WEBVTT - Surveillance: Dudley Supports 2nd Powell Term 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 Jailey. We bring you 0:00:13.280 --> 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, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.760 and of course on the Bloomberg Terminal. Always a joy 0:00:30.840 --> 0:00:33.760 to speak to William Dudley. He's a former president of 0:00:33.800 --> 0:00:36.879 the New York Fellow Reserve, the interesting mandate after New 0:00:36.960 --> 0:00:40.120 York fed Bloomberg opinion columnists and doing so much for 0:00:40.159 --> 0:00:45.199 Bloomberg Economics as a senior advisor. Bill Dudley a virtual 0:00:45.360 --> 0:00:48.440 Jackson Hole. You and I have been there. There's a 0:00:48.760 --> 0:00:51.720 you know, the central bankers go out, they wave at 0:00:51.720 --> 0:00:54.320 the moose, at the split rail fans. They're not going 0:00:54.360 --> 0:00:57.520 to do that this year. How does it change if 0:00:57.600 --> 0:01:02.520 Jackson Hall is virtual, Well, it eliminates all the side 0:01:02.560 --> 0:01:06.200 conversations at the luncheons on the hikes, So there isn't 0:01:06.200 --> 0:01:08.560 a kind of back channel kind of communication that you 0:01:08.680 --> 0:01:12.720 might get otherwise. I mean, there's a number of things 0:01:12.720 --> 0:01:15.039 that I would love to talk to that participants about 0:01:15.440 --> 0:01:17.840 that I have nothing to do with. Entrey policy. You know, 0:01:17.920 --> 0:01:20.800 what do they plan to do on payments and cydewere uh, 0:01:21.200 --> 0:01:25.720 cryptocurrencies and digital currencies? What's their add to about climate change? 0:01:26.160 --> 0:01:27.720 So there's a lot of things to talk about. And 0:01:27.760 --> 0:01:31.360 if you don't have those opportunities at lunch and dinner, 0:01:31.560 --> 0:01:33.760 you don't you can't talk about those things from the 0:01:33.800 --> 0:01:36.920 fractious FED development, you know, not to make it a 0:01:37.000 --> 0:01:40.120 history lesson, but the panic of OH seven out to 0:01:40.240 --> 0:01:44.800 mcchesley Martin in the early nineteen fifties out to now, 0:01:44.959 --> 0:01:50.040 where is the FED mandate to consider climate change? How 0:01:50.040 --> 0:01:53.520 do they do that? How do they affect that? I 0:01:53.560 --> 0:01:57.120 think they certainly have a mandate to consider climate change 0:01:57.120 --> 0:01:59.920 from a financial stability perspective, to the extent that climate 0:02:00.080 --> 0:02:05.240 change induces worst outcomes on the macro economy, it's the 0:02:05.360 --> 0:02:09.280 disasters defect This the extent that affects the value of 0:02:10.200 --> 0:02:14.080 assets that banks lend against that does threaten the individual, 0:02:14.280 --> 0:02:17.840 could potentially threatened individual institutions and the financial system. And 0:02:17.840 --> 0:02:20.359 the FED has responded to that. They've set up two committees, 0:02:20.360 --> 0:02:23.080 one to address the overall financials deblay risk and another 0:02:23.160 --> 0:02:26.400 to address risk at individual institutions and they're pushing these 0:02:26.400 --> 0:02:31.040 individual institutions to develop data uh and processes to evaluate 0:02:31.040 --> 0:02:33.200 climate risk and how they make their lending and other 0:02:33.360 --> 0:02:37.160 business banking decisions. I think it's completely appropriate. Entrey policy 0:02:37.200 --> 0:02:40.200 is a lot more difficult, right, because Entrey policy is 0:02:40.240 --> 0:02:41.760 really about what's going to happen in the next year 0:02:41.840 --> 0:02:43.799 or two, not what's gonna happen in the next one 0:02:43.880 --> 0:02:46.600 year thirty years. So even if you think climate change 0:02:46.639 --> 0:02:50.440 is an existential threat to the US global economy, which 0:02:50.480 --> 0:02:52.880 I think it is, it's not clear how you would 0:02:52.880 --> 0:02:57.520 incorporate climate change risk into the near term monetary policy decisions. 