Fed 'deaf and blind to the real causes of inflation,' strategist says

Clearnomics Founder-CEO James Liu and Bryce Doty, Senior Portfolio Manager and Senior VP at Sit Fixed Income, join Yahoo Finance Live to discuss economic headwinds amid the latest workforce data and the Fed's plans for interest rate hikes.

Video transcript

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DAVE BRIGGS: And with that, we start the 4 o'clock hour, the closing bell, and here is the market action on the day. A lot of green on the board, relatively insignificant. The Dow just up 20 points, the NASDAQ up 27 points, and a slight gain for the S&P as it climbs 10 points. Joining us for more on the broader markets are Clearnomics founder, CEO James Liu, and Sit Fixed income senior portfolio manager and senior VP, Bryce Doty. Good to see you both. Bryce, seems like the markets are holding their breath and waiting some sort of catalyst. What might that be?

BRYCE DOTY: Well, I think what they're doing is looking past what, hopefully, will be an end to the damage done by the Fed, frankly. I think that earlier in the year, both stocks and bonds were plummeting very, very quickly, thinking the Fed was behind the curve. Now there's a little bit of a relief. You've seen yields come off their peak in 10 years. You're seeing stocks rebound a bit, thinking, hey, maybe we're getting closer and closer to the end of the Fed rate increases.

And then along with that, we're starting to see people come back into the workforce. They're running out of money. They're burning through their savings. And maybe things could get brighter then. Maybe the shortages will clean up. But everyone's kind of holding their breath right now.

SEANA SMITH: James, what do you think? Is there enough to keep the recent rally that we've seen in tact?

JAMES LIU: That's a great question, Seana. The market's been on this tear for two months now. And basically, when you look at the S&P, we're hovering right around that correction level, maybe we'll see skip past that soon. And the NASDAQ is up 20% over those two months. Ultimately, what it comes down to is inflation. The inflation story is driving everything, including the Fed and including how much to discount earnings going forward.

And we look at that inflation story. The fact that energy has basically helped to improve the inflation numbers over the last couple of months has really, really helped. So the question is, what happens from here? And assuming energy prices continue to stay stable, maybe even come down a bit more, then you could see that glide path for inflation come down in the first half of next year, in which case maybe the Fed does start to either pause or turn around a bit. That's really the key driver to what's happening there.

DAVE BRIGGS: Yeah, energy a nice gain on the day. WTI up 2.8% and Brent up more than 3%. But getting back to the Fed, Bryce-- and you use some colorful language here in your notes. You say, the Fed has a "damn the torpedoes" attitude. If you could describe that and what you mean.

BRYCE DOTY: Right, well, they seem to think that the solution to the inflation problem is to just do as much damage to the economy as possible and destroy demand. They want unemployment to go up. And it seems like it's really, they're just deaf and blind to the real cause of the inflation or shortages, that we need people to get back to work to resolve that. So I do think they have a "damn the torpedoes" kind of attitude.

They're just going to keep raising rates and keep marching ahead when demand has already started to go down. And a lot of what they're doing is they're driving down supply. A record number of small businesses have a record low in number of businesses that expect to expand for the last three months in a row. OK? We need production to increase. We need shortages to go down. We need businesses to go back to their normal regular business hours.

Businesses can't even run at full tilt because they can't find enough people. So the Fed is just-- I don't know-- they seem oblivious to what we all know is the reality. You can't get anyone to show up at your house to do work. And you can't find stuff. There's shortages all over.

DAVE BRIGGS: Sure. Bryce--

BRYCE DOTY: They want to destroy employment.

DAVE BRIGGS: How, Bryce, would the Fed change that equation? What would you like to see them do?

BRYCE DOTY: Well, a lot of it's a fiscal issue. Fiscally, they paid too much money out, so everyone had too much in savings. A bunch more cash, but there wasn't any additional number of goods or resources. So obviously, all the goods and resources simply cost more money.

So a bit of it's a fiscal issue. You would like to see the fiscal government and the federal government say, OK, workers that come back into the workforce, you get a big tax credit in your first year's worth of earnings. Companies will get some sort of incentive for hiring people back that have been out of the workforce. And the Fed would stay below a neutral rate to encourage expansion, to encourage an increase in production. Those would be solutions that would bring down inflation in a hurry.

SEANA SMITH: So, James, what's your strategy now? There certainly is a lot of uncertainty ahead. A lot of the market's moves will likely hinge on what we hear from the Fed over the coming months. So how are you positioned?

JAMES LIU: Yeah, so I think ultimately, Seana, it does come down to what happens with these inflation numbers, as we've been discussing. And what you see there is that if they do continue to come down, then what will happen is that that will help the consumer sectors. It'll will help the consumer balance sheets and their pocketbooks. And this is on the backs of whether or not we do potentially achieve a soft landing, which is that most of the economy, although it's slowing, that slowing is expected because we're no longer in that initial recovery stage.

And so as long as the economy stays stable here-- we've got great retail sales numbers last week. Last month's jobs numbers were fantastic. As long as that continues, then you could still see many of these sectors continue to outperform. And so right now, we do like the consumer sectors. And we do think that a lot of the longer term plays, the secular stories in technology, are also quite attractive because a lot of the baby was doing out with the bathwater when everything fell to bear market territory earlier this year.

And so I think what you'll start to see is that there's going to be a lot more discrimination amongst different stocks and different stories, as the rebound starts to really take shape here.

DAVE BRIGGS: Bryce, your thoughts on that. Will inflation continue to dissipate? And your strategy going into the face of this?

BRYCE DOTY: Well, I think that as people get back into the workforce-- I agree that jobs numbers last month, with half a million people coming and getting jobs is a great step towards lessening some of the inflation. As far as ideas, as a bond person, yeah, I love our short-term bond ETF that's up to a 4% yield for the underlying bonds. And the duration is only 1.3 years. I mean, that's a ratio we haven't seen in ages. And I think with the Fed keep raising rates, that fund is just going to keep going up and up in yield. And that's a nice place to put some cash while you wait and see how everything shakes out.

But as time goes by and more people decide, oh, my gosh, I ran out of money. I got to go get a job-- I think a lot of our problems will go away. And when you think of those jobs, the Fed thinks that the economy just suddenly made those jobs. All those job openings have been there for a long time. It's just people finally decided, oh, my gosh, I better go back to work, and decide to take those jobs. But there's still millions of job openings still out there. So hopefully, we can get some of those filled. And then we'll finally see a relief from inflation.

SEANA SMITH: All right, we've got to leave it there. Bryce Doty, James Liu, thanks so much for joining us this afternoon.