WEBVTT - Bloomberg Surveillance TV: August 5th, 2026 0:00:00.080 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Amerie Hordernt. Join us each day 0:00:18.760 --> 0:00:22.320 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.159 Terminal and the Bloomberg Business app. We begin this hour 0:00:37.320 --> 0:00:39.600 with stocks adding to the record breaking rally at leash 0:00:39.600 --> 0:00:42.320 to the vnfbny Wath recently raising her year end target 0:00:42.360 --> 0:00:45.080 for the SMP to eight K. Earnings took over from 0:00:45.080 --> 0:00:48.440 macro and driving markets. The capex cycle continues to support 0:00:48.479 --> 0:00:51.760 the economy and industrial sectors as hyper scatter spending as 0:00:51.840 --> 0:00:55.800 power and earnings of twenty percent of the SMP Alisa 0:00:55.880 --> 0:00:57.800 joins us now from more Aisia. Good morning, Good morning, 0:00:57.840 --> 0:00:59.480 what a massive run we've sin in just a few 0:00:59.560 --> 0:01:01.840 days on tech's phenomenal What are your turn in class? 0:01:01.920 --> 0:01:02.520 It's phenomenal. 0:01:02.560 --> 0:01:02.760 Look. 0:01:02.800 --> 0:01:05.040 We think the market ends higher at the end of 0:01:05.080 --> 0:01:07.319 the year, we're in prints at eight thousand. I think 0:01:07.319 --> 0:01:10.720 it's probably moving higher. The forward earnings growth rate right 0:01:10.760 --> 0:01:13.240 here of the S ANDP is actually thirty percent. 0:01:13.560 --> 0:01:16.480 So the multiples come down even now. 0:01:17.480 --> 0:01:20.280 It's you know, the market sort of tread water around that, 0:01:20.600 --> 0:01:25.280 you know, seventy five hundred range since mid May kind 0:01:25.280 --> 0:01:28.200 of stuck there as the market rotated, and we've, as 0:01:28.240 --> 0:01:30.839 you talked about, we've had these clearing events. There are 0:01:31.160 --> 0:01:35.080 major questions hanging over this market. The first of which 0:01:35.120 --> 0:01:39.800 is the war restarted. Oil prices are higher, yields are higher. 0:01:40.040 --> 0:01:43.280 Can the market rally if the ten years over four 0:01:43.319 --> 0:01:46.120 point five percent, which was really the bogie in this 0:01:46.360 --> 0:01:49.840 entire cycle. The answer is yes, it can. The second 0:01:49.880 --> 0:01:53.000 thing was is there ROI on hyper scale or spending? 0:01:53.040 --> 0:01:57.200 Are they just spending into oblivion funding the balance sheets 0:01:57.200 --> 0:01:59.480 of every other company but not themselves as they go 0:01:59.520 --> 0:02:03.480 freach pretty cashful negative turns out, actually there's a business 0:02:03.520 --> 0:02:07.680 case for it, and their cycle reaccelerated through the growth rate. 0:02:07.760 --> 0:02:10.800 So that was answered as well. And so you've gotten 0:02:10.840 --> 0:02:12.960 two major questions out of the way. And then the 0:02:12.960 --> 0:02:15.760 third is this an earnings bubble? And the answer is. No, 0:02:15.960 --> 0:02:18.400 it is not, because you've got accelerated growth rates for 0:02:18.440 --> 0:02:22.799 the spenders and that once you've answered that question, it's 0:02:22.840 --> 0:02:24.040 pretty much clear out there. 0:02:24.080 --> 0:02:26.520 If there is a clearing event and you've identified several 0:02:26.600 --> 0:02:29.200 it seems to be benefiting everybody at the moment, and 0:02:29.200 --> 0:02:30.920 we're trying to figure out when do we start to 0:02:30.919 --> 0:02:34.400 discriminate again, because much of this year you saw chips 0:02:34.400 --> 0:02:36.680 do well but software bring out poorly. You saw an 0:02:36.680 --> 0:02:39.520 inverse correlation between the hyperscalis and the chip players at 0:02:39.560 --> 0:02:42.120 times as well. That's what ultimately blew up the likes 0:02:42.160 --> 0:02:45.120 of Situational Awareness, who were very long cantwhere and very 0:02:45.120 --> 0:02:47.560 short software and things flipped pretty quickly in the last 0:02:47.639 --> 