0:02:57.560 --> 0:03:00.600 And that's where the Fed's getting some criticism of from 0:03:00.720 --> 0:03:03.160 people who say that it's not doing enough on climate change. 0:03:03.200 --> 0:03:05.880 I just think it's difficult to take the Monterrey policy 0:03:06.000 --> 0:03:08.760 mandate and say, well, that really expands to the climate 0:03:08.840 --> 0:03:10.800 change issue and bill It also, though, goes to the 0:03:10.880 --> 0:03:13.840 question of policy drift. Has the FED gotten too far 0:03:14.080 --> 0:03:17.920 from their main goals of trying to control inflation and 0:03:18.000 --> 0:03:20.519 support the labor market? I mean, when their labor market 0:03:20.520 --> 0:03:24.240 goals are a lot less defined and perhaps and they 0:03:24.240 --> 0:03:26.160 have been in the past, and then you have also 0:03:26.520 --> 0:03:30.000 other goals like climate change and broader other goals and 0:03:30.120 --> 0:03:34.320 initiatives that feel more like policy. How much is the 0:03:34.360 --> 0:03:38.160 FED risking allowing some of their main goals, namely inflation, 0:03:38.280 --> 0:03:41.160 to get out of control as it focuses on some 0:03:41.240 --> 0:03:45.119 of these other goals. I think this is why Tripole 0:03:45.160 --> 0:03:48.960 hasn't gone that far in the climate change direction from 0:03:48.960 --> 0:03:51.960 the Monterrey policy perspective, compared to say, like the European 0:03:52.000 --> 0:03:54.960 Central Bank. The understands that there is a risk of 0:03:54.960 --> 0:03:58.080 being criticized and going too far. That said, the financial 0:03:58.120 --> 0:04:01.080 stability party is certainly part of the sense mandate because 0:04:01.120 --> 0:04:04.400 without financial stability, the FED can't achieve its goals on 0:04:04.480 --> 0:04:08.360 inflation on employment. So I think that the FED is 0:04:08.400 --> 0:04:11.280 taking the right course. That they're taking climate change seriously, 0:04:11.520 --> 0:04:14.600 but they're focusing on it from a financial stability and 0:04:14.640 --> 0:04:19.000 safety and soundness proposition. Well, you mentioned some of the 0:04:19.000 --> 0:04:21.640 criticism that the FED has not gotten has gotten for 0:04:21.680 --> 0:04:23.880 not acting on this in a more aggressive way. A 0:04:23.880 --> 0:04:26.560 lot of that comes from the progressives who may we 0:04:26.600 --> 0:04:28.680 would like to see someone else at the helm, but 0:04:28.720 --> 0:04:31.159 we had. Janet Yellen reportedly over the weekend telling White 0:04:31.160 --> 0:04:34.560 House advisors that she should supports Powell for a second term. 0:04:34.600 --> 0:04:39.640 Just how significant is that. I think Treasure Secretary Yellen's 0:04:39.720 --> 0:04:43.160 endorsement is important because she knows what is needed to 0:04:43.200 --> 0:04:46.080 be the chair of the Fed Reserve, and she's very 0:04:46.080 --> 0:04:49.440 well respected both inside the administration and outside the administration. 0:04:49.480 --> 0:04:51.800 So I think her endorsement is very, very important. I 0:04:51.839 --> 0:04:54.360 think also, when you think about it, Chair Pole really 0:04:54.440 --> 0:04:57.080 is the path of least resistance. He's already shown that 0:04:57.120 --> 0:04:59.839 he's very capable, and he has support on both sides 0:04:59.880 --> 0:05:03.040 of the political aisle. If you that progressives got their 0:05:03.080 --> 0:05:06.320 way and nominated someone someone that was consistent with what 0:05:06.400 --> 0:05:08.640 they want, then I think it'd be a lot higher 0:05:08.680 --> 0:05:12.400 to get that person confirmed because tony Republican voters, would 0:05:12.440 --> 0:05:14.919 you get you know? Tom asked a question earlier today, 0:05:14.920 --> 0:05:17.200 and given FED share, Powell is likely to remain at 0:05:17.200 --> 0:05:20.359 the HELM. What inflation is he looking at most closely? 