WEBVTT - Surveillance: Bear Market with Wilson 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best an economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.439 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.880 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. 0:00:30.400 --> 0:00:33.080 Right now, and this is important. You need to reset 0:00:33.200 --> 0:00:35.360 for the weekend. You need to reset for the second 0:00:35.400 --> 0:00:39.000 half of twenty twenty three, and particularly if you've not 0:00:39.200 --> 0:00:43.760 participated in the seven tech stocks. Mike Wilson will brief 0:00:43.800 --> 0:00:46.159 on the caution that is out there. He is at 0:00:46.200 --> 0:00:49.720 Morgan Stanley. They're us equity strategists and has been. I'm 0:00:49.720 --> 0:00:52.120 going to suggest cautious through thick and thin of this 0:00:52.240 --> 0:00:55.680 pandemic and forward. Mike, what are you writing this weekend 0:00:55.720 --> 0:00:59.920 to recalibrate a cautious call. 0:01:00.080 --> 0:01:02.600 Yeah, good to see you guys. I mean, our call 0:01:02.640 --> 0:01:06.720 really hasn't changed. You know, we're very disciplined on price 0:01:07.319 --> 0:01:09.960 and as you know, we got tactically bullish last fall 0:01:10.480 --> 0:01:12.720 at thirty five hundred because that was a good price 0:01:12.840 --> 0:01:14.880 and now or of course back to the high end 0:01:14.880 --> 0:01:17.360 of the range, and that's not a good price, and 0:01:17.400 --> 0:01:19.600 that's at the SMP level. That's not really what's been 0:01:19.640 --> 0:01:21.800 interesting over the last six or seven months. As you know, 0:01:21.840 --> 0:01:24.120 what's been interesting is what's going on under the surface. 0:01:25.040 --> 0:01:27.319 I would say in the fourth quarter that was a 0:01:27.480 --> 0:01:30.840 very hated rally because it was led by kind of 0:01:30.840 --> 0:01:34.120 the old economy financials, industrials and energy materials. It was 0:01:34.160 --> 0:01:37.080 all based on, you know, the China reopening story, which 0:01:37.120 --> 0:01:41.479 was legitimate, and technology stocks obviously disappointed and they did 0:01:41.480 --> 0:01:42.920 not trade well in the fourth quarter, So there was 0:01:42.920 --> 0:01:44.960 a hated rally because that's what people own. 0:01:45.120 --> 0:01:45.480 Now. 0:01:45.920 --> 0:01:48.040 Of course, the SMP is training at the same price 0:01:48.120 --> 0:01:51.560 it was in early December, we got cautious again and 0:01:51.680 --> 0:01:54.320 tech is obviously going to the moon. And now this 0:01:54.440 --> 0:01:57.200 rally is loved because these you know, this is what 0:01:57.200 --> 0:01:58.920 people want to buy, is what people want to own. 0:01:58.920 --> 0:02:01.480 Its a lot more in interesting and you know, kind 0:02:01.480 --> 0:02:05.400 of exciting to own AI and technological revolution, and it 0:02:05.440 --> 0:02:08.040 is to hold some those old economy stock that's you. 0:02:08.040 --> 0:02:09.880 Know, well why do I want to own this long term? 0:02:09.919 --> 0:02:13.120 So it's just an interesting development we would characterize this 0:02:13.360 --> 0:02:15.519 as the bear market is continuing. 0:02:15.560 --> 0:02:17.040 Okay, this is what bear markets do. 0:02:17.080 --> 0:02:20.600 They they're designed to fool you, confuse you, make you 0:02:20.639 --> 0:02:22.440 do things you don't want to do, chase things at 0:02:22.440 --> 0:02:24.440 the wrong time, probably sell them at the wrong time. 0:02:24.880 --> 0:02:28.120 And the overriding we think the overwriting driver. Okay, if 0:02:28.120 --> 0:02:31.920 this year's rally has been increased liquidity. Liquidity has improved 0:02:32.000 --> 0:02:35.360 dramatically both on a global scale, and the weaker dollar 0:02:35.440 --> 0:02:37.480 is helped, that's going the wrong way now again. And 0:02:37.480 --> 0:02:41.160 then of course, ironically, the