Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminent. We begin at
Speaker 1: this moment as we will for the coming days and
Speaker 1: maybe even stretching out to two weeks. The City Group
Speaker 1: just publishes they believe Mr paulib Be renominated our FED
Speaker 1: coverage with Michael McKee, and we look forward to advising
Speaker 1: you with the best guests we can find over the
Speaker 1: coming days and weeks. We start strong with William Dudley
Speaker 1: Bloomberg Opinion Columns, of course, the former president of the
Speaker 1: New York Federal Reserve and UH for years, with Goldman
Speaker 1: Sachs as well. Bill, you mentioned in your essay on
Speaker 1: a FED with some degrees of constraint. I would say
Speaker 1: a path forward is the Powell in the Brainer path
Speaker 1: all that much different forward into twenty two, twenty three,
Speaker 1: and twenty four. I don't think so. I think they're
Speaker 1: pretty much in the same page in terms of thinking Anthony.
Speaker 1: Inflation pressures that we're seen now are mostly transitory. Remember,
Speaker 1: the entire f O MC has supported the current policy path.
Speaker 1: There's been no dissents for for many many meetings, so
Speaker 1: everybody's on board. And also remember the chair can'tons do
Speaker 1: what the chair wants. They have to bring the rest
Speaker 1: of the committee along with you. So I think the
Speaker 1: difference between Paul and Brainer is pretty slight in terms
Speaker 1: of what Monterrey policy actually is going to turn out
Speaker 1: to be over the next couple of years. Some of
Speaker 1: this is the guestimates of previous inflations. Paul Krugman and
Speaker 1: Will Folks will talk about this with Jeffrey Lacker here
Speaker 1: in a bit Bill Dudley Krugman leans to the post
Speaker 1: World War two forty seven super inflation and then collapse
Speaker 1: to Eisenhower deflation, where Mr Lacker of Richmond suggests, maybe
Speaker 1: this is more pernicious like what we saw in the
Speaker 1: nineties sixties. Which kind of inflation is this? Well, I
Speaker 1: don't think we know the answer to that, because we
Speaker 1: haven't had this kind of recovery from a pandemic before.
Speaker 1: What we do know, though, is that the inflation pressures
Speaker 1: are turning out to be higher for longer. We know
Speaker 1: that that's starting to feed into wages, and we know
Speaker 1: that that's starting to feed into inflation expectations. So even
Speaker 1: if the initial impulse turned out to be transitory, you
Speaker 1: could still have long lasting consequences. We also know that
Speaker 1: the Federal Reserve is pretty late here in terms of
Speaker 1: responding to any of this. They're still adding stimulus, They're
Speaker 1: still buying treasuries and agency mortgage backed securities, which is
Speaker 1: pretty remarkable if you just step away from it for
Speaker 1: a moment and say, would you expect the Fed be
Speaker 1: adding monetary policy SteamOS at a time that inflation is
Speaker 1: running over six percent bell A market participant could be
Speaker 1: super nimble. I could be nimble with the incoming dates
Speaker 1: when change my mind. It seems to be a really
Speaker 1: high bar for federals of participant to change their mind.
Speaker 1: As you point out, this is way harder than expected
Speaker 1: it would be. It's stickier, it's broader. But I don't
Speaker 1: hear them changing their mind. But from your experience, what
Speaker 1: does it take to change your view? But I think
Speaker 1: they're in a type place because the fact is to
Speaker 1: change their mind, they have to accelerate the taper to
Speaker 1: get the taper done quicker, because they've made it very
Speaker 1: clear that they're not going to taper and you're not
Speaker 1: gonna be buying assets and at the same time being
Speaker 1: raised raised short term interest rates. So the taper has
Speaker 1: to be completed before they actually lift off. And to
Speaker 1: accelerate the taper would be problematic because you tried to
Speaker 1: put this out in a very controlled way to avoid
Speaker 1: a taper tantrum. If you not accelerate the taper, you're
Speaker 1: gonna get the taper tantrum that you're that you've been
Speaker 1: trying to avoid for the last six or twelve months.
Speaker 1: In your mind, Then do you conclude building this is
Speaker 1: no longer a date independent Federal Reserve given what you
Speaker 1: just said, well, I think that you know there's a
Speaker 1: case to be made for accelerating the taper. I mean,
Speaker 1: I think if you just look at the economic information
Speaker 1: that we're seeing flash and higher for longer fleash next
Speaker 1: dictations becoming unanchored, the labor market very tight. But I
Speaker 1: think it's very difficult for them to actually do that
Speaker 1: because that's an admission of a policy error, and it
Speaker 1: creates the risk of this taper TENDERM so I think
Speaker 1: end of the day, I think they'll probably wait. Should
Speaker 1: they wait, We'll see, Bill, you said basically that they
Speaker 1: have put themselves between a rock and a hard place.
