Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Right now, the
Speaker 1: micro economists from the University of Chicago. Jeffrey Curry holds
Speaker 1: court at Golden Sachs's Global head of Commodity Research. Jeff
Speaker 1: love your note where you really go into the price
Speaker 1: theory off the dollar of your commodity space. You have
Speaker 1: something that I would suggest one of our listeners and
Speaker 1: viewers don't understand commodities year to date in Japan up
Speaker 1: fifty year to date in the United States. Up. The
Speaker 1: dollar matters, doesn't it absolutely. That's why we titled the
Speaker 1: piece of Dollar dominance UM. And the main point there
Speaker 1: is as the US hikes interest rates faster than the
Speaker 1: rest of the world, you get a divergence in global
Speaker 1: interest rates UM, which then in turns puts upward pressure
Speaker 1: on the dollar. So funding costs in dollar increase and
Speaker 1: then people d leverage dollar denominated assets in commodities are one.
Speaker 1: I don't care if it's a financially held one or
Speaker 1: a physically held one. You'd rather liquidate that and hold
Speaker 1: cash paying five percent, then take the risk of that.
Speaker 1: And then what happens, deflation sets in and dollar denominated assets.
Speaker 1: That deflation then increases real US incomes, which then puts
Speaker 1: more upward pressure on interest rates, and so it's at
Speaker 1: US negative feedback loop. Take us to supply and demand then,
Speaker 1: and I guess we could go to the next OPEC
Speaker 1: meeting if we really wanted to. But do you throw
Speaker 1: general equilibrium study of oil out the window because of
Speaker 1: this excess dollar move? Really good question, and I keeps
Speaker 1: me up at night. And here's the way I'm thinking
Speaker 1: about it is, let's go to the definition of UM
Speaker 1: inflation too much money chasing too few goods. You have
Speaker 1: two conditions to get inflation, too much money and too
Speaker 1: few goods. We still have too few goods. The oil
Speaker 1: market is in a deficit. Inventories are low. But what's
Speaker 1: happening money supply is shrinking, and so that's taking the
Speaker 1: price level and driving it down even though you still
Speaker 1: have too few goods. So you know, we look at
Speaker 1: the fundamental picture our base cases, it's going to continue
Speaker 1: to tighten as we go into year in and particularly
Speaker 1: you take out the spr barrels. Um, you get stabilization
Speaker 1: in in China, oil, the gas substitution in Europe. Um,
Speaker 1: this market is gonna get tighter and tighter as we
Speaker 1: go into the winter months. Um. So if we we
Speaker 1: need to see some stability in money supply or in
Speaker 1: the dollar in terms of thinking about that liquidity issue,
Speaker 1: then those fundamentals can press higher. But I think right
Speaker 1: now you need to really separate what's happening on the
Speaker 1: money supply side and what's happening on the fundamental supply
Speaker 1: and demand side. One aspect of the story, Jeff that's
Speaker 1: gotten a bit lost in the recent turmoil turmoil and
Speaker 1: worry about a recession is possible capacity to produce. And
Speaker 1: there was a story out today talking about how OPEC
Speaker 1: plus may actually cut its production at its next meeting.
