WEBVTT - Surveillance: US Inflation Cools Sharply 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.320 the Bloomberg Terminal, and the Bloomberg Business App. We get 0:00:30.360 --> 0:00:36.000 perspective from William Dudley. Bill Dudley describe transitory on the 0:00:36.080 --> 0:00:39.080 way down. I don't understand that. How do we have 0:00:39.280 --> 0:00:41.559 transitory disinflation? 0:00:42.880 --> 0:00:46.440 Remember, goods prices went up dramatically because during the pandemic 0:00:46.440 --> 0:00:48.479 people bought a lot more goods and bought a lot 0:00:48.520 --> 0:00:50.920 less services as they stayed home. Now we're on the 0:00:50.920 --> 0:00:53.400 flip side of that, they're buying less goods more services. 0:00:53.400 --> 0:00:55.440 So goods prices are very weak and earned me very 0:00:55.440 --> 0:00:58.600 weak for a while as people have managed their inventories down. 0:00:58.960 --> 0:01:01.200 But once that comes to an then goods prices will 0:01:01.240 --> 0:01:04.640 level off, and so the benefit to line inflation from 0:01:04.680 --> 0:01:07.160 following goods prices will be over and you'll be stuck 0:01:07.160 --> 0:01:09.360 with what's happening in the services side. Look, I think 0:01:09.360 --> 0:01:11.280 this is a very good report today and the FED 0:01:11.319 --> 0:01:13.679 should be pretty cheered by this, But I don't think 0:01:13.680 --> 0:01:15.800 it changes what they're going to do at the July meeting, 0:01:15.840 --> 0:01:19.120 because they that they're looking at the totality of the 0:01:19.200 --> 0:01:21.440 data over the last three months going to the July meeting, 0:01:21.720 --> 0:01:23.920 and the reality is the commy is still doing quite well. 0:01:24.120 --> 0:01:26.000 We had two percent growth in the second quarter. If 0:01:26.040 --> 0:01:28.440 you look at the Ladd FED GDP now tracker for 0:01:28.480 --> 0:01:30.800 the third quarter, it's at two point three percent. So 0:01:30.840 --> 0:01:33.520 the e commy really hasn't slowed down enough to make 0:01:33.600 --> 0:01:35.640 the FIT confident that they're going to see that slack 0:01:35.680 --> 0:01:37.760 in all their work that they that they want. What 0:01:37.840 --> 0:01:39.800 I think this does do is opens up the question 0:01:39.920 --> 0:01:43.200 is could July be the last one? And that's certainly possible, 0:01:43.240 --> 0:01:45.520 because you know they won't they won't move at the meeting. 0:01:45.560 --> 0:01:47.640 After July. They'll take a break, just like they did 0:01:47.680 --> 0:01:49.520 this last time, and then we're going to get to 0:01:49.560 --> 0:01:51.320 November first. Well, it was a long time between now 0:01:51.320 --> 0:01:54.160 and November first. I can imagine by that point it's 0:01:54.200 --> 0:01:56.760 possible that they'll see enough news that makes some confident 0:01:56.800 --> 0:01:58.640 that they've done enough, so I think I think the 0:01:58.680 --> 0:02:01.840 November rate high is really up for grabs at this point. 0:02:01.920 --> 0:02:05.360 Bill, you talked about how disinflation might be transitory and 0:02:05.360 --> 0:02:08.000 that there could be a reinflation once the base effects 0:02:08.000 --> 0:02:11.440 are stripped out, and especially as real incomes continue to 0:02:11.560 --> 0:02:14.880 rise at a faster pace as inflation comes in. What 0:02:14.919 --> 0:02:17.160 do you have to see to believe in the disinflation 0:02:17.280 --> 0:02:19.760 that it will hold and revert back to a sub 0:02:19.800 --> 0:02:22.959 two percent inflation norm over the longer term. 0:02:23.560 --> 0:02:25.320 For me, it's all about the labor market. I want 0:02:25.360 --> 0:02:27.679 to see slow down and pay one plant growth. I 0:02:27.720 --> 0:02:29.360 want to see you rise in the interplaying rate, and 0:02:29.400 --> 0:02:33.400 most especially I want to see further moderation wages. So 0:02:33.560 --> 0:02:35.760 labor markets too tight, then you're not gonna get inflation 0:02:35.840 --> 0:02:36.720 back down in two percent. 