banking failures that happened in 0:02:41.240 --> 0:02:45.200 March led to an injection of liquidity from the FDIC 0:02:45.360 --> 0:02:47.080 and the FED, and we think those things have really 0:02:47.120 --> 0:02:50.079 conspired to drive the market. I mean, nobody talks about 0:02:50.080 --> 0:02:53.400 the fathtic crypto is up sixty percent this year, okay. 0:02:53.639 --> 0:02:55.840 And then the next one, of course, is the is 0:02:55.840 --> 0:02:58.920 a tech world, So this is what's going on. We 0:02:58.960 --> 0:03:02.200 think that the fundament cases not support you know, where 0:03:02.280 --> 0:03:04.919 stocks are treating today, whether it's at the index level 0:03:05.400 --> 0:03:07.560 or at the single stock level, and the second half 0:03:07.639 --> 0:03:10.400 is going to be a bit choppier and probably downward 0:03:10.520 --> 0:03:11.080 in the index. 0:03:11.400 --> 0:03:13.040 Let's just talk about the index a little bit more 0:03:13.040 --> 0:03:14.480 and great to have you with us as all ways, 0:03:14.520 --> 0:03:17.280 particularly going into the long weekend. Mike, you really started 0:03:17.280 --> 0:03:20.160 the debate this week on this program, and we reflected 0:03:20.160 --> 0:03:22.959 on your note from over the weekend into Monday when 0:03:22.960 --> 0:03:25.200 you said the following that there are many technical signals 0:03:25.200 --> 0:03:27.000 that conflict with the idea that this is the beginning 0:03:27.000 --> 0:03:29.400 of a new cycnical ball market. There was a short 0:03:29.400 --> 0:03:33.000 list after that of those signals, and one was extreme narrowness, 0:03:33.320 --> 0:03:37.000 poor breath. We presented that severe supermanium a peer of 0:03:37.080 --> 0:03:39.240 yours over at Bank for America, and she said, narrow 0:03:39.240 --> 0:03:42.560 breadth is not a precursor for doom and gloom. Michael, 0:03:42.600 --> 0:03:44.440 just wanted to give you the opportunity to respond to that. 0:03:44.520 --> 0:03:46.840 What is it about narrow breadth that you think signals 0:03:46.880 --> 0:03:48.400 something at the index level? 0:03:49.640 --> 0:03:52.480 Well, I think there's you could debate this one way 0:03:52.600 --> 0:03:53.040 or the other. 0:03:53.160 --> 0:03:56.160 Meaning, when you make a market low, you typically do 0:03:56.320 --> 0:03:59.840 have you know, severely negative breadth. That is a good sign. 0:04:00.080 --> 0:04:03.640 However the index is usually down with it. So we 0:04:03.680 --> 0:04:05.640 think where we are is the index is telling you 0:04:05.680 --> 0:04:08.200 things are rosy, things are fine, and the breath is 0:04:08.240 --> 0:04:11.119 telling you otherwise. And then when we put our fundamental 0:04:11.160 --> 0:04:12.920 overlay on top of that, which is, you know, we're 0:04:12.960 --> 0:04:15.960 way out of consensus now on the earnings front. Then 0:04:16.080 --> 0:04:19.000 we can make the conclusion that the internals right, the 0:04:19.040 --> 0:04:20.839 breath is being one of those, but the internals and 0:04:20.839 --> 0:04:23.840 the leadership is telling you that growth is going to 0:04:23.880 --> 0:04:25.800 be a problem in the second half of this year. 0:04:25.839 --> 0:04:29.080 Whether that's an economic recession or not, doesn't it We 0:04:29.120 --> 0:04:31.160 think it's going to be an earnings recession that's way 0:04:31.200 --> 0:04:34.080 worse than what people are currently modeling. And like, I 0:04:34.120 --> 0:04:35.480 want to go back to the beginning of the year. 0:04:35.960 --> 0:04:37.919 You know, you guys are good readers of our reports. 0:04:37.920 --> 0:04:39.520 You remember in the beginning of the year, I was 0:04:39.600 --> 0:04:42.200 somewhat nervous that everyone was in the same camp. 0:04:42.240 --> 0:04:46.040 At that point. We were our view is very consensus. 