WEBVTT - Surveillance: Fed & Inflation with Blanchard 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.120 and of course on the Bloomberg terminal. Also Lignos Joints 0:00:31.200 --> 0:00:34.720 right now global head of FX Strategy at RBC Capital Markets. 0:00:34.880 --> 0:00:36.720 And we can go to her physics at Cambridge and 0:00:36.720 --> 0:00:39.240 look at fourteen topics. We're not gonna do that, Elsa. 0:00:39.600 --> 0:00:41.560 I want to look at the one true thing you're 0:00:41.600 --> 0:00:44.800 focused on, which is your e c B. You've provided 0:00:45.000 --> 0:00:48.479 huge research over the last decade on e c B. 0:00:49.120 --> 0:00:52.519 What does Laguard do is there is her degrees of 0:00:52.640 --> 0:00:57.160 freedom so shrunk down that she has limited choice. April fourteen, 0:00:59.120 --> 0:01:02.440 So this stage they'll be doing very little. Um, they're 0:01:02.480 --> 0:01:06.880 setting ourselves up for a normalization coming further in the year. 0:01:07.200 --> 0:01:09.240 But I think what gets really interesting is what they 0:01:09.280 --> 0:01:12.880 do further out. Because the market is pricing hikes and 0:01:13.160 --> 0:01:15.720 it's clear that's the direction of travel. But the question 0:01:15.880 --> 0:01:18.280 is how far do we just get to zero and stop? 0:01:18.360 --> 0:01:20.759 Do we go any further than that. And the reality 0:01:20.920 --> 0:01:23.040 is that unlike the US where you have this really 0:01:23.080 --> 0:01:25.880 strong domestic demand, in Europe it's a bit more about 0:01:25.920 --> 0:01:29.759 inflation without as much strength in the economy. How do 0:01:29.840 --> 0:01:33.240 you respond to the certitude that they will raise rates, 0:01:35.240 --> 0:01:37.639 begin to raise rates, or get out front of raising 0:01:37.720 --> 0:01:41.840 rates to keep up with the Fed. Well, the reality 0:01:41.880 --> 0:01:43.440 is they're not going to keep up with the FED, 0:01:43.480 --> 0:01:47.000 and I think that's what's going to just give increasing 0:01:47.040 --> 0:01:49.040 support to the your solo as the year goes on. 0:01:49.120 --> 0:01:52.080 I mean, our call for for euro dollar is still 0:01:52.280 --> 0:01:55.320 a trough around one oh seven, and quite comfortable with that. 0:01:55.520 --> 0:01:57.800 But you know, if I had to look at where 0:01:57.800 --> 0:02:00.400 the risks lie around that, you know, and less the 0:02:00.480 --> 0:02:03.840 FED change's course, or you know, something happens to derail 0:02:03.920 --> 0:02:06.080 the US tightening, and it may well happen later on 0:02:06.120 --> 0:02:08.800 in the year. Um, if things turn out as market 0:02:08.800 --> 0:02:11.080 surprised at the moment, we're going to have a really 0:02:11.080 --> 0:02:13.880 significant meld advantage for the US over the your area 0:02:13.919 --> 0:02:15.920 by the end of the year, and that in itself 0:02:16.080 --> 0:02:18.519 will be very meaningful for the currency. So what's a 0:02:18.600 --> 0:02:21.679 ramification for the dollar of this balance sheet reduction? That 0:02:21.720 --> 0:02:24.239 we're trying to game out and coming up with question marks. 0:02:25.840 --> 0:02:27.919 So I think it's a little bit more indirect than 0:02:28.080 --> 0:02:31.440 most people perhaps might think, because all of our research 0:02:31.480 --> 0:02:34.200 historically has found that there's no one for one link 0:02:34.280 --> 0:02:36.520 between the size of a central banks balance sheet and 0:02:36.560 --> 0:02:38.640 the domestic currency. A lot of it depends on the 0:02:38.720 --> 0:02:41.120 status of the currency as a haven or as a 0:02:41.200 --> 0:02:43.520 risk proxy. And because in the case of the dollar 0:02:43.560 --> 0:02:45.200 at the moment it is trading as a bit more 0:02:45.240 --> 0:02:47.320 of a haven, you do tend to find that if 0:02:47.320 --> 0:02:49.640 equities sell off, the dollar finds a little bit of 0:02:49.639 --> 0:02:52.520 a boost um to the extent that the market, like 0:02:52.600 --> 0:02:55.440 you said earlier, is not necessarily priced