0:05:20.360 --> 0:05:23.320 And is it changing in terms of the nature of 0:05:23.440 --> 0:05:26.359 price increases where it is occurring. In terms of how 0:05:26.440 --> 0:05:30.000 they evaluated at the FED, well, I think they've focused 0:05:30.040 --> 0:05:32.200 on the notion of is this transitory or is this 0:05:32.320 --> 0:05:35.880 going to be more persistent? For tamp persistent inflation, Really 0:05:35.880 --> 0:05:37.599 two things have to happen. One you have to have 0:05:37.960 --> 0:05:40.440 you have to run on labor and have pressure on wages, 0:05:40.720 --> 0:05:42.920 and that weight pressure on wages gets into prices, and 0:05:43.000 --> 0:05:45.360 too you have to have a rise in inflation expectations. 0:05:45.760 --> 0:05:47.520 So far it looks like there's still some slack in 0:05:47.560 --> 0:05:51.640 the labor market uh and and inflation expectations they've risen 0:05:51.680 --> 0:05:54.400 a little bit, really two levels more consistent with what 0:05:54.440 --> 0:05:56.880 the Fed wants rather than higher than we So at 0:05:56.880 --> 0:06:00.520 this point, the Fed view is that the inflation pressures 0:06:00.560 --> 0:06:05.039 that we're having our transitory probably they're gonna be uh 0:06:05.200 --> 0:06:08.520 more persistent than one would like for transitory pressures. In otherwise, 0:06:08.560 --> 0:06:10.559 the inflation rate will probably stay above the FEDS target 0:06:11.520 --> 0:06:14.279 for a while. But they're they're really focused on what's 0:06:14.279 --> 0:06:16.960 having the labor market and what's having the inflationations and 0:06:17.040 --> 0:06:19.360 all those things. As as long as those things are 0:06:19.360 --> 0:06:22.040 open in terms of their inflation signal, and the Federal 0:06:22.040 --> 0:06:25.720 Reserve will be pretty comfortable with with where inflation is 0:06:25.800 --> 0:06:29.280 right now. Dr Dudley, as did Secretary Yellen. Can you 0:06:29.760 --> 0:06:33.240 tell us this morning that you would actively support the 0:06:33.320 --> 0:06:40.240 renomination the reappointment of Chairman Powell. Absolutely absolutely, He's a 0:06:40.279 --> 0:06:44.120 done a terrific job. He has the whole EONC behind him. 0:06:44.440 --> 0:06:47.280 I think he's articulated what the feds of policy UH 0:06:47.760 --> 0:06:50.960 is in a very clear, inconsistent way. So I don't 0:06:51.000 --> 0:06:53.800 see any reason why you wouldn't be Really. Bill Dudley, 0:06:53.839 --> 0:06:56.279 thank you so much for joining us this morning, former 0:06:56.320 --> 0:06:58.840 president of the New York Federal Reserve and senior advisor 0:06:59.320 --> 0:07:07.839 to Bloomberg Economics. Right now, Laura Calvacino with us RBC 0:07:08.400 --> 0:07:12.280 Capital Markets. Laurie, it is a resilient market, is it 0:07:12.360 --> 0:07:16.680 a market that can break out to new highs? So 0:07:16.760 --> 0:07:19.120 thanks for having me, Tom, Thanks for having me, Lisa. Look, 0:07:19.160 --> 0:07:20.840 we're still in the camp that things will get a 0:07:20.840 --> 0:07:22.960 decent sized pull back before the end of the year. 0:07:23.040 --> 0:07:25.720 So we've got a target on the S and P 0:07:26.480 --> 0:07:28.720 and Look, I think what was interesting in the price 0:07:28.720 --> 0:07:30.640 action last week it felt like we had a bit 0:07:30.640 --> 0:07:33.320 of a growth skirmish to start the week. We saw 0:07:33.360 --> 0:07:36.800 the index faulter and we saw defensive sectors leading the charge. 0:07:37.400 --> 0:07:39.840 When that ends up happening, the market really can't sustain 0:07:39.920 --> 0:07:42.280 this move um to the upside. Now, what we saw 0:07:42.280 --> 0:07:44.040 towards the end of the week is that those jitters 0:07:44.040 --> 0:07:46.760 did calmed down a little bit, tech started working. We 0:07:46.800 --> 0:07:49.400 started to see just some stability in the index return. 