Speaker 1: Are you saying that they've already committed a policy error
Speaker 1: by waiting as long as they have, particularly for ending
Speaker 1: their bond purchases. Well, I think they have made a
Speaker 1: mistake in the sense of being so slow to start
Speaker 1: the taper. They basically said, we're not going to start
Speaker 1: the taper until we made substantial progress towards these goals
Speaker 1: of employment and inflation. And now the taper isn't going
Speaker 1: to be completed by until June of next year. On
Speaker 1: the current trajectory, that's a very slow path of removal
Speaker 1: of accommodation given the economic information that we're seeing. So
Speaker 1: I think they've by locking themselves in this way. I
Speaker 1: think they've doubled down on being late. This is an
Speaker 1: important distinction when you say that this is the FEDS
Speaker 1: do wing that they are are between a rock and
Speaker 1: a hard place, when some people are arguing, even if
Speaker 1: they were to raise rates, that wouldn't have a material
Speaker 1: effect on the inflationary inputs, that won't solve supply chain
Speaker 1: disruptions that won't necessarily heal some of the labor shortages.
Speaker 1: Are you basically saying that at this point they are
Speaker 1: lacking the tools to really curtail inflation in a controlled way,
Speaker 1: and that they're hoping that it just remedies itself without
Speaker 1: them having to act. I mean, monitary policy obviously can't
Speaker 1: solve supply constraints. The only time can solve supply constraints.
Speaker 1: But what monterrey policy can do is keep temporary shocks
Speaker 1: to inflation from becoming more persistent and long lasting by
Speaker 1: preventing it from getting into inflation expectations and getting into wages.
Speaker 1: I think the biggest risk for the FED right now
Speaker 1: is that the labor market may turn out to be
Speaker 1: tighter sooner than what they anticipated. If that's the case,
Speaker 1: they're gonna have to make monterrey policy much tighter at
Speaker 1: some point. Bill, you've been in the trenches of market
Speaker 1: economics working with Ed mcclvy, and of course a younger
Speaker 1: Jan has a golden secs. Have you ever seen such
Speaker 1: an odd consensus so many not idiosyncratic but original Modeling
Speaker 1: forward twelve months of the guestimates of market economics, Well,
Speaker 1: I think that the FETE has been very clear about
Speaker 1: what their framework is and that been their applied trajectory
Speaker 1: for interestry. I think that's unusual to to commit yourself
Speaker 1: for so long into the future about what you're going
Speaker 1: to do when, as we see, the economic environment can
Speaker 1: change very quickly. It's also risking environment that's highly uncertain.
Speaker 1: It's not like we have a lot of experience in
Speaker 1: terms of recoveries from pandemics. So I think the FED
Speaker 1: probably made a mistake by locking themselves to to to
Speaker 1: into it a pre predicted path of how they were
Speaker 1: going to be. Bill. There was one conversation this year
Speaker 1: that's really stood out for me and I won't forget it.
Speaker 1: It was sitting down with you and Mohammed, just going
Speaker 1: into the summer, and you said something that really stunck
Speaker 1: with Mohammed, and and we talked about it subsequently that
Speaker 1: if the FETE started to move, they may have to
Speaker 1: move more quickly to get back to neutral, to do
Speaker 1: it more quickly. And that was an original thought at
Speaker 1: the time going into summer. But I wonder if we
Speaker 1: can add to that right now because we have this
Speaker 1: bizarre situation on Wall Street at the moment where we
Speaker 1: have this conversation about a FED being behind the curve,
Speaker 1: and then I'll ask someone, Okay, what does the FED do?
Speaker 1: And they'll say, one high CONQ three, one hiking Q four.
Speaker 1: Then they'll repeat the move in the year after and
Speaker 1: we'll have another two interest rate hikes. And it all
Speaker 1: sounds very calm, very smooth, and very orderly. Bill, you
Speaker 1: disagree with that to some extent, Can you just inform
Speaker 1: our audience, how well, what's very unusual about the market
Speaker 1: right now is the market expects the peak in short
Speaker 1: term interest rates for the federal fund rate to be
Speaker 1: around one in three quarters percent. One in three quarters
Speaker 1: percent peak in the federal fund rate in this business
Speaker 1: cycle will be the lowest peak ever going back all
Speaker 1: the way to the nineteen fifties. So this idea that
Speaker 1: somehow the peak in infestrates is going to be extremely
Speaker 1: low environment where inflation is extremely high just seems completely
Speaker 1: inconsistent to me. A lot of people will argue, though, Bill,
Speaker 1: that one of the reasons why is because of all
Speaker 1: the depth that's been issued, because of all of the
Speaker 1: high valuations and stocks that pensions rely on retirees. So basically,
Speaker 1: the FED will not allow the market to fall because
Speaker 1: it could torpedo the economy at a time when they
Speaker 1: have fewer tools to deal with it. Do you buy
Speaker 1: that argument, Well, of course the Fed doesn't want to
Speaker 1: cause a premature recession, but they're gonna the tightening of
Speaker 1: Mantrey policy has to tighten financial conditions. Tighter financial conditions
Speaker 1: is the mechanism that slows down at the economy, prevents
Speaker 1: the economy from continue to overheat. Now, obviously there's risks
Speaker 1: into doing that. You want to do enough to slow
Speaker 1: the economy down so you don't have higher and higher inflation,
Speaker 1: but not so much that you put push the e
Speaker 1: commy into recession. The risk, of course have gone up.
Speaker 1: The later you are to tighten Montrey policy, the higher
Speaker 1: the risk that the tightening ultimately leads to recession. This
Speaker 1: is crystal ball type stuff, Bill, But what kind of
Speaker 1: right path do you imagine? How shallow, how stape incrementally?