0:04:45.360 --> 0:04:47.800 On the fire and ice, you know, the tightening and 0:04:47.839 --> 0:04:49.760 then the slow down, and so we were trying to 0:04:49.760 --> 0:04:52.680 figure out, well, how could everybody be right? That doesn't work. 0:04:52.760 --> 0:04:55.120 And so what we've done now is we've worked off 0:04:55.480 --> 0:04:56.640 that oversoul condition. 0:04:56.760 --> 0:04:58.640 And more importantly, now. 0:04:58.480 --> 0:05:02.040 I would say the consensus is actually optimistic on earnings again, 0:05:02.080 --> 0:05:03.760 and that's just where we completely disagree. 0:05:03.960 --> 0:05:05.720 So Mike can we just build on the challenge to 0:05:05.760 --> 0:05:09.320 the index level retesting the loads of last year, given 0:05:09.360 --> 0:05:13.600 the muscle of five or so names doing just ridiculous 0:05:13.640 --> 0:05:16.800 things of one hundred percent plus METSA and video, et cetera. 0:05:17.279 --> 0:05:19.560 Is that a big enough challenge to the view that 0:05:19.600 --> 0:05:22.039 we can retest the lows of last year. 0:05:23.360 --> 0:05:24.680 Well, not necessarily note at all. 0:05:24.720 --> 0:05:26.640 In fact, it kind of sets us up where it's 0:05:26.640 --> 0:05:30.080 probably inevitable now because what's happening is you're you're basically 0:05:30.120 --> 0:05:34.840 forcing people into these stocks at bad prices. Now. I mean, 0:05:34.880 --> 0:05:37.919 you know, the evaluations last fall on these stocks in particular 0:05:38.080 --> 0:05:41.240 was extremely attractive. And if you look at the performance 0:05:41.279 --> 0:05:43.400 of all of these names, with the exception perhaps of 0:05:43.760 --> 0:05:46.040 the one this week, which you know earnings are going up, 0:05:46.440 --> 0:05:49.280 the earnings are not driving these stocks. It was one 0:05:49.320 --> 0:05:52.680 hundred percent multiple expansion, which goes back to our gritty questions. So, look, 0:05:52.800 --> 0:05:55.400 the price is wrong in our view because the earnings 0:05:55.400 --> 0:05:57.760 are probably going to be wrong for most of these stocks, 0:05:57.839 --> 0:05:59.279 not all of them, but most of them. 0:05:59.680 --> 0:06:01.200 And so from here we think it is still a 0:06:01.200 --> 0:06:02.000 stock picking game. 0:06:02.040 --> 0:06:04.320 And of those six seven eight stocks, my guess is 0:06:04.320 --> 0:06:06.120 two of them will probably be okay, and the other 0:06:06.120 --> 0:06:08.720 ones will not because there's they are the economy. 0:06:08.800 --> 0:06:11.520 Okay, they can't avoid the economic. 0:06:11.120 --> 0:06:13.120 Slowdown and the top line slowdown that we see in 0:06:13.120 --> 0:06:14.120 the second half of this year. 0:06:14.520 --> 0:06:16.800 Mike, maybe a bit off your remit, but I got 0:06:16.800 --> 0:06:20.320 to go here. Just percolating in the zeitgeist into June 0:06:21.200 --> 0:06:25.680 is the once again debate of active versus index usage 0:06:25.920 --> 0:06:28.880 in the equity market. Give us your update on the 0:06:29.000 --> 0:06:33.080 value of active versus the value of index investing. 0:06:34.279 --> 0:06:37.640 Really interesting confluence right now, because you know, you could 0:06:37.760 --> 0:06:40.320 argue both are working at the moment, right I mean, 0:06:40.440 --> 0:06:43.200 you know, having the right stocks in your portfolio has 0:06:43.279 --> 0:06:45.240 been really the only way to make money this year. 0:06:45.480 --> 0:06:47.400 The problem is is that those stocks are such a 0:06:47.400 --> 0:06:50.039 big part of the index. The passive person could say, look, 0:06:50.040 --> 0:06:52.560 my passive strategy is working as well, you know, and 0:06:52.960 --> 0:06:56.679 so we still think active will have a comeback here 0:06:57.080 --> 0:06:58.600 as we go through the next couple of years. It 0:06:58.680 --> 0:07:01.840 already is to some degree. But boy, it's you know, 0:07:01.880 --> 0:07:04.240 it's the market once again. The market is doing a 0:07:04.279 --> 0:07:06.480 very good job of kind of fooling us into whatever 0:07:06.560 --> 0:07:09.800 we want to believe. We think active will be the 0:07:09.840 --> 0:07:11.280 place to be for the next two or three years. 