Active Insights

Rates, Inflation and The Fed with Onsel Emre

July 23, 2021 Putnam Investments
Active Insights
Rates, Inflation and The Fed with Onsel Emre
Show Notes Transcript

In this episode, Chris speaks with Onsel Emre, Ph.D.  Dr. Emre is an Analyst in the Global Fixed Income group.  She specializes in analyzing macroeconomic, political, financial, and other policy developments in global markets. Dr. Emre is responsible for making directional and relative-value interest-rate, inflation, and currency recommendations in major economies.  During the conversation, they touch on many topics, including: 

  • The current labor market
  • The pandemic’s effects on employment
  • Rates
  • The Fed, CPI and inflation
  • Wage growth
  • The peak rate of change in economic activity
  • The growth of debt

 

This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. This information is not meant as tax or legal advice. Investors should consult a professional advisor before making investment and financial decisions and for more information on tax rules and other laws, which are complex and subject to change.

 All funds involve risk, including the loss of principal. You can lose money by investing.

 Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary prospectus if available, containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

 

Putnam Retail Management                                                                           AD1714294 7/21

You should consider the fund’s investment objectives, risks, charges, and expenses carefully before you invest. This and other important information is contained in the fund’s prospectus available on Putnam.com or by calling 1-833-228-5577. Please read carefully before you invest.

Putnam ETFs are distributed by Foreside Fund Services, LLC. Foreside is not affiliated with Putnam Investments.

Putnam Retail Management AD2557752 11/22

Active Insights

Putnam Investments


Episode 5

 

 

Title

Rates, Inflation and The Fed with Onsel Emre

 

Patrick Laffin: Welcome to Putnam Investments Active Insights, a podcast series hosted by Chris Galipeau. Chris is the Senior Market Strategist in the Capital Market Strategies Group at Putnam Investments. Each episode, Chris has an in-depth conversation with a different Putnam portfolio manager to share timely insights on the markets and global economy.

 

Chris Galipeau: Thanks for joining us on the Putnam Active Insights Podcast. This is Chris Galipeau, Senior Market Strategist. Thanks for joining us, everybody. Today, we’re joined by Onsel Emre of Putnam’s Fixed Income Division. Onsel’s been with Putnam for 14 and a half years, roughly, and spends her time focused on helping form the firm’s views on global rates, inflation and  currencies among other things. So, Onsel, thanks for joining us on the podcast today. Welcome!

 

Onsel Emre: Happy to be here.

 

Chris Galipeau: One of the things that I think is interesting for our listeners is to hear from the PMs about how they got here and the journey to get here, and so I’d love for you to walk us through where you were up and where you went to school and how you ended up at Putnam.

 

Onsel Emre: Sure. I studied actually electrical and electronics engineering at undergrad in Turkey, but when I was studying I started thinking Turkey, as usual, was going from one crisis to another and I was thinking what was the point of studying and designing hardware or software chip if there are bigger problems in the country I’m living, the country I grew up. So, after finishing my undergrad in engineering, I moved to economics. First, I had the master’s degree in Turkey in economics and then I came to University of Chicago for PhD program. And, I had my PhD there and I was about to go to Fed actually.

 

Chris Galipeau: Oh, really?

 

Onsel Emre: Yes. Jim Bullard hired me to St. Louis Fed.

 

Chris Galipeau: Is that right? Oh the Hawk himself.

 

Onsel Emre: Yes. Right now, he was a doll. He was one of the Dovish members actually, a few years ago. And, I first accepted the offer and then I had another offer from Putnam and then I decided to join Putnam.

 

Chris Galipeau: Talk about making the right choice. You made the right choice. What was your PhD again?

 

Onsel Emre: Well, I studied Social Security programs and I looked for the optimal Social Security program. It turned out to be a not surprisingly program. The government mandates households to save a certain portion of their income for retirement and supports the rest. There’s an income distribution so there are some people they won’t able to save for future enough and government supports them with minimum retirement income. So, it’s a similar to 401(k)s they say but government mandates, let us say, for your retirement, if you cannot save enough I’m going to support you, this kind of a program. But this is very different from what we have right now. We have a pay-as-you-go system basic but there are some savings but basically nothing you can say so you are contributing and that contribution is going directly to retirees right now, so it’s a transfer program. Pretty different from the optimal I found in my dissertation.

 

Chris Galipeau: Right. We’re going to start just by talking about concepts and subjects that were asked about consistently. But before I get to that, I want to talk a little bit about the labor market and I know you have some strong opinions here and you’re doing some research now, but I think you might have some different shade of views here. So, I’d love to just start there and listen to you talk about what you think is happening here and how the pandemic might have influenced it and what do you say?