0:02:37.160 --> 0:02:39.880 That's that's the key, Bill Dudley, thank you so much 0:02:39.919 --> 0:02:43.239 for joining us. Your commitment of Bloomberg surveillance really really appreciated. 0:02:43.240 --> 0:02:46.560 William Dudley, writing for Bloomberg Opinion, of course, a former 0:02:46.600 --> 0:02:54.520 president of the New York Fed. Thanks to zero Hedge, 0:02:54.560 --> 0:02:57.920 they had out yesterday a Michael Gape in production That 0:02:58.080 --> 0:03:01.120 is a chart from Bank of America that showed the 0:03:01.280 --> 0:03:06.359 fan distribution of our American inflation, where we could see 0:03:06.400 --> 0:03:09.720 the surprise of a normal disinflation back to the two 0:03:09.720 --> 0:03:13.480 percent level, or maybe something stasis three four percent, or 0:03:13.560 --> 0:03:17.320 dare I say we could even see sticky inflation and 0:03:17.440 --> 0:03:21.280 arise as disinflation moves a lower A lot of confusing 0:03:21.320 --> 0:03:24.040 trends in math. Michael Gaban joins US NOW head of 0:03:24.200 --> 0:03:31.120 US Economics. Michael, what's the key determinant of how disinflation unfolds? 0:03:33.400 --> 0:03:36.920 I think, I mean just I think it's catching on 0:03:37.000 --> 0:03:40.400 with what Bill Dudley just said. Does the labor market 0:03:40.440 --> 0:03:44.560 soften enough to give you confidence that services inflation will 0:03:44.680 --> 0:03:47.760 keep inflation running around two percent? So for me, it's 0:03:47.800 --> 0:03:52.480 about broad based disinflation across services. Yes, we should get 0:03:52.520 --> 0:03:55.560 some payback in goods prices, we saw that again this 0:03:55.640 --> 0:03:59.240 month with used cars. But can we get a combination 0:03:59.440 --> 0:04:05.240 of disinfl in services so beyond shelter? I agree with you. 0:04:05.320 --> 0:04:07.880 I'm not sure ourline Ferris fell eight percent on the month, 0:04:07.880 --> 0:04:11.680 But is it broad based enough to make you confident 0:04:11.720 --> 0:04:14.040 that the new trend or we're back to our prior 0:04:14.120 --> 0:04:15.440 trend of roughly two percent? 0:04:16.080 --> 0:04:18.599 What do you make of what Billaudly was just talking about, Michael, 0:04:19.040 --> 0:04:22.320 that you can't see this ongoing disinflation unless the labor 0:04:22.360 --> 0:04:26.720 market cracks, unless you see a bit more loosening in 0:04:27.000 --> 0:04:28.400 what we see in the job space. 0:04:28.680 --> 0:04:29.520 Do you agree with that? 0:04:29.560 --> 0:04:31.240 Do you think we need to see that pain in 0:04:31.360 --> 0:04:34.560 order to create a subsistence in this low inflation. 0:04:36.600 --> 0:04:39.120 I do agree with it. Now, it doesn't necessarily mean 0:04:39.480 --> 0:04:42.479 the FED keeps hiking. I agree with the narrative of 0:04:42.600 --> 0:04:46.160 I think the FED will hiking in July. I're if 0:04:46.160 --> 0:04:48.960 we're posting point two's on core from here, it'll call 0:04:48.960 --> 0:04:52.000 into question what they have to do after that. So 0:04:52.040 --> 0:04:54.240 they may stay on hold. They may be reluctant to 0:04:54.440 --> 0:04:58.000 cut until they see more evidence that the labor market 0:04:58.040 --> 0:05:00.839 is imbalance, that supply of labor and demand for labor 0:05:01.240 --> 0:05:03.599 are more imbalanced. So that argument may be more about 0:05:03.600 --> 0:05:07.080 how quickly the FED cuts or when it cuts, than 0:05:07.120 --> 0:05:09.600 it is how high the FED goes in the near term. 0:05:09.680 --> 0:05:12.320 This is an interesting distinction because Bill Dudley has been 0:05:12.320 --> 0:05:14.680 pretty hawkish in terms of the FED having to do 0:05:14.760 --> 0:05:17.520 more in order to get inflation under control, and yet 0:05:17.640 --> 0:05:19.200 he just came on and said, this is a great 0:05:19.240 --> 0:05:22.599 report and this may be the last rate hike that 0:05:22.640 --> 0:05:24.839 we see from the Fed this month. They may not 0:05:24.960 --> 0:05:27.400 go in September. That brings us to November. A lot 0:05:27.400 --> 0:05:31.560 of data in between. Is that bullish or bearish for bonds? 