0:07:11.280 --> 0:07:12.320 It's going to be a comeback there. 0:07:13.040 --> 0:07:16.480 Mike, uh, dovetail this with Ellen Zettner. Take the recession 0:07:16.520 --> 0:07:20.000 call of Morgan Stanley and dovetail into your caution on equities. 0:07:21.120 --> 0:07:22.800 Yeah, so Ellen and team, I mean, they're not looking 0:07:22.800 --> 0:07:24.920 for a hard landing, but they are looking for, though, 0:07:25.040 --> 0:07:28.840 is a very sluggish economy. So there's sort of zero 0:07:28.880 --> 0:07:34.200 percent P growth right now that you know, that's fine 0:07:34.240 --> 0:07:36.440 if you still got price. Our view is that zero 0:07:36.520 --> 0:07:38.640 percent GDP growth will lead to bad price, and we're 0:07:38.640 --> 0:07:40.760 already seeing that in the good sector. And then we've 0:07:40.760 --> 0:07:43.080 done some consumer work recently, which is we're starting to 0:07:43.120 --> 0:07:45.360 see signs that even the high end is starting to 0:07:45.360 --> 0:07:47.480 pull back on spending intentions on services. 0:07:47.840 --> 0:07:50.040 So you know, services is seventy percent of the economy. 0:07:50.320 --> 0:07:52.600 It's you know, goods are seventy percent of the S 0:07:52.600 --> 0:07:55.000 and P five hundred earnings. So in other words, the 0:07:55.040 --> 0:07:57.840 economy can stay kind of at zero, but that's not 0:07:57.880 --> 0:07:59.600 going to be a good outcome for SMP ear needs. 0:07:59.640 --> 0:08:01.800 And our view, Mike Debasi Lobster. 0:08:04.000 --> 0:08:06.040 Well, we can't afford it because we're parish. You know, 0:08:10.080 --> 0:08:11.560 I'm cheap anyway, So you know. 0:08:11.720 --> 0:08:13.240 Mike, we'll try and hook you up with one. Thanks 0:08:13.240 --> 0:08:16.720 for repairing this morning. We appreciate it, Mike Wilson that most. 0:08:20.680 --> 0:08:28.440 Cares about economics, fans investment or that, as you know, 0:08:28.760 --> 0:08:31.920 over the years I've made clear, the Bank of England 0:08:32.000 --> 0:08:35.479 simply does it better. Maybe it's because it's a surprisingly 0:08:35.679 --> 0:08:39.880 new public institution versus the FED and all the codified 0:08:40.000 --> 0:08:42.440 history of the Fed. But what they do, more than 0:08:42.480 --> 0:08:45.440 anything is they take in people with different views. I 0:08:45.480 --> 0:08:48.920 think of Adam Posen now at the Peterson Institute. Excuse me, 0:08:48.920 --> 0:08:53.160 the Internet, I I f I'll get it right, International Economics, 0:08:53.360 --> 0:08:57.000 Peterson International Economics in Washington. I think of David blanche 0:08:57.040 --> 0:09:00.120 Flower at Dartmouth and now they go brilliant and the 0:09:00.200 --> 0:09:03.880 number of months by bringing in somebody really original in 0:09:04.080 --> 0:09:08.120 economic analysis and policy discussion, Meghan Green of the Croal 0:09:08.240 --> 0:09:11.480 Institute and of course at Brown University. She will join 0:09:11.520 --> 0:09:14.520 the Bank of England. And obviously with those constraints she 0:09:14.600 --> 0:09:18.720 cannot speak about the Bank of England. She cannot speak 0:09:18.920 --> 0:09:22.360 about the United Kingdom. We checked where they're entourage, she 0:09:22.400 --> 0:09:26.800 cannot speak about the future of Tottenham's Spurs, and she 0:09:26.920 --> 0:09:32.200 can definitely not speak about the politics between Cambridge and 0:09:32.280 --> 0:09:34.440 Oxford is just too deep and too dangerous to go 0:09:34.520 --> 0:09:40.719 to this morning. Megan, congratulations on this hugely important appointment. 0:09:41.200 --> 0:09:45.160 I wanted just to talk today about the American economy 0:09:45.800 --> 0:09:49.920 and the certitude we have of guessing vectors of inflation. 