Speaker 1: What kind of moves would you expect. I think they're
Speaker 1: gonna go, you know, start probably after you know, June
Speaker 1: or a little bit later, and then they're gonna go
Speaker 1: faster than what people think and to a higher rate
Speaker 1: peak than what people think. Well, I think It's interesting
Speaker 1: is people have completely forgotten about what happened between two
Speaker 1: thousand and four and two thousand and six, where the
Speaker 1: FED tightened seventeen times in a row, each meeting quarter
Speaker 1: percentage point, taking the federal fund ray from one percent
Speaker 1: to five and a quarter percent. That seems extreme, but
Speaker 1: remember inflation wasn't a problem then, uh, and financial conditions
Speaker 1: weren't as a cognative as they are today. So you know,
Speaker 1: that's certainly an alternative type of pass that we could see.
Speaker 1: I certainly expect the peak to be well above the
Speaker 1: one and three quarters percent it's currently priced into financial markets.
Speaker 1: Just not have a three handle bill just to squeeze
Speaker 1: that question in what kind of thinking about Yeah, probably
Speaker 1: probably three or four. Yeah, that's what I would You know,
Speaker 1: obviously it's a crystal ball is cloudy? Was as you
Speaker 1: get further out of there we go Fed speak. You
Speaker 1: can't quite get away from the Fed too much. Tom,
Speaker 1: that was such a rude question the clinic, the former
Speaker 1: New York Fed President, thank you very much. Just to
Speaker 1: get in the mind, Tom, of a policy maker at
Speaker 1: the moment and a FLM a policy maker just to
Speaker 1: speak hopingly about what they think compared to where this
Speaker 1: market is. As we spoke with William Dudley earlier, we
Speaker 1: now speak with Jeffrey Lacker of Wisconsin, and of course
Speaker 1: of tenure at the Richmond Fed. And it is a
Speaker 1: wonderful sequence of conversation because of the history of the
Speaker 1: Richmond Fed. No one is is owned economic history like
Speaker 1: the Richmond Fed. Back the over thrilled to Jeffrey Lacker
Speaker 1: could join us, uh this morning, Jeff Lacker, we were
Speaker 1: talking in the comments there of Bill Dudley of Berkeley,
Speaker 1: and of course of the New York Fed shifting. Dare
Speaker 1: I say, Jeff to the edge of lacquer, does it
Speaker 1: surprise you to see moderates or even some doves approach
Speaker 1: a more cautious Richmond view. It's certainly striking that a
Speaker 1: number of people that you would historically think of as
Speaker 1: on the dovish wig have come around to this. But
Speaker 1: in a way it's not surprisingly. I think it's because
Speaker 1: of how far out of bounds of historical pattern the
Speaker 1: feds reaction for this inflation surge has been. People forget
Speaker 1: that the reason we got inflation under control, haimed it
Speaker 1: and then brought it down to two percent was by
Speaker 1: reacting with alacrity to inflation, scares little blips in the
Speaker 1: bond market that signaled the possibility of increased inflation expectations. Instead,
Speaker 1: this FED seems to be willing to let it run.
Speaker 1: And Jeffrey, and let's take at Jeffrey right now, to
Speaker 1: the immedia debate at hand. And I do this in
Speaker 1: honor of Thomas Humphrey, of course, and all the history
Speaker 1: you've done, Paul Krugman has gone back to the history
Speaker 1: of ninety seven, the post World War two spike down.
Speaker 1: We came with massive disinflation, Eisenhower deflation, and then there's
Speaker 1: a late sixties which was a little bit different. You
Speaker 1: basically suggests Mr Kruegman maybe off and Mr Lacker maybe on,
Speaker 1: with a more pernicious inflation of the late sixties discuss Well,
Speaker 1: I can see why the episode is attractive for those
Speaker 1: who are sanguine about this surge, But for me, it
Speaker 1: seems like the nineteen sixties and early set and vis
Speaker 1: is the more apt comparison. Inflation is ultimately about fiscal
Speaker 1: and monetary policy, and at that time period you had
Speaker 1: two very significant shifts shift in fiscal policy, with President
Speaker 1: Johnson running a Great Society program, but also running an
Speaker 1: escalation in the war in Vietnam that busted budgets. And
Speaker 1: then on the monetary policy side, you had the gradual
Speaker 1: and then sudden abandonment of the Breton Woods system, which
Speaker 1: tied the value of the dollar, however loosely, but in
Speaker 1: the long run to gold and tied down longer run
Speaker 1: inflation expectations. In addition, you had the subservience of FED
Speaker 1: Chairman William mc chesney, Martin and Arthur Burns to prevailing
Speaker 1: political wins, a subservience that tilted them in the direction
Speaker 1: of um reducing unemployment and setting inflation pressures aside. Today
Speaker 1: now we obviously have a very striking and la change
Speaker 1: in the fiscal outlook that's appeared over the last couple
Speaker 1: of years. And on the monetary policy side, the Fed
Speaker 1: rewrote its framework, it rewrote its philosophy last year, and
Speaker 1: again it tilted towards greater concern about employment and less
Speaker 1: of a concern about inflation, more of a willingness to
Speaker 1: let it run. Do you agree? Do you agree then
Speaker 1: that the remedy is going to be a very quick
Speaker 1: series of rate hikes or perhaps a jump again to
Speaker 1: what Bill Dudley was talking about where we could get
Speaker 1: three to four percent up and policy rates or peak
Speaker 1: policy rates in the cycle. Three to four percent wouldn't
Speaker 1: surprise me. Recycle, I think they're on track to a
Speaker 1: major policy blunder and recovering from that, realizing they've waited
Speaker 1: too long, it's going to cause them two of necessity,
Speaker 1: raise rates sharply and try and engineer a cooling of
Speaker 1: the labor market, and that very rarely turns out. Well,
Speaker 1: it's Bill Dudley's pointed this out publicly that UM and
Speaker 1: others as well, that the FED rarely is able to
Speaker 1: get the unemployment rate to like go back up a
Speaker 1: little bit without it going up fairly large amounts very
Speaker 1: hard to calibrate just how much UM to take out
Speaker 1: of the system, and UM, it seems to me plausible
Speaker 1: that we get to three and a half four percent,
Speaker 1: and in addition, that we pushed the economy into a recession. Yeah, well,
Speaker 1: that's exactly where I was going to go with this,
Speaker 1: Jeff Man. I'm looking right now at the average high
Speaker 1: yield bond held. The average junk bond HEIL to the
Speaker 1: United States is currently at four point to three percent.