for a full 0:02:55.480 --> 0:02:58.640 one point one trillion of reduction and balance sheet per year. 0:02:59.000 --> 0:03:01.760 You may well see the weighing on equities and boosting 0:03:01.760 --> 0:03:04.400 the dollar as a result. Elsa, you talk about the 0:03:04.440 --> 0:03:07.239 global picture for the currency, and so I have to 0:03:07.280 --> 0:03:09.640 go to a philosophical point, especially as you see China 0:03:09.960 --> 0:03:12.280 start to pay for call from Russia and u N 0:03:12.520 --> 0:03:15.120 and you start to get this concern, especially as you, 0:03:15.200 --> 0:03:17.760 as Treasury Secretary Jenny Ellen yesterday said that they could 0:03:17.760 --> 0:03:21.079 actually actually impose some sanctions similar to what they did 0:03:21.280 --> 0:03:25.320 on Russia to China, should they invade Taiwan? How much 0:03:25.520 --> 0:03:28.680 are you looking at the diminishing of the dollars place 0:03:28.840 --> 0:03:31.640 as a result of what some people are saying the 0:03:31.639 --> 0:03:36.400 weaponization of its cloud on the global financial system? Right? 0:03:36.480 --> 0:03:38.480 You know, a lot of what we've seen with Russia 0:03:38.760 --> 0:03:41.360 in some ways has been unprecedented. But I think the 0:03:41.440 --> 0:03:44.040 key task is what's going to take its place. We 0:03:44.080 --> 0:03:47.320 had a really interesting conversation about this exact topic just 0:03:47.360 --> 0:03:49.640 a few hours ago with the client talking about de 0:03:49.720 --> 0:03:52.680 dollarization and that. Two big obstacles I think for China 0:03:53.200 --> 0:03:56.480 one is the closed capital account, you know, the fact 0:03:56.520 --> 0:04:00.000 that they don't allow free, unflanted access to their capital market. 0:04:00.000 --> 0:04:02.680 It's and the second is liquidity and the ability to 0:04:02.800 --> 0:04:07.280 hedge exposure via the US dollar or via dollar leg 0:04:07.320 --> 0:04:10.040 funding markets. So I think until you get a very 0:04:10.080 --> 0:04:13.280 broadshift on both those topics, you're not really going to 0:04:13.320 --> 0:04:15.720 see a proper challenge. Of course, it's going to happen 0:04:15.720 --> 0:04:18.160 over the next decade or fifteen years, but most investors 0:04:18.320 --> 0:04:22.480 don't think on that horizon. Also, the bet here is 0:04:22.560 --> 0:04:26.839 on all these currencies amid massive uncertainty, can you make 0:04:26.880 --> 0:04:30.200 a big figure bet and dollar or a big figure 0:04:30.279 --> 0:04:33.640 bet and d x Y or the Bloomberg Dollar Index. 0:04:33.680 --> 0:04:37.400 Is that even feasible? Now, I've got to say, Tom, 0:04:37.440 --> 0:04:39.640 we've had a lot of success this year with quite 0:04:39.680 --> 0:04:43.359 short term tactical trades. Um. It's definitely paid off a 0:04:43.400 --> 0:04:46.200 lot better than trying to kind of position for those big, 0:04:46.279 --> 0:04:49.400 longer term trends. Uh. You know, at the moment, I 0:04:49.440 --> 0:04:52.799 think we've been watching your dollar kind of bounce around 0:04:52.800 --> 0:04:55.279 in that range. We obviously have the French election coming 0:04:55.320 --> 0:04:58.240 up that's attracting a lot more interest and attention. My 0:04:58.320 --> 0:05:01.599 bias longer term is still for a grind lower, but 0:05:01.680 --> 0:05:04.200 clearly there's a lot of risks around that. I look 0:05:04.240 --> 0:05:08.200 at the Pacific Rim and of Lisa mentions China and 0:05:08.240 --> 0:05:11.840 the challenges there as well. Is there an opportunity of 0:05:12.000 --> 0:05:16.719 surprise opportunity in the Pacific Rim here, given the COVID 0:05:16.800 --> 0:05:20.640 story in China, given sort of a Pacific Rim gloom 0:05:20.640 --> 0:05:25.080 out there, where's that opportunity? Yeah, it's a really interesting 0:05:25.160 --> 0:05:28.560 question because actually I see quite a lot of optimism 0:05:28.560 --> 0:05:30.880 baked into parts of the Pacific Rim. You know, if 0:05:30.920 --> 0:05:33.760 you look at the Australian dollar, even the new Zealand dollar. 