0:02:50.400 month or so. Where do you see things going from here? 0:02:50.440 --> 0:02:52.440 What does the leadership come from? Surely you don't believe 0:02:52.480 --> 0:02:54.760 that everything can take just keeps on rallying the way 0:02:54.800 --> 0:02:55.280 it has been. 0:02:55.320 --> 0:02:57.440 No, there's definitely going to be there's going to be 0:02:57.520 --> 0:03:00.240 more selection here. I mean, this was sort of clearing chars, 0:03:00.240 --> 0:03:02.280 like you went through fifty to two hundred days in 0:03:02.320 --> 0:03:04.200 the last two weeks, which you really needed to do 0:03:04.320 --> 0:03:08.120 to clear the charts of the deteriorating software company so 0:03:08.160 --> 0:03:10.760 we cleared it. I think for the most part it's 0:03:10.840 --> 0:03:14.480 likely to be from the hyperscalers and less on the chips, 0:03:14.480 --> 0:03:17.600 in part because the chips have come so far, and 0:03:17.639 --> 0:03:21.240 there is that lingering question. You know what you quoted 0:03:21.280 --> 0:03:26.360 here which I said, which is they're funding the balance 0:03:26.360 --> 0:03:29.440 sheets and the p and ls of twenty percent of 0:03:29.480 --> 0:03:32.560 the S and P very clearly. And we know that 0:03:32.600 --> 0:03:36.760 Marcus trade on the rate of change. At some point 0:03:37.120 --> 0:03:40.080 there's going to be a question, can you grow earnings 0:03:40.120 --> 0:03:44.360 one thousand percent? Are you growing earnings twenty percent instead, 0:03:44.360 --> 0:03:47.400 which is still excellent, but it's not growing one thousand percent. 0:03:47.480 --> 0:03:49.520 And there's a reason some of these chip companies are 0:03:49.560 --> 0:03:52.920 trading in the single digits because the street just doesn't 0:03:52.960 --> 0:03:55.680 see this going forever. And I think that's where you're 0:03:55.680 --> 0:03:57.520 going to start to see the differentiation. 0:03:58.000 --> 0:04:00.920 You still haven't cleared the parabolas. That's an issue. 0:04:01.040 --> 0:04:03.720 So I think you're probably getting it to the unloved companies. 0:04:03.960 --> 0:04:07.920 Since November one of last year, that whole panoply of 0:04:08.480 --> 0:04:11.520 large cab tech has been terrible underperformed the S and P. 0:04:11.640 --> 0:04:16.800 It's underperformed the rustle, it's underperformed international, it's underperformed emerging markets, 0:04:16.800 --> 0:04:18.960 and I think that gets a little that gets reverted 0:04:19.000 --> 0:04:24.200 to here. I think the chips while benefiting and the 0:04:24.240 --> 0:04:27.880 investment cycle can go for a long time, eighteen months, more, 0:04:28.279 --> 0:04:31.600 three years maybe, who knows. Actually eventually the growth rate 0:04:31.680 --> 0:04:34.840 is going to slow on the earnings for those companies. 0:04:34.920 --> 0:04:37.680 How much is the success on return on investment and 0:04:37.720 --> 0:04:40.040 the likes of hyperscalers and software going to come at 0:04:40.040 --> 0:04:42.760 the expense of open AI and anthropic And I say 0:04:42.760 --> 0:04:45.560 this because it could be a volatility inducing event when 0:04:45.560 --> 0:04:48.279 they try to IPO, if they try to IPO, given 0:04:48.320 --> 0:04:50.679 some of the noise about exactly what this model looks 0:04:50.720 --> 0:04:54.240 like and how much of a moat they have over 0:04:54.279 --> 0:04:55.719 something that's increasingly open model. 