Speaker 1: That is all inclusive, you get the overnight rate at
Speaker 1: three and a half to four percent, What does that
Speaker 1: do to the valuations of these securities? What kind of
Speaker 1: recession are we looking at? And won't the Fed be
Speaker 1: reluctant to move in that kind of manner because of
Speaker 1: the torpedoing effect on markets? Yeah, I think they're in
Speaker 1: a situation where they need to avoid an era. They
Speaker 1: need to pivot, recalibrate pretty rapidly, accelerate the taper get
Speaker 1: ready increases started earlier next year in the first half,
Speaker 1: and they're gonna need some good luck. And I think, um,
Speaker 1: a lot of markets seem to me priced for a
Speaker 1: lot of good luck. Jeff Flecker. I want to take
Speaker 1: the freshwater heritage here of the wonderful Marvin good Friend
Speaker 1: and of course his mentor Alan Meltzer at Carnegie mel
Speaker 1: And Alan Meltzer lectured me like you lectured me. We've
Speaker 1: got to look all in at the macro data in
Speaker 1: America as an entirety. Or are we so polarized now
Speaker 1: that the president's studying inflation has to look at it
Speaker 1: as two chords, the haves and they have nots. Good question,
Speaker 1: we typically haven't don't have a lot of data on
Speaker 1: UM inflation rates by cohorts UM. I think, more broadly,
Speaker 1: differential effects of inflation translated into UH, different political implications
Speaker 1: for the FED, different levels of political system dissatisfaction for
Speaker 1: the FED. On the employment side, I think UM, the
Speaker 1: FEDS redefined maximum employment as broad and inclusive. UM. That's
Speaker 1: all well and good, but it's really hard to measure,
Speaker 1: and by adding more, essentially more goals, you sort of
Speaker 1: weaken your attachment to any of them, and it raises
Speaker 1: serious questions. I think like the FED has been UM
Speaker 1: a slave to a deeply flawed and outmoded conception of
Speaker 1: maximum employment, and I think they missed an opportunity lest
Speaker 1: way to update that. Jeff one last question, because you're
Speaker 1: gonna throw me off air. Who was closer to the
Speaker 1: flawed concept? Governor Brainerd or Chairman Paul. I don't see
Speaker 1: much daylight to between them on this. I think that
Speaker 1: they're both strongly aligned with the House view that the
Speaker 1: board staff and others in the system promulgate UM views
Speaker 1: that views maximum employment as this timeless parameter that we
Speaker 1: get to at the very end of a long expansion
Speaker 1: if we're not if in the event that we're not
Speaker 1: hit by any shocks in the meantime, and you have
Speaker 1: to ask yourself the question, what was maximum employment in
Speaker 1: the third quarter of two thousand and twenty one, Well,
Speaker 1: whatever it was, we surely got there and went beyond.
Speaker 1: So the modern view that corresponds to the Monar view,
Speaker 1: which is that, uh, maximum employment in the natural rate,
Speaker 1: call it what you will, is something that fluctuates substantially
Speaker 1: over the business cycle, sub fluctuates with a lot of
Speaker 1: different economic conditions, and the FED needs to take that
Speaker 1: on board. This is why I love to speaking a
Speaker 1: former FED presidents because, Jeff, you'd never say this ten
Speaker 1: years ago. People speak them openly, I say, I said
Speaker 1: in the committee, and now it's only a changement. Jeff,
Speaker 1: thank you. Fund it there, Jeff Laca, former welcome FED president,
Speaker 1: Thank you very much. Joining us now. Lori Calvacina, head
Speaker 1: of US equity strategy at RBC Capital Markets. Laurie at
Speaker 1: the close on Friday forty two year end two, you're
Speaker 1: at fifty fifty. Walk us through the path to fifty
Speaker 1: fifty year and twenty two. So thanks John, It's great
Speaker 1: to be with you guys. As always, Um, look, we
Speaker 1: wanted to really refocus the conversation as opposed to just
Speaker 1: kind of thinking about where we're going to trade over
Speaker 1: the next six weeks, where we're going to trade over
Speaker 1: the next twelve months. And so we just went back
Speaker 1: to our models on basically all of the economic back
Speaker 1: tests and models point us to about fifty or higher.
