central banks are buying a ton of bonds. So as long as that continues, it's not a problem. But you know we're seeing a big backup in European rates over the last couple months of the [inaudible] it sounds ridiculous to say it, but the 10 year [inaudible] is almost up to 0. And that is one fears that as the economy recovers ECB is going to slow down its rate of purchases. And you know so these central banks, you know, buying a trillion, you know, or so a year, U.S, ECB, out of the bond market, and that helps a lot. In the long run I think that's a real concern. There's talk about, you know, Fed taper at the end of this year. Fed is saying they're not going to taper until they see substantial progress towards their dual objectives. If they want to create 8 million jobs, if they're only running at a quarter million or half million a month, it's going to be -- you know, or like the prior month people were expecting a million jobs a month. So it's a huge bit off there. Are they going to get there in eight months? Or is it going to take them 32 months? So at some point we're going to find out about the crowding in. I have -- you know, so far I think things are going pretty well on that front. Markets are functioning amazingly well. But it'll be something to keep an eye on. You know, especially as the central banks begin to reduce their purchases.
>> Yeah. No doubt. No doubt. Well, we're down for one more really interesting question from our audience, and I think we can all agree all of us on this call that it's May of 2021 and no investment discussion would be complete without a reference to ESG and climate change. So let's get the view from an economist and from a fixed income strategist, and here it is. Is the pivot to ESG and climate change going to lead to greenflation, retrofitting buildings, electrifying vehicles? You know, you saw president Biden at the Ford factory yesterday. These are all very expensive investments that need to be made in both the public sector as well as the government support. How does that play in to -- is greenflation something that either one of you are worried about or thinking about? And how should investors consider the costs to convert to more environmentally friendly use of energy?
>> Now if I could come in, Cameron, I would say it's, you know, essentially another piece of the jigsaw which does make me worry about inflation because you've got a number of different factors coming together, and meanwhile all the reasons why we are going to, you know, make our economies more green are highly laudable. They're coming at a time which may turn out to be inconvenient in terms of the inflation outlook because they're coming at a time when money supply growth is high, fiscal policy is very expansionary, and now you've got all these other reasons why your costs are going to go up. So, you know, certainly the examples you gave, just gave, in stating the question. The example I gave earlier in terms of the copper price. So the copper price is importantly going up for green reasons. And you've had an important copper mining company tell you that they're not going to bring on new supply until the copper price gets to $15,000. Now that's about 45% away. So and you've got this whole constellation of factors coming together there, and I think a part of the reason large firms are willing to grant more significant wage increases is also the ESG agenda because they're getting pressure to essentially run companies not just in the interests of shareholders, but in the interests of all stakeholders. Now I give that may be a very good positive development, but it's going to give you cost pressure.
>> How about you, Robert? What's keeping you up at night with greenflation, if anything? You seem to sleep very well at night.
>> Well, let me talk more about the markets than the ESG itself. I mean on the greening itself and the ESG, you know, who likes smoke? Everybody loves efficiency. But, you know, there are a range of views on that topic. Let me set that aside and just go right to the markets. And I think there's a difference for stocks and for bonds. For bonds it's easy. In the long run it's a plus. I mean if you have a world with electric cars running off of solar, if you're actually moving parts, you have a lot less maintenance, you have a lot of efficiency, you probably have less need to borrow. Right? So in the long run that could be very efficient. In a lot of ways it could be very efficient. In the short run, it's a nightmare. Right? Anything that involves massive fiscal is a nightmare. It pushes up growth and takes you in to this overdrive economy with shortages that causes people to freak out and push up inflation expectations and assume that you're going to have a forest fire, you know, of an economy that burns up the bond market. But frankly I think that's what's priced in the market right now. For the equity market I think it's more of a bonanza because the fiscal stimulus, any kind of a rushed government effort to push money in to the economy, is fat margin business for the large companies that can deliver in size. And so their profit growth which already has been really impressive through this COVID crisis then goes up from that starting point. You know, if they're -- I mean if you need a lot of turbines, you know who can make a world full of turbines in short order? Not everybody can do that. Those tend to be listed companies, I would guess. So that's my short story on ESG.
>> Boy do we need -- we need a lot more time, gentlemen, but I think our time is just about up. I know the climate change subject is near and dear to most everybody's heart and I want to point out the PGM weather and climate change white paper which was published just a few months ago. It goes quite deep in to exploring the portfolio implications of global warming, and climate change asset class by asset class. So Robert's team and Sushil's team all contributed to that document. I'd encourage you to look at pgm.com's website. Gentlemen, Sushil, Robert, thank you so much. You've given us a lot to think about, some of which will keep me up at night. We'll be watching the central banking behavior. We hope it's good behavior, Sushil, but they do need to be watched carefully. Sushil's clearly a bit more cautious about the longer term risk of inflation. Robert is quite confident that inflation's on a transitory path and we can keep our long duration and credit [inaudible] on in our portfolios.
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