Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Inflation coming up here in four minutes. Michael Ball on deck.
Speaker 2: But first Jim Karen joins us from Morgan Stanley. The
Speaker 2: note is brilliant. We protect the copyright of all of
Speaker 2: our guests. Get Jim Karen's brilliance from Morgan Stanley. Okay,
Speaker 2: so you're out of aeronautical engineering at Caltech. And the
Speaker 2: final trick question on the exam sophomore year Jim Kern
Speaker 2: is what does it mean if the bond markets worry, worry, handringing, worry,
Speaker 2: and Google can do one hundred year bond nine times
Speaker 2: over subscribed. Jim, I've never seen this.
Speaker 1: Well.
Speaker 3: I think it's I think it's really a statement on
Speaker 3: the dispersion that's in the markets right now. So, look,
Speaker 3: there's a lot of volatility that's happening. Right We understand
Speaker 3: what's happening in the equity markets, but then when we
Speaker 3: look at the publicly traded fixed income markets, as you're
Speaker 3: pointing out, the risk isn't necessarily being evenly distributed across
Speaker 3: all markets. And Tom, that's good news, okay, because whenever
Speaker 3: we go into these types of market events where there's
Speaker 3: a big repricing in a certain sector. In this case
Speaker 3: in software, the number one question is always about contagent.
Speaker 3: Is their contagent into other markets? And we're seeing fire
Speaker 3: breaks between the public markets and the private markets, and
Speaker 3: certainly equities are taking the brunt of this in some way,
Speaker 3: but we're not seeing broad based contagent. So I think
Speaker 3: if there's a silver lining around all of this, I
Speaker 3: think that's it.
Speaker 4: Jim, what do you make about this rotation we've seen
Speaker 4: out of some higher growth areas, most notably software, into
Speaker 4: more valuable parts of the market, maybe even a small
Speaker 4: and midcaps. That spooked a lot of folks who thought
Speaker 4: software and tech broadly was a good place to be.
Speaker 3: Well, it's a great example of why you want to
Speaker 3: have a diversified portfolio.
Speaker 1: Right.
Speaker 3: So we've come off of a market over the past
Speaker 3: couple of years it's been highly concentrated MAG seven Mag seven,
Speaker 3: Mag seven, and people have just forgot about the other
Speaker 3: four ninety three right in the s and P. Five
Speaker 3: hundred And the point here is that if we get
Speaker 3: this rise in economic growth is higher productivity, there should
Speaker 3: be a cyclical broadening of the markets. Look at the
Speaker 3: ISM data. Isms are well above fifty, right, now even
Speaker 3: new orders are around fifty seven. You've got the manufacturing
Speaker 3: above fifty two. You've got GDP growth which is still
Speaker 3: pretty reasonable.
Speaker 1: Jobs.
Speaker 3: You know, market seems pretty stable. Let's let's keep our
Speaker 3: eye on the bigger picture and in the reality here
Speaker 3: is that I do think that the cyclical broadening of
Speaker 3: the markets is actually really a healthy line, you know,
Speaker 3: for more diversified growth.
Speaker 2: When you listen to your economics team, is the vector
Speaker 2: in goods inflation? Usually it's a disinflation, and all of
Speaker 2: a sudden, in the last six months, Jim Kier and
Speaker 2: I got goods inflation and rising inflation. Is that going
Speaker 2: to reverse and get back to quote unquote normal?
Speaker 1: No, I don't think it will.
Speaker 3: I think that we have gone through a period of
Speaker 3: time and this goes back to two thousand and one
Speaker 3: when China joined the wto that goods inflation was relatively
Speaker 3: flat down and it was all about services inflation and
Speaker 3: everything else. So therefore overall inflation was able to stay low.
Speaker 3: Now we're in a different, different place.
Speaker 2: Should get Jim Karen into trouble this morning? Oh do
Speaker 2: you do you agree with a Posen or Zagg thesis
Speaker 2: of four percent inflation, I do not.
Speaker 3: I think the number is probably around two and a
Speaker 3: half to three.
Speaker 1: That's likely where we're going to stabilize.
Speaker 3: I don't think we're going to see below two for
Speaker 3: a while unless we see a recession.
Speaker 2: That's brilliant. See that he's so trained by compliance. I
Speaker 2: mean just about Adam posed it out on Twitter this morning,
Speaker 2: recapitulating how we get to that worry of high inflation.
Speaker 2: The release, you will, the reaction function is through maybe
Speaker 2: a higher wage, which we really haven't seen yet. Well,
Speaker 2: if that's a bet, that's an outlier, as many people
Speaker 2: have said to us, Jim Karen with us, and we'll
Speaker 2: stay with us. With Morgan Stanley Investment Management, as we
Speaker 2: go to the nation's inflation report, usually midweek, it's on
Speaker 2: a Friday because of that brief government shut down as well.
