Morgan Stanley's Jim Caron Talks Tech Selloff
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Inflation coming up here in four minutes. Michael Ball on deck. But first, Jim Caron joins us from Morgan Stanley. The note is brilliant. We protect the copyright of all of our guests. Get Jim Caron's brilliance from Morgan Stanley. Okay, so you're out at Aeronautical Engineering at Caltech. And the final trick question on the exam sophomore year, Jim Caron, is what does it mean if the bond markets worry, worry, hand-wringing worry, and Google can do a 100-year bond nine times over subscribed? Jim, I
What insights does Jim Caron provide on the recent tech selloff?
I've never seen this.
Well, I think it's really a statement on the dispersion that's in the markets right now. So look, there's a lot of volatility that's happening, right? We understand what's happening in the equity markets. But then when we look at the publicly traded fixed income markets, as you're pointing out, the risk isn't necessarily being evenly distributed across all markets. And Tom, that's good news, okay? Because whenever we go into these types of market events where there's a big repricing in a certain sector, in this case in software, the number one question is always about contagion. Is there contagion into other markets? and we're seeing firebreaks between the public markets and the private markets, and certainly equities are taking the brunt of this in some way, but we're not seeing broad-based contagion.
So I think if there's a silver lining around all of this, I think that's it.
Jim, what do you make about this rotation we've seen out of some higher growth areas, most notably software, into, I don't know, more value parts of the market, maybe even the small and mid-caps? That spooked a lot of folks who thought software and tech broadly was a good place to be.
Well, it's a great example of why you want to have a diversified portfolio, right? So we've come off of a market over the past couple of years that's been highly concentrated. MAG-7, MAG-7, MAG-7. And people just forgot about the other 493, right, in the S&P 500. And the point here is that if we get this rise in economic growth, this higher productivity, there should be a cyclical broadening of the markets. Look at the ISM data. ISMs are well above 50 right now. Even new orders are around 57. You've got the manufacturing above 52. You've got GDP growth, which is still pretty reasonable. Jobs, market seems pretty stable. Let's keep our eye on the bigger picture. And the reality here is that I do think that the cyclical broadening of the markets is actually really a healthy sign for more diversified growth.
When you listen to your economics team, is the vector in goods inflation, usually it's a disinflation, and all of a sudden in the last six months, Jim Caron, I got goods inflation and rising inflation. Is that going to reverse and get back to quote-unquote normal?
No, I don't think it will. I think that we have gone through a period of time, and this goes back to 2001 when China joined the WTO, that goods inflation was relatively flat to down. And it was all about services inflation and everything else. So therefore, overall inflation was able to stay low. Now we're in a different place.
Should we get Jim Caron into trouble this morning?
Oh, yeah, absolutely.
Do you agree with the Posen-Orszag thesis of 4% inflation?
I do not. I think the number is probably around two and a half to three. That's likely where we're going to stabilize. I don't think we're going to see below two for a while unless we see a recession.
That's brilliant.
See how he did that? He avoided that nicely.
He's so trained by compliance. I mean, he just absolutely nailed it. Adam posted out on Twitter this morning recapitulating how we get to that worry of higher inflation. The release, you will, the reaction function is through maybe a higher wage. which we really haven't seen yet. Well, that's a bet. That's an outlier, as many people have said to us. Jim Caron with us, and we'll stay with us with Morgan Stanley Investment Management as we go to the nation's inflation report, usually midweek.
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