Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. 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,
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Speaker 1: part of Global Wall Street on the radio and television.
Speaker 1: This morning, this is not only the interview of the day,
Speaker 1: but I'm sorry, maybe it's the interview of two thousand
Speaker 1: twenty one long agoing far away. At Deutsche Bank, Adam
Speaker 1: Saminski had a team to dream of on hydro carbon's.
Speaker 1: They were red cover to cover worldwide. Christian Meylick part
Speaker 1: of that team and he is now at JP Morgan
Speaker 1: or He has a thirty two page power point migrating
Speaker 1: base case oil out to eighty with possibilities out to
Speaker 1: well over a hundred dollars of bear Girl and even
Speaker 1: out to a hundred and fifty dollars a barrel. After
Speaker 1: JP Morgan London dusk. He joins us this morning. Christian.
Speaker 1: Within all the hyper detail of your wonderful report is
Speaker 1: the idea that United States shell production will not come on. Boy,
Speaker 1: do a lot of people disagree with you. Why are
Speaker 1: you skeptical Shell will produce it? A hundred dollars of barrel? Paul,
Speaker 1: thank you for your client comments. And I think that
Speaker 1: you know shale isn't a straight jacket. That's the best
Speaker 1: way to explain it. The straight jacket is they've got
Speaker 1: to pay dividends, they've gotta paid their debt down, and
Speaker 1: they've got to decarbonize. When you layer all this on,
Speaker 1: we can talk economics four year dollars all day long,
Speaker 1: but the reality is the fiscal baggage on top of that,
Speaker 1: related in parts of transition, related in parts of what
Speaker 1: I call the black premium, which is, I'm a share
Speaker 1: little company. I've got to give Wayne more cash back
Speaker 1: now than I ever had to because my investments only
Speaker 1: only for that reason. When you put that all together,
Speaker 1: you're clearing seventy five to eight dollars at least before
Speaker 1: you're all to qualify to invest and grow your capex
Speaker 1: once again, three years ago, that was down at forty.
Speaker 1: So things have fundamentally change, particularly in the context of
Speaker 1: this energy transition. It does applied to shale, not just
Speaker 1: the majors. Let's not bury the lead here, Christian. This
Speaker 1: is now earlier this week, one fifty one fifty on Brent.
Speaker 1: Let's go there, Opec. You say, show me the barrels,
Speaker 1: walk us through. It reminds when I said thirty dollars
Speaker 1: back in and I think, ultimately what we have now
Speaker 1: here is this garage of spare capacity. I love today's headlines.
Speaker 1: Are they going to add four hundred, They're going to
Speaker 1: add two hundred and fifty, And we can debate this
Speaker 1: all day long. The question people are asking is what
Speaker 1: do they actually have over the medium term. And you know,
Speaker 1: we've been running this supercycled thesis from the spring of
Speaker 1: last year and all went negative and it was almost
Speaker 1: right in front of us. We didn't see it, which
Speaker 1: was actually, we're obsessed with under investment with the majors.
Speaker 1: What about OPEC. You've got fiscal problems, you've got reservoir issues,
Speaker 1: you've got supply chain issues. You throw that all together
Speaker 1: and our spect capacity nowalysis comes out as half what
Speaker 1: the market deems it to be around five million pounds
Speaker 1: And what does that actually mean? It means that we
Speaker 1: don't think they can actually clear two hundred up to
Speaker 1: that amount by the second half of next year. And
Speaker 1: so when you run that analysis, you get into around
Speaker 1: a hundred and fifte hundred twenty dollars. But then if
Speaker 1: you fast forward in that scenario come eighteen months, there
Speaker 1: is this kind of like sort of like the penny
Speaker 1: dropping moment in the market, you know, which is, oh
Speaker 1: my god, these guys don't have the spare capacity. And
Speaker 1: when we've gone to look and looked at forty years
Speaker 1: of history around when a spare capacity being you know,
Speaker 1: single digits as a posential of total capacity, that's when
Speaker 1: the risk premium shoots up. And that's how you get
Speaker 1: two hundred and fifty. You kind of your fundamentals are
Speaker 1: thing around a hundred and twenty, and then it's the
Speaker 1: market saying we've got no we've got no cushion here anymore.