0:04:55.839 --> 0:04:58.440 Look, it's really it's very unclear. I mean, there are 0:04:58.440 --> 0:05:01.640 many people who think the models are converging. So the 0:05:01.720 --> 0:05:05.320 latest for one LLM over another, they're starting to look 0:05:05.440 --> 0:05:07.520 very similar. And I think that is the question for 0:05:07.600 --> 0:05:10.440 those those business models, right, Like, you know, if you 0:05:10.480 --> 0:05:14.080 can't differentiate, then you know what's the value. On the 0:05:14.120 --> 0:05:16.760 other hand, I know everybody uses all of them, and 0:05:17.240 --> 0:05:19.479 so they seem to be terrific. Also, if you just 0:05:19.520 --> 0:05:22.720 look at the revenue growth rate. I mean, the revenue 0:05:22.920 --> 0:05:27.440 is compounding for both those companies at an extraordinary We're 0:05:27.480 --> 0:05:31.160 talking close to one hundred billion dollars for each coming 0:05:31.200 --> 0:05:35.200 off of zero two three years ago. So the revenues 0:05:35.400 --> 0:05:38.320 are sounding compounding at a sounding rate. So I think 0:05:38.640 --> 0:05:39.839 I think they'll be successful. 0:05:39.920 --> 0:05:42.080 Do you think that the doors are still as wide 0:05:42.120 --> 0:05:45.839 open for IPOs for raising money in the equity and 0:05:45.880 --> 0:05:49.360 debt markets now as they were two months ago at 0:05:49.360 --> 0:05:52.240 a time when there still is a huge bill coming 0:05:52.279 --> 0:05:52.760 for all of the. 0:05:52.720 --> 0:05:53.320 Build out here. 0:05:53.400 --> 0:05:56.120 I think that we're going to have to see some 0:05:56.240 --> 0:06:00.159 of the lockups on some of the marquee IPOs to 0:06:00.240 --> 0:06:02.400 kind of clear the deck a little bit. You know, 0:06:02.480 --> 0:06:04.880 in the end, you want the IPOs to be successful 0:06:04.920 --> 0:06:06.760 and that break price. And if you break price within 0:06:06.760 --> 0:06:09.240 a week or two, that's an issue. And I think 0:06:09.279 --> 0:06:11.120 that's why you've seen it slow down in the calendar 0:06:11.400 --> 0:06:13.359 right and then you have a lot of SpaceX because 0:06:13.360 --> 0:06:15.160 you have to you have to get through the lockup. 0:06:15.240 --> 0:06:17.640 You have to get through the lockups here. I don't 0:06:17.680 --> 0:06:20.719 think there's too much capital coming to the market. The 0:06:20.880 --> 0:06:23.920 S and P is sixty trillion dollars. I don't think 0:06:23.960 --> 0:06:26.440 the IPOs are too big. I think there's a massive 0:06:26.480 --> 0:06:28.800 wall of capital coming to this, not just in the US, 0:06:29.080 --> 0:06:32.440 but globally. You know, we're hearing from our Iflow team 0:06:32.480 --> 0:06:36.000 there's a massive, massive buying of US equities globally because 0:06:36.040 --> 0:06:38.040 where else are you going to go with that wall 0:06:38.080 --> 0:06:38.599 of money? 0:06:38.960 --> 0:06:40.680 Other markets are simply not big enough. 0:06:40.680 --> 0:06:43.920 So I'm not worried about the dollar amount, but there 0:06:44.000 --> 0:06:46.200 is that marketing thing right where you want it to 0:06:46.240 --> 0:06:48.320 be successful, and I think the markets have to calm 0:06:48.360 --> 0:06:49.040 down a little bit. 0:06:49.440 --> 0:06:51.880 On the previous parted too alphabet again and ahead of 0:06:51.880 --> 0:06:54.680 some of this, the additional supply to your point on SpaceX, 0:06:54.880 --> 0:06:57.760 anthropic on the horizon, open ai, just the reporting we've 0:06:57.760 --> 0:07:00.520 seen around open ai potentially pushing things out twenty seven 0:07:00.600 --> 0:07:02.159 maybe beyond, I don't know, Yeah. 0:07:02.000 --> 0:07:04.839 And potentially because of some of the concerns around the 0:07:05.000 --> 0:07:08.719 capital rais with respect to their model, competitive pressure, et cetera. 0:07:08.760 --> 0:07:10.480 At the same time, it seems like a lot of 0:07:10.480 --> 0:07:12.480 people are pretty ambitious some of their voice. 0:07:12.560 --> 0:07:14.160 It looks like both are winning. Like it looks like 0:07:14.200 --> 0:07:17.240 everybody's winning. You know, it doesn't look like once, but they're. 0:07:16.920 --> 0:07:19.000 All being a prize and you get a prize. 0:07:19.040 --> 0:07:20.520 It's one of the last four days it's felt like 0:07:20.520 --> 0:07:21.280 in the stock market. 0:07:21.480 --> 0:07:23.280 I'll take it, you know, it's finish, good change. 