0:09:50.640 --> 0:09:53.360 You're expert at the history of the study of that. 0:09:53.880 --> 0:09:56.880 Can we actually gain a vector of inflation? 0:09:58.640 --> 0:09:58.880 Yeah? 0:09:59.040 --> 0:10:02.840 Look, the inflation data was always going to be bumpy 0:10:02.880 --> 0:10:06.040 coming down, and that's what we're seeing. But I think 0:10:06.080 --> 0:10:08.800 what we can gauge is sort of underlying trends and 0:10:08.840 --> 0:10:12.640 look for signs of persistence of inflation. In the US, 0:10:13.679 --> 0:10:16.520 the core capital goods data that just came out surprised. 0:10:16.559 --> 0:10:19.840 On the upside, that's about seventy percent of fixed investment, 0:10:19.920 --> 0:10:22.760 So that suggests that demands pretty strong in the UK economy, 0:10:23.520 --> 0:10:26.920 and core PCEE was stronger than many had hoped. So, 0:10:27.160 --> 0:10:30.079 you know, I wouldn't read too much into one data point, 0:10:30.280 --> 0:10:32.320 but it does suggest that the FED isn't done. So 0:10:32.480 --> 0:10:34.839 even if the FED does end up pausing, I don't 0:10:34.880 --> 0:10:38.480 think it's finished here. We've seen that corporate earnings have 0:10:38.520 --> 0:10:40.880 been pretty strong. That means that there's a lot of 0:10:40.920 --> 0:10:44.080 labor hoarding that may well continue keeping the labor market strong. 0:10:44.160 --> 0:10:48.480 That again keeps demand strong and keeps upper pressure on inflation. 0:10:48.679 --> 0:10:50.600 So I think that the Fed's got more work ahead 0:10:50.600 --> 0:10:50.760 of it. 0:10:51.080 --> 0:10:54.800 One of the Meghan Green realities is plain language. You 0:10:54.880 --> 0:10:57.160 actually speak in English, Thank you for that'll help you 0:10:57.280 --> 0:11:00.439 with the Bank of England. You speak of the is 0:11:00.480 --> 0:11:03.760 a weird time in history. Define that phrase. 0:11:05.520 --> 0:11:07.520 So it's a weird time in history. Just given the 0:11:07.559 --> 0:11:11.200 success of shocks that we've had on the economy between 0:11:11.200 --> 0:11:15.040 a pandemic a war, a lot of the indicators aren't 0:11:15.040 --> 0:11:19.480 really responding, particularly to tightening of monetary policy, as one 0:11:19.520 --> 0:11:22.200 might expect. And the labor market here is a great example. 0:11:22.280 --> 0:11:25.280 The labor market is holding up freakishly well given how 0:11:25.400 --> 0:11:28.439 much aggressive tightening there's been in the US, and as 0:11:28.480 --> 0:11:30.880 I just said, you know, that keeps demand really strong, 0:11:30.960 --> 0:11:34.040 and so the Fed's trying to sort of kill off 0:11:34.080 --> 0:11:36.200 demand to bring it back in line with supply. So 0:11:36.240 --> 0:11:39.440 we can see price stability, but it's just not transmitting 0:11:39.800 --> 0:11:42.719 monetary policies, just not transmitting into the real economy as 0:11:42.720 --> 0:11:43.719 we expected it might. 0:11:45.320 --> 0:11:49.000 Donnie Constanin was on earlier with Miszouo, also out of Oxford, 0:11:49.000 --> 0:11:51.679 and he made very clear as there is a partition 0:11:51.800 --> 0:11:56.080 between demand driven inflation and supply side inflation. Obviously that's 0:11:56.080 --> 0:12:00.200 a pandemic inflation. Are we still living the pandemic in 0:12:00.280 --> 0:12:03.400 the wall of data scene in America this morning? Are 0:12:03.400 --> 0:12:07.480 we still living the pandemic in our funny savings ratios 0:12:07.520 --> 0:12:09.840 and what that means for income and spending? 0:12:11.160 --> 0:12:11.920 I think we are. 0:12:12.240 --> 0:12:13.960 It's a bit too early to say how long that 0:12:14.040 --> 0:12:17.120 will actually last, but we're seeing it in consumption patterns. 