Speaker 1: Christie and I just want to go through these numbers
Speaker 1: with you so our audience can really get their hands
Speaker 1: around them, because that's what separates you in the crowd.
Speaker 1: Right now, for OPEC spare capacity, you're at two million
Speaker 1: consensuses at four point eight that's a two point eight
Speaker 1: million spread. Kristen, can you walk me through the numbers?
Speaker 1: How you got to two and what you think everyone
Speaker 1: else is all the way up there by five? It's
Speaker 1: it's it's basically, we've gone through the west upfroom countries.
Speaker 1: We want to juicy sea countries. And what we're looking
Speaker 1: at is not the oil in the ground. We're looking
Speaker 1: at two things, how they finance the oil production effectively
Speaker 1: as what we call the spare capacity, and to where
Speaker 1: the logistics supply chain are and whether it's conducive for
Speaker 1: them to be able to do it. And when we
Speaker 1: look at this, we sort of break it into of
Speaker 1: high risk, medium risk and low risk countries. High risk
Speaker 1: countries you've got Iran, Libya and Nigeria and god, I mean,
Speaker 1: I love everyone sort of threatening around Iran. Sanctions again,
Speaker 1: remove the sanctions. Let's see what you've got in terms
Speaker 1: of actual barrels, and we think they don't actually have
Speaker 1: more than three and four and thou in addition to
Speaker 1: where they're already are at the moment. And then we
Speaker 1: move to the medium risk and believe are not rushes
Speaker 1: in that camp because they've had reservoir problems, they've had
Speaker 1: to deliver storage into their own inventories, and equally they've underinvested,
Speaker 1: and then they can't add quickly enough because it will
Speaker 1: hurt their reservoirs. And then you have a low risk
Speaker 1: countries like Saudi in the UAE, which have been investing
Speaker 1: in their specapacity over the past three years, and therefore
Speaker 1: as and when demand calls for it, they will be
Speaker 1: able to deliver. So we're actually two point eight million
Speaker 1: barrels of specapacity, the market somewhere around four and a
Speaker 1: half to five and a half, but it's a long
Speaker 1: way down and I think people ask me, when is
Speaker 1: that going to actually play out? How do we know?
Speaker 1: How can we believe this? It will simply be through
Speaker 1: month and month production ads where they just can't keep
Speaker 1: up with whatever they're targeting, be it four hundred or
Speaker 1: potentially to fifty Christian The idea of a hundred and
Speaker 1: fifty dollars a barrel oil comes from the idea that
Speaker 1: demand is going to pick up back to pre pandemic
Speaker 1: levels by March of next year. How does the armicron
Speaker 1: variant really play into this at a time when we
Speaker 1: see people canceling their travel plans and we see a
Speaker 1: lot more uncertainty in the global vacationing space. If nothing else, Yeah,
Speaker 1: you're absolutely right. I was hoping you wouldn't ask the question.
Speaker 1: But the whole thing relies. The whole thing is anchored
Speaker 1: on demand. It's almost like the you know, it's nine
Speaker 1: and nine of our thesis that demand actually continues to
Speaker 1: recover and grow. We've already adjusted in the context of
Speaker 1: a weak aviation outlook in Key One clearly that was
Speaker 1: omicron is going to be um somewhat uncertain. But we
Speaker 1: do think as a house to add on risk because
Speaker 1: we do see demand recovery. Mark Colin the also talked
Speaker 1: about that in his recent piece to Buy the Dips,
Speaker 1: and the raality is that, you know, we're sort of
Speaker 1: coining this very especially the the omega, in the sense
Speaker 1: that this is potentially what qualifies for a risk contrade,
Speaker 1: because immunity will continue to be strong, and we don't
Speaker 1: think that hospilitations will actually keep sort of end up
Speaker 1: of catching up with the cases. In other words, even
Speaker 1: if I have high cases, it won't actually fundamentally impact demand. Outlook. Now,
Speaker 1: if we do see demand potentially damaged where we're around
Speaker 1: we're around a hundred million pounds from next year, I
Speaker 1: do expect then to take take action Christian the perception
Speaker 1: in America as a Democrats, President Biden's secretary grand Home
Speaker 1: are against American oil. In our conversation with Secretary grand Home,
Speaker 1: what she emphasized is oil is one global price, is it.