0:07:23.280 --> 0:07:25.400 At least just going to see you. Thanks, one of 0:07:25.440 --> 0:07:27.040 the best. Appreciate it at lea should have been there 0:07:27.160 --> 0:07:28.040 of bn y wealth. 0:07:29.520 --> 0:07:33.000 Stay with us. More Bloomberg surveillance coming up after this. 0:07:42.320 --> 0:07:44.520 It's the latest this morning, the president out in the 0:07:44.560 --> 0:07:48.000 US economy as midterm primary results roll in In the 0:07:48.040 --> 0:07:51.240 crucial swing state of Michigan, the Senate Democratic primary between 0:07:51.280 --> 0:07:54.920 progressive Abdul al Said and Representative Hattie Stephens still too 0:07:54.960 --> 0:07:55.560 close to cool. 0:07:55.840 --> 0:07:56.160 Aaron A. 0:07:56.200 --> 0:07:59.200 Sabbataur of More Than Stanley, writing, we think Democrats hold 0:07:59.240 --> 0:08:01.880 a slight edge, but the Senate map remains a major 0:08:02.080 --> 0:08:05.239 structural headwind. Arianna joins us now for more and good morning, 0:08:05.240 --> 0:08:07.080 it's going to see you. How is the state set 0:08:07.080 --> 0:08:09.120 for this economy into November and what does it mean 0:08:09.280 --> 0:08:10.280 for voters at the moment. 0:08:10.800 --> 0:08:13.040 Yeah, a lot of things to unpack there. Obviously, the 0:08:13.080 --> 0:08:16.960 economic picture is one of an aggregate of different indicators, right, 0:08:17.000 --> 0:08:19.240 so if you look at things like inflation, we're expecting 0:08:19.240 --> 0:08:21.840 more disinflation throughout the remainder of this year. If we 0:08:21.880 --> 0:08:25.440 look at things like consumption, the overall sentiment is not great, 0:08:25.480 --> 0:08:27.400 where we're a little bit higher off of the low lows, 0:08:27.800 --> 0:08:30.240 but we don't think that really translates to spending intentions. 0:08:30.240 --> 0:08:33.680 We still see relatively robust consumption this year around two percent. 0:08:33.679 --> 0:08:35.720 We just revised that up from one point seven percent. 0:08:36.080 --> 0:08:39.120 You know, the labor market still relatively sideways. So all 0:08:39.160 --> 0:08:41.439 of that paints sort of a decent picture for the ECON. 0:08:41.480 --> 0:08:43.880 We call it a benign macro backdrop. That's not the 0:08:43.960 --> 0:08:47.520 only thing that matters to voters. Obviously, affordability a top concern, 0:08:47.880 --> 0:08:50.600 but aside from that, we see prediction markets, we see polling, 0:08:50.640 --> 0:08:53.760 we see the presidential approval rating, all signaling a more 0:08:53.800 --> 0:08:56.080 favorable environment for Democrats come November. 0:08:56.160 --> 0:08:58.560 I remember thinking that bind it would get battered in 0:08:58.600 --> 0:09:01.000 the midterms into that and event a few years ago, 0:09:01.080 --> 0:09:03.600 and it didn't happen. The white people thought it would. 0:09:03.600 --> 0:09:05.560 What's the lesson from them? And how might it apply 0:09:05.640 --> 0:09:06.400 to this situation? 0:09:06.720 --> 0:09:08.599 So twenty two to two is actually really similar to 0:09:08.960 --> 0:09:11.280 this midterm election if you think about it. We had 0:09:11.320 --> 0:09:13.640 an energy shock in February of that year, right, and 0:09:13.679 --> 0:09:17.320 then the structural the map the Senate was really what 0:09:17.400 --> 0:09:20.079 was important in that election. There were some anomalies. Remember 0:09:20.080 --> 0:09:22.679 we had the Roe v. Wade decision leaked, which energized 0:09:22.720 --> 0:09:26.559 turnout among specifically women and college educated voters. I think 0:09:26.640 --> 0:09:28.840 that is what allowed the Democrats to maintain the edge. 0:09:29.080 --> 0:09:31.600 But back to the structural sort of dynamics here, the 0:09:31.640 --> 0:09:34.320 map is really important, and with this progressive win we 0:09:34.360 --> 0:09:37.360 saw in Michigan last night, that makes it really challenging 0:09:37.440 --> 0:09:40.200 as a general election seat for Democrats to flip right, 0:09:40.240 --> 0:09:42.040 And that's going to be kind of the key point 0:09:42.080 --> 0:09:47.120 between Michigan, North Carolina, Georgia races for November one. 0:09:47.120 --> 0:09:49.080 Are the main issues and I'm thinking. 