Speaker 1: How much do you expect something like that, not necessarily
Speaker 1: in response to the price going down, but in response
Speaker 1: to a lack of capacity to continue to produce at
Speaker 1: levels that they're doing now. Well, I mean, if their
Speaker 1: data dependent, if they're going to cut production. They're doing
Speaker 1: it because they look at the market being in a
Speaker 1: surplus and that's what made sense. But in terms of
Speaker 1: thinking about the overall capacity, that should affect longer term prices,
Speaker 1: which is one of the reason why we're bullish long
Speaker 1: dated long term oil prices. If we can, you're out
Speaker 1: of capacity, which means you have to forward invest, and
Speaker 1: ultimately that's what you know can solve this problem. But
Speaker 1: to attract that capital, you need higher long dated prices,
Speaker 1: which is why in our note we recognated recommended going
Speaker 1: long long dated oil for precisely that reason. What about
Speaker 1: natural gas? And I know it's a hard pivot because
Speaker 1: it's a different asset class, but we're seeing a bit
Speaker 1: of overlap here as Europe faces a winter of discontent
Speaker 1: where they're flat on their back. Where is the extra
Speaker 1: margin of supply going to come from for Europe at
Speaker 1: a time when the US is exporting more than it
Speaker 1: ever has and it's facing some constraints with production there. Well,
Speaker 1: I think the answer to that is, look, domestically, you're
Speaker 1: gonna get it through weaker demand. You know, we're barished
Speaker 1: European natural gas going into January and February and see
Speaker 1: it trading blow a hundred euros per megawatt hour. Why,
Speaker 1: I like to point out, no one ever gets hit
Speaker 1: by the train they see coming in the sense that
Speaker 1: you know, the disruption happened in August, so you were
Speaker 1: able to make adjustments by reducing demand, industrial demand, destruction,
Speaker 1: making substitution into two other fuels. Um. So we believe,
Speaker 1: you know, barring an absolutely freezing cold winner, they're gonna
Speaker 1: get through this winner. Prices are going to moderate. But
Speaker 1: longer term you have a problem. To get to your point, Um,
Speaker 1: you know, you have to, you know, come up with supplies,
Speaker 1: whether it's through exports of l en G or domestic
Speaker 1: investment or substitution in other fuel. So longer term you've
Speaker 1: got a problem in yourype. Jeffrey, unfair question, but it's
Speaker 1: unfair Thursday, What is the optimal price of a barrel
Speaker 1: of oil for OPEC? Well, if you look at where
Speaker 1: where the equilibrium price should be, um, you know it
Speaker 1: should be somewhere in that dollars a barrel. Um. Given
Speaker 1: the fact that that's we're probably the cost structure in
Speaker 1: the U S. Why don't we know it's got to
Speaker 1: be somewhere in that vicinity because riggs were rising when
Speaker 1: we were above a hundred, and since we've been now
Speaker 1: below that hundred ninety US call it around a hundred.
Speaker 1: Rick counts in the US are coming off. They've been
Speaker 1: they're off about riggs over the last three to four weeks,
Speaker 1: which is telling you're getting down in these levels. You're
Speaker 1: now below the equilibrium price. So somewhere in that, say,
Speaker 1: ninety five hundred dollars of arrel seems to be where
Speaker 1: the markets functioning UM. And we also look at you know,
Speaker 1: that's where our price target is in four que a
Speaker 1: hundred dollars about UM. And you know, the potential for
Speaker 1: upside around that I think is substantial. Going back to
Speaker 1: the point that, uh, you know, we're out of spare capacity.
Speaker 1: Jeff wantedful to hear from you. It's been too long, Jeff,
Speaker 1: carry that of Thank you, buddy, wonderful us a white
Speaker 1: thank you very much. Our team is committed to bringing
Speaker 1: you voices within this crisis. And there's none on policy
Speaker 1: and economics more competent in this world than Michael Spence,
Speaker 1: the Laureate of Stanford, New York University and of course
Speaker 1: chairman of General Antics Global Growth Institute Professor Spence, thank
Speaker 1: you so much for joining us this morning. I want
Speaker 1: to go to another time and place in your ute,
Speaker 1: when you were studying with John Hicks long ago. Let
Speaker 1: us go, folks to nineteen eight one and William Grider's
Speaker 1: classic The Atlantic Essay on a very young David Stockman.
Speaker 1: The whole thing is premised on faith. The inflation premium
Speaker 1: melts away like the morning missed a great battle over
Speaker 1: the conventional theories of economic performance. David Stockman in the
Speaker 1: middle of reconomics. Michael Spence, the tumult of the last
Speaker 1: forty eight hours seems like a Reaganomics redux, is it?
Speaker 1: It looks like it, Tom, But I don't I actually
Speaker 1: don't think it is so both Um, Ronald Reagan and
Speaker 1: Margaret Thatcher. We're dealing with a situation in which you
Speaker 1: had embed inflation uh, but also you know, uh kind
Speaker 1: of stagflation pattern, low growth, and they were basically trying
Speaker 1: to remove the constraints and obstacles to higher rates of growth.