Speaker 1: It is one global price um and it's set ultimately
Speaker 1: by the marginal producer. And if the marginal producer can't
Speaker 1: deliver owing to productivity or federal land restrictions or Wall Street,
Speaker 1: that marginal role moves to whoever does have the spare capacity.
Speaker 1: And at that point the question is model price do
Speaker 1: they want? And I think ultimately, when we think about
Speaker 1: e M countries, I understand the point around wanting to
Speaker 1: keep press the prices low, but that global price rob
Speaker 1: ultimately drives significant revenue for a lot of the poorer
Speaker 1: e M countries, and so there's a sort of interesting
Speaker 1: tension between the consumers um and the producers. And I
Speaker 1: think that then segues into opexibility to actually manage this
Speaker 1: balance between having to keep the west and sort of
Speaker 1: restrict inflation visit versus the i M countries that relyableheartedly
Speaker 1: on this as a revenue source. But the bottom line
Speaker 1: is the marginal cost of the marginal price setter is
Speaker 1: shifting to OPEC. Then it all comes down to how
Speaker 1: much additional barrels they have. And this is the point
Speaker 1: where it's almost like you can ask them to do
Speaker 1: whatever you want, but it really the question is can
Speaker 1: they actually do it well? Christian, just real quick here,
Speaker 1: does this give them incredible cover the omicron variant to
Speaker 1: basically not boost production for January at their meeting that
Speaker 1: ends today? It does. It gives them cover it and
Speaker 1: and it actually gives them a breather, which is that
Speaker 1: you can actually get back to your reservoirs, focused on
Speaker 1: the technicals, build your inventories and delay um and at
Speaker 1: that point when demand recovers and we don't see it
Speaker 1: being damaged, but ultimately as it continues to grow, you
Speaker 1: then have these barrels for a higher or price and
Speaker 1: a sunnier day. Christian, before you run, because we've got
Speaker 1: sixty seconds left and to make sure we use all
Speaker 1: its and we've got with you just briefly, do you
Speaker 1: think this esset class has taken a bit of a
Speaker 1: hit the credibility of it, it's taken a bit of
Speaker 1: a hit recently. It's a great question, and I do
Speaker 1: I think that's rather that we've seen we're in a
Speaker 1: bear market for oil ultimately creates this volatility kind of paralysis,
Speaker 1: which is, you know what, I don't want to go
Speaker 1: on holiday and come back and all down. This is
Speaker 1: just too high octane for me. And so with that
Speaker 1: in mind, I think that being able to put a
Speaker 1: floor on price is important. Ultimately that's open role in
Speaker 1: some ways, but equally the geopolitics of oil can often
Speaker 1: sort of get in the way. And this is where
Speaker 1: I think if you just take a step back and
Speaker 1: just cut through it all, we've got to come back
Speaker 1: to what's the marginal cost to produce this stuff? And
Speaker 1: that's what we're trying to say here, mean a hundred
Speaker 1: and fifty dollar oil called this, colleague, quite bold, but
Speaker 1: people are missing the detail, which is actually what we're
Speaker 1: saying is the aged dollar, long term wal prices, what
Speaker 1: you're gonna need to produced the additional bowl and that's
Speaker 1: bullish reguties. Christian, just absolutely fantastic to hear the work
Speaker 1: that goes behind a call like that. It's just brilliant.