0:09:48.920 --> 0:09:51.360 Specifically of the hyperscalar build out and some of the 0:09:51.600 --> 0:09:53.920 energy plants, and this concern about the cost of living 0:09:54.000 --> 0:09:57.040 that could potentially be tied to artificial intelligence. How much 0:09:57.080 --> 0:10:00.560 is that present in some of the discussions with constituents. 0:10:00.080 --> 0:10:03.280 Extremely present, And this is probably the biggest wedge issue 0:10:03.320 --> 0:10:06.359 heading into the midterm elections. Right, we know AI is unpopular. 0:10:06.440 --> 0:10:10.120 We know specifically among younger voters so eighteen to twenty nine, 0:10:10.520 --> 0:10:14.280 something like sixty percent are worried about job displacement. When 0:10:14.280 --> 0:10:17.000 we look at the data center build out specifically, the 0:10:17.080 --> 0:10:20.240 concerns are really threefold. So first is quality of life, right, 0:10:20.280 --> 0:10:21.920 so no one likes to see large scale construction in 0:10:21.960 --> 0:10:25.200 their neighborhoods. Second is around water usage, which we find 0:10:25.200 --> 0:10:27.040 to be a little bit less well founded than some 0:10:27.040 --> 0:10:29.800 of the other concerns. And then of course electricity inflation 0:10:30.040 --> 0:10:32.640 and what you're paying for your utility bill. That is 0:10:32.640 --> 0:10:35.160 more a phenomenon on a regional level rather than national, 0:10:35.400 --> 0:10:37.079 but it is certainly part of the discussion and part 0:10:37.080 --> 0:10:40.000 of the reason we're seeing this real political constraint in 0:10:40.040 --> 0:10:41.360 building out these data centers. 0:10:41.360 --> 0:10:44.360 Well, so, how much of a political constraint will this be, 0:10:44.360 --> 0:10:47.480 because so far the White House has been behind a 0:10:47.520 --> 0:10:49.240 lot of these efforts and saying we have to maintain 0:10:49.280 --> 0:10:51.880 a dominant edge. How much will it constrain some of 0:10:51.920 --> 0:10:54.280 those policies that have enabled to build out so far. 0:10:54.559 --> 0:10:56.480 So, look, we think there are ways to mitigate it. 0:10:56.520 --> 0:10:59.120 We think there are certain concessions that hyperscalers and other 0:10:59.120 --> 0:11:03.920 companies can offer these communities, whether that's bonuses to local 0:11:04.440 --> 0:11:07.559 community engagement or whether it's some sort of a large 0:11:07.559 --> 0:11:11.080 load tariff or commitments to grid modernization. We think there's 0:11:11.240 --> 0:11:14.040 enough they can sort of promise and provide to facilitate 0:11:14.040 --> 0:11:16.520 the build out. But that's importantly why we think it's conditional. 0:11:16.520 --> 0:11:18.679 We don't think this is going to be a uniform 0:11:18.760 --> 0:11:21.199 kind of one size fits all approach across the country. 0:11:21.480 --> 0:11:23.880 And what that leads to is basically a bifurcation between 0:11:23.920 --> 0:11:26.640 regions that allow data center development and regions that do not. 0:11:27.240 --> 0:11:29.439 It's the left tripping up on the national stage. Are 0:11:29.440 --> 0:11:31.480 you seeing sort of the highly progressive members and I've 0:11:31.600 --> 0:11:33.480 noted a few. I've seen a few in the last 0:11:33.480 --> 0:11:36.360 twenty four hours struggle to articulate that view and being 0:11:36.440 --> 0:11:38.520 sucked into major issues that have nothing to do with 0:11:38.600 --> 0:11:39.520 local ground issues. 