0:12:17.640 --> 0:12:20.880 We're seeing it in people's decisions to leave jobs to move, 0:12:21.280 --> 0:12:23.640 We're seeing in the real estate market. So the pandemic 0:12:24.080 --> 0:12:26.800 is very much still with us, and I think some 0:12:26.880 --> 0:12:30.200 things will structurally change going forward as a result of 0:12:30.240 --> 0:12:32.600 the pandemic. We're just not sure exactly what it is. 0:12:32.640 --> 0:12:36.520 If you look at the labor force participation for different demographics, overall, 0:12:36.559 --> 0:12:37.599 it's recovered. 0:12:37.240 --> 0:12:37.720 In the US. 0:12:37.760 --> 0:12:40.360 It took a really long time, but there are differences, 0:12:40.559 --> 0:12:43.760 particularly among older workers, and I think that will be 0:12:43.880 --> 0:12:47.040 with us for a while. That said, we really struggled 0:12:47.040 --> 0:12:49.360 with supply constraints, not just in the labor market, but 0:12:49.400 --> 0:12:53.040 also of course with global supply chains during the pandemic 0:12:53.080 --> 0:12:55.400 and an immediate aftermath of the pandemic, and if you 0:12:55.440 --> 0:12:58.680 look at a bunch of gauges for global supply, chain 0:12:58.760 --> 0:13:01.959 tightness actually eased quite a lot. So I think that 0:13:02.080 --> 0:13:05.880 piece has eased, and yet inflation remains stronger than what 0:13:06.000 --> 0:13:06.640 we'd hope. 0:13:07.360 --> 0:13:09.640 Okay, inflation is stronger than we hope, but there's a 0:13:09.640 --> 0:13:11.920 belief there of getting back now. I don't want to 0:13:11.920 --> 0:13:14.160 get in trouble with Bank of England here, but the 0:13:14.160 --> 0:13:17.040 former Vice chair of the of the FED, Richard Clarita, 0:13:17.440 --> 0:13:21.120 and others are debating a two percent idea. Would you 0:13:21.200 --> 0:13:26.000 suggest the greater theory of our macro policy forward is 0:13:26.040 --> 0:13:30.600 going to be an adjustment of any given central banks 0:13:31.480 --> 0:13:33.960 band or target that they're getting back to. 0:13:35.559 --> 0:13:39.120 So we may we're certainly beginning a debate about that, 0:13:39.200 --> 0:13:42.480 I think among the intelligentsia, but I don't think we've 0:13:42.480 --> 0:13:45.000 made much progress on that. Some are calling for a 0:13:45.080 --> 0:13:48.080 higher inflation target in the US, in particular, you know, 0:13:48.160 --> 0:13:51.440 somewhere around three percent. The FED and most other major 0:13:51.480 --> 0:13:54.280 central banks have defined price stability as is the metric 0:13:54.320 --> 0:13:57.880 target around two percent. What the academic literature shows is 0:13:57.880 --> 0:14:00.640 that actually until inflation gets above four percent, most people 0:14:00.679 --> 0:14:03.960 don't really notice it. Yeah, so I'm not sure they 0:14:03.960 --> 0:14:06.360 don't notice inflation at least in terms of you know, 0:14:06.400 --> 0:14:09.200 they hit to their actual standards of living. So whether 0:14:09.200 --> 0:14:11.760 it's two percent or three percent, that may be more 0:14:11.760 --> 0:14:12.880 of an academic debate. 0:14:13.040 --> 0:14:14.079 You absolutely nailed this. 0:14:14.200 --> 0:14:16.080 I got one minute left back, and I'm sorry, but 0:14:16.160 --> 0:14:19.560 this is research out of VCU that Olivia Blanchard is 0:14:19.600 --> 0:14:25.760 calling sentient inflation. Are we anywhere near sentient inflation where 0:14:25.800 --> 0:14:28.000 we're just comfortable with our inflation rate? 0:14:29.640 --> 0:14:32.200 So no, I don't think we are near an inflation 0:14:32.360 --> 0:14:35.040 rate that we as the public or that the Fed's 0:14:35.080 --> 0:14:37.400 willing to tolerate. In the US, I think I think 0:14:37.440 --> 0:14:39.120 it will need to come down closer to the two 0:14:39.160 --> 0:14:42.920 percent target before the Fed's really ready to hang up 0:14:42.920 --> 0:14:45.320 its boots and be done with it. So, as I said, 0:14:45.480 --> 0:14:47.680 we might get a pause in June, but I wouldn't 0:14:47.720 --> 0:14:49.440 take a pause to mean that the FED is done. 0:14:49.480 --> 0:14:50.640 I think