0:07:49.720 --> 0:07:53.280 But when you have fear seep in markets really can't climb. 0:07:53.360 --> 0:07:55.360 When you have sort of that nervousness and that shift 0:07:55.360 --> 0:07:57.920 to high quality, markets can climb that wall of WORI, 0:07:58.280 --> 0:08:00.720 but it's a very delicate balance in front. Didn't work 0:08:00.720 --> 0:08:03.280 for most of last week. Well, but honestly, how big 0:08:03.440 --> 0:08:05.640 is this wall of Rory Laurie. If we have the 0:08:05.680 --> 0:08:07.720 FED that is backing the market, if we have the 0:08:07.760 --> 0:08:12.560 potential a greater potential frankly for federal fiscal stimulus, if 0:08:12.600 --> 0:08:16.680 the slowdown does persist, I mean, doesn't policy support sort 0:08:16.680 --> 0:08:20.600 of completely cancel out slowdowns that might otherwise come up. 0:08:21.760 --> 0:08:24.280 I think that's one of the reasons why over the 0:08:24.360 --> 0:08:26.120 last you know, sort of a few months, we've seen 0:08:26.160 --> 0:08:28.200 a lot of nervousness in the work in the market 0:08:28.240 --> 0:08:30.600 just sort of expressed through well, I'm in certain I'm 0:08:30.600 --> 0:08:32.120 going to go to high quality, I'm not going to 0:08:32.200 --> 0:08:34.480 go to defensives. I think that that, you know, has 0:08:34.520 --> 0:08:37.520 helped bolster that case for moving to the secular growers. 0:08:37.679 --> 0:08:39.560 But we do know that we're starting to wind down 0:08:39.600 --> 0:08:41.240 some of these programs or we can sort of see 0:08:41.240 --> 0:08:43.040 the light at the end of the tunnel. So I 0:08:43.080 --> 0:08:45.920 think the power of that to sort of bolster markets 0:08:45.960 --> 0:08:49.040 going forward at least has a diminished impact, even if 0:08:49.040 --> 0:08:50.880 you're not pulling the rug out from the market all 0:08:50.920 --> 0:08:54.000 at once. But we have seen also under performance of 0:08:54.080 --> 0:08:57.359 small caps. We have seen a rotation out of cyclicals. 0:08:57.640 --> 0:09:01.120 Can we glean any confidence in equity valuations based on 0:09:01.200 --> 0:09:05.720 this discretion that we're seeing on the part of fund managers? Look, 0:09:05.760 --> 0:09:07.160 I think that you know, there are a couple of 0:09:07.200 --> 0:09:09.079 different questions I think baked in there. I think it's 0:09:09.080 --> 0:09:11.320 a great question. But I think in terms of small cap, 0:09:11.720 --> 0:09:14.200 you know, I think that we've seen so many worries 0:09:14.280 --> 0:09:17.480 manifest and the dramatic underperformance of small cap since March. 0:09:17.559 --> 0:09:19.640 I think at first it was the impact of inflation 0:09:19.679 --> 0:09:22.760 on profit margins, which really didn't end up coming through um, 0:09:22.760 --> 0:09:25.720 but I think worries were expressed there. Investors have threaded 0:09:25.720 --> 0:09:28.760 about the negative feedback that you'll get on demand from inflation. 0:09:28.840 --> 0:09:31.000 That's also been expressed in small cap. And now I 0:09:31.000 --> 0:09:33.120 think sort of you mentioned the softening and the high 0:09:33.120 --> 0:09:36.240 frequency indicators. I think some of the short term you know, 0:09:36.280 --> 0:09:39.000 sort of economic damage from the delta variant. I think 0:09:39.040 --> 0:09:42.000 that's manifest in small cap UM. But small caps have 0:09:42.559 --> 0:09:44.960 you know, at the end of the day not completely collapsed. 