0:05:34.080 --> 0:05:36.839 We model it based on the usual fundamental drivers two 0:05:36.880 --> 0:05:39.800 year yields, commodity prices and so on. And actually for 0:05:39.839 --> 0:05:42.440 the last few months there's been this big unexplained residual, 0:05:42.560 --> 0:05:45.000 so a lot of optimism kind of getting baked in 0:05:45.560 --> 0:05:48.080 to the top side. I do think that as the 0:05:48.160 --> 0:05:50.360 year goes on, you know, if the FED is really 0:05:50.360 --> 0:05:52.200 going to deliver as much as it says it will, 0:05:52.320 --> 0:05:54.720 as much as markets expect it might, Um, then that 0:05:54.800 --> 0:05:57.280 yield advantage for the US is going to undermine not 0:05:57.360 --> 0:06:00.680 just the Pacific rim, but global currencies will oddly else. 0:06:00.800 --> 0:06:02.520 Before we let you go, you're talking about some of 0:06:02.560 --> 0:06:06.080 your conversations with clients. What are the biggest concerns for 0:06:06.120 --> 0:06:09.240 clients right now? What is their biggest worry that they 0:06:09.279 --> 0:06:12.440 present to you? You know, I think there are a 0:06:12.520 --> 0:06:16.960 number of questions topics on people's minds. Um. Clearly, you're 0:06:17.040 --> 0:06:19.520 looking at the situation UK and everybody is sensitive to 0:06:19.560 --> 0:06:24.520 the fact that it can worsen materially at very short notice. UM, 0:06:24.560 --> 0:06:27.839 it's a political decision what extent of sanctions are imposed, 0:06:27.839 --> 0:06:31.000 and and that political pressure for further sanctions could change. 0:06:31.279 --> 0:06:33.120 Now beyond that, I think people are a little bit 0:06:33.120 --> 0:06:37.400 perplex you know, looking at the relative strength of equity markets, 0:06:37.400 --> 0:06:40.200 for example, and constructing their heads trying to figure out 0:06:40.320 --> 0:06:42.240 where that's coming from. Granted, you know, I'm talking to 0:06:42.320 --> 0:06:44.880 macro investors. Probably if you speak to an ext investor, 0:06:44.920 --> 0:06:46.960 they feel a lot more comfortable with it, but there's 0:06:46.960 --> 0:06:50.320 certainly a lot of anticipation of perhaps and weakness further 0:06:50.360 --> 0:07:01.680 out the line. Thank you RBC. Nobody owns it for 0:07:01.760 --> 0:07:05.480 almost a decade. Like Elena Paoliakova, when you are at 0:07:05.520 --> 0:07:08.680 Berkeley and write a thesis on the Dark Side of 0:07:08.720 --> 0:07:12.800 European Integration, you are a decade out front on the 0:07:12.920 --> 0:07:16.000 dark side of this war. Professor, Thank you so much 0:07:16.040 --> 0:07:18.760 for joining us this morning with the Center for European 0:07:18.840 --> 0:07:22.440 Policy Analysis. Elena cut to the chase. You nailed this 0:07:22.600 --> 0:07:26.000 ten years ago. How dark is this war and what 0:07:26.040 --> 0:07:31.960 does Ukraine have to do about it? Unfortunately, the threat 0:07:32.000 --> 0:07:34.440 that is Russia we now know. We tried to ignore 0:07:34.440 --> 0:07:38.000 it and we just can't, you know, in Russian Vida 0:07:38.080 --> 0:07:42.280 Crimea and then you know invaded Russia's sorry crane's eastern 0:07:42.280 --> 0:07:45.840 the dorn Bus. We put sanctions on Russia. Obviously sanctions 0:07:45.880 --> 0:07:49.280 didn't change Putin's calculus, and here we are. This is 0:07:49.320 --> 0:07:54.200 the most significant, most brutal war since we've seen since 0:07:54.240 --> 0:07:57.920 World War two. Um. And it is a dark moment 0:07:57.960 --> 0:08:00.520 for Europe. Absolutely, It's a dark moment for all of us, 0:08:00.560 --> 0:08:03.000 even here in the United States. Elena, I've got John 0:08:03.040 --> 0:08:06.240 Bolton on the right and Elena Farcas working with Obama 0:08:06.280 --> 0:08:10.400 on the left, both agreement that we weigh over estimate 0:08:10.480 --> 0:08:14.120 the ability to start World War three. Do you agree 0:08:14.120 --> 0:08:17.440 with them that we were overwrought in our worries about 0:08:17.480 --> 0:08:21.920 the ghosts of nineteen thirty nine? Uh? You know, it 0:08:22.120 --> 0:08:25.880 is rare to have someone like Bolton and Evelyn, whom 0:08:25.880 --> 0:08:28.960 I know as well, uh, to agree on this issue. 