Speaker 1: That that meant cutting back government uh and cutting back
Speaker 1: you know, unfortunate and dysfunctional regulation. I think this is
Speaker 1: a completely different situation we've lived in the you know,
Speaker 1: liberated economics world for a long time, and we're actually
Speaker 1: going in different directions. So uh, you know, I mean,
Speaker 1: policies are always context specific, but but I don't think
Speaker 1: this is an analogous to that situation. So then what
Speaker 1: situation is this? What is the policy prescription for the
Speaker 1: United Kingdom are quite frankly China or any others? What
Speaker 1: is the new Spence prescription? Well, it starts with recognizing that,
Speaker 1: you know, for a whole variety of reasons, we we
Speaker 1: have quite suddenly shifted into a supply constrained world. So
Speaker 1: you know, growth strategies based on expanding demand don't make
Speaker 1: any sense. I mean, I think that's the core of
Speaker 1: the mistake that's been made in the UK. You just
Speaker 1: don't cut taxes if the supply side can't respond, especially
Speaker 1: if you're fighting in the central Bank who's trying to
Speaker 1: get you know, nearly out of control inflation back under control.
Speaker 1: And then at that, you know, I see, I think
Speaker 1: you have to face the fact that in the short
Speaker 1: run we don't have any choice the supply side agenda
Speaker 1: that we really need, you know, reversing the productivity trends
Speaker 1: isn't gonna happen. Overnight. So the central banks, who are
Speaker 1: a little late to the game but in an awkward position,
Speaker 1: just have to, you know, deal with the inflation thing
Speaker 1: by trimming back the demand side as best they can
Speaker 1: and as delicately as they can um. But then the
Speaker 1: rest of the agenda should be focused on real supply
Speaker 1: side can straints, both domestic and global um and there
Speaker 1: are a lot of them, aging populations, you know, fading,
Speaker 1: deflationary pressures from the emerging economies, UH diversification and global
Speaker 1: supply chains, the energy transition in Europe. I mean, the
Speaker 1: list is very long, and I won't bore you with
Speaker 1: the whole thing, but but you know, that's the situation
Speaker 1: that we have to bottom line is we need a
Speaker 1: productivity search without that or to get there. There is
Speaker 1: also an issue with how do you fiscally arrange a
Speaker 1: situation where deficits are not easy to finance anymore? How
Speaker 1: concerned are you about the inability of a lot of
Speaker 1: nations to finance some of the developments required to increase productivity,
Speaker 1: required to increase growth in the face of inflation that
Speaker 1: is persistent. I'm very worried. I mean, you know, one
Speaker 1: of the one of the other sort of constraints that
Speaker 1: that you talked about before, Lisa was a rising levels
Speaker 1: of some and debt, you know, and in a rising
Speaker 1: inflationary environment. You know that that that on in many countries,
Speaker 1: maybe the United States is uniquely an exception. Um places
Speaker 1: fairly superior constraints on the kinds of investments that form
Speaker 1: a portion of you know, sensible growth strategies, you know,
Speaker 1: supply side oriented growth strategies of the type that we
Speaker 1: you know, the bills we passed recently in the US.