0:05:31.600 --> 0:05:34.000 Is that bullish or bearish for the idea of how 0:05:34.120 --> 0:05:37.440 long the Fed can hold rates at a high level? 0:05:39.160 --> 0:05:42.560 I think unbalanced. You'd have to conclude that it's bullish 0:05:43.000 --> 0:05:46.080 in the sense that we're seeing disinflation in the US 0:05:46.120 --> 0:05:51.280 economy that is gradually becoming more broad based in an 0:05:51.400 --> 0:05:54.279 environment where the labor market still is very healthy and 0:05:54.320 --> 0:05:57.440 the unemployment rate is low. So again, I think what 0:05:57.800 --> 0:05:59.760 Bill was saying was if this is the new run 0:05:59.839 --> 0:06:02.560 rate eight, then yes, it would call into question hikes 0:06:02.640 --> 0:06:05.640 beyond beyond July, and it might give you more confidence 0:06:05.680 --> 0:06:08.719 that's a less pain in the labor market is needed 0:06:08.760 --> 0:06:12.200 to convince and give the Fed confidence that inflation stability, 0:06:12.480 --> 0:06:16.440 price stability will be restored. So on net, I think 0:06:16.440 --> 0:06:19.560 it's hard to argue that disinflation in an environment of 0:06:19.560 --> 0:06:23.360 a strong labor market, you know, is bearish. I think 0:06:23.360 --> 0:06:24.960 at the moment that's a bullish view. 0:06:25.520 --> 0:06:27.920 Where are you a nominal GDP? I mean, Michael Gaban 0:06:28.040 --> 0:06:30.160 just simply here, if we go out one year, dare 0:06:30.200 --> 0:06:33.440 I say out two years? Not that anybody's modeling out 0:06:33.480 --> 0:06:37.039 to twenty twenty five, but do we get back to 0:06:37.120 --> 0:06:40.480 some kind of four percent top line GDP? Two percent 0:06:40.480 --> 0:06:42.840 inflation two percent real GDP? 0:06:44.720 --> 0:06:48.480 Probably not until twenty twenty five, if most of our 0:06:48.520 --> 0:06:52.080 baseline forecasts are accurate. For let's call it gradual disinflation 0:06:53.160 --> 0:06:55.599 and perhaps a hiccup in growth here in the short run, 0:06:55.640 --> 0:06:58.839 if growth continues to slow down, you might get you 0:06:58.920 --> 0:07:02.280 might get something around four percent temporarily, but I think 0:07:02.360 --> 0:07:06.119 nominal GDP growth is likely to remain pretty healthy until 0:07:06.160 --> 0:07:08.680 you get into twenty twenty five and inflation maybe is 0:07:08.720 --> 0:07:10.119 settled down to around two percent. 0:07:10.360 --> 0:07:12.280 Or speaking with Michael Gape and if Bank of America 0:07:12.320 --> 0:07:15.520 and Michael you were saying that if this data does continue, 0:07:15.760 --> 0:07:19.120 that does seem like a likely case. I just want 0:07:19.200 --> 0:07:22.080 to get a sense from you on the real wages point. 0:07:22.240 --> 0:07:25.680 How much does that make it difficult to see ongoing disinflation, 0:07:25.760 --> 0:07:29.280 that real wages are rising at an accelerating pace. 0:07:31.120 --> 0:07:33.280 I think it makes it difficult if you're a policy 0:07:33.320 --> 0:07:36.280 maker and you're thinking, you know, I need to get 0:07:36.280 --> 0:07:39.680 demand and supply into better balance. But what I'm seeing 0:07:39.720 --> 0:07:42.440 as a consumer that continues to want to spend and 0:07:42.600 --> 0:07:46.800 is getting significant increases in real wages, so it may 0:07:46.840 --> 0:07:48.680 be hard for them to, you know, again, make that 0:07:48.800 --> 0:07:51.680 conclusion that we're on a path back to two. It's 0:07:51.680 --> 0:07:54.920 about confidence in that outlook. So you need a combination 0:07:55.080 --> 0:07:57.840 then of actual evidence on the ground that you know, 0:07:57.880 --> 0:08:00.320 where is the new trend in inflation, for example, is 0:08:00.920 --> 0:08:02.640 it point two or is this a one off and 0:08:02.680 --> 0:08:05.240 we go back