0:11:40.000 --> 0:11:40.680 If you notice the. 0:11:40.679 --> 0:11:43.040 Same thing, I think what you're seeing is an amalgamation 0:11:43.080 --> 0:11:45.200 of concerns among the voter base. And right now, if 0:11:45.240 --> 0:11:47.440 you look at the Democrat Party, there's no clear front 0:11:47.480 --> 0:11:50.240 runner for leadership, right so we don't have a clear 0:11:50.640 --> 0:11:52.800 person that's ahead of the other candidates when it comes 0:11:52.840 --> 0:11:54.719 to even the twenty twenty eight election. So I think 0:11:54.760 --> 0:11:56.920 Democrats are right now going through a really important phase 0:11:56.960 --> 0:11:59.640 of sort of self discovery, right so figuring out which 0:11:59.640 --> 0:12:01.960 policy paths are the ones that are going to resonate 0:12:01.960 --> 0:12:04.319 with voters. And remember this is an election that's the 0:12:04.360 --> 0:12:06.640 pretext to twenty twenty eight, so this is the important 0:12:06.679 --> 0:12:09.280 time to sort of have those debates and those discussions. 0:12:09.280 --> 0:12:11.920 I think it's experimentation and we'll probably see it on 0:12:11.920 --> 0:12:14.560 the Republican side as well once Trump steps back. 0:12:14.760 --> 0:12:15.839 Aarana, it's good to see you. 0:12:15.920 --> 0:12:18.920 Thanks for Thank you, Ariana Sabato there of Morkan Stanley 0:12:20.080 --> 0:12:23.600 stay with us mult Bloomberg surveillance coming up after this. 0:12:32.760 --> 0:12:35.040 Andrew holmholsts the City, writing this this morning. We do 0:12:35.160 --> 0:12:38.280 not see risks that the labor market is retiming and 0:12:38.360 --> 0:12:41.520 becoming a source of upward pressure on wages and prices. 0:12:41.600 --> 0:12:44.120 Andrew joined us Now for more. Andrew and Morning Morning 0:12:44.240 --> 0:12:46.280 sending the ADP number we'd found to take that view. 0:12:46.520 --> 0:12:47.840 Yeah, a little bit weaker on the ADP. 0:12:47.920 --> 0:12:50.000 It's a pretty volatile number, but I would say in 0:12:50.040 --> 0:12:52.720 the context of labor market data that's just in general 0:12:52.760 --> 0:12:56.040 been very volatile. So we had much stronger payrolls readings 0:12:56.040 --> 0:12:58.600 at the beginning of the year, had a weaker report 0:12:58.600 --> 0:13:00.400 in the month of June. We think we're store for 0:13:00.440 --> 0:13:02.040 some weaker reports upcoming. 0:13:01.760 --> 0:13:06.080 Good services, energy and labor. The sources of inflation LABE, 0:13:06.080 --> 0:13:07.880 it's not really been a source of inflation over the 0:13:07.960 --> 0:13:11.040 last twelve months, not a major one anyway. The inflation 0:13:11.160 --> 0:13:13.760 is coming from other places. Where'd you get confidence that 0:13:13.760 --> 0:13:17.320 that disinflation repath will continue and what does it come from? 0:13:17.480 --> 0:13:19.800 You know, I'm a lot more confident now than I 0:13:19.960 --> 0:13:21.559 was even a few weeks ago after we had the 0:13:21.640 --> 0:13:24.520 Gune inflation report. You look at these various underlying measures 0:13:24.559 --> 0:13:27.240 of inflation, and there's always an issue when we say 0:13:27.280 --> 0:13:29.040 which measure are you looking at right? This is part 0:13:29.040 --> 0:13:30.640 of what came up in the press conference with Chair 0:13:30.679 --> 0:13:33.880 of Warsh last week. But when you look at the 0:13:34.000 --> 0:13:37.280 various measures that we have of underlying inflation, most of 0:13:37.320 --> 0:13:40.480 them are telling us that inflation is slowing and it's 0:13:40.520 --> 0:13:42.720 not that far off of target. I know that's very 0:13:42.720 --> 0:13:46.120 different than a lot of people's perceptions of what's going on. 0:13:46.679 --> 0:13:49.200 But if you look at the actual data, you can 0:13:49.240 --> 0:13:51.160 look at a trend, mean, you can look at a median, 0:13:51.360 --> 0:13:54.080 you can look at core CPI. Core CPI inflation is 0:13:54.120 --> 0:13:56.960 not an esoteric measure of inflation. This is one of 0:13:57.000 --> 0:13:59.920 the typical measures that anybody would look at to try 0:13:59.920 --> 0:14:02.440 to assess what's going on with inflationary pressure. Two point 0:14:02.480 --> 0:14:05.360 six percent core CPI year on year, that's not far 0:14:05.440 --> 0:14:08.560 off of what would historically normally be historically normally be 0:14:08.600 --> 0:14:10.760 two point three percent, And we think we're going to 0:14:10.800 --> 0:14:12.520 see that two point three percent number in the next 0:14:12.520 --> 0:14:13.000 couple months. 