there's more work to be done. 0:14:50.760 --> 0:14:53.040 Megan very quickly here, and I'm really trying to stay 0:14:53.040 --> 0:14:55.040 away from the Bank of England police here, and I 0:14:55.040 --> 0:14:57.480 think I'm safe going here as well. One of the 0:14:57.480 --> 0:15:00.040 great things about Fenway Park, Meghan Green. And it's not 0:15:00.240 --> 0:15:04.240 Narrogance at Lagger Beer, it's the Yankee Lobster Company. Can 0:15:04.280 --> 0:15:06.640 you give us a rating on the lobster roll from 0:15:06.640 --> 0:15:09.360 the Yankee Lobster Company at Fenway Park? 0:15:10.680 --> 0:15:12.880 I can't tell me because why would anyone ever get 0:15:12.920 --> 0:15:15.720 anything but a Fenway Frank at Fenway Parks? So I've 0:15:15.760 --> 0:15:18.400 never had it. I stick with Fenway Franks. 0:15:18.880 --> 0:15:20.560 Bottle that and you will see that. 0:15:20.680 --> 0:15:23.880 As she enters the August doors of the Bank of England, 0:15:23.920 --> 0:15:37.960 Meghan Green, congratulations from the Crawl Institute. Joining us now 0:15:38.560 --> 0:15:42.160 Janette Lowe, Managing Director Policy Research at Strtigas it is 0:15:42.280 --> 0:15:43.960 a Baird company. 0:15:44.080 --> 0:15:46.560 Jeannette, what is a distinction for you? What will you 0:15:46.960 --> 0:15:49.320 listen for this weekend? 0:15:50.800 --> 0:15:54.280 So first, thanks for having me. So we do have 0:15:54.600 --> 0:15:58.200 a deal coming together, which is good news. There are 0:15:58.240 --> 0:16:01.400 still a lot of details that need to be worked out. 0:16:01.720 --> 0:16:04.040 As you continue to hear that they've made progress and 0:16:04.080 --> 0:16:06.960 they are limiting the number of issues that still need 0:16:07.040 --> 0:16:12.240 to be taken into account and finalized among the negotiators. 0:16:12.600 --> 0:16:14.960 So it does seem like we are getting closer. We're 0:16:14.960 --> 0:16:17.359 definitely going to be looking at how this deal is structured. 0:16:17.720 --> 0:16:22.160 This is definitely smaller than what the Republicans initially proposed. 0:16:22.360 --> 0:16:25.280 They were looking at ten years of discretionary spending PAPS. 0:16:25.680 --> 0:16:27.160 We might be more at two years. 0:16:27.520 --> 0:16:29.640 So that how that's going to be structured is going 0:16:29.640 --> 0:16:32.120 to be important, I think for the markets, because there 0:16:32.200 --> 0:16:34.840 is this anticipation that we're going to get some austerity 0:16:35.280 --> 0:16:37.840 out of this deal. But even if we don't get 0:16:37.880 --> 0:16:39.800 austerity out of this deal, we still think there's more 0:16:39.840 --> 0:16:41.880 for school austerity in the years ahead. 0:16:41.920 --> 0:16:44.480 For the United States, this is really really important right 0:16:44.480 --> 0:16:46.120 where I want to go, and this is literally the 0:16:46.240 --> 0:16:47.120 history learned. 0:16:47.160 --> 0:16:48.320 At Richmond and BEU. 0:16:48.760 --> 0:16:52.800 What's the difference between our austerity and what's say the 0:16:52.920 --> 0:16:56.640 United Kingdom is living. They seem to be drowning in 0:16:56.680 --> 0:17:00.760 an austere psychology. I don't see that. In the last 0:17:00.760 --> 0:17:03.400 eight or ten years in Washington, I see you know, 0:17:03.560 --> 0:17:06.040 if it moves, spend, it spend every dollar. 0:17:06.400 --> 0:17:07.200 What's changed. 