Speaker 2: We'll you'll give you the headline data, folks, but then
Speaker 2: we dive into it and give you the nuance as
Speaker 2: we can on Bloomberg through the morning. Jim Karen with this,
Speaker 2: Morgan Stanley, I go to a weeker dollar out there,
Speaker 2: but some real churn in the market as well, and
Speaker 2: we see it in Jim Karen's space as they say
Speaker 2: in the bond market, Jim Karen with a ten year
Speaker 2: yield four point zero seven percent with a substantial move
Speaker 2: over the last two three days, can you at Morgan
Speaker 2: Stanley model a three point ninety nine percent ten year yield.
Speaker 3: I mean, it's certainly lower than what we would have
Speaker 3: expected it to be. It's really a question in terms
Speaker 3: of how we think the Fed starts to react to this.
Speaker 3: Does the Fed now start to see a clear runway
Speaker 3: to cutting rates maybe more aggressively because inflation, as we
Speaker 3: just saw, is maybe coming down a bit, maybe a
Speaker 3: bit faster than many people are expecting. I'm still in
Speaker 3: the camp that there's maybe one more cut this year,
Speaker 3: possibly too so. And I think that's pretty much well
Speaker 3: in the price at this point as far as where
Speaker 3: the two year treasury is currently trading. And so I
Speaker 3: think it's going to be very difficult for the ten
Speaker 3: year yield to stay below four percent for any material
Speaker 3: period of time unless you believe there's going to be
Speaker 3: a significant flattening, and we don't, and we think the
Speaker 3: curve is going to stay relatively steep around you know,
Speaker 3: sixty bases points or so.
Speaker 2: We welcome all of you across America. Bloomberg surveying US
Speaker 2: commercial free to the nine o'clock our, Micael ball Away
Speaker 2: meeting us as well, and Veronica Clark will join us
Speaker 2: some city group here in a moment. Paul Sweeney with
Speaker 2: Morgan Stanley's Jim Karen.
Speaker 4: Jim, this is a pretty eventful week for the FED
Speaker 4: to reserve lots of data. It's a data rich week,
Speaker 4: and I guess the takeaway is, boy, we've got a
Speaker 4: pretty solid labor market. We saw that on Wednesday, and
Speaker 4: now we've got an inflation environment that continues to be
Speaker 4: pretty reasonable out there. A boy, the Fed could go
Speaker 4: either way here. They could sit on their hands, or
Speaker 4: they could cut rates. How do you think they're going
Speaker 4: to interpret this week's data.
Speaker 3: I think at the moment that they're probably still leaning
Speaker 3: towards potentially one more cut this year if the inflation
Speaker 3: numbers are coming down. But we also have to understand
Speaker 3: that the unemployment rate did tick down from four point
Speaker 3: four to four point three percent.
Speaker 1: Now could that be seasonal? Could that be an aberration?
Speaker 3: You know, maybe this is maybe we need to see
Speaker 3: a couple of more numbers, which is why I don't
Speaker 3: think the Fed's going to do anything, you know, in
Speaker 3: the first quarter of this year or probably they're gonna
Speaker 3: have to wait until the second quarter, maybe late second quarter.
Speaker 3: So I think the way the FED is likely to
Speaker 3: interpret this is that we have inflation.
Speaker 1: That seems to be stabilizing.
Speaker 3: That's good news, a labor market that also seems to
Speaker 3: be stabilizing, but we need a little bit more confidence
Speaker 3: in that.
Speaker 1: You brought this point up earlier. What about wages, right, So.
Speaker 3: You know, I think the big complaint out there, and
Speaker 3: I did a podcast on this which was to make
Speaker 3: a twenty dollars hamburger affordable again? And my point was that,
Speaker 3: you know, the price of that hamburger is not likely
Speaker 3: coming down. What's going to make it more affordable is
Speaker 3: that incomes and wages need to start to go up,
Speaker 3: but they have to go up in a non inflationary way.
Speaker 3: And the way that happens, this is the magic trick
Speaker 3: that the economy does, is through higher productivity. So higher
Speaker 3: productivity is the non inflationary speed limit on growth, meaning
Speaker 3: that you can have higher wages better growth, but that
Speaker 3: higher wages doesn't necessarily increase goods, inflation or anything like that.
Speaker 3: That's what productivity does, right, now thea any numbers are
Speaker 3: accelerating higher. So it is likely if we get a recovery,
Speaker 3: that these incomes in wages can go up without creating
Speaker 3: the inflation. And that's what makes the twenty dollars Hamburger
Speaker 3: more affordable.
Speaker 2: See how clear he does that?
Speaker 5: Surely learned that if you're at the Bowden Observatory in
Speaker 5: physics in February and it's twenty below zero and you
Speaker 5: get the telescope, it's clearer because it's cold air.
Speaker 2: That's how you get to think that clearly.
Speaker 1: And then he says that bad.
Speaker 4: And then he says, I got to go California to
Speaker 4: California's technology smart tech as well.
Speaker 2: Jim Karen go write a report. He is brilliant at
Speaker 2: Morgan Stanley. We appreciate mister Karen's expertise here