Speaker 1: Our valuation models um several of which are looking at
Speaker 1: stocks versus bonds, reporting us to a number of about
Speaker 1: fifty fifty. And I think what we're really seeing in
Speaker 1: the data are two things. Is One, even though economic
Speaker 1: growth is expected to cool off next year and we
Speaker 1: do have some hurdles to get through frankly on supply
Speaker 1: chains and inflation, if we're if we're right about where
Speaker 1: the economy is going to end up next year, if
Speaker 1: it's about a four percent type number, which is what
Speaker 1: the economics community is anticipating right now, we should be
Speaker 1: getting to somewhere around SMP. That would be fair value.
Speaker 1: And all of our valuation work. If you look at
Speaker 1: stocks versus bonds in particular, stocks are still the only
Speaker 1: game in town, and I think that gets lost in
Speaker 1: this equity market discussion. At some point in time, Yes,
Speaker 1: we have extended valuations um. But stocks, at the end
Speaker 1: of the day are an inflation hedge. And when we
Speaker 1: look at our models that evaluate stocks versus bonds, we're
Speaker 1: still seeing a case for eight percent type returns next year. Laura,
Speaker 1: just a beautiful brief there. Um. I noticed Lory the
Speaker 1: string from General Electric to J and J and this
Speaker 1: morning the idea that Royal Dutch Shell will finally move
Speaker 1: from the Netherlands back over the United Kingdom. And these
Speaker 1: are corporations that adapt. They're gonna adapt based on what
Speaker 1: you just said to seven, eight, even nine nominal g
Speaker 1: d P if you, you know, forget about the mathiness
Speaker 1: of it. You extrapolate, the interpolate whatever a phrase from
Speaker 1: my childhood. How do you base your call? Is it
Speaker 1: based simply on non an old g d P. It's
Speaker 1: we we look at nominal GDP, we look at real
Speaker 1: GDP um again, we look at stocks relative to bonds.
Speaker 1: We look at a plain old fashioned pe multiple and
Speaker 1: make an assessment about next year's earnings. And I'll tell you, Tom,
Speaker 1: the earnings discussion is fascinating because there was so much
Speaker 1: eggs on this last reporting season. But whether or not
Speaker 1: companies were going to be able to manage through supply
Speaker 1: chain pressures and inflation pressures, and there was a lot
Speaker 1: of you know, complaining, and I'm not saying that it's unjustifiable,
Speaker 1: but if you look at the inflation discussion, it was
Speaker 1: pretty negative. We had a lot of companies talking about how,
Speaker 1: you know, their inflation outlooks had gone up next year,
Speaker 1: that they were caught off guard by the inflation that
Speaker 1: they saw perk up in three Q. Supply chain pressures
Speaker 1: have been real, they have been intense, but at the
Speaker 1: same time, companies have demonstrated a remarkable ability to structurally
Speaker 1: suck out costs from their systems. They have been applauding
Speaker 1: their supply chain teams, their logistic teams. They've been getting
Speaker 1: inventories on the shelves, they've been meeting the demand that
Speaker 1: they can, and they are managing through in a remarkable way.
Speaker 1: And I'm really hard pressed to understand why that won't
Speaker 1: continue next year on the strength that we've already seen glory.
Speaker 1: How much is a question mark here fiscal spending, the
Speaker 1: idea that we're gonna get a fiscal drag next year,
Speaker 1: and that could potentially affect how much consumers are willing
Speaker 1: to absorb these costs. I mean, I'm struck with the
Speaker 1: fact that nearly two out of three of the biggest
Speaker 1: two AS companies actually reported substantially fatter profit margins this
Speaker 1: year than back in two thousand nineteen. Well, look, I
Speaker 1: think it's a question on consumers and corporates, and we
Speaker 1: know that the corporates are passing along price increases, and
Speaker 1: what we're seeing so far is that there is not
Speaker 1: any negative feedback on underlying appetite, as I like to
Speaker 1: call it. There have been some issues with meeting demand
Speaker 1: technically here and there, not for everybody but a few,
Speaker 1: but under underneath the surface, consumers still have the cash
Speaker 1: to go out and spend, and still have the appetite
Speaker 1: to go out and spend, even though frankly they've been
Speaker 1: feeling lousy for the last couple of months. And I
Speaker 1: think part of that is a testament to the fact
Speaker 1: that we have this unbelievably strong labor market. We are
Speaker 1: seeing wage gain increases, so at the end of the day,
Speaker 1: the appetite is still there. And you know, I look
Speaker 1: at some the forecast around the street that are calling
Speaker 1: for negative numbers next year or severe pullback, and I
Speaker 1: just simply don't see the case for a growth scare.
Speaker 1: I don't see the case for the idea that we're
Speaker 1: going to be flirting with recession, which is typically what
Speaker 1: really pushes us down into negative territory and equities. Laurie,
Speaker 1: great to catch up as always, good to see you.