0:09:45.000 --> 0:09:47.400 We haven't seen them go into bear market territory. So 0:09:47.440 --> 0:09:49.280 there's you know a little bit of that resilience that 0:09:49.320 --> 0:09:51.280 we will be able to turn the corner still showing 0:09:51.360 --> 0:09:53.520 up in that data set. Is it time to get 0:09:53.520 --> 0:09:57.520 more defensive within your equity allocation? Though, Lorie, you know 0:09:57.559 --> 0:10:00.360 we essentially did that, Kaylee. We actually have been aisling 0:10:00.400 --> 0:10:03.439 down the cyclicality. I don't make sector recommendation changes all 0:10:03.480 --> 0:10:05.439 that often, but a few weeks ago we actually did 0:10:05.480 --> 0:10:08.600 pull down materials, which was our least favorite of the cyclicals. 0:10:08.600 --> 0:10:11.319 Were sticking with financials and energy, UM, but we did 0:10:11.360 --> 0:10:14.600 actually boost the tech sector. The proper tech sector doesn't 0:10:14.600 --> 0:10:17.160 include the Internet stuff, UM, but we did pull that 0:10:17.360 --> 0:10:19.640 up to and overweight from a market weight, and we 0:10:19.720 --> 0:10:22.040 basically said, going forward, if we're thinking about the next 0:10:22.040 --> 0:10:24.520 twelve months or so, we want to be very balanced 0:10:24.559 --> 0:10:27.200 between sort of the defensiveness of secular growth and the 0:10:27.240 --> 0:10:30.679 cyclical oriented sectors. So we did actually make that that 0:10:30.760 --> 0:10:32.880 sort of shift on the dial. So you're looking out 0:10:32.880 --> 0:10:35.160 twelve months, I'm looking out the next you know, three 0:10:35.160 --> 0:10:38.080 months in change and wondering if in one we will 0:10:38.080 --> 0:10:40.120 see a five percent draw down at any point in 0:10:40.160 --> 0:10:42.160 this equity market, what would be the catalyst for that. 0:10:43.480 --> 0:10:44.760 So I think we got a little bit of a 0:10:44.840 --> 0:10:47.720 hint of it last week with concerns on the growth outlook. 0:10:47.760 --> 0:10:50.240 And look, I'm not saying that anybody is anticipating we're 0:10:50.240 --> 0:10:52.400 going to have a recession or anything like that, but 0:10:52.440 --> 0:10:54.640 I do think there have been some complacency on the 0:10:54.679 --> 0:10:58.120 economic data that investors had, or some deterioration on the 0:10:58.120 --> 0:11:01.480 economic data, and there have been frankly complacency about the 0:11:01.520 --> 0:11:04.200 impact of this delta variant from market participants. So I 0:11:04.200 --> 0:11:05.679 think that was a little bit of a wake up call, 0:11:05.720 --> 0:11:07.679 a little bit of period of digestion we had to have. 0:11:08.280 --> 0:11:10.160 And but let's just zoom out a little bit. What 0:11:10.200 --> 0:11:12.240 was that, you know, sort of reaction to the delta 0:11:12.320 --> 0:11:16.280 variant all about? It was an unanticipated bit of bad 0:11:16.400 --> 0:11:19.679 news that hit the market and really challenged investors assumptions 0:11:19.679 --> 0:11:21.800 of what they thought going forward. So I think the 0:11:21.800 --> 0:11:24.440 answer in their keylie, it's probably something that the market 0:11:24.480 --> 0:11:27.760 is not able to anticipate with valuations where they are. 0:11:27.800 --> 0:11:29.880 What sentiment is stretched as it is, This is not 0:11:29.960 --> 0:11:31.760 a market that has a lot of room to absorb 0:11:31.840 --> 0:11:34.800 bad news. When we do get it, thank you so much, 0:11:34.800 --> 0:11:42.720 greatly appreciate it. This is a joy. Let's get right 0:11:42.760 --> 0:11:47.880 to it with Michael Dardo with m KM Partners are 0:11:47.920 --> 0:11:52.200 chief economist and market strategy Mark. Michael, you go right 0:11:52.320 --> 0:11:55.480 at the media gloom crew. You just taram shreds in 0:11:55.520 --> 0:11:58.040 your note and you say, look, there's a lot of 0:11:58.120 --> 0:12:02.599 labor data which shows a more employed America. There is 0:12:02.679 --> 0:12:06.920 high frequency data that shows a pretty good, maybe not 0:12:07.120 --> 0:12:10.439 mint set of data as well. What's the gloom crew 0:12:10.760 --> 0:12:16.360 get