Speaker 1: So I think that's, ah, you know, essentially a reason
Speaker 1: why why we may not be able to dig our
Speaker 1: way out of this whole. All that pass well to
Speaker 1: your writing, recent writings on investment, sir, And I'm going
Speaker 1: to assume that Chad Jones Berkeley to Stanford was a
Speaker 1: Michael Spence disciple. He's got the definitive book on post
Speaker 1: solo productivity. And that's all great. But the answer is
Speaker 1: we need capital deepening. How do we do that? Well,
Speaker 1: I mean, you you make sensible choices. So the first
Speaker 1: thing you do is you don't do is cut revenues, right,
Speaker 1: I mean, you know, if we're going to get out
Speaker 1: of this, we all have to pay a price. The
Speaker 1: politicians have a tough job convincing people, that's right. But basically,
Speaker 1: you know, we have to finance the investments we need
Speaker 1: to get out of this and that means probably um
Speaker 1: some at least holding fast on the tax situation, if
Speaker 1: not increasing them. Michael Spence, thank you so much in
Speaker 1: honor to have you with us today from always Stanford
Speaker 1: and New York University in great Atlantic as well coming
Speaker 1: to us from Italy at today right now, and this
Speaker 1: is a joy as we continue to bring in to
Speaker 1: gather in people. As John mentioned, Dr el Arian YenS
Speaker 1: Nordvig with us yesterday. I thought Allen Ruskin was wonderful
Speaker 1: with Deutsche Bank. Right now, Carl Weinberg, chief economist high
Speaker 1: frequency economics and far more out of the Lawrence Klein
Speaker 1: wing of the University of Pennsylvania with real world work
Speaker 1: in the rooms. Is these things get worked out? Carl,
Speaker 1: you nailed at this morning by saying, look, it's liquidation
Speaker 1: of bonds for cash. How will politicians respond to the
Speaker 1: threat of liquidation of bonds for cash? Well? I think
Speaker 1: good morning, Tom, thank you. I'll try to live up
Speaker 1: to your introduction. Um, you know what the government can do,
Speaker 1: is the government can give people a better reason to
Speaker 1: hold bonds, a prospect for thinking that inflation will come
Speaker 1: down and that will bring down bond yields, a prospect
Speaker 1: for thinking that the public finances are stabilized that will
Speaker 1: bring down bond yields. Prospect for thinking that once inflation
Speaker 1: is under control and growth will be able to resume,
Speaker 1: that will bring down bond yields. But right now we're
Speaker 1: not getting any of that in the UK um at
Speaker 1: least not in the judgment of the markets as we're
Speaker 1: plainly seeing. And whether it's right, wrong, good, bad politics,
Speaker 1: it nonetheless seems to be the market's reading it as
Speaker 1: bad economics. And how much is the Bank of England's
Speaker 1: response kind of the playbook for a lot of central
Speaker 1: banks going forward in terms of both hiking rates, keeping
Speaker 1: the front and high and buying bonds to basically monetize
Speaker 1: a fiscal response, to monetize what the policymakers and government
Speaker 1: are going to be doing without completely upending the economy. Hi,
Speaker 1: good morning, Lisa. That's that's all the right questions and
Speaker 1: it's hard to know what the answers are. The Bank
Speaker 1: of England has done a good job of convincing everybody
Speaker 1: that inflation is rampant, and whether I agree with that
Speaker 1: or not, or that's what the market believes and that's
Speaker 1: what the market expects. So having convinced the public, having
Speaker 1: generated expectations in the public that there is a true
Speaker 1: inflation problem and that the right answer to that is
Speaker 1: hiking rates, the Bank of England really has no choice
Speaker 1: but to continue to deliver the remedy for the problem
Speaker 1: that it's defined and continue to raise interest rates. And
Speaker 1: it's going to have to raise that by a lot.
Speaker 1: If you look at their own inflation forecasts, which again
Speaker 1: they aim to convince us are accurate forecasts. Right, real
Speaker 1: interest rates are nowhere near real positive alright, let alone
Speaker 1: high enough to break the economy. And now add to
Speaker 1: it the fiscal stimulus they have to in order to
Speaker 1: deliver the promise, in order to play out the scene
Speaker 1: that they have set, they have to deliver much higher
Speaker 1: interest rates and it won't be until they do. I
Speaker 1: think that the market will find the equilibrium price. Carl,
Speaker 1: Have we reached the limits of deficit financing? Well, certainly
Speaker 1: in the case of the UK, we have to say
Speaker 1: that the market isn't buying what the government is selling
Speaker 1: in terms of the amount of debt that it believes
Speaker 1: it can finance at this time. You know, in the
Speaker 1: longer term, you know, we're all dead, of course, but
Speaker 1: in the longer term we can probably borrow a lot
Speaker 1: more than we are right now. But to amp up
Speaker 1: the game at such a rapid pace under these current circumstances,
Speaker 1: which is to say, an opposition to the stated policy
Speaker 1: goals of the Central Bank, ignoring if you will, the
Speaker 1: advice of the Central Bank governor and his committee and
Speaker 1: his economists and his analysis, all right, and going ahead
Speaker 1: and ramping up spending anyhow, that seems to be a
Speaker 1: movement pushed beyond credibility. Carlinberks have NBO and of course
Speaker 1: Daniel Jurgen wrote this up beautifully and commanding heights. You
Speaker 1: are at the Bank of Montreal doing debt workouts on
Speaker 1: disasters in Latin America. What does trust anomics to look like?