Speaker 1: Christ a mantic there of JP Morgan, Tom out of London,
Speaker 1: brilliant Tom. When did we start to describe the holiday
Speaker 1: period as a period of getting together and breathing on
Speaker 1: each other and making each other sick. I'm enough to
Speaker 1: actually remember when there was a wonderful majesty of this
Speaker 1: towards Christmas. Sea. Yes, John, there were some excesses along
Speaker 1: the way. It's not about COVID, it's it's it's slipped
Speaker 1: away over the last ten years. Yeah, well we got
Speaker 1: to the point where we had saying at the Christmas
Speaker 1: party that worked out, Well, let's get it back to
Speaker 1: let's get it back with dust coast Rick now, but
Speaker 1: a Christmas spirit with our global allocation. From portfolio manager
Speaker 1: of black Rock Russ, let's start right here your line.
Speaker 1: We expect interest rates to rise from these low levels.
Speaker 1: We think any backup in long term rates will be
Speaker 1: contained given a still insatiable appetite for yield. How much
Speaker 1: of what we're seeing, Russ, is that How much of
Speaker 1: it is actually worries about the future, the future of
Speaker 1: this economy? Good more and Jonathan, still, look, I do
Speaker 1: think that what you're seeing now is the unexpected uncertainty
Speaker 1: over the virus. You know, we we thought we hope
Speaker 1: this was behind us. Clearly that's not the case, and
Speaker 1: this is why you've seen this modest pullback and yields.
Speaker 1: But again it's worth highlighting even a few weeks back,
Speaker 1: when inflation was pushing up against thirty year highs, nominal
Speaker 1: GDP was pushing up against multi decade highs, the tenure
Speaker 1: was at one. That's not something that would have made
Speaker 1: sense to us two or three years ago. I think
Speaker 1: a lot of it does come back to this longer
Speaker 1: term secular trend that has nothing to do with the
Speaker 1: near term inflation outlook, nothing to do with the virus
Speaker 1: over the next few months, and really is about the
Speaker 1: fact that we've been in a low yield world for decades.
Speaker 1: You've got an Asian population, people need income, and when
Speaker 1: you see these backup in yields, it's incredible how quickly
Speaker 1: people jump on that and enter the fray. And that's
Speaker 1: likely to continue even in this current environment. Rossimnor to
Speaker 1: ask you this because not only is a global l ocation,
Speaker 1: but it's you really thinking across assets as well. How
Speaker 1: important is the sector call into the new year versus
Speaker 1: the individuals security call. I think the sector call is
Speaker 1: going to be very important. You know, where you are
Speaker 1: in the sector always matters, But you think about the
Speaker 1: last year, you've seen days where the market is flat,
Speaker 1: and whether you're in the right sectors or the right style,
Speaker 1: he's made a huge difference in your performance. So you've
Speaker 1: got to get the stock pick right. But you've also
Speaker 1: got to think about what is the regime we're in,
Speaker 1: Or we're going to see inflation continue to climb, or
Speaker 1: we're going to see growth decelerate. Those are going to
Speaker 1: influence whether we continue to see technology dominate, whether we
Speaker 1: go back to that value cyclical trade. Uh So, I
Speaker 1: do think it's gonna matter a great deal, particularly in
Speaker 1: an environment in which the economy, while still very strong
Speaker 1: and growing above trend, is almost certain to decelerate in
Speaker 1: two thousand twenty two. Rus we're giving narrative to all
Speaker 1: sorts of macro themes, and it's unclear whether this narrative
Speaker 1: is actually playing out in markets. Instead, people are saying
Speaker 1: it's positioning. It's people hunkering down, cashing out of their
Speaker 1: positions after a tremendous year. If they were long equity,
Speaker 1: if they were long risk, What are you doing over
Speaker 1: the next couple of weeks as we head into two
Speaker 1: given the uncertainty and given the lack of conviction right
Speaker 1: now of what next year we'll bring. I think the
Speaker 1: short answers were we're sticking to our positions. Uh, you know,
Speaker 1: we've had a portfolio for most of the year, really
Speaker 1: all of the year that has been overweight equities. We're
Speaker 1: going to continue with that because we still think an
Speaker 1: environment of well above trend growth and very low rates
Speaker 1: is still positive for equities. Were underweight duration. Again, we
Speaker 1: don't think right smelt up, but we're not changing that.