0:14:13.120 --> 0:14:15.040 Why do you think it's going to continue going down? 0:14:15.240 --> 0:14:15.440 Right? 0:14:15.679 --> 0:14:17.920 This goes to the question of sufficiently restrictive and the 0:14:17.960 --> 0:14:21.520 faith of the path of some of the inflation reads. 0:14:21.800 --> 0:14:23.920 Why isn't it just a one off tied to. 0:14:24.160 --> 0:14:28.280 Energy prices and a couple of other just comparative reasons 0:14:28.320 --> 0:14:29.280 for the disinflation. 0:14:29.440 --> 0:14:31.600 Yeah, what's happening with headline inflation? That is a function 0:14:31.640 --> 0:14:34.040 of energy prices. They came up that boosted headline, they've 0:14:34.040 --> 0:14:36.760 come back down. That's going to drag on headline. If 0:14:36.800 --> 0:14:38.280 you look at the core measure that we've got a 0:14:38.360 --> 0:14:41.640 very weak reading for core CPI and core PCE in 0:14:41.680 --> 0:14:45.760 the month of June. That extreme weakness might not repeat, 0:14:45.880 --> 0:14:48.360 But what we saw in those readings if you looked 0:14:48.360 --> 0:14:52.440 at the underlying data was broad based lack of inflationary pressure. 0:14:52.480 --> 0:14:55.320 You see it across all categories of inflation is significant 0:14:55.360 --> 0:14:58.360 slowing in the month of June in particular shelter prices, 0:14:58.720 --> 0:15:01.160 and I think go out and look at house prices, 0:15:01.240 --> 0:15:02.080 look at rents. 0:15:02.800 --> 0:15:05.800 These enter official measures of inflation with a. 0:15:05.840 --> 0:15:08.280 Lag of about a year, maybe a year and a half, 0:15:08.560 --> 0:15:09.640 and they've been very slow. 0:15:09.680 --> 0:15:13.000 So those shelter pressures should stay slow. That's a key 0:15:13.040 --> 0:15:15.120 reason that we're going to have slower inflation going forward. 0:15:15.280 --> 0:15:17.680 How do you then understand the move that we've seen 0:15:17.840 --> 0:15:20.080 down at the front end in terms of yields are 0:15:20.280 --> 0:15:22.000 essentially pinned and the rise. 0:15:21.840 --> 0:15:22.760 And long end of the yields. 0:15:22.760 --> 0:15:25.040 It seems like the market is saying something very different 0:15:25.480 --> 0:15:26.480 to what you're saying. 0:15:27.040 --> 0:15:28.040 How do you interpret that? 0:15:28.320 --> 0:15:29.920 So if you look at the market, and this is 0:15:29.960 --> 0:15:32.520 another thing that again maybe very different than how some 0:15:32.560 --> 0:15:35.400 people are talking about this. The market is not worried 0:15:35.520 --> 0:15:37.880 about inflation in the US if I look at the 0:15:37.920 --> 0:15:41.040 market that assesses that most carefully, which is the market 0:15:41.040 --> 0:15:43.280 for inflation link security. So if you look at inflation 0:15:43.360 --> 0:15:46.040 break evens, if you look at inflation swaps, we are 0:15:46.120 --> 0:15:49.120 pricing inflation to be around two percent for the next 0:15:49.200 --> 0:15:51.840 two years. We're pricing inflation to be around two percent 0:15:51.880 --> 0:15:54.280 for the next ten years. So this idea that higher 0:15:54.320 --> 0:15:56.640 longer term yields have something to do with a lack 0:15:56.640 --> 0:15:59.200 of heed credibility and an expectation that inflation is going 0:15:59.240 --> 0:16:01.600 to run persistently higher. It's just not the case when 0:16:01.600 --> 0:16:03.840 you look at markets. The movement that we've had higher 0:16:03.840 --> 0:16:06.120 in long term yields is in real yields. It's not 0:16:06.200 --> 0:16:08.600 in the inflation component. It's in the real yield component. 