to a point three point threees are 0:08:05.240 --> 0:08:07.720 more the run rate or you need a collection of 0:08:07.760 --> 0:08:10.520 evidence on what the new run rate is, plus where 0:08:10.560 --> 0:08:14.840 spending in real wage data evolve. Again, this may ultimately 0:08:14.880 --> 0:08:17.760 be about the timing of cuts and how quickly those 0:08:17.760 --> 0:08:21.000 cuts come in, and the near term path for the 0:08:21.040 --> 0:08:23.760 FED may be more about these prints on inflation. Inflation 0:08:23.840 --> 0:08:27.880 may dominate whether the FED hikes beyond July, but the 0:08:27.960 --> 0:08:31.040 cutting environment when they're back to a neutral rate of 0:08:31.080 --> 0:08:33.200 interest on the other side, could very much be about 0:08:33.200 --> 0:08:34.320 that labor market story. 0:08:34.440 --> 0:08:37.640 Meanwhile, counter programming as Richmond FED President Tom Barkin, who's 0:08:37.640 --> 0:08:40.120 speaking at a separate event that came out in tandem 0:08:40.320 --> 0:08:43.680 with the CPI data saying that the inflation rate is 0:08:43.679 --> 0:08:47.000 still too high, that the FED has been moving aggressively 0:08:47.640 --> 0:08:51.120 as aggressively as it could against inflation, and talking about 0:08:51.160 --> 0:08:54.959 the longer term view. Michael, if we do see the 0:08:55.440 --> 0:08:57.680 rate hike that we get this month as the last 0:08:57.760 --> 0:09:00.000 in the rate hiking cycle, how long do you expel 0:09:00.320 --> 0:09:03.040 rates in the US to remain about five point three percent, 0:09:03.080 --> 0:09:06.200 give or take, for the foreseeable future. 0:09:07.800 --> 0:09:10.160 Well, we have the first cut coming in May of 0:09:10.200 --> 0:09:12.640 next year, next year, so our baseline still has another 0:09:12.720 --> 0:09:15.920 hike beyond July, but we've highlighted that that ultimately will 0:09:15.960 --> 0:09:18.480 be data dependent and we'll have to see how things evolve. 0:09:18.960 --> 0:09:22.200 Our first cut in an end to balance sheet runoff 0:09:22.240 --> 0:09:25.560 would be in May of next year. So the debate 0:09:25.600 --> 0:09:29.040 on the committee is some combination of higher or for longer, 0:09:29.760 --> 0:09:32.640 and I think they would be inclined to want again. 0:09:32.679 --> 0:09:35.600 This is about the evidence, the accumulation of evidence and 0:09:35.679 --> 0:09:39.000 confidence about restoring price stability. So we don't have that 0:09:39.080 --> 0:09:40.600 first cut until May of next year. 0:09:40.840 --> 0:09:43.760 Michael Gape, and thank you so much, and congratulations on 0:09:43.840 --> 0:09:47.480 that really informative Bank of America charter. The last twenty 0:09:47.480 --> 0:10:01.439 four hours. Megan Horneman joins us downt investment Officer Verdant's 0:10:01.520 --> 0:10:07.040 Capital Megan. Do you change your outlook with this disinflation report? 0:10:08.160 --> 0:10:09.960 No, I think this was a good report. I do 0:10:10.040 --> 0:10:13.479 agree with that inflation's going in the right direction. Disinflation 0:10:13.640 --> 0:10:15.760 is starting to take hold, But I don't think it 0:10:15.880 --> 0:10:19.160 changes the move in July from the Fed. They can't 0:10:19.160 --> 0:10:21.720 take their foot off the pedal yet. There's still three 0:10:21.760 --> 0:10:23.960 things that they're looking at, and they're not necessarily looking 0:10:24.000 --> 0:10:27.640 at airline fares. What they're looking at is housing, which owners' 0:10:27.600 --> 0:10:31.240 equivalent rent is still slightly elevated. They're looking at earnings, 0:10:31.520 --> 0:10:34.679 which we've just finished talking about how real earnings now 0:10:34.679 --> 0:10:36.920 are higher. And they're also going to be looking at 0:10:36.920 --> 0:10:41.240 the service sector. So those three things they are improving. 