Speaker 1: And you know, we're also sticking to what I would
Speaker 1: call a Barbell approach on the equity side. I don't
Speaker 1: think this is the time to chase steep value. I
Speaker 1: don't think this is a time to go all in
Speaker 1: on early growth. It's really a matter of having high
Speaker 1: quality cyclicals that are going to benefit for this recovery
Speaker 1: and sticking with some of the longer term themes and technology, communications,
Speaker 1: healthcare that we think are still going to work until
Speaker 1: next year. Why do you think the dollar is going
Speaker 1: to continue to strengthen if a lot of the rate
Speaker 1: hikes have already been priced in, you know, the dollar,
Speaker 1: I'm going to frame it slightly differently if I can.
Speaker 1: I think the dollar has become one of the last
Speaker 1: hedges that are really working in this environment. We all
Speaker 1: know that, you know, the correlation between stocks and bonds
Speaker 1: have shifted up. Has been a problem this year, given
Speaker 1: that as traded with risk, not against risk. What's happened
Speaker 1: with the dollar is that it's actually become fairly negatively
Speaker 1: correlated with stocks. And it sounds like, well, you know,
Speaker 1: fairly geeky observation, but it's important because when you get
Speaker 1: these days when the market is getting hit on rate volatility,
Speaker 1: which has happened a lot more in the last six
Speaker 1: to eight months, the dollar has generally worked as a hedge.
Speaker 1: So we've been maintaining and overweight to the dollar. We're
Speaker 1: going to keep that into two thousand twenty two. Sintensity,
Speaker 1: catch up and good to see you as always, Rust
Speaker 1: Coast of black Rock, Thank you, sir. It is a
Speaker 1: hundred eighty nine miles from Munich to Davos, and this
Speaker 1: is a real important idea. Yesterday DLD Munich was canceled
Speaker 1: for January of two thousand twenty two, no doubt, getting
Speaker 1: out front of shoals and Chancellor miracle as well and Lisa,
Speaker 1: to me, that's the first real symbol of the log vector.
Speaker 1: We see in Austria terrible, Switzerland somewhat like the UK,
Speaker 1: Frankly and Germany in between, and they're migrating in the
Speaker 1: wrong direction. It's so frustrating, especially because of vaccination rate
Speaker 1: and a lot of these nations in Europe is actually
Speaker 1: better than the United States. You wonder what we have
Speaker 1: to come as we head into the winter months and
Speaker 1: when we can just leave the pandemic era and enter
Speaker 1: something more endemic that people just deal with. The latest
Speaker 1: headline of Bundestag to have quote open vote on mandatory vaccination.
Speaker 1: We have a mandatory conversation with Halline Becker, senior research
Speaker 1: Analystic Cow and barely describes as she has seen it all.
