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Fed can’t curtail inflation ‘without a massive economic slowdown': Strategist

G Squared Private Wealth Chief Investment Officer Victoria Greene joins Yahoo Finance Live to discuss the state of the economy, stocks, inflation, the probability of a recession, the state of the labor market, and the outlook for Fed policy.

Video transcript

JARED BLIKRE: Now for more on the market action, let's bring in Squared Private Wealth chief investment officer Victoria Greene. And Victoria, thank you for joining us here today. Just want to get your comments on the huge moves that we're seeing in the currency markets here.

VICTORIA GREENE: Sure. And I think some of it has to do with the commodities as well, the euro and Japan and the yen and some of the weak currencies right now, they're going to have to import energy. And the costs and the concerns on what's going to happen to the energy market to the euro I think is weighing on it, as well as the relative strength and how quickly the US Fed is going to raise rates. It's just putting this disparity in there. Strong US dollar really isn't great for anybody multi-nationally. It tends to drag a lot on earnings. And large moves like this tend to be very disruptive.

So I don't think it's the end of the world. But I do think there's concerns. Germany all of a sudden becoming a net importer is a bit scary to what's happening to the euro economy. And you're seeing the weakness reflect that concern as well as the concern on where is Europe going to get its energy and is Russia going to reopen the Nordstrom pipeline after the 10-day shutdown it looks to have?

JARED BLIKRE: And Victoria all of this comes about as we're talking the dreaded R word, which is recession. Just want to get your views on if and when you think we will get that word because that is really behind some of the moves that we're seeing in the currency market today.

VICTORIA GREENE: Sure. And we have been in the recession court for quite a few months now. I think there's no way to stop it. I don't think the Federal Reserve is going to stop hiking and tightening and trying to slow down the economy until the labor market breaks because their mandate has nothing to do with the stock market. They want full employment and stable inflation. They obviously have full employment, if not excess employment, because we have 11 million jobs that are still unfilled and some dislocation in the job market.

Their singular focus, as they said last month, was inflation, inflation, inflation. So the Fed is doing its best to slow the economy right now. And they're not going to stop what they're doing just because the stock market's going down. The Fed doesn't care if Apple is going down in price. That's not their job to worry about it. So we do think it's going to push us into recession because there's no way to stop inflation like this without a massive economic slowdown.

JARED BLIKRE: Now, the Fed may not care where the price of Apple lands in the middle of this. But they do care about the bond market and that there is sufficient liquidity. As I was talking about before at the open, we have quantitative tightening ongoing right now. And that is sucking liquidity out of the system. The Fed does care about this. So at what point do they break something that matters to them?

VICTORIA GREENE: It will be about I would say if Treasury markets or money markets lock up like they did in 2020. Obviously, as you pointed out, liquidity is important. And they will care about that. Spreads can continue to blow out. That's fine. If high yields getting punished just a little bit, buyer beware. That's why you own high yield. You understand it's a little bit riskier. But I do think if you see the Treasury market lineup start to freeze, investment grade or especially money market like we saw in the depths of 2020, then, yes, the Fed will step in.

But right now, those markets are still functioning, even if it's rather painful on the high yield side. It would take a non-functioning market for them to step in. Now, they may run off a little bit slower. They really are trying not to death spiral us into a recession. I don't see how they avoid it. We're talking about a soft landing. At this point, I think almost everybody just wants to get the plane on the ground and walk away. I'm not sure anybody's going to see a soft landing out of this.

JARED BLIKRE: No. It doesn't increasingly seem that way. Want to talk about some of your stock picks here. We're in a big pullback. We're in a bear market right now. Energy, the best performing sector of the year, has taken a big hit. It's up about 25%, but had been up I think close to 60%. Any energy stocks? Because investors are wondering, something that has worked this year, maybe there's a little bit more juice to be squeezed out of that trade.

VICTORIA GREENE: We do. We still like energy. We did take some profits end of June. We pulled back a little bit on our bearish to kind of-- or bullish on energy to a little bit more neutral. We are still slightly overweight in our portfolios because a lot of them are paying a lot of cash flow with the fixed plus variable dividends. So a name like Devon Energy or EOG or Diamondback, who they're all getting punished today with the fall in WTI, but they had these massive run ups. So some of this is also repricing. But they're still extremely moderately priced.

You're talking about like 10 to 12 PEs. They're doing where they're printing cash, mostly break even in the Permians. Still around $30 to get it out. You are seeing rig counts climb up slightly. But we're still at like 750. We're nowhere near the 2,000 rigs we used to be. And we're still around break on production. And we're exporting a lot more than we ever used to export.

So I think you're still seeing that you have a supply constraint. However, the concerns on demand destruction is what had us pull back a little bit. But I'd love to sit around and collect a big fat dividend. And they're paying out their excess free cash flow about 50% as a variable dividend. So you may have to be a little bit patient. I'm not saying this trade is going to be a huge price winner in the next 30 days. You could see these prices come back. But I do think energy is still a good place to sit because of the supply constraint.

And if you look at what the Street's saying, you have JPMorgan at $380 as a worst case, and then you have Citi out here at $65 if we have a deep recession. Most likely, it's going to be somewhere between the two. We think it'll stay 90-plus through year end. But there's a lot of caveats to that. Iran could come on board. Venezuela. We're talking to China. Biden's aware it's an election year and he's got to get some of this under control. So I think you could see some near-term pressure because the White House is going to throw everything they can to get prices down at the pump.

JARED BLIKRE: Yeah. But, unfortunately, those oil producers, especially in the Permian region, the shale producers, have been so shell shocked since 2015. Probably only going to return shareholder capital until we get past this recession talk. Want to move on to two more of your picks. We've got Costco, which is a consumer staple, and also IBM, a legacy tech play, admittedly in a turnaround, but also has some software exposure as well, which has been picking up lately.

VICTORIA GREENE: Yeah. So I've liked IBM for a couple of years. And it's not a very sexy trade to say necessarily. But I like the company. It's a turnaround story. They're well on their way to the turnaround. They've already spun off a lot of legacy stuff into Kyndryl. So the new CEO kind of looked around and said, hey, we need to get this company faster growing. And so they took some slow growth areas and they spun it out. And they're more focused on the hybrid cloud with their acquisition of Red Hat a couple of years ago. And they've got a great balance sheet.

They pay a fat 5% dividend. They're still about a 14% PE. And if you're a company and you're concerned about where you're spending money, you still have to spend money on tech and IT, right? You can't have your servers not work. You can't have your cloud not connect in. And so I think a lot of their revenues might be a little bit more recession proof. And that's what we're looking at.

And that's also why we like the Costcos of the world because, first off, Costco people are loyal. They have like a 90%-plus retention on their membership. They may end up raising memberships next January. They tend to raise every five or six years. So there's potential even increased revenue. But they saw a little bit of pressure earlier this year because they consider themselves a value play for their customers. So they have been a little slower about pushing some of this inflation pressure to their customers. I think you know we're in trouble if Costco ever rises the price of the hot dog meat over $1.50.

JARED BLIKRE: I was going to go there. I was definitely gonna go there.

VICTORIA GREENE: I know. It's all about the Costco hot dog. That is the best matrix out there.

JARED BLIKRE: You don't even want to read those Reddit boards with their wily schemes on this. All right. Thank you for stopping by here. Victoria Greene, G Squared Private Wealth chief investment officer. Thank you again.

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