0:08:29.040 --> 0:08:32.240 But it just tells you how Um at the end 0:08:32.240 --> 0:08:34.920 of the day, you know, we are so worried about 0:08:35.080 --> 0:08:38.559 escalating and worrying about what will Putin do if we 0:08:38.640 --> 0:08:41.559 give the Ukrainians more weapons, all we can do if 0:08:41.559 --> 0:08:44.040 we give the Ukrainians fighter jets. But you know the 0:08:44.080 --> 0:08:47.360 truth is we can't predict what Putin will do, and 0:08:47.360 --> 0:08:49.680 we should be worried more about how do we ensure 0:08:49.760 --> 0:08:52.720 that Europe is whole, free and a peace How do 0:08:52.760 --> 0:08:55.600 we ensure the United States, Um isn't going to get 0:08:55.640 --> 0:08:57.960 pulled in with troops and things of the nature into 0:08:57.960 --> 0:09:00.240 the war, and the best way to do that is 0:09:00.280 --> 0:09:03.000 to give you know, as a Swarmers could have said, 0:09:03.320 --> 0:09:06.800 to give the Ukrainians absolutely everything they need to be 0:09:06.960 --> 0:09:09.760 putin in Ukraine so we don't have to fight him 0:09:09.800 --> 0:09:13.400 as Nano in Poland or the Baltic States, because unfortunately, 0:09:13.960 --> 0:09:16.520 if Putin isn't stopped in Ukraine, there is a very 0:09:16.559 --> 0:09:19.679 good chance that he'll take that as an opportunity to 0:09:19.800 --> 0:09:23.120 keep going forward, keep going further into Europe. A leader 0:09:23.160 --> 0:09:25.240 to the sanctions work at a time when a lot 0:09:25.280 --> 0:09:29.719 of the opposition to Vladimir Putin within Russia has been squelched, 0:09:29.760 --> 0:09:32.920 where protests aren't really working if everyone's hauled off to 0:09:33.000 --> 0:09:36.640 jail or forced to leave the country. You know, economic 0:09:36.679 --> 0:09:41.160 sanctions are historically speaking, especially with Russia, have never worked 0:09:41.160 --> 0:09:44.880 to change the short term military behavior on the ground. 0:09:45.160 --> 0:09:49.480 You know, looking back at when Russia invaded in ins Crimea, 0:09:49.800 --> 0:09:53.200 we impose some significant sanctions on Russia, but it didn't 0:09:53.320 --> 0:09:56.280 change Putins calculus. How do we know that because he 0:09:56.360 --> 0:09:59.840 invaded Ukraine eight years later. So now we have an 0:10:00.000 --> 0:10:04.000 incredibly significant round of sanctions that we've imposed on Russia. 0:10:04.080 --> 0:10:07.439 We've never tried this before. It's affecting the global economy. 0:10:07.760 --> 0:10:10.240 The Russian economy is not like North Career orr on 0:10:10.320 --> 0:10:12.800 It's it's significant and we're seeing some of the effects 0:10:12.880 --> 0:10:15.960 of that, you know, in grain prices and oil prices obviously, 0:10:16.400 --> 0:10:20.679 But sanctions are a long term tool in themselves. They 0:10:20.720 --> 0:10:23.800 will not change what's happening day and day out on 0:10:23.880 --> 0:10:27.880 the battlefield. For that, we need the military and security assistance. 0:10:27.920 --> 0:10:30.880 Sanctions in themselves won't change behavior. And at the end 0:10:30.960 --> 0:10:34.160 of the day, the elite, the oligarchs, they're close to Prutin, 0:10:34.440 --> 0:10:37.920 They're not breaking ranks um, They're staying loyal to Mr. Prutin, 0:10:38.240 --> 0:10:39.840 and I don't think that's going to change. This is 0:10:39.840 --> 0:10:42.559 a really important point. The sanctions are not helping in 0:10:42.600 --> 0:10:45.000 the near term when it comes to the day and 0:10:45.120 --> 0:10:48.079 day out of the on the ground military actions. If 0:10:48.120 --> 0:10:51.360 that's the case, do policymakers realized that, Do they sort 0:10:51.400 --> 0:10:53.880 of recognize that, and if so, what are they doing 0:10:53.920 --> 0:10:56.080 to actually affect that at a time when they're talking 0:10:56.120 --> 0:10:59.920 about war crimes. Well, absolutely, I do think there's