Speaker 1: What does it symbolize, Hallane, excuse me from Europe and
Speaker 1: do we see those tensions of Europe come over to
Speaker 1: America economy and America aviation? Yeah, morning, Tom, thanks for
Speaker 1: having me. Um. Yeah, we're really concerned about dusk because
Speaker 1: typically what happens in Europe gets exported to the United
Speaker 1: States with some type of lag. Um. And I think
Speaker 1: you're right, we are going in the wrong direction. We
Speaker 1: need to move forward. Um. Lisa made the comment that
Speaker 1: this is endemic. We all get flu shots every year,
Speaker 1: so why wouldn't we get booster shots for the coronavirus
Speaker 1: every year? And it's a flu, it's a type of flu,
Speaker 1: a bad one, admittedly, But in order to have vibrant economies,
Speaker 1: you need vibrant airline industries. And the only reason the
Speaker 1: world has been able to get as vaccinated as it
Speaker 1: has in the past one year has been because the
Speaker 1: airline industry, fed x UPS, DHL and others have got
Speaker 1: really distributed all this vaccine um that's enabled us to
Speaker 1: get to where we are. So why wouldn't we just
Speaker 1: keep moving forward and instead of moving back? Elena, what
Speaker 1: we would and what we could and what we should
Speaker 1: do is not necessarily what is happening, and we are
Speaker 1: seeing these restrictions put back into place. We are seeing
Speaker 1: global conferences canceled, like the d LD in munich As
Speaker 1: how much just mentioning what is the potential ramification for
Speaker 1: an airline industry heavily indebted still from the pandemic, dealing
Speaker 1: with reduced capacity, reduced numbers of travelers, reduced business travel.
Speaker 1: How much of a hit are they going to take? Yeah,
Speaker 1: I don't know the specific answer to that. Question, because
Speaker 1: to your point about liquidity, all the airlines grabbed as
Speaker 1: much cash as they could last year, and the government
Speaker 1: was governments, not just the United States, but worldwide government
Speaker 1: supported the airline industry to the tune of two billion
Speaker 1: dollars and that money is still on balance sheet. If
Speaker 1: you look at all the US airlines specifically, which is
Speaker 1: obviously my purview, UM, you'll see that they have huge
Speaker 1: liquidity position, six billion dollars of liquidity, and and they
Speaker 1: weren't going to repay debt um that quickly. Their their
Speaker 1: goal is to keep that liquidity in case of scenarios
Speaker 1: like this where you see continued UM restrictions in place,
Speaker 1: or where we make it difficult to travel for business
Speaker 1: because you require testing and so on, and so it
Speaker 1: makes it and practical to do a one day trip
Speaker 1: to Europe or something like two day trip to Europe whatever.
Speaker 1: So so I think that, um, the liquidity side of
Speaker 1: the equation is fine. I think to your point about demand,
Speaker 1: we think we're seeing demand x business traffic and international
Speaker 1: that exceeds two thousand nineteen levels UM. Two point four
Speaker 1: million people were screened on Sunday, which is a near
Speaker 1: which is a pandemic record where clearly within ten percent
Speaker 1: of where we were in two thousand nine. So I
Speaker 1: think that's a good sign. Um. I was at an
Speaker 1: industry event last night. A lot of the airlines were there.
Speaker 1: Not well, few airlines were there, and um, they said
Speaker 1: they haven't really seen an impact, but are expecting in
Speaker 1: an impact, but they haven't seen cancelations for December yet.
Speaker 1: They're still seeing December bookings Alane, And just to sort
Speaker 1: of put this into cold relief, if there is another
Speaker 1: downturn and travel, if the US implements some curves similar
Speaker 1: to what we're seeing in Europe, are there airlines that
Speaker 1: will not be able to survive it? Probably yes, Um,
Speaker 1: I mean it will be tough. Uh. We don't have
Speaker 1: any cell recommendations, but we actually do have bone cell
Speaker 1: as I think about it. Um, But yeah, if we
Speaker 1: go into a downturn again, even with their massive liquidity,
Speaker 1: some some one or two airlines, well, this is the
Speaker 1: gloomy at least, this is the gloomyous Helene Becker I've
Speaker 1: ever seen. Helene. Let me cut to the chase. I
Speaker 1: own United Airlines at ninety You told me to get out.
Speaker 1: I didn't. I got crushed you loaded the boat in
Speaker 1: March of two thousand twenty. Is this an opportunity to
Speaker 1: reduct March of two thousand twenty again? Yeah, I think so.