Speaker 1: To kick off a train in Wlauri Cavasina of OURBC
Speaker 1: campital markets. Sometimes things need to be made pretty simple,
Speaker 1: This from Manamaha Jan. Overall, we continue to believe that
Speaker 1: the economic cycle in the US remains in the middle
Speaker 1: innings with above trend GDP growth in twenty one and
Speaker 1: twenty two. For investors, this means that the bullmarket still
Speaker 1: likely has room to run. Markets tend not to enter
Speaker 1: bear markets unless the economy is entering a recession, exactly
Speaker 1: the point Lisa was making just moments ago. Joining us
Speaker 1: now is Manamaha Chan, Senior investment strategist at Edward Jones.
Speaker 1: Congratulations on the new seat, mon A. Great to catch
Speaker 1: up with you once again, Thank you, John. Great to
Speaker 1: be back. Is it that simple? Is it that simple?
Speaker 1: No recession? This equity market grinds higher. You know, really
Speaker 1: when you look historically and we when we did the analysis, uh,
Speaker 1: when we do get worried when we do hit those
Speaker 1: twenty type drawdowns or bear markets. We do tend to
Speaker 1: see an economy that is either in a recession or
Speaker 1: entering recession, or the FED is close to the end
Speaker 1: of its tightening cycle. Of course, as we look into
Speaker 1: twenty two, neither of these conditions are in place, and
Speaker 1: so yes, we think this bull market has legs still. Uh.
Speaker 1: That being said, we do think that returns will likely moderate,
Speaker 1: that we will likely see more normal levels of volatility.
Speaker 1: Keep in mind, we are now in the third year
Speaker 1: of very strong double digit gains in the smp SO
Speaker 1: in two thousand nineteen we had percent. Last year was
Speaker 1: close at seventeen. This year we're already at twenty. When
Speaker 1: you look historically at those figures as well, a fourth
Speaker 1: year of those type of returns is less likely. But
Speaker 1: could we get positive returns in line with earnings growth.
Speaker 1: We think that's fair. And I have the clearest memories
Speaker 1: of when Wharton invented the dual degree track. You did that,
Speaker 1: which is one of the most prestigious academic tracks in America. John,
Speaker 1: It's very much equivalent to what goes on in the
Speaker 1: United Kingdom. That track is based on humility. I want
Speaker 1: you to speak to Edward D. Jones clients. Now they're
Speaker 1: sprawled across this nation and they're looking at the fancy
Speaker 1: people booming on both coasts. How do you respond to that?
Speaker 1: What do you tell the rest of America about the
Speaker 1: boom economy of the elite? Yeah. Look, certainly in the
Speaker 1: United States we continue to see a little bit of
Speaker 1: this dual track, as you're alluding to, this K shaped recovery,
Speaker 1: where part of the economy and part of you know,
Speaker 1: investor basin is doing well and and part of it
Speaker 1: is is not doing so well. But what we like
Speaker 1: to tell our clients, you know, at Edward Jones, certainly
Speaker 1: we have seventeen million plush nearly two trillion dollars in assets.
Speaker 1: We think generally the course is to remain uh diversified
Speaker 1: in your portfolios, stick with equities. You know, there's been
Speaker 1: a lot of talk on inflation and inflation fears. When
Speaker 1: you look historically, one of the best asset classes to
Speaker 1: own in an inflationary environment is equities. And even if
Speaker 1: you look at this here, yes, c p I is
Speaker 1: at six point two percent, but as we alluded to,
Speaker 1: S and P returns close to so you know, it
Speaker 1: certainly makes sense to to stay that course within equities.
Speaker 1: Of course, uh, you know, we continue to like here
Speaker 1: that value cyclical trade. We think that has legs as well.
Speaker 1: We're mindful that as we get towards the end of
Speaker 1: next year, there is some uh you know, the top
Speaker 1: the comps get tougher for value and maybe easier for growth,
Speaker 1: but from now value continues to remain attractive. Start to
Speaker 1: look outside the U S. You know, we talked about
Speaker 1: tremendous growth here in the US. Well, there may be
Speaker 1: some room for catch up in areas of emerging markets,
Speaker 1: even non US developed markets, as we get hopefully better
Speaker 1: vaccine and COVID trends longer term, as we get these
Speaker 1: supply chain issues hopefully easing, and of course hopefully we'll
Speaker 1: start to see some stability out of China, and we'll
Speaker 1: we'll hear from Biden and Presidente later today as well.
Speaker 1: Own A. No one sees truly dark clouds, and that's
Speaker 1: what we've been talking about. Recession seems to be off
Speaker 1: the table, and you do have consumer confidence at the
Speaker 1: lowest since two thousand and eleven here in the United States.
Speaker 1: You do have things that are sort of screamed publishests
Speaker 1: like my twelve year old son asking whether he can
Speaker 1: buy an unfungible token this morning. I am wondering, from
Speaker 1: your perspective, whether this gives you concern, Not my son,
Speaker 1: but the idea that no one sees truly dark clouds.
Speaker 1: You know, certainly when you think about black Swan events,
Speaker 1: and last year could certainly be considered one. Yes, it
Speaker 1: is hard for economists to sit here and predict what
Speaker 1: could really derail the market from a really true black
Speaker 1: Swan event. Um. But generally we do have a good
Speaker 1: sense of what earnings growth will look like next year.