 

Onsel Emre: Yeah. It’s everything else. Labor market went through a huge change in a short period of time. Employment collapsed literally for a few months and then we had been looking like a recovery for a few months but many things told afterwards. So, if you look at the age distribution, for example, the people over 65, we had an uptrends before the pandemic, that’s told and the employment in that age range declined. Obviously, those people went back to retirement and we had a similar trend for people close that age range, 55 to 64, their employment declined and some of them went to retirement and they are not likely to come back to labor market. That’s one of the things. And it is partly a pandemic story because we were told to stay at home and we were working from home, childcare became an issue and care of elderly became an issue too. So, we started relying more on extended family, families united. Some of those people are just taking care of their grandchildren. They are not going to come back to labor market or if they come back later, a few years later, things improve, the pandemic is totally over they might feel comfortable and childcare issues might be totally gone, they might come back but those things take time. Besides, housing market has been booming and if you are thinking about downsizing, those people downsize, loved the capital gains and feel better for the retirement. So, that reduces incentive to come back to labor force. If you look at the other end of labor market, some people went back to college. We observed this thing in the previous conversation, the period after global financial crisis.

 

Chris Galipeau: I did that actually. I went to graduate school, [I remember that day].

 

Onsel Emre: Oh, really? Okay. Yeah. Makes sense because the job available to declines, your incentive to go to college rises and there is no improvement in that age range since, I think, last August of 2020. Employment has not been growing in that age range because they’re in college. Once you’re in college, even if wages rise, you’re in college, you’re not going to drop out of college. So, those things will take time to normalize. There are also what we call the prime working age. Even in that age range there are changes, 45 to 54, that’s the most puzzling age range to me. Actually, employment growth has been coming down especially in men. That is the most puzzling thing and I have been, “what’s going on, what’s going on” because there are some childcare issues that are affecting women more and you see women and men going at about the same pace in terms of improvement, but that age range is very different and usually childcare issues lessen than get older.

 

Chris Galipeau: Yeah. I’m in the middle of that age range and my youngest is going to be 21 here in a couple months. So, that’s interesting. What do you think is going on there?

 

Onsel Emre: If you look at the job application, business formation application. There’s a surge and actually in the last press conference, Powell talked about startups. There’s a surge in applications. This is part of the pandemic story. If you look at what people have been applying is called retail trade but online trade is part of retail trade. I’m guessing that some people started thinking about starting their business and given the rise in demand for online needs, so those things will take time. So, some will turn into jobs, some will not be successful and those people will come back to labor force but maybe in a few years, not immediately.

 

Chris Galipeau: Alright. So, what you said a couple times in there is the concept of time, the dimension of time, years. And so, in your view, could that be playing into, because Powell seems to be hyper focused on employment. Not worried about inflation, really. Continues very steady with the transient rhetoric. So, would that mean that their rates lower for longer here, policy rate? Until people can get back, if you’re right on that?

 

Onsel Emre: Actually, that’s very tricky. For months, if you look at the Fed’s minutes, several speakers and some of the region have actually papers on that. They have been discussing this issue. So, it looks like there’s a structural change in the labor market. Some people left the labor force for good or it will take time for them to come back to labor market. That means this labor supply is limited relative to demand for labor. That says labor market is tight. What happens when labor market is tight? Wages rise and that’s what’s happening. It’s true that fiscal programs distorted this story for a little bit. We are very generous on employment programs, especially this incentivizing people on the low and of the income distribution. That matters for some sectors like restaurants and entertainment or it matters for some status with lower wages. But beyond that, some people left for good, people retired, people went to college, thinking about starting their business, and consequently, wages are rising. That is an issue for Fed because they care about wage inflation more than CPI inflation. That is the issue.

 

Chris Galipeau: So, is it fair or accurate to break that down into, let’s say, supervisory wages and non-supervisory wages, right? To me it seems like, where we’re seeing the pressure is non-supervisory whether it’s retail workers or hospitality and leisure, that sort of thing. But you’re saying it’s possible that it’s at the higher level too and could bleed through, and that would be a problem.

 

Onsel Emre: That’s obviously true. You would expect more pressure at the lower end and that’s what we are seeing but we are seeing some at the high end as well. The wages have been all rising together and that is not likely to correct in a few months.

 

Chris Galipeau: Is there a level? Is it a wage level? Is it employment cost index? What are the tools in your kit to look at and monitor that?