Speaker 1: I mean to your point of being bullish, be bearish. Um,
Speaker 1: we're we have I think seven or eight buys actually,
Speaker 1: and I was looking. I went out to Lynch yesterday
Speaker 1: and the stocks were up, and I came back and
Speaker 1: they were down six. I do think it's a it's
Speaker 1: a significant overreaction and I need their opportunities. So yes,
Speaker 1: thank you, Helene Becker. Thank you so much. On something
Speaker 1: we all care about, which is aviation. We do this
Speaker 1: of stunning headlines out of Germany. A theme this week
Speaker 1: has been uncertainty. It's out there and one of the
Speaker 1: best people we know to measure uncertainty is a gentleman
Speaker 1: out of the Wisconsin Complex of economics. Birthday boy Michael
Speaker 1: Darta joins us this morning. Michael Darta, Happy thirty nine,
Speaker 1: thrilled to see your cotton chiseled at thirty nine. Michael,
Speaker 1: you mix in the stock market synthesis with some wonderful economics.
Speaker 1: I want to start with the animal spirit that links
Speaker 1: the markets to our economy. What does our nominal GDP
Speaker 1: look like forward? Well, it looks pretty incredible going into
Speaker 1: the fourth quarter. Tom we have tracking estimates pushing ten
Speaker 1: percent for real GP quarterly annualized in Q four. The
Speaker 1: p m I data yesterday would have been consistent with
Speaker 1: at least a five real GDP handle for Q four,
Speaker 1: but I think it will be stronger than that. And
Speaker 1: with high inflation, we've got nominal GDP running well into
Speaker 1: the double digeons. So this is a very hot economy.
Speaker 1: But risk markets are jittery because of concern about this
Speaker 1: new variant. And then obviously Ben Chairman Powell has pivoted
Speaker 1: this week I think completely appropriately, so so we've got
Speaker 1: a bit of a dust up in volatility. But you know,
Speaker 1: these things happen, and this is an economy with tremendous
Speaker 1: forward momentum, and that is a good thing. Not that
Speaker 1: What is the choice set that the Fed will have
Speaker 1: not at the December fifteenth meeting, But if I wander on, folks,
Speaker 1: a great terminal function on this is f O m C.
Speaker 1: If I staggered a January or the March seventeenth meeting
Speaker 1: of next year at St. Patrick's State meeting, what will
Speaker 1: be the choices the Fed has at that time. Well,
Speaker 1: I think the Fed really does want to wind the
Speaker 1: taper up for midyear next year, so they have the
Speaker 1: flexibility to start raising short term interest rates if the
Speaker 1: economy continues to perform as it has been. Let's take
Speaker 1: a step back for a moment and recognize that the
Speaker 1: Fed is still doing quantitative easing, albeit at a slower
Speaker 1: pace each month, with an unemployment rate in the mid
Speaker 1: fours and plunging. Okay, during the last cycle, the unemployment
Speaker 1: rate fell only very slowly. This is a much more
Speaker 1: rapid recovery, and we're very far along towards full employment
Speaker 1: with the Fed still doing HWEI in paining short term
Speaker 1: interest rates at zero. That is a policy that will
Speaker 1: cement a more permanent inflationary backdrop in place if policy
Speaker 1: doesn't adjust. And so if we're talking about you know,
Speaker 1: retiring temporary and transitory, a big part of that is
Speaker 1: adjusting the policy stands to a more neutral level. And
Speaker 1: that's going to require the Fed to wrap up quantitative
Speaker 1: east sooner, and that's the right thing to do in
Speaker 1: my opinion. So taking a step further, Mike, in order
Speaker 1: to fight what you see as what otherwise will become
Speaker 1: a very persistent high inflation rate. What does the FED
Speaker 1: have to do? How much do they have to act
Speaker 1: next year? Well, I think if they get going sooner
Speaker 1: with an economy that has a lot of momentum, that
Speaker 1: should actually increase the probability that we don't have a
Speaker 1: hard landing later on. What you don't want is a
Speaker 1: situation where the FED falls so far behind the curve
Speaker 1: inflation and inflation expectations become embedded, and then there's a
Speaker 1: panicky catch up to adjust policy later on. And you know,
Speaker 1: that's the that's the go stop cycle, and the stop
Speaker 1: part usually needs a severe recession. So better to start
Speaker 1: doing adjustments that don't have to be panicky and radical
Speaker 1: earlier when the economy is strong and hopefully we'll be
Speaker 1: able to preserve the business cycle, um, you know, going forward.