Speaker 1: We do have a good sense of, uh, you know,
Speaker 1: whether or not we're seeing any big holes in the
Speaker 1: economy when we look at areas like credit spreads, when
Speaker 1: we look at areas like even the VIX index, which
Speaker 1: is a fear index. UM. So when we track these
Speaker 1: economic metrics, um, and you know, we've we've done of
Speaker 1: historically and they've provided a really good basis for you know,
Speaker 1: looking at the future, we're not seeing any huge holes
Speaker 1: or areas of concern. You know, I think the biggest
Speaker 1: ones would be inflation and a FED policy mistake. Uh.
Speaker 1: And thus far, we're hopeful that inflation does ease from
Speaker 1: these peak levels. You know, we've talked about supply chain easing.
Speaker 1: We also think we won't see a repeat of what
Speaker 1: we saw this year in commodity prices, energy prices um,
Speaker 1: you know, going up another thirty or forty dollars. We
Speaker 1: won't see a repeat of auto prices increasing to the
Speaker 1: magnitude they did this here UM. And so you know,
Speaker 1: from that perspective, we feel comfortable with the view that
Speaker 1: positive earnings growth above trend GDP growth UM. Certainly a
Speaker 1: consumer that is showing really high appetite for demand and
Speaker 1: we're seeing that. We'll see how the retail sales figure
Speaker 1: comes out, but certainly the last couple have been strong,
Speaker 1: and so to us this is not a demand shock,
Speaker 1: which would probably be more worrisome than what we're seeing
Speaker 1: in the marketplace, which is more of a supply shock.
Speaker 1: MONA great to catch up and roll, Wishing you the
Speaker 1: best for the year. Head, thank you, thank you, thank
Speaker 1: you very much. Money John that of Edwich Giants right
Speaker 1: now it is an annual visit, but this year highly unusual.
Speaker 1: Steven Sadof is foundational in retail. His his heritage at
Speaker 1: Saxforth Avenue and now senior advisor at MasterCard. We're thrilled
Speaker 1: that he could join us. I've never seen an essay
Speaker 1: like you wrote for master Card, you and your team,
Speaker 1: Steve Sadov of the Bang Up Year. What I love
Speaker 1: is you go back and do a compare and contrast
Speaker 1: not pandemic, but with two thousand nineteen, reaching out to
Speaker 1: the guestimates of this holiday season, and I see retail
Speaker 1: up twelve percent after auto and guests taken out, and
Speaker 1: I see what Lisa cares about bubbles, bangles and beads up.
Speaker 1: Explain that two year arc that we see in retail. Well,
Speaker 1: good to see you, Tom. And it really is a
Speaker 1: healthy consumer right now, and it looks like a very
Speaker 1: strong Thanksgiving, Black Friday and back and holiday season. If
Speaker 1: you look at it versus two thousand nineteen, we're seeing
Speaker 1: some real recovery in the consumer. We're looking at growth
Speaker 1: in the double digit range, twelve versus pre pandemic levels.
Speaker 1: Department stores, apparel, luxury accessories, UH all doing extremely well
Speaker 1: and the consumer is healthy. They're back and what we're
Speaker 1: seeing is good margins with the retailers. We're seeing the
Speaker 1: consumer having a lot of money in their pockets, and
Speaker 1: this is across the high end as well as the
Speaker 1: lower end of the consumer. You have lived inflation abouts
Speaker 1: It's sex Fifth Avenue. They directly affected the every floor
Speaker 1: of the Great Store. What does this inflation about mean
Speaker 1: for master Card and the optimism you have about retail buyers. Well,
Speaker 1: I think right now it's saying that as we get
Speaker 1: through the rest of this year, we're really on a
Speaker 1: very good glide path to a strong consume humor. The
Speaker 1: holiday forecast was for seven point four percent growth for
Speaker 1: the overall season. We're looking at Black Friday and the
Speaker 1: type of range we're looking at Black the Thanksgiving week
Speaker 1: in the double digit range. So the consumer is healthy.
Speaker 1: Now we've got pricing, we've got inflation. The retailers are
Speaker 1: taking pricing and you're seeing it in some of the
Speaker 1: margins that you're seeing coming out of a lot of
Speaker 1: the brands and the retailers right now. So it is
Speaker 1: an inflationary environment. Hopefully it will start to ease as
Speaker 1: we go into next year, but the supply chain issues
Speaker 1: are real and that inflationary number is factored in into
Speaker 1: the overall of growth rate. How much Steve is this
Speaker 1: a supply chain disruption issue, the idea of shortages of labor.
Speaker 1: How much is this company is taking advantage of all
Speaker 1: of these concerns and then jacking up prices way more
Speaker 1: than they've been able to for years when they've been
Speaker 1: forced to keep them down due to global competition. I
Speaker 1: don't know whether it's taking advantage or not. We're in
Speaker 1: an environment where companies are able to get pricing through
Speaker 1: with their customers, but they're seeing real price increases. I mean,
Speaker 1: if you look at the transportation cost, you look at
Speaker 1: the labor input costs, all of these are very dramatic. UH.