wrong? Well, Tom, I think that the gloom crew 0:12:16.480 --> 0:12:19.600 is focused on the variant and and that news has 0:12:19.640 --> 0:12:23.480 been bad and there are risks. All of that said, 0:12:23.520 --> 0:12:26.800 if we do look at the highest frequency economic data, 0:12:26.920 --> 0:12:29.320 that should tell us if the economy is rolling over, 0:12:30.000 --> 0:12:32.800 that still looks good for the most part. So this 0:12:32.960 --> 0:12:35.960 past week with such jobless claims hit a new post 0:12:35.960 --> 0:12:39.560 pandemic blow. So at least so far, you know, the 0:12:39.640 --> 0:12:44.600 labor market looks fairly undisturbed and unperturbed um by this 0:12:44.760 --> 0:12:48.200 delta shock that could change in the future. But so far, 0:12:48.600 --> 0:12:52.319 you know, high frequency labor market data looking good. Also, 0:12:53.040 --> 0:12:57.520 your weekly confidence numbers that come out on on Thursday 0:12:58.120 --> 0:13:00.720 have actually held up pretty well. And it's a critical 0:13:00.760 --> 0:13:04.440 point because the University of Michigan data that totally fell 0:13:04.440 --> 0:13:07.320 out of bed in August. I think really scared along 0:13:07.360 --> 0:13:11.280 with people, and in the risk with the variant is 0:13:11.320 --> 0:13:15.120 really twofold. One would be if there are actually explicit 0:13:15.360 --> 0:13:18.760 directed shutdowns, which doesn't seem to be happening on a 0:13:18.840 --> 0:13:22.520 large scale. The other risk would be that households consumers 0:13:22.559 --> 0:13:26.440 just simply get scared and pulled back, and so that's 0:13:26.440 --> 0:13:28.559 why there was a lot of concern with that number. 0:13:28.640 --> 0:13:32.440 Yet the weekly confidence data over the last four weeks 0:13:32.520 --> 0:13:35.720 is increased each week and it's almost back at a 0:13:36.160 --> 0:13:40.000 you know, essentially is matching a post pandemic high. So 0:13:40.840 --> 0:13:44.200 if that continues, I think we're in in pretty good shape. 0:13:44.240 --> 0:13:46.400 If not, then we'll have to worry more. So that's 0:13:46.440 --> 0:13:50.360 my that's my right. Michael Darter SPX level four four 0:13:50.440 --> 0:13:55.560 or five two, DOWT thousand to nineteen. The markets share 0:13:55.559 --> 0:13:57.800 of the streets gloom, don't they? Why is there a bid? 0:13:57.880 --> 0:14:04.240 Two stocks free reasons? Tom Uh, we have high equity prices, 0:14:04.320 --> 0:14:07.360 earnings are very high and have been doing very well 0:14:07.480 --> 0:14:11.920 record sup by hundred earnings and expectations are high. Still 0:14:12.000 --> 0:14:14.720 low discount rates, so the tenure yield is moving up 0:14:14.760 --> 0:14:17.280 a little bit, but very low, lower than most people 0:14:17.360 --> 0:14:20.280 thought at the beginning of the year. And high liquidity, 0:14:20.440 --> 0:14:24.080 so you have to disturb one of those three supports 0:14:24.240 --> 0:14:29.080 or equity prices, high liquidity, high earnings, low discount rates. 0:14:29.080 --> 0:14:33.320 Our view with the strong recovery is that discount rates 0:14:33.360 --> 0:14:36.480 should be moving up over time and and that will 0:14:36.520 --> 0:14:39.600 be a headwind two pe ratios if it plays out. 0:14:39.600 --> 0:14:41.760 It's not really playing out, you know, we've had a 0:14:41.800 --> 0:14:45.200 little bit of a movement northward. Real rates do seem 0:14:45.240 --> 0:14:47.640 like they're starting to move up now, stir up about 0:14:47.680 --> 0:14:51.280 twenty basis points since early August. That will be something 0:14:51.320 --> 0:14:53.960 to keep an eye on, you know, as we move 0:14:54.040 --> 0:14:57.560 into Jackson Hold this week and potentially hear more plans 0:14:57.600 --> 0:15:01.240 about UH potential tapering from the feed mike. We talk 0:15:01.320 --> 0:15:03.160 about Jackson Hole, but we