a 0:11:00.040 --> 0:11:03.000 recognition that sanctions have a way of taking a long 0:11:03.080 --> 0:11:06.360 time to work because we've never tried this level of 0:11:06.400 --> 0:11:09.560 economic sanctions that country as large as Russia. We're still 0:11:09.559 --> 0:11:12.680 waiting to see how they will all interlock and play out. 0:11:13.000 --> 0:11:16.160 Right now, the strategy is too pronged. It's one to 0:11:16.240 --> 0:11:18.520 make it really hard for Russia to sustain the war 0:11:18.559 --> 0:11:22.840 effort financially forced Russia potentially to default. This seems to 0:11:22.840 --> 0:11:25.920 be what the United States is pursuing right now. Close 0:11:25.960 --> 0:11:28.920 all avenues of financing for the Russian government so they 0:11:28.960 --> 0:11:31.480 can no longer pay down on their debts. But you know, 0:11:31.679 --> 0:11:34.400 they'll have a thirty day great spirit if they even uh, 0:11:34.559 --> 0:11:36.520 stop payments on their debts. So it's really not a 0:11:36.559 --> 0:11:39.760 short term solution. So the second prong of the strategy 0:11:39.880 --> 0:11:42.840 has to be making sure that you know, we are 0:11:42.920 --> 0:11:45.800 supplying Ukrainians and what they need on the ground, I mean, 0:11:45.840 --> 0:11:51.200 and together that should contain Russia if we do it rapidly, 0:11:51.559 --> 0:11:53.800 if we do what it takes, and if we don't, 0:11:54.040 --> 0:11:56.760 you know, kind of pursue a very cautious tentative policy 0:11:56.840 --> 0:11:59.120 where you know, we may do eggs, we won't do 0:11:59.200 --> 0:12:01.960 why so if we go in full, we give the 0:12:02.040 --> 0:12:05.760 Ukrainians what they're asking for. We ramp up those economic sanctions. 0:12:06.040 --> 0:12:08.080 You know, the war will eventually have to come to 0:12:08.160 --> 0:12:11.600 a halt by you know, eventually. How many more deaths 0:12:11.600 --> 0:12:13.640 would that mean? How many more brutal images are we 0:12:13.720 --> 0:12:15.800 going to see like we've beens in the last couple 0:12:15.880 --> 0:12:18.880 of days. That's really the where we are right now, 0:12:18.920 --> 0:12:22.280 calculating those costs, and it's it's painful. It's quite painful, 0:12:22.440 --> 0:12:25.439 incredibly painful for the people of Ukraine. Elena, Thank you. 0:12:25.679 --> 0:12:29.079 Elena Polla cover the of the Center for European Policy Analysis. 0:12:35.000 --> 0:12:39.240 Olivia Blanchard joins us this morning. Professor Blanchard, thank you 0:12:39.320 --> 0:12:41.640 so much for joining us. You were just out at 0:12:41.760 --> 0:12:46.120 Washington University with all of the heritage of Murray Weidenbaum 0:12:46.240 --> 0:12:50.920 and all the optimism of Washington University and growth. Can 0:12:50.960 --> 0:12:55.600 you be optimistic about the American economic experiment at this time? 0:12:57.240 --> 0:13:00.160 It depends which one, but the count one one we're 0:13:00.160 --> 0:13:03.040 all thinking about is how we're going to basically decrease 0:13:03.080 --> 0:13:06.200 inflation and get back to to a low level. In 0:13:06.280 --> 0:13:11.720 that I'm not as optimistic as as most people. I 0:13:11.800 --> 0:13:15.319 still think it's going to be viat. I think inflation 0:13:15.400 --> 0:13:18.840 has a lot of momentum. I think wage golf is 0:13:19.000 --> 0:13:21.480 you know, there's a very tight labor market. Wedge golf 0:13:21.600 --> 0:13:24.000 is very strong. The fect is going to have very 0:13:24.080 --> 0:13:26.280 hard time stewing down the machine and it has to 0:13:26.320 --> 0:13:28.679 admit that it has to stow the machine a lot. 0:13:28.720 --> 0:13:31.560 And we don't want a recession. But you know, there's 0:13:31.600 --> 0:13:34.760 this term come golf recession. I think that this will 0:13:34.800 --> 0:13:38.320 have to come with some increasing unemployment and maybe some 0:13:38.440 --> 0:13:42.280 increasing ways beyond what is currently priced in. With all 0:13:42.280 --> 0:13:45.040 of your work, and particularly with the firepowered M I 0:13:45.160 --> 0:13:49.200 T and the seventies you live the dismal seventies and 0:13:49.240 --> 0:13:53.840 the debate over trenched entrenched inflation. You have a chart 0:13:53.960 --> 0:13:57.559 at Peterson Institute of the seven or eight year battle 0:13:57.679 --> 0:14:02.800 to extract ourselves from nine eighteen. Is that our future 0:14:03.120 --> 0:14:06.640 out to two thousand? Now it's the past, it's not 0:14:06.679 --> 0:14:09.920 the future, but it's a warning. Uh. You know, basically 0:14:10.000 --> 0:14:14.000 what happened is that that just delayed doing what it 0:14:14.040 --> 0:14:16.680 had to do, and pull Voca came very late in 0:14:16.760 --> 0:14:19.960 the game and just want at it. But you had 0:14:20.000 --> 0:14:23.440 to increase rays by first in a hundred basis points 0:14:23.720 --> 0:14:26.760 to actually get to where he wanted, We're not going 0:14:26.760 --> 0:14:30.320 to go there with feed is much smart. Facial expectations 0:14:30.360 --> 0:14:32.920 are not as bad. But you know, the hope that 0:14:33.000 --> 0:14:35.440 we can do all this by having rays going to 0:14:35.480 --> 0:14:38.520 two point five or even three, I think it is 0:14:38.560 --> 0:14:42.000 a hope, not not in my my book of forecast. 0:14:42.240 --> 0:14:44.800 The hope is underscored by the mystery of some of 0:14:44.840 --> 0:14:46.760 the tools that the FET is using. And I'm thinking 0:14:46.800 --> 0:14:50.560 most importantly of the federals Ers balance sheet, possibly reducing 0:14:50.560 --> 0:14:53.520 it by one point one trillion dollars over a year. 0:14:53.960 --> 0:15:00.520 How much do we understand how this reduces inflation? Well, 0:15:00.840 --> 0:15:03.160 you know, it's likely to make the long rates a 0:15:03.160 --> 0:15:06.640 bit higher than they would otherwise be so to the 0:15:06.680 --> 0:15:09.680 extent that long rates affect activity, that's going to basically 0:15:09.680 --> 0:15:13.680 slow down again the machine. And that's the way you 0:15:13.880 --> 0:15:17.320 reduce inflation is basically by making the labor market less 0:15:17.360 --> 0:15:20.160 type than it is now exactly how it works, I 0:15:20.200 --> 0:15:22.440 think when it comes to the policy rate, I think 0:15:22.440 --> 0:15:25.720 we have some understanding of how it affects the economy. 0:15:25.720 --> 0:15:29.320 When it comes to quee or QT, now I think 0:15:29.320 --> 0:15:32.360 were we know much less And if I have a 0:15:32.440 --> 0:15:35.800 father would denounce some path but not feel that I'm 0:15:35.840 --> 0:15:38.400 committed to it if it turns out to be the 0:15:38.720 --> 0:15:42.240 stronger weaker than expected. Do you think we're heading into 0:15:42.280 --> 0:15:45.680 a period of time where inflation is structurally higher than 0:15:45.720 --> 0:15:48.240 it has been over the previous few decades because of 0:15:48.280 --> 0:15:50.760 the globalization and because of some of the shifts that 0:15:50.840 --> 0:15:54.400 we've seen that were accelerated during the pandemic. No, I 0:15:54.440 --> 0:15:56.920 don't think so. I don't think there's any close link 0:15:57.000 --> 0:16:01.120 to say, between productivity goal for globalized or any of 0:16:01.200 --> 0:16:04.400 these structural elements and the rate of inflation that the 0:16:04.440 --> 0:16:08.080 economy has. The rate of inflation can be anything. You 0:16:08.200 --> 0:16:11.160 just have to to have it flat. You basically have 0:16:11.240 --> 0:16:14.920 to uplay the economy at for employment, not hotter than that, 0:16:15.200 --> 0:16:18.080 not colder than that. But you can have any rate 0:16:18.080 --> 0:16:22.600 of inflation you want. Olivier, you have lived the vogues 0:16:22.680 --> 0:16:25.280 and the religions of the moment. You and I remember 0:16:25.280 --> 0:16:27.280 where the world stopped. I believe it was on a 0:16:27.320 --> 0:16:31.000 Thursday afternoon at three pm, and we'd all count M one, 0:16:31.280 --> 0:16:34.120 M two, M three. There's been any number of other 0:16:34.200 --> 0:16:39.080 religions of economics. What's