 

Onsel Emre: Well, you can look at different measures and wage inflation. We have monthly and timely payrolls release and they have wage inflation, that’s a very good, I think, reliable indicator of it. You can see the segments at specific sectors. Most of the pressure is obviously in leisure and entertainment but all sectors are showing up a pressure.

 

Chris Galipeau: Alright. If this were to continue—let’s say it continues for a couple quarters, is that in your view? Would that be possible to make the Fed start to move quicker than the markets anticipating.

 

Onsel Emre: I think that turn the Fed hawkish. They had been discussing for a few months.

 

Chris Galipeau: In the last meeting.

 

Onsel Emre: Yes. If you read the minutes of March meeting carefully, they were discussing couple of regional heads, presidents talk about it and they had papers. I said, okay, this is changing. That’s why I had been on the nervous side. The Fed might be turning hawkish already, that’s an issue. It’s not, I think, broad base. So, they made this hawkish turn but I don’t think all, if when I see participants have that view. So, they have been debating and the debate has been intensifying because every month we have a debate stronger and stronger but still if you look at some members, they have been on the dovish side and that is, kind of, comforting to market players but that is likely to change.

 

Chris Galipeau: Okay.

 

Onsel Emre: That would keep you, you know?

 

Chris Galipeau: Because Powell did that last week, right? 

 

Onsel Emre: Yeah.

 

Chris Galipeau: He was a little more dovish.

 

Onsel Emre: Yes.

 

Chris Galipeau: Alright. So, this is a great segue. So, we’ll monitor that, we’ll monitor wages, it is something we’re asked about, it’s something that we speak to a lot. Thankfully, have been pretty much in line with you position there. So, that’s a pretty good segue to talk about just, I think, the overall economy, the pace of real GDP here. We’re going to have the strongest rate of change since 1983 in the U.S. roughly. Where do you think we are? Are we peakish PMI levels now? I’d love to hear your thoughts on it.

 

Onsel Emre: Yeah. Let’s start going back a few months. U.S. economy accelerated from the middle of February until May. Really it was an acceleration. There were a couple of factors. One, we were sustainably reopening and we had a large fiscal stimulus. And we were ready and we went out and [spin] but afterwards, we have been seeing some moderation activity that’s still strong. Still strong but it looks like the fastest acceleration phase, but activity is not going to come down quickly. U.S. has been leading, [and remember], the rest of the world was following. That will be supporting for U.S. activity as well and so we are dealing with supply constraints. Still, producers are trying to catch up. They are doing their best to produce. So,  that’s going to keep the activity high for a little while but it probably passed the peak.

 

Chris Galipeau: Okay, that’s interesting. Taylor and I did a lot of research on that a few months ago and looked at forward equity returns when you have manufacturing PMI data in the plus 60 range.

 

Onsel Emre: Right.

 

Chris Galipeau: And I think what most advisors struggle with is for the end client to say, “Mr. and Mrs. Advisor, I know I was afraid last year when the economy was in recession and unemployment rate was 15 and so on. Now the vaccines rolled out, now the economy is reopening, now I feel good, I think, let’s get back, invested to stock market should do well.” That’s not how it works. Stock market is already up 100% and what’s interesting to look at is if you look at forward one, three, and five-year returns from periods where PMI is north of 60, they’re de minimis. They’re significantly below the long run average of equities of 100 years and I think the one-year number was three-ish, the five-year number was probably four or five-ish and the seven or 10-year number was little higher so still positive, but the rate had change down significantly and I was thinking about that and which is why I wanted to ask you about it but...

 

Onsel Emre: Right, definitely. Most of the gains are made or in the cycle then PMI started rising.

 

Chris Galipeau: I want to spin back to just talk about inflation because we hit on wages and the wage component and how important that is to watch and we can even look at last week’s or the week before is core CPI number, where a lot of it seemed to be driven by used cars and trucks, air fair, motor fuel, right? 50% of core, that’s transportation-centric, had the biggest rate of change and seemed to drive it to me when I looked at the tables. Where do you stand? I know your views on wages because we just end labor because we covered that. Where do you stand on the rest of it? Can we really chalk this up to a combo of supply chain disruption and then almost a demand shock and a supply shock at the same time conceptually and do you think the bulk of that is transient or do you think it’s sticky?

 

Onsel Emre: Yes, I’m in the transient camp as well but half transient.

 

Chris Galipeau: Half transient.

 

Onsel Emre: Is it three months? Six months? Probably longer than that because we have those supply issues but remember, prices bring supply and demand into equilibrium.