Speaker 1: How do they get from what everybody believes as a
Speaker 1: theoretical train wreck to whatever the outcome is. How do
Speaker 1: you get the reaganomics too? How do you get the
Speaker 1: trusts snomics too? Well, Thomas, I'm sure you've mentioned many
Speaker 1: times over the last couple of days. The Reagan administration
Speaker 1: cut taxes like mad and ran up the federal deficit
Speaker 1: like mad in the early days of its administration. By
Speaker 1: the time we got to the end, they were raising
Speaker 1: taxes to pay for it, and all of the promises
Speaker 1: of supply side economics and voodoo economics or whatever you
Speaker 1: chose to call it didn't seem to work out. So
Speaker 1: I suspect that someday there will be a day of
Speaker 1: reckoning in the UK where they will have to unwant
Speaker 1: some of this. But it's pretty clear from the Prime
Speaker 1: Minister's statement that that's not going to happen this week,
Speaker 1: or next week or the month even after. Okay, I'm
Speaker 1: gonna we gotta continue this. John Farrell jump in here.
Speaker 1: You're the guy from Britain as well. What does the
Speaker 1: committee do under your odd government in Britain? Within the
Speaker 1: market is going to dictate that some potentially over the
Speaker 1: next few weeks, And Carla is right for the next
Speaker 1: few weeks at least. I think a lot of people
Speaker 1: don't see list trust changing our mind at the moment,
Speaker 1: Carl This operation from the Bank aving that goes until
Speaker 1: the middle of October. The concept we're all talking about now,
Speaker 1: Carla's fiscal dominance. Walk us through that concept. Carlin, how
Speaker 1: well do you think this Bank of England can push
Speaker 1: back against it? Well, the Bank of England, John, as
Speaker 1: you know, has unlimited resources. It can raise interest rates
Speaker 1: to a million percent if it wants to to achieve
Speaker 1: its goals. It's said what it wants to do, it's
Speaker 1: said how it's going to do it, and I don't
Speaker 1: think it can or will back down. M On terms
Speaker 1: of the government, the government has limited fiscal resources. If
Speaker 1: it gets into a battle with the Bank of England
Speaker 1: over whether the economy should be stimulated or not not,
Speaker 1: the Bank of England will win. It's a question at
Speaker 1: what interest rate do we have to get there? The risk,
Speaker 1: the big risk, and John, I know you're conscious of this,
Speaker 1: very much more so than I am, is that the
Speaker 1: government gets fed up with the Bank of England and
Speaker 1: starts to restrict its independence. On that day Sterling will
Speaker 1: go down the tubes and on that day go yields
Speaker 1: wolf story levels that I dare not even contemplate. And
Speaker 1: there was a whisper of that in August, and they
Speaker 1: tried to address it as soon as they took out
Speaker 1: of account. Fantastic to hear from me, said as always Kyle,
Speaker 1: wind back. There of high frequency economics right now and
Speaker 1: this is a huge joy to know. The team that
Speaker 1: Neil Sauce of Credit Sweez put together decades ago at
Speaker 1: Credit Suietz included the giant dominic constom now over at
Speaker 1: Missooo and still at Credit Suetz is Ray Ferris. He
Speaker 1: only high ground on Pacific rim analysis and also were
Speaker 1: in exchange in London for the shop. We're thrilled that
Speaker 1: the chief economists of Credit Suites joins us this warning.
Speaker 1: I'm gonna cut right to the chase, Ray, and this
Speaker 1: goes into your foreign exchange of that ground yesterday was original.
Speaker 1: What is the original solution for the Prime Minister. Well, look,
Speaker 1: I'm thrilled to be here. I've been a long time
Speaker 1: listener to the show and it's it's great to be on.