the religion right now that we 0:16:39.160 --> 0:16:44.360 need to be aware of that? We need to fear well. 0:16:44.400 --> 0:16:46.640 I was never kind of in the m one and 0:16:46.800 --> 0:16:49.200 to m free religion. I always thought that was that 0:16:49.320 --> 0:16:54.160 was the religion and not not not not science. I think, 0:16:54.200 --> 0:16:56.120 you know, the way to think about how much peoples 0:16:56.200 --> 0:16:58.640 he works is to have to look at the yelk 0:16:58.680 --> 0:17:02.520 of and so of the of economic activity depends on 0:17:02.560 --> 0:17:06.000 the short end of the curve, some of economic activity 0:17:06.040 --> 0:17:09.160 depends on the long ends the mortgage rates and basically 0:17:09.280 --> 0:17:15.159 the however yield curve the more tightening, Okay, is I 0:17:15.240 --> 0:17:17.240 think that you know, if I had to choose one 0:17:17.280 --> 0:17:19.840 object as opposed to say I'm one or I'm two 0:17:19.880 --> 0:17:22.320 or whatever, I would say, just look at the yeld curve, 0:17:22.720 --> 0:17:25.120 and the yel curve, I think is telling us rates 0:17:25.160 --> 0:17:27.480 are going to go work for a while, then maybe 0:17:27.480 --> 0:17:31.720 they'll come down a bit, at least adjusted for inflation. Uh. 0:17:31.720 --> 0:17:34.399 And I think that's you know, that's the tool that 0:17:34.480 --> 0:17:36.760 the FED has. I mean, the old days it only 0:17:36.800 --> 0:17:39.919 played you know, at the short end. Now it plays 0:17:40.160 --> 0:17:42.680 all the way through the yeld curve. But that's the object. 0:17:42.760 --> 0:17:44.600 I think we have to look at, what's the tool 0:17:44.760 --> 0:17:47.440 of real yields. Olivier and I talked about this as 0:17:47.480 --> 0:17:50.719 the real yields, the inflation adjusted yield anten your treasuries 0:17:50.880 --> 0:17:53.439 moves to the highest the least negative, I should say, 0:17:53.640 --> 0:17:57.879 going back to March, Yes, I mean you have to 0:17:57.880 --> 0:18:01.560 realize that we're still in in an era of very 0:18:01.680 --> 0:18:04.879 very low bial rate UH. At the short end of 0:18:04.920 --> 0:18:08.280 the yield curve, bill rates are very large negative. At 0:18:08.359 --> 0:18:10.720 the long end, they are less negative than they used to. 0:18:10.840 --> 0:18:14.720 I think they are getting closer to zero. I think 0:18:14.760 --> 0:18:17.720 that's what's needed to get the economy going in the 0:18:17.760 --> 0:18:20.680 long run. We don't exactly know what the long run 0:18:20.960 --> 0:18:23.880 equilibrium rate, if you want to call it this way, is, 0:18:24.200 --> 0:18:27.120 but it's probably around zero at this point. So if 0:18:27.160 --> 0:18:29.560 we were you know, if we are cruising along with 0:18:30.200 --> 0:18:33.520 no more inflation than target, then I would say zero 0:18:33.600 --> 0:18:36.679 is probably the right number. But we have before we 0:18:36.720 --> 0:18:39.439 get there. We have to get inflation down, so we 0:18:39.520 --> 0:18:43.400 have to go above zero in terms of real rates. Olivia, 0:18:43.440 --> 0:18:45.359 We've better leave it there. Thank you so much, really 0:18:45.359 --> 0:18:48.280 looking forward to your work with the Peterson Institute, particularly 0:18:48.320 --> 0:18:57.439 on the new inflation level. Professor Blanchard. Right now we 0:18:57.480 --> 0:19:00.719 hold court with this colleague severta Supermannian head of Equity 0:19:00.720 --> 0:19:03.200 and derivative strategy at b of a. Buried in your 0:19:03.200 --> 0:19:06.000 note sa Vida is the mathewiness of your Berkeley, which 0:19:06.040 --> 0:19:09.760 is followed the money, follow the cash to borrow from Colbert. 0:19:10.080 --> 0:19:16.880 It's a cashiness moment. How much cash is our cashiness? Cash? Well, listen, 0:19:16.920 --> 0:19:19.440 I think that what we're seeing in the in the 0:19:19.440 --> 0:19:24.800 overall investment landscape is a reallocation towards the short end 0:19:24.840 --> 0:19:26.640 of the curve. I mean, we've seen it with Wall 0:19:26.680 --> 0:19:32.160 Street strategists. They amped up their cash recommended cash allocations 0:19:32.160 --> 0:19:35.520 and took down equity allocations. I think that's actually net 0:19:35.600 --> 0:19:39.280 bullish for equities, because what we found is that when 0:19:39.280 --> 0:19:43.600 Wall Street gets barished, that's generally assigned to get bullish. 