 

Chris Galipeau: Lumber?

 

Onsel Emre: Yes. So, if prices keep rising, we tend to see a slowdown in demand and this exactly what we’ve seen.

 

Chris Galipeau: That’s right. That’s exactly right.

 

Onsel Emre: Households responded by spending more cautiously. Firms responded by hiring more cautiously. So, that is a sign that things are transitory but it’s likely to take time because we are dealing with supply issues. Probably, in the next 12 months or so, high inflation numbers are with us but they are not likely to break higher ranges. Everyone knows this base effect issue. Base effect was really—we’re strong in April and May.

 

Chris Galipeau: Right.

 

Onsel Emre: It’s going to ease a little bit but still we have some sequential increase in the prices so a combination of this can keep inflation high but in a range and next year is likely to ease but is 12 months long enough? Probably. It’s long enough to worry Fed.

 

Chris Galipeau: Right. Good point. And they seem to make some comments around that, right? That it’s time to—Powell said we can retire this phrase, right? And start to...

 

Onsel Emre: Yeah.

 

Chris Galipeau: Okay. Can we talk just the QE for a second and then policy rate movement. So, it seems like they’re getting ready. They’ve already started to unwind their corporate and ETF purchases, right? It sounds like they’re getting ready, they’re thinking about it like Powell said, “This was our thinking about thinking about it.” last meeting. What do you think we should expect?

 

Onsel Emre: Yeah. So, they turn hawkish, marginally hawkish maybe as a sign that.

 

Chris Galipeau: Half hawkish. Can we go with half hawkish?

 

Onsel Emre: Yeah. So, that’s a sign that they are going to announce taper in a few months, that was the reason. So, my expectation is still in either Jackson Hole or in September meeting, they announced it, they are going to start tapering but there will be a few months. Probably, in the first quarter of next year, they will start to process. This can be a different taper. I think they are still debating but it may not be on an autopilot, that’s one thing that came up. Taper can be data-dependent as well depending on the developments on the economy, on the virus, on the vaccine front, but they unlikely to announce it soon that’s why they turn hawkish. Again, it depends on how things move but if everything moves along with their expectations, once they they start, it would take six to nine months from the end to finish of taper.

 

Chris Galipeau: I think that’s really interesting. So, the time frame lines up. I think that’s the way many of our PMs feel. It seems to me that’s what the market probably is expecting as well at this point? And I think it will be interesting to see what happens to 10-year yields? Which have been to your earlier point about rising prices, diminishing demand and I threw out lumber as an example, which is down 60%  right quickly, 10-year bond yields peaked at the end of March, let’s call it 180, traded to 135 last week, right? Commodities peaked in May with the exception of oil and possibly gold, many of them are off 10%, 20% and so I’ve thought to myself, I wonder if this a market sign telling us whether bond yields and commodity prices that it is in fact transient and maybe to the PMI question earlier, we’ve seen the peak rate of change in economic activity, I guess we’ll see. Alright, so get moving on QE. Maybe start Q1 2022. I know it’s data-dependent and we don’t have crystal balls and now the dark parts have move up to 2023, what are your thoughts there as to policy movement?

 

Onsel Emre: Yes. My best guess is 2023 but it can be really earlier, that’s a possibility. Let’s say everything has been coming better than expected thus far partly. Feds brought forward is taper plans and hike plans. If things really improve quickly, yes, late 2022 is a possibility but my best guess is 2023.

 

Chris Galipeau: And that’s basically what Bullard said.

 

Onsel Emre: Yeah.

 

Chris Galipeau: Right? That’s what he said and that makes sense. Alright, I want to end it just with one final question and just conceptually. We’re asked this a lot about the level of debt as a percentage of GDP in the United States and you and I talked about this a little bit this morning but the average financial advisor is worried about it. They’re certainly asked a lot about it, where their clients are very worried about it and some people have very draconian scenarios, which I don’t think are likely. But you have interesting views here too. I’d love to hear what your thoughts are on the growth of debt, is it sustainable? Just at a high level.

 

Onsel Emre: Yeah. That is one side of the coin. You own someone and that is someone else assets. So, if there is a willingness to save, you can sustain higher levels of debt. So, why there is a high willingness to save? Because people are saving for retirement, people are preparing for old age, for health reasons, for their children’s education and if there is a willingness to save, you can have higher levels of debt, that’s the dynamic. Actually, I came up with this idea when I saw, I think, my dissertation. My dissertation was basically around the savings behavior. When I observed that optimal Social Security System in most actual saving, I noticed that interest rates are lower.