0:10:41.679 --> 0:10:43.640 You can't deny that in the report today. But I 0:10:43.800 --> 0:10:45.719 just don't think it's enough for the Fed to say 0:10:45.760 --> 0:10:46.800 we're completely done. 0:10:46.920 --> 0:10:49.360 Do you think, though, that there is a greater likelihood 0:10:49.360 --> 0:10:51.680 as a result of this report, that this raid hike 0:10:51.840 --> 0:10:54.000 at this month's meeting will be the last. 0:10:54.880 --> 0:10:56.360 If this is the trend that continues. 0:10:56.440 --> 0:10:58.960 Yes, Let's keep in mind there's a lot of base 0:10:59.000 --> 0:11:00.760 effects in this report, so we don't want to take 0:11:00.800 --> 0:11:03.120 one month as a trend. But if this continues, I 0:11:03.160 --> 0:11:05.560 think this may be the last. But I don't think 0:11:05.559 --> 0:11:07.520 they're going to be cutting, And that's something that we've 0:11:07.559 --> 0:11:09.959 been saying for a long time. The market is too 0:11:09.960 --> 0:11:13.520 optimistic about the path and the timing of rate cuts. 0:11:13.920 --> 0:11:16.080 We think they're going to stay higher for longer. They've 0:11:16.120 --> 0:11:18.880 told us that, and they can afford, especially with the 0:11:18.920 --> 0:11:21.880 consumers still wanting to spend to take their foot off 0:11:21.920 --> 0:11:22.480 the gas here. 0:11:22.760 --> 0:11:25.839 That said, how does this shift your view on how 0:11:25.880 --> 0:11:28.000 to allocate your assets at a time when a lot 0:11:28.040 --> 0:11:30.520 of people are betting that the economy can remain strong 0:11:30.600 --> 0:11:34.040 even as we continue to see price stability restored to 0:11:34.040 --> 0:11:34.520 the market. 0:11:36.000 --> 0:11:38.520 So we've been taking the opportunity this year with the 0:11:38.559 --> 0:11:41.440 big rally we've seen across the global equity sector, to 0:11:41.480 --> 0:11:43.880 start to reduce some of the allocation. We want to 0:11:43.880 --> 0:11:46.400 get more to a neutral waiting to our benchmark, because 0:11:46.480 --> 0:11:48.800 we're not while we're looking at a period where the 0:11:48.840 --> 0:11:52.280 Fed may be near the end of their aggressive tightening cycle, 0:11:52.440 --> 0:11:55.520 we're not calling for cuts. There is still, as we said, 0:11:55.679 --> 0:11:57.600 there is still some inflation in the pipeline that. 0:11:57.520 --> 0:11:58.880 They have to get under control. 0:11:59.160 --> 0:12:02.560 Our bigger concern is that the market's got a little 0:12:02.559 --> 0:12:06.560 too optimistic about the economy. We continue to see in 0:12:06.640 --> 0:12:09.760 a lot of these reports underneath of the details that 0:12:09.800 --> 0:12:13.400 there is significant weakness in the economy and especially the consumer. 0:12:14.000 --> 0:12:17.160 We've talked about this before, the FED tightening cycle as 0:12:17.200 --> 0:12:20.760 well as now tightening lending conditions. This takes time to 0:12:20.840 --> 0:12:23.920 work into the economy. We haven't seen those full effects. 0:12:24.120 --> 0:12:26.720 The labor markets now starting to show signs of weakness. 0:12:26.960 --> 0:12:28.640 This is all negative for the consumer. 0:12:28.800 --> 0:12:31.280 So we're concerned about the consumer in the second half 0:12:31.320 --> 0:12:34.360 of this year despite some of this positive inflation report, 0:12:34.559 --> 0:12:36.640 because we just don't see the spending that we saw 0:12:36.679 --> 0:12:38.600 on the first part of this year sustainable. 0:12:39.000 --> 0:12:41.880 So to cut to the Chase Magan, I think this 0:12:42.000 --> 0:12:46.280 is really important. A tep of economy just simply means 0:12:46.400 --> 0:12:51.920 less revenue for corporations, and that's where the earning shortfall begins. 0:12:53.440 --> 0:12:55.880 Right, And this is you know, we're getting ready to 0:12:55.920 --> 0:12:58.040 start this earning season here in the second quarter. This 0:12:58.200 --> 0:13:01.360 is the first the it's expected to be the worst 0:13:01.400 --> 0:13:04.120 earning season that we've seen since the pandemic. And we 0:13:04.160 --> 0:13:06.280 don't really think that this is completely over from an 0:13:06.280 --> 0:13:09.080 earning's perspective, I. 0:13:09.040 --> 0:13:14.280 Look Megan the step forward here, and I get that 0:13:14.360 --> 0:13:18.079 this is one report. Lisa's told me that three times today. 