0:16:08.960 --> 0:16:10.920 And why are they higher. It's what you've been talking 0:16:10.960 --> 0:16:13.320 about all morning and apparently with your children at bed time, 0:16:13.320 --> 0:16:16.520 which is and the deficit in this country. 0:16:16.560 --> 0:16:20.080 Our inflation expectations anchored because people still believe this Fed 0:16:20.080 --> 0:16:22.840 will hike. If they believed your story, I wonder whether 0:16:22.840 --> 0:16:23.240 it'd be. 0:16:24.800 --> 0:16:28.320 We have a probability of a hike that's priced in right. 0:16:28.400 --> 0:16:30.440 The FED came into July, there was a thirty percent 0:16:30.480 --> 0:16:32.280 probability that they were going to hike coming into July. 0:16:32.320 --> 0:16:34.240 At some point there was a fifty percent probability that 0:16:34.240 --> 0:16:36.280 they were going to hike in July. The Fed declined 0:16:36.280 --> 0:16:38.800 to hike in July. We got a very small movement 0:16:38.880 --> 0:16:41.520 higher in inflation break events, but. 0:16:41.560 --> 0:16:43.320 Staying really at low levels. 0:16:43.360 --> 0:16:46.080 So what I saw there was an indication that the 0:16:46.120 --> 0:16:48.640 market doesn't need the FED to hike one time or 0:16:48.640 --> 0:16:50.600 two times, which is essentially was priced in right. One 0:16:50.640 --> 0:16:52.560 or two hikes from the FED. That's not going to 0:16:52.560 --> 0:16:57.360 be determinative for inflation. The trend in inflation is not 0:16:57.400 --> 0:17:00.280 going to be significantly affected by the FED being fifty 0:17:00.280 --> 0:17:02.480 basis points high or fifty basis points lower. If we 0:17:02.480 --> 0:17:04.680 have a big inflation problem in this country, if we're 0:17:04.720 --> 0:17:07.840 accelerating in inflation, you would need rates one hundred basis 0:17:07.880 --> 0:17:09.680 points higher, one hundred and fifty basis points higher. 0:17:09.680 --> 0:17:11.800 I don't think any of us suggesting we have a 0:17:11.800 --> 0:17:14.639 big inflation problem with regards to where the index the 0:17:14.680 --> 0:17:17.760 target is right now, but it's the problem. It's been 0:17:17.840 --> 0:17:21.480 five years above target, and is that not evidence? So 0:17:21.560 --> 0:17:23.080 they're not sufficiently restrictive. 0:17:23.640 --> 0:17:26.560 You don't restore the two things on that one. Number one, 0:17:26.600 --> 0:17:30.680 you don't restore credibility, And I agree credibility has been damaged. Right. 0:17:30.680 --> 0:17:33.000 This is a FED that said inflation is transitory, and 0:17:33.040 --> 0:17:35.520 five years later we still have above target inflation. So 0:17:35.760 --> 0:17:38.920 clearly there's been a hit to credibility. You don't re 0:17:39.160 --> 0:17:43.240 establish that by hiking just for the point of hiking 0:17:43.320 --> 0:17:45.639 and showing that you can be tough in the face 0:17:45.680 --> 0:17:49.320 of even many underlying inflation measures that are slowing. You 0:17:49.440 --> 0:17:53.560 establish credibility by watching the data and affecting the appropriate 0:17:53.600 --> 0:17:56.560 policy to bring inflation down. Now, the question is do 0:17:56.600 --> 0:17:59.639 we have the appropriate policy to bring inflation down? If 0:17:59.720 --> 0:18:02.159 you step back and you don't just look at the 0:18:02.200 --> 0:18:03.760 last six months, look at the last year of data, 0:18:03.760 --> 0:18:06.200 look at the last two years. Inflation is slow, the 0:18:06.280 --> 0:18:08.639 unemployment rate has come up. If you look at the 0:18:08.680 --> 0:18:12.119 housing sector, we clearly have restrictive rates for the housing sector. 0:18:12.640 --> 0:18:14.720 So I do think that we still have rates. 0:18:14.480 --> 0:18:16.520 That are modestly restrictive here, and I think a lot 0:18:16.560 --> 0:18:19.399 of FED officials actually think that also. Their voices are 0:18:19.440 --> 0:18:21.239 not as loud right now. That has not been the 0:18:21.240 --> 0:18:24.440