Speaker 1: And so that's that's really the key here. But I
Speaker 1: just think it's important for people to understand this is
Speaker 1: not the last business cycle. We've got double digit at
Speaker 1: average annualized nominal cheating he growth since the economy bottomed
Speaker 1: last year. In the last cycle, nominal growth was running
Speaker 1: four per anum on average, with sub two percent inflation
Speaker 1: those variables look nothing like that this time, much much
Speaker 1: much stronger. And so if we go back to the
Speaker 1: old Milton Friedman concept, which is that money times velocity
Speaker 1: equals prices times output times out nominal GDP, so by
Speaker 1: definition that that has a much more accommodative monetary stance
Speaker 1: this time. Uh, and they're they're going to need to
Speaker 1: to adjust that light. I'm gonna channel Danny Blanche Flower
Speaker 1: of Dartmouth, who would come out and say people are
Speaker 1: ignoring some of the warning signs on the peripheries. The
Speaker 1: idea here that you have consumer confidence that fell dramatically
Speaker 1: in the face of some of the inflation reads that
Speaker 1: we've been seeing and what they see in the grocery stores,
Speaker 1: and that the participation rate really has not gotten back up.
Speaker 1: In fact, it's still far below where we were pre pandemic.
Speaker 1: How do you spawn to these issues? Is this the
Speaker 1: new normal that we're facing? And if the FED has
Speaker 1: to sort of reckon with or if we keep policy easy,
Speaker 1: do we start to see more people come back into
Speaker 1: the labor market well on participation? You know, I don't
Speaker 1: think anybody really knows exactly what's going on there. The
Speaker 1: hope was with schools reopening in the pandemic proceeding until
Speaker 1: this recent news that we start to see a pick
Speaker 1: up in labor supply, and that may still be in
Speaker 1: the offering, but so far the numbers have been disappointing.
Speaker 1: In the meantime, the labor market is tightening drastically. I mean,
Speaker 1: we've gone from you know, almost fIF unemployment in the
Speaker 1: eye of the storm last April to the mid fours
Speaker 1: uh and the Fed is still doing QI and holding
Speaker 1: short term interest rates to zero. So you know, I
Speaker 1: think the question is how far along do you want
Speaker 1: to cook this thing? And yes, inflation is already high,
Speaker 1: the temporary transitory folks, and let's just face it, they've
Speaker 1: been completely wrong even even inflation headline inflation falls next year.
Speaker 1: You know, the that crew was just simply incorrect in
Speaker 1: terms of matut timing. So you have a lot of
Speaker 1: forward momentum in this in this economy. Yet confidence is definitely,
Speaker 1: you know, looking a bit stopped, but you have a
Speaker 1: strong labor market with jobless claims. We just got the
Speaker 1: two figure. That's an extremely good figure. So this is
Speaker 1: not new in terms of this debate. You know, we've
Speaker 1: had previous waves of the virus even before the vaccines
Speaker 1: didn't stop, the recovery, didn't stop, growth didn't stop unexpectedly
Speaker 1: high inflation. So you know, at some point, those making
Speaker 1: those arguments over and over again incorrectly, I think, are
Speaker 1: going to have to, you know, think about adjusting their view. Mike.
Speaker 1: We've sent a lot of adjustments in the last week.
Speaker 1: It's gonna catch up, Mike down to that of m
Speaker 1: Campotus on this economy. This is the Bloomberg Surveillance Podcast.
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Speaker 1: Tom Keene and this is Bloomberg