really ought to call it 0:15:03.320 --> 0:15:06.000 a zoom event. I don't know, a zoom fab. It's 0:15:06.000 --> 0:15:09.120 just really kind of an interesting UH shift to all 0:15:09.240 --> 0:15:12.720 remote for a second year. What is a bigger risk 0:15:12.800 --> 0:15:15.920 to markets coming out of the Jackson Hole remote con 0:15:16.040 --> 0:15:19.200 fab Is it the potential for a more hawkish FED 0:15:19.280 --> 0:15:22.440 chair Powell, someone who actually makes news, or perhaps somebody 0:15:22.480 --> 0:15:26.040 who holds the stance and raises the specter of higher 0:15:26.040 --> 0:15:29.360 than expected inflation down the line. Should the delta variant 0:15:29.400 --> 0:15:34.000 prove to be a passing a viral strain, yeah, I 0:15:34.040 --> 0:15:36.600 think you know, Paul is going to try not to 0:15:36.760 --> 0:15:40.440 make big waves on Friday. All of that said, it's 0:15:40.480 --> 0:15:43.440 pretty clear now based on recent speeches in the recent 0:15:43.520 --> 0:15:46.560 Seed minutes at the center of intellectual gravity on the 0:15:46.560 --> 0:15:51.480 Feed is definitely moving towards announcing a taper uh this here, 0:15:51.520 --> 0:15:55.800 and probably commencing the taper before year end provided the 0:15:55.880 --> 0:15:58.360 labor market bold stuff. So this is all going to 0:15:58.400 --> 0:16:01.880 be dated dependent. The BEDS operating assumption at this point 0:16:01.960 --> 0:16:05.160 is that the delta variant is not going to dramatically 0:16:05.200 --> 0:16:08.000 throw the recovery off course. If that proves to be false, 0:16:08.080 --> 0:16:11.640 then they're gonna end up waiting longer. UM. But as 0:16:11.680 --> 0:16:16.200 I mentioned before, with those high frequency indicators UM suggesting 0:16:16.240 --> 0:16:18.480 that we're still in pretty good shape. I think the FED, 0:16:18.640 --> 0:16:22.280 I think what how how will hint at is what 0:16:22.320 --> 0:16:24.520 we already know that you know that the taper will 0:16:24.560 --> 0:16:27.400 be announced likely this fall, and by the winter the 0:16:27.400 --> 0:16:29.680 Fed will be pulling the trigger on it. What high 0:16:29.680 --> 0:16:33.560 frequency data points are you paying the most attention to, Mike, Well, 0:16:33.600 --> 0:16:36.640 aside from claims and confidence to come out weekly, I'm 0:16:36.640 --> 0:16:39.800 really you know, watching the anatomy of this bond market. 0:16:39.880 --> 0:16:42.920 So is yields move up and down? You know, we're 0:16:42.960 --> 0:16:45.960 watching what is driving that? Is it real rates or 0:16:46.000 --> 0:16:49.760 inflation expectations. You also have the estimated term premium in 0:16:49.800 --> 0:16:54.440 there and against that foliage, what's happening in metals market 0:16:54.600 --> 0:16:57.680 and in markets and in risky credit right, So what 0:16:57.800 --> 0:17:00.520 we need to be on the lookout for is if 0:17:00.560 --> 0:17:04.280 real rates start to spike and you have inflation expectations crashing, 0:17:04.320 --> 0:17:07.199 credit spreads blowing out, you know, that would not be 0:17:07.320 --> 0:17:10.439 what we want to see. Uh. So far, that's you know, 0:17:10.520 --> 0:17:12.880 that's not really playing out. We've got a modest correction 0:17:12.880 --> 0:17:17.760 in commodities taking shape, credit spreads have lightened some, um 0:17:17.880 --> 0:17:20.480 but you know, but so far that really doesn't look 0:17:20.520 --> 0:17:24.680 like there's anything malignant taking place in in credit markets, Mike, 0:17:24.840 --> 0:17:27.520 Is this a market that has already positioned for the 0:17:27.520 --> 0:17:31.840 taper and therefore we will get no tantrum. Yeah. I 0:17:31.880 --> 0:17:35.000 think that's a good point. Um. You know, what's happening 0:17:35.000 --> 0:17:38.040 in the bond market doesn't look anything like two thousand 0:17:38.119 --> 0:17