0:13:18.080 --> 0:13:21.280 Maybe you take a smooth three month moving average of disinflation. 0:13:21.800 --> 0:13:25.720 Did the disinflation vector change enough for you to have 0:13:25.800 --> 0:13:28.960 to sit down and recalibrate getting to the third quarter? 0:13:29.880 --> 0:13:32.640 No, not yet. I still think, like I mentioned, there's 0:13:32.679 --> 0:13:33.360 three things. 0:13:33.520 --> 0:13:35.680 That's what the Fed's looking at, and they have gotten 0:13:35.720 --> 0:13:37.720 slightly better. But even if you look at the owner's 0:13:37.720 --> 0:13:40.640 equivalent rent component that was running a five tents on 0:13:40.679 --> 0:13:42.800 a month of a month basis, Oh, it's slipped to 0:13:42.840 --> 0:13:45.040 four tenths. Is that enough for the FED? I don't 0:13:45.040 --> 0:13:47.520 think so. I still think that's a concern for the FED. 0:13:47.559 --> 0:13:50.160 So I'm not ready to make any changes. We're sitting 0:13:50.200 --> 0:13:52.960 neutral with our equity exposure. We have a nice cash 0:13:53.000 --> 0:13:55.600 position because we are earning now on that, and we're 0:13:55.640 --> 0:13:58.840 looking for the potential that we could see some weakness 0:13:58.840 --> 0:14:00.480 of the equities in the second half this year. 0:14:00.679 --> 0:14:03.080 I gotta say, Tom, I'm looking at Bespoke Investment. They 0:14:03.120 --> 0:14:05.360 put out a report saying that at the headline level, 0:14:05.679 --> 0:14:08.720 there have only been two stronger than expected CPI readings 0:14:08.720 --> 0:14:10.320 in the last year, which is the fewest and twelve 0:14:10.360 --> 0:14:13.560 month period going back to November twenty nineteen on a 0:14:13.640 --> 0:14:17.600 core basis just three stronger than expected monthly CPI readings 0:14:17.679 --> 0:14:20.880 that has been the fewest since November twenty twenty. There 0:14:20.920 --> 0:14:23.560 is a sense that Wall Street doesn't have as much 0:14:23.600 --> 0:14:25.880 faith in the disinflation as is actually coming through in 0:14:25.880 --> 0:14:26.320 the number. 0:14:26.440 --> 0:14:28.600 This is really well timed that you bring this up, 0:14:28.600 --> 0:14:31.440 because doctor Dudley alluded to that when he did as 0:14:31.560 --> 0:14:36.200 Newtonian calculus in English, where we talk about the first derivative, 0:14:36.280 --> 0:14:39.960 the second derivative, you'd make jokes if you're particular, if 0:14:39.960 --> 0:14:43.160 you had a hangover from course three to light, you'd 0:14:43.160 --> 0:14:46.160 make a joke about the third derivative or the fourth derivative. 0:14:46.520 --> 0:14:50.800 But all of this anecdotal evidence leads to some form 0:14:50.840 --> 0:14:54.640 of vectors which say the agony of this inflation is over. 0:14:54.800 --> 0:14:56.200 Then the debate begins. 0:14:56.360 --> 0:14:59.640 From an investment perspective, Megan, is it time to get 0:14:59.640 --> 0:15:02.560 out of CA maybe not go into risk your assets, 0:15:02.600 --> 0:15:04.120 but lock in yields. 0:15:04.400 --> 0:15:05.720 At a higher level data. 0:15:05.600 --> 0:15:08.000 Kelly, if we are seeing inflation come in. 0:15:09.320 --> 0:15:11.760 And we actually started to do that, recently as well, 0:15:11.800 --> 0:15:14.560 we moved our duration of our fixed income investments out 0:15:14.560 --> 0:15:18.680 a little bit, not significantly long at this point, because 0:15:18.680 --> 0:15:21.680 I still do think there is that uncertainty around the FED. Yes, 0:15:21.760 --> 0:15:23.560 it looks like they may be able to be done 0:15:23.560 --> 0:15:26.200 in June, I mean in July, but when it comes 0:15:26.200 --> 0:15:28.800 to ray cuts, when are they really coming in? And 0:15:28.880 --> 0:15:31.600 we don't think that's the story until twenty twenty four. 0:15:31.720 --> 0:15:34.280 So it's not a rush to run into the long 0:15:34.360 --> 0:15:36.680 term yields at this point, but we do think you 0:15:36.720 --> 0:15:39.400 should move out some of those shorter durations into more 0:15:39.400 --> 0:15:41.680 of an intermediate intermediate duration. 