 

Chris Galipeau: Really?

 

Onsel Emre: Because there is a large amount of capital in the system. When there is more savings, more capital, interest rates decline. So, consequently, interest rates are lower and lower interest rates sustain higher levels of debt and this dynamic is not likely to change because we are still getting older, still saving more and more, saving for retirement and this is going to continue for the next couple of decades.

 

Chris Galipeau: And I don’t want to put words in your mouth but that’s not just an issue in the United States, it’s a global issue right?

 

Onsel Emre: Right. Yeah. Japan has been leading. Even in Japan, for this saving dynamics to change they need at least 20 to 30 years.

 

Chris Galipeau: Wow! Alright. In the essence of time, we’ll wrap it up there and now we want to get to know Dr. Emre a little bit, so just a couple of questions. Your favorite food? 

 

Onsel Emre: So, if this is a desert island kind of question, I would say meat. I cannot live without meat but if it is like a leisure type of food, I think it’s ice cream.

 

Chris Galipeau: Ice cream, nice. I knew it. It’s good. What kind of ice cream?

 

Onsel Emre: Chocolate chip.

 

Chris Galipeau: Oh gosh, me too. Alright. Your type of music?

 

Onsel Emre: Music...

 

Chris Galipeau: Deserted island or at home.

 

Onsel Emre: I think I like a little bit of everything, but if I’m looking for something energizing with more upbeat mood I think I would go with 70s.

 

Chris Galipeau: 70s?

 

Onsel Emre: Yeah.

 

Chris Galipeau: Alright. That’s awesome. This one, I think, is a great question. We’ve got some great answers from our colleagues and it centers around your favorite investment book or books or things that you’ve read along the journey or that we talked about earlier that made an impact on you or might have shaped the way you think about certain things?

 

Onsel Emre: I always say, go with the fundamentals. So, I would suggested that the CFA curriculum is a really good curriculum. It is broad base. You can find things from behavioral finance [together] with pricing to asset management. So, it’s a very well-designed curriculum and I would look at it not just to get the CFA or pass the exam, but the curriculum is great and I would start with that.

 

Chris Galipeau: It’s Paul Drury, who runs munis here, gave us the same answer in the last podcast and I think the book was called Winning the Loser’s Game, which I had read. I thought I had read almost every book so I bought that and I texted a screenshot to him this week and I said, “See Paul? I was listening.” Alright. That’s good. Well, thanks for sitting down with us and sharing your thoughts. I know that that was great especially the comments around labor and wages, it’d be interesting to watch that, the QE questions and the policy movement questions and the questions around inflation are seemingly never ending. So, I know that the info that we laid out here is going to be super valuable to our listeners and for the listeners, thanks for hopping on and listening again and we’ll be back shortly the next couple of weeks with another Putnam portfolio manager. Thank you!

 

Patrick Laffin: Thank you for listening to Active Insights. For more information on Putnam, please visit Putnam.com. All opinions expressed by the podcast host or podcast guests are solely their own opinions and do not represent the opinions or views and Putnam Investments or any affiliates. This podcast is not investment advice and is not intended as a recommendation to buy or sell any type of securities. This production is for informational purposes only.

 

Online Title and Description:

 

Rates, Inflation and The Fed with Onsel Emre

In this episode, Chris speaks with Onsel Emre, Ph.D.  Dr. Emre is an Analyst in the Global Fixed Income group. She specializes in analyzing macroeconomic, political, financial, and other policy developments in global markets. Dr. Emre is responsible for making directional and relative-value interest-rate, inflation, and currency recommendations in major economies.  During the conversation, they touch on many topics, including: 

·           The current labor market
 The pandemic’s effects on employment
 Rates
 The Fed, CPI and inflation
 Wage growth
 The peak rate of change in economic activity
 The growth of debt

 

This material is for informational and educational purposes only. It is not a recommendation of

any specific investment product, strategy, or decision, and is not intended to suggest taking or

refraining from any course of action. It is not intended to address the needs, circumstances, and

objectives of any specific investor. This information is not meant as tax or legal advice. Investors

should consult a professional advisor before making investment and financial decisions and for

more information on tax rules and other laws, which are complex and subject to change.

 

All funds involve risk, including the loss of principal. You can lose money by investing.

 

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund

before investing. For a prospectus, or a summary prospectus if available, containing this and other

information for any Putnam fund or product, call your financial representative or call Putnam at 1-

800-225-1581. Please read the prospectus carefully before investing.

 

Putnam Retail Management                                                                           AD1714294 7/21