0:17:08.760 --> 0:17:12.720 So what we've seen is that, you know, obviously the pandemic, 0:17:12.760 --> 0:17:17.159 you've had extraordinary fiscal stimulus come into and that the 0:17:17.200 --> 0:17:20.639 government provided, and then obviously we've had inflation come on 0:17:20.680 --> 0:17:23.440 top of that. What's really been the key change now 0:17:23.520 --> 0:17:25.359 because to your point, we have been able to just 0:17:25.400 --> 0:17:28.520 spend and cut taxes quite freely for the past number 0:17:28.520 --> 0:17:31.120 of years, but now that we've had to interest rates 0:17:31.160 --> 0:17:33.800 prise so much that is now increasing the cost of 0:17:33.840 --> 0:17:36.639 the US debt, and so net interest costs for the 0:17:36.760 --> 0:17:40.440 US are now increasing. We have seen historically that once 0:17:40.480 --> 0:17:44.480 those rates hit fourteen percent of tax revenues, financial markets 0:17:44.480 --> 0:17:48.000 begin to impose austerity on policy makers. We are currently 0:17:48.040 --> 0:17:50.600 at twelve point seven percent, and we anticipate that we 0:17:50.640 --> 0:17:53.480 will get to fourteen percent by the end of the year, 0:17:53.800 --> 0:17:55.840 and so that is where we're really looking. That's going 0:17:55.920 --> 0:17:59.160 to start to squeeze the federal budget. So even if 0:17:59.240 --> 0:18:04.000 this deal is not particularly austere, which given the current 0:18:04.000 --> 0:18:06.359 contours it doesn't seem like it will be, we are 0:18:06.440 --> 0:18:08.560 still looking at the fact that over the next couple 0:18:08.600 --> 0:18:11.680 of years, the policymakers still have a number of other 0:18:11.760 --> 0:18:13.520 times that they're going to have to come into play 0:18:13.840 --> 0:18:16.800 to think about how do they bring the US fiscal 0:18:16.840 --> 0:18:19.960 budget into a better alignment to kind of handle some 0:18:20.000 --> 0:18:21.240 of these costs that they're dealing with. 0:18:21.320 --> 0:18:23.679 Jenna, can we just finish on the X date, the 0:18:23.720 --> 0:18:26.080 so called X state the Treasury doesn't have a precise 0:18:26.119 --> 0:18:28.720 idea of when that force. We're all guessing KIA they 0:18:28.760 --> 0:18:31.000 have some information about tax receipts. It can be very 0:18:31.080 --> 0:18:33.440 lumpy sometimes. How are you reading the tea leaves of 0:18:33.480 --> 0:18:34.639 that situation. 0:18:36.000 --> 0:18:36.200 Right? 0:18:36.320 --> 0:18:39.119 So, I mean, I think all the negotiators want to 0:18:39.119 --> 0:18:41.440 operate off the fact that we have June first as 0:18:41.520 --> 0:18:43.879 the X state. Now there always is a little bit 0:18:43.920 --> 0:18:48.000 of flexibility with that. Treasury wants to have a little 0:18:48.080 --> 0:18:50.159 bit of a buffer so that if we were to 0:18:50.200 --> 0:18:53.040 cross over the X state, you would still have maybe 0:18:53.080 --> 0:18:56.080 some cash to still continue to make payments before the 0:18:56.080 --> 0:18:59.119 Treasury Department actually run out of cash. Maybe they might 0:18:59.160 --> 0:19:01.399 be able to make it to g third, maybe not. 0:19:01.720 --> 0:19:04.960 They did put out an auction this morning that does 0:19:05.080 --> 0:19:06.640 make it seem like they might have a little bit 0:19:06.640 --> 0:19:09.840 more cash at the X state. But I think the 0:19:09.880 --> 0:19:12.680 more important thing is is that their negotiators are focused 0:19:12.720 --> 0:19:15.439 on the X state, and if we were to cross it, 0:19:15.520 --> 0:19:17.760 we do think that would be quite a market jolt. 0:19:18.480 --> 0:19:20.000 It would actually help with get a deal if we 0:19:20.040 --> 0:19:22.480 still hadn't gotten one at the same time, but I 0:19:22.480 --> 0:19:27.480 think that the actual loss of cash is less important 0:19:27.520 --> 0:19:30.119 than that X state right now, just for policy makers 0:19:30.160 --> 0:19:31.200 to be able to control their. 0:19:31.040 --> 0:19:33.119 Focus Jenna, just to finish on that point when they 0:19:33.160 --> 0:19:35.720 start to think about prioritizing spending. I think there can 0:19:35.760 --> 0:19:37.879 be some confusion between going through the X state and 0:19:37.920 --> 0:19:39.360 defaulting on debt obligations. 0:19:39.400 --> 0:19:40.600 There can be two different things. 0:19:40.840 --> 0:19:42.720 How do you think the treasury will start to prioritize 0:19:42.760 --> 0:19:45.600