Speaker 1: In many cases, if a brand has pricing power, some
Speaker 1: categories you have pricing power, others you don't. Where you
Speaker 1: have pricing power, I'm seeing them taking pricing at margin,
Speaker 1: which means that they're getting a flow through and you're
Speaker 1: seeing it in overall prices and in terms of their
Speaker 1: growth margins. Steve, when we were talking about former President
Speaker 1: Trump's policies, we discussed the effect on retail from some
Speaker 1: of the tariffs that he implemented across the world. How
Speaker 1: much are those tariffs still instated and still raising prices
Speaker 1: for end consumers in a way that perhaps President Biden
Speaker 1: could alter. Well, the prices through the tariffs still are there,
Speaker 1: and we do need to see them come down because
Speaker 1: the consumer is going to feel the feeling the effect
Speaker 1: of these UH higher prices. So is there an opportunity
Speaker 1: to take off some of the tariffs. Absolutely over time,
Speaker 1: But right now the issue is that the consumer is
Speaker 1: facing some of these UH price increases. However, they do
Speaker 1: have money in their pocket. If I look at the
Speaker 1: month of October, for example, we're looking at six percent
Speaker 1: type of growth on top of when you had Amazon
Speaker 1: Prime Day and you had the early promotions year ago.
Speaker 1: So the consumer spending as we go into next year,
Speaker 1: it's going to start lapping a little tougher. You had
Speaker 1: the some of the UH the government payments that started
Speaker 1: last January, so the environment, especially with the inflation, is
Speaker 1: going to get tougher. But as we go through the
Speaker 1: holiday season, I feel very good that you have good
Speaker 1: momentum across all these categories. Steve, I want to bring
Speaker 1: up a board again in radio. Let me describe this
Speaker 1: board to you, because I think it's just that important.
Speaker 1: It talks about the explosive two year growth and what
Speaker 1: we see, particularly our of the Amazon and the rest
Speaker 1: of the digital space is just a hugely explosive growth
Speaker 1: of fifty point two percent arcing across two years. Steve,
Speaker 1: you're a sex for thevenue guy. What does that mean
Speaker 1: to you to see that statistic of fifty percent e
Speaker 1: commerce growth in twenty four months. I think it shows
Speaker 1: the digitization of America that this is here to stay.
Speaker 1: That you're seeing the seven percent growth on top of
Speaker 1: the UH you know, in terms of on top of
Speaker 1: the going from twelve percent of commerce to eight percent
Speaker 1: of commerce. Digital is real. The consumer wants an omni
Speaker 1: channel experience. They want to buy products anywhere, they want
Speaker 1: to be able to get them. And the winners are
Speaker 1: being able to do in store, online, buy online, pickup
Speaker 1: in store. And that's tom in the luxury sector as
Speaker 1: well as in the UH entry you know, even the
Speaker 1: dollar store type of environment. So I think what you
Speaker 1: have as an environment where the consumer is king, they
Speaker 1: have all the data and they want to shop conveniently.
Speaker 1: And uh, you know, those of us in the luxury
Speaker 1: sector used to think that digital wasn't going to play.
Speaker 1: They weren't in a shop online. That's just not true anymore.
Speaker 1: Look at what Sacks did they're building their Sacks dot
Speaker 1: com businesses and investing in it, Lisa, And let's Dove
Speaker 1: tell this in and make some money for MasterCard and Steve, Lisa,
Speaker 1: now you and I need a road trip to the
Speaker 1: Sacks Fifth Avenue shoe floor. You go up that elevator
Speaker 1: where they used to go click click click on the elevator,
Speaker 1: and you open out into an extravagance of shoes. Lisa,
Speaker 1: how far are we from them amazoning that and like
Speaker 1: taking a firm in there, so any any person could
Speaker 1: migrate out to a sensible three or four pair shoe
Speaker 1: acquisition a reasonable All this tells you a lot about
Speaker 1: Tom King, not about my shoe proclivities. I'll just put
Speaker 1: that there just to have this up though, Steve. You
Speaker 1: know what we're talking about. Going to Sacks fifth Avenue
Speaker 1: is a high class issue, right. People go there if
Speaker 1: they want to spend, usually a lot more money than
Speaker 1: say somebody who shops in some of the other retailers.
Speaker 1: And I wonder, at to Thoma's point earlier in the
Speaker 1: show the bifurcated recovery, whether the spending is a bifurcated
Speaker 1: spending of the halves and bigger ticket items and the
Speaker 1: have nots still restricting some of their purchases. I'm not
Speaker 1: so sure. I agree with Tom on that I think
Speaker 1: the consumers healthy across the high and clearly the luxury environment.
Speaker 1: You look at growth versus year ago, or even thirty
Speaker 1: sevcent growth versus two years ago in some in the
Speaker 1: luxury sector. Luxury, the high end electronics, jewelry very very strong.
Speaker 1: But if I look at the dollar stores, I look
Speaker 1: at the recovery and some of the uh, the t
Speaker 1: j X is of the world, I think, and even
Speaker 1: the strength you see in the targets, uh. The consumer
Speaker 1: at the lower end had a lot of some of
Speaker 1: it because of the government's support programs, the labor market
Speaker 1: being very strong, wages going up, the consumers spending at
Speaker 1: all levels right now. That's great. Only only Sex could
Speaker 1: come up with a central Park theme for their shoes
Speaker 1: floor with MasterCard and of course to gentlemen, always and
Speaker 1: forever from Sex. Steve Sadof with us this morning. Steve,
Speaker 1: thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening.
Speaker 1: Join us live weekdays from seven to ten a m.
Speaker 1: Eastern on Bloomberg Radio and on Bloomberg television each day
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Speaker 1: the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com,
Speaker 1: and of course, on the terminal. I'm Tom Keene, and
Speaker 1: this is Bloomberg.