0:15:41.880 --> 0:15:45.120 Megan, Thank you so much. Meghan Hartman with Verdant's Capital Advisors. 0:15:49.120 --> 0:15:51.520 Right now we have a Darta moment. Michael Darta joins 0:15:51.560 --> 0:15:55.680 us MKM Partners and the chief economists is also disinflation 0:15:55.840 --> 0:16:03.400 strategist for Roth MK Partners. Michael, data is disinflation in place. 0:16:04.600 --> 0:16:07.720 Hi, Tom, thanks for having me. It certainly is in place. 0:16:08.360 --> 0:16:10.880 So maybe these numbers came as a bit of a 0:16:10.920 --> 0:16:16.000 surprise to some, but frankly, if you've been tracking the macroeconomy, 0:16:16.080 --> 0:16:20.080 what we're seeing is a rapid deceleration in nominal GDP growth. 0:16:20.200 --> 0:16:23.280 Aggregate demand. In fact, we've got some numbers on same 0:16:23.360 --> 0:16:27.520 store sales going into July that are comping negative now, 0:16:27.760 --> 0:16:32.560 so nominal growth momentum has really hit a wall here. 0:16:33.200 --> 0:16:35.520 And if you just look at an indicator like the 0:16:35.560 --> 0:16:41.240 ISM Manufacturing Index, their prices paid component has just collapsed 0:16:41.440 --> 0:16:45.360 and that leads the headline CPI by four to six months. 0:16:45.640 --> 0:16:48.480 So you know, this rapid rollover that we're seeing in 0:16:48.480 --> 0:16:52.040 flexible price inflation shouldn't be a big surprise. And we've 0:16:52.080 --> 0:16:54.280 got a good number on core today. You know, those 0:16:54.320 --> 0:16:57.640 numbers tend to be stickier because they're tied to contracts 0:16:57.640 --> 0:17:00.880 and leases, so they tend to lag the business cycle. 0:17:01.560 --> 0:17:05.919 But the market, you know, is certainly being lifted on 0:17:05.960 --> 0:17:07.360 a sentiment basis from that. 0:17:08.400 --> 0:17:10.480 So how do you think our Federal Reserve kind of 0:17:10.520 --> 0:17:13.000 takes in this print we're going to get some PPI 0:17:13.160 --> 0:17:15.720 tomorrow as it relates to kind of where they want 0:17:15.720 --> 0:17:17.040 to go over the next several meetings. 0:17:17.920 --> 0:17:20.080 Well, I think this is a case of you know, 0:17:20.200 --> 0:17:23.359 once bit and twice shy, So they obviously didn't have 0:17:23.440 --> 0:17:27.600 the correct inflation forecast coming into the cyclical upswing, and 0:17:27.680 --> 0:17:30.399 I think they've already tightened enough to put the economy 0:17:30.600 --> 0:17:34.440 into a eventual recession. And so you know, the equity 0:17:34.480 --> 0:17:37.840 market is acting like a soft landing is at hand, 0:17:38.040 --> 0:17:41.560 and most commentators on your network and others are, you know, 0:17:41.600 --> 0:17:46.200 seemingly falling into that camp. Yet historically, if you take 0:17:46.200 --> 0:17:48.960 a look back at the data, you don't get soft landings. 0:17:49.000 --> 0:17:52.760 When the FED raises rates, inverts, the yield curve collapses, 0:17:52.800 --> 0:17:57.760 money growth presides over a drastic in sustained tightening in 0:17:57.880 --> 0:18:02.040 lending standards and focuses on backward looking information. And that's 0:18:02.080 --> 0:18:05.959 exactly where we are now. Equity markets, you know, I mean, 0:18:06.000 --> 0:18:09.479 they can defy gravity for a while. We've had a 0:18:09.480 --> 0:18:12.400 heck of a rally this year that few people have predicted, 0:18:12.440 --> 0:18:15.960 Present Company included. But the equity market is up on 0:18:16.040 --> 0:18:20.960 a zero earnings growth. This is an entire entirely driven 0:18:21.000 --> 0:18:24.960 by valuations and long term interest rates really haven't come 0:18:25.000 --> 0:18:27.040 down if you go back to the October lows of 0:18:27.119 --> 0:18:31.040 last year, no earnings growth, about a flat ten year 0:18:31.080 --> 0:18:35.080 treasury yield and a four point multiple expansion. I mean, 0:18:35.960 --> 0:18:39.000 you know, I think investors do themselves a disservice if 0:18:39.040 --> 0:18:42.840 they are going to chase a market that's been propped 0:18:42.920 --> 0:18:43.840 up in that fashion. 