0:19:43.640 --> 0:19:46.200 But when you think about the overall market, I think 0:19:46.200 --> 0:19:48.440 the reason that you want to buy stops right now 0:19:48.840 --> 0:19:51.800 is the cashiness of the market. And you know, the 0:19:51.880 --> 0:19:55.000 good the good news about the government and the FED 0:19:55.040 --> 0:19:57.440 being in debt is that they passed on a whole 0:19:57.440 --> 0:20:01.560 bunch of liquidity to consumers and corporate Something like nineteen 0:20:01.560 --> 0:20:05.399 trillion dollars of cash went from the public sector to 0:20:06.040 --> 0:20:09.920 consumers and corporates. And that's good that cash. Like you said, 0:20:09.920 --> 0:20:12.200 it is going to be worth It's going from worthless 0:20:12.320 --> 0:20:15.560 right now yieldless to three percent by the end of 0:20:15.560 --> 0:20:17.960 the year. That's a huge move in terms of the 0:20:18.000 --> 0:20:21.480 return profile, especially against a backdrop. Well, we don't think 0:20:21.480 --> 0:20:24.840 that equities are going to return anything close to that 0:20:25.000 --> 0:20:27.879 on a on a longer term basis. UM. So, I 0:20:27.960 --> 0:20:30.640 think all of this conspires to create an environment where 0:20:30.720 --> 0:20:32.879 some equities are going to do well and those are 0:20:32.920 --> 0:20:36.760 the most cashy of the equities and um and we 0:20:36.800 --> 0:20:38.680 can talk about sectors in a moment, but I think 0:20:38.680 --> 0:20:40.640 that there are a lot of parts of the SMP 0:20:40.760 --> 0:20:43.760 five hundred that look incredibly attractive from a free cash 0:20:43.760 --> 0:20:48.600 flow perspective and are also relatively inexpensive versus say tech 0:20:48.800 --> 0:20:51.399 or you know, high growth stops. At this point, de civated. 0:20:51.440 --> 0:20:53.959 That takes us strike to energy. Why stick with it 0:20:54.040 --> 0:20:57.919 after the massive move we've had here today, Dick with energy. 0:20:58.040 --> 0:21:00.800 I know it sounds crazy because the set has basically 0:21:00.840 --> 0:21:03.600 doubled or tripled, but you know, look, if you look 0:21:03.640 --> 0:21:07.560 at at the world around us, everybody still hates energy, 0:21:07.640 --> 0:21:10.600 and um what we found in our work is that 0:21:11.200 --> 0:21:14.440 energy is still a massive underweight, and the average long 0:21:14.480 --> 0:21:18.080 only portfolio same underweight that we started last year with 0:21:18.200 --> 0:21:20.720 something close to you know, over at ten percent underweight. 0:21:21.000 --> 0:21:24.679 But the sector has basically doubled in its size in 0:21:24.720 --> 0:21:28.199 the benchmark. So last year it didn't necessarily hurt to 0:21:28.200 --> 0:21:30.520 be out of the best performing sector. This year, it 0:21:30.560 --> 0:21:32.639 is probably going to hurt a lot more. And our 0:21:32.720 --> 0:21:36.719 view is that energy is still incredibly inexpensive, still offers 0:21:36.760 --> 0:21:39.480 a very high free cash flow, real free cash flow 0:21:39.520 --> 0:21:43.040 relative to other sectors. Um the free the earnings have 0:21:43.160 --> 0:21:45.879 kept up with its price moves, and it's it's really 0:21:45.880 --> 0:21:49.119 a sector that's gotten capital discipline. It's playing nice with 0:21:49.240 --> 0:21:51.439 E s G investors. I said this all before on 0:21:51.480 --> 0:21:54.960 your show. I think energy is now finally investable again. 0:21:55.280 --> 0:21:58.760 But folks haven't necessarily moved into the sector as aggressively 0:21:58.880 --> 0:22:00.520 as we would have expected it. And a lot of 0:22:00.520 --> 0:22:02.520 people would agree with you. You're seeing an increasing number 0:22:02.560 --> 0:22:04.840