Speaker 1: But I just wanted to address the elephant in the room.
Speaker 1: That is a fantastic bowtie. I love it. Um. I
Speaker 1: think it was said a little bit earlier by one
Speaker 1: of the guests that you know, the UK increasingly needs
Speaker 1: to be viewed in the context of an emerging market
Speaker 1: sort of situation. Not that they're going to default on
Speaker 1: their debt, but the economy has lost a nominal anchor
Speaker 1: for the system, and that's I think why investors don't
Speaker 1: want to hold bonds and they don't want to hold
Speaker 1: the currency. The fiscal agent looks like it's a little
Speaker 1: out of control and the Bank of England isn't stepping
Speaker 1: up to the plate to regain control to establish that
Speaker 1: nominal anchor by saying that we don't care what happens
Speaker 1: on fiscal We're going to control inflation. What needs to
Speaker 1: happen here is the Bank of England needs to step in.
Speaker 1: They need to be aggressive with their next rate. Height
Speaker 1: could be better if they move before November, and they
Speaker 1: need to signal that they will do more after that.
Speaker 1: Markets are pricing very high rates as the terminal rate.
Speaker 1: They don't have to get there if they acts. You
Speaker 1: have a huge credibility with Asia and with China, with Japan,
Speaker 1: and you come out and calculate one point six global
Speaker 1: growth for next year. Are we pricing for that? No?
Speaker 1: I don't think we are, certainly not in equities um
Speaker 1: the way we look at equities and I wear two
Speaker 1: hats of credit. Swiss I'm chief economists but also the
Speaker 1: chief investment officer for the America's About three weeks ago,
Speaker 1: we went underweight in our investment Wealth Division equities for
Speaker 1: the first time since two thousand and thirteen. That's really
Speaker 1: a huge move for us. And when we look at equities,
Speaker 1: we think, as we just published yesterday our new economic quarterly,
Speaker 1: the worst is yet to come was the title, And
Speaker 1: it's all about the fact that nominal growth is going
Speaker 1: to slow. Financiing costs are going up, and wage growth,
Speaker 1: the persistence of a lot of costs you know, are
Speaker 1: going to be there for another few quarters, so profits
Speaker 1: are gonna get squeeze. Margins look too high, consensus earnings
Speaker 1: look too high. To that point, right, Let's go back
Speaker 1: some of the data that we just got. The initial
Speaker 1: jobless claims of a hundred and ninety three thousand, It
Speaker 1: was the expectation of two hundred and fifteen thousand. You
Speaker 1: hear the FED saying they want to see a little
Speaker 1: bit more slack in this labor market, or even a
Speaker 1: lot more with the projection of four and a half
Speaker 1: percent of an unemployment rate possibly by next year. How
Speaker 1: far away are we what kind of Fed funds rate.
Speaker 1: Do we need to get to the type of slack
Speaker 1: to the loosening of this labor market required to bring
Speaker 1: inflation down? Oh? Absolutely, The Fed is going to be
Speaker 1: angry about these numbers. Um, we've got a forecast of
Speaker 1: one and a half percent, but well, really, uh, four
Speaker 1: and five aids for FED funds as a terminal rate.
Speaker 1: But we stress we don't really know where this thing
Speaker 1: could peak, and the the there's an asymmetry still in
Speaker 1: the Fed's reaction functions to the top side. They have
Speaker 1: shown that they aren't going to ease just because numbers
Speaker 1: get or turn a little bit less hawkish, just because
Speaker 1: numbers get a bit better the June July CPI data,
Speaker 1: and they will respond aggressively if the numbers, you know,
Speaker 1: aren't so nice the August CPI data. So could they
Speaker 1: hike beyond what the market's got priced, you know, the
Speaker 1: four and a half percent for terminal rate next year? Yes?
Speaker 1: Do they? I think just really dislike the idea that
Speaker 1: markets have got a cut price for two thousand twenty
Speaker 1: three and are they going to continue to argue against that? Absolutely? Right.