0:18:43.960 --> 0:18:48.359 Michael Darta earning season kicking off in Earnest Friday with 0:18:48.440 --> 0:18:50.760 some of the big banks. What are you looking for 0:18:51.359 --> 0:18:53.000 from this earnings cycle? 0:18:54.240 --> 0:18:57.760 Well, you know, we've already got a earnings recession well underway, 0:18:58.040 --> 0:19:01.040 so we have three quarters now we're the SMP operating 0:19:01.080 --> 0:19:05.479 earnings have fallen. There's a huge and growing divergence between 0:19:05.520 --> 0:19:10.080 the GDP based NIPPA profits that cover all US corporations 0:19:10.080 --> 0:19:14.320 and SMP operating earnings. That's been a late cycle recession 0:19:14.560 --> 0:19:17.920 bear market flag in the past. And then I mentioned 0:19:18.560 --> 0:19:21.800 the nominal growth momentum fading on the back of tighter 0:19:21.840 --> 0:19:26.960 monetary policy. If top line growth is weakening or especially 0:19:27.040 --> 0:19:32.040 contracting relative to slower moving cost variables on the wage side, 0:19:32.560 --> 0:19:35.199 that is a setup for a margin squeeze. So I 0:19:35.240 --> 0:19:37.880 think we're going to have difficulty going forward. And then 0:19:37.880 --> 0:19:40.800 we have to ask ourselves why is this equity market 0:19:41.160 --> 0:19:44.199 performing the way it is. It is simply pricing in 0:19:44.320 --> 0:19:47.440 a huge turnaround in earnings. Do the forward indicators tell 0:19:47.480 --> 0:19:50.440 you that there's no there there? And then eventually I 0:19:50.480 --> 0:19:52.400 think we're looking at lower equity prices. 0:19:52.880 --> 0:19:53.240 Michael. 0:19:53.280 --> 0:19:55.639 So if you look at the SMP earnings for twenty 0:19:55.680 --> 0:19:58.320 twenty three about two hundred and twenty dollars per share. 0:19:58.800 --> 0:20:00.639 A lot of folks will come in to the studio 0:20:00.640 --> 0:20:02.480 and say, hey, that number could be even closer to 0:20:02.640 --> 0:20:05.040 two hundred dollars, maybe even south of two hundred dollars. 0:20:05.160 --> 0:20:07.240 How much earnings risk do you think is still left 0:20:07.240 --> 0:20:07.800 in this market? 0:20:08.640 --> 0:20:11.679 Yeah? I think there is considerable risk. You know, you're 0:20:11.760 --> 0:20:15.560 running the mill. Recession is going to put forward estimates, 0:20:15.600 --> 0:20:19.119 you know, down at least fifteen or twenty percent, and 0:20:19.200 --> 0:20:22.560 then you know the actual trailing operating earnings typically fall 0:20:22.600 --> 0:20:26.040 more than that, and you've got this big divergence between 0:20:26.080 --> 0:20:30.160 the economy wide profits now in S and P operating earnings. 0:20:30.240 --> 0:20:34.160 None of that adds up to a highly confident full 0:20:34.240 --> 0:20:38.600 run or risk assets in my opinion. So you know 0:20:38.680 --> 0:20:41.479 this is you know, I can understand why people are 0:20:41.480 --> 0:20:44.720 getting more optimistic, because you know, everyone tends to get 0:20:44.720 --> 0:20:46.880 whipped around by the market. The market has done well 0:20:46.920 --> 0:20:49.720 this year, but I think we need to take a 0:20:49.760 --> 0:20:52.400 step back and look at this in a sober fashion. 0:20:53.000 --> 0:20:56.560 Unfair question, but I'll conflate the two DARTERA would give 0:20:56.600 --> 0:20:59.760 me a C minus on this can we say that 0:20:59.800 --> 0:21:03.119 we're going to get a constrained near four percent nominal 0:21:03.200 --> 0:21:07.480 GDP and at the same time, does that reaffirm John 0:21:07.520 --> 0:21:11.280