Speaker 1: We saw from the Bank of England the conundrum that's
Speaker 1: becoming increasingly global conundrum and perhaps may face this fedure reserve,
Speaker 1: which is when do you reach the breaking point? And
Speaker 1: then how do they counteract that? From a financial stability perspective,
Speaker 1: What is the break point when it comes to real
Speaker 1: yields which we saw hit one point six percent just
Speaker 1: a few trading days ago. Where is the breakpoint for
Speaker 1: this market and then for the Federal Reserve to have
Speaker 1: to step in on a stability stance. Well, let me
Speaker 1: identify three different things here. The first is that one
Speaker 1: of the key reasons I think real yields are going
Speaker 1: as high as they are back into positive territory is
Speaker 1: that balance sheet strength in the United States, especially within
Speaker 1: the housing sector, is the best that it's been in
Speaker 1: depending on your metric, anywhere between twenty to thirty years.
Speaker 1: The Fed has to push up yields much more than
Speaker 1: we were fought a year and a half two years
Speaker 1: ago to actually slow the system down, and that's kind
Speaker 1: of what their claims dated. The second thing is, I'm
Speaker 1: here in Dallas. I was meeting with a lot of
Speaker 1: retail corporates yesterday and when I asked, are we in
Speaker 1: a recession? Everybody in the room put their hand off
Speaker 1: the key thing here is there's a dichotomy in this economy.
Speaker 1: The good sector, the cyclical components housing and goods already
Speaker 1: or in a recession. Services is doing just fine, and
Speaker 1: that's where you're getting this continued labor force growth, now
Speaker 1: some real income growth, and the vet's just gonna have
Speaker 1: to keep pushing against it. Fishures deteriorate on negative one
Speaker 1: p SMP futures, a fix out two big figures thirty
Speaker 1: two point to three, not through the highs yesterday, but
Speaker 1: the stress is out there off of the good news
Speaker 1: we saw on claims. Ray Ferris, I want to speak
Speaker 1: to you about the US economy and the FEDS path forward.
Speaker 1: If we get a real rate out to two point
Speaker 1: zero five percent, which is my calculation of maybe great
Speaker 1: financial crisis average before the crisis, I should say, do
Speaker 1: you suggest they need to overshoot on the real rate
Speaker 1: to really turn things around? Or can they go to
Speaker 1: just above two percent and stabilize sit there. We think
Speaker 1: that they're going to be able to Our base case
Speaker 1: is they're going to be able to pull off a
Speaker 1: tiny bit of growth, and a lot of that is
Speaker 1: because of this balance sheet position that households are in.
Speaker 1: If we're going to go into a recession in the
Speaker 1: next you know, twelve to eighteen months. It's not going
Speaker 1: to be because we're forced into it by financial distress.
Speaker 1: It's going to be because consumers choose to retrench. But
Speaker 1: with this type of employment growth, they're probably not going
Speaker 1: to do that. Do we have to get the you know,
Speaker 1: now very fashionable vacancy to unemployment ratio down a lot
Speaker 1: to get wage growth to come down? Well, history says no,
Speaker 1: vacancy unemployment doesn't actually forecast wage growth very well. So
Speaker 1: we think it's gonna be a tough fight. If that's
Speaker 1: probably gonna have to go to four and a half percent,
Speaker 1: They couldn't go a bit above that. But you know,
Speaker 1: we've got employment growth, pay rolls coming down to a
Speaker 1: hundred and fifty or so by the end of the
Speaker 1: year early next year, and then, you know, I think
Speaker 1: the risk is maybe we go a bit softer gradually
Speaker 1: that will pull down wage growth. Goods inflation is gonna
Speaker 1: come down. Looks like housing on a forecast basis has
Speaker 1: already peaked. Services are gonna be a problem for a while,
Speaker 1: but they're gonna edge off. So we're optimistic that by
Speaker 1: the end of next year, the FED is gonna be
Speaker 1: much closer to where it wants to be without necessarily
Speaker 1: having to pull the economy into a recession. Right Tom,
Speaker 1: I's gonna send you a sign both side. How would
Speaker 1: you like that? From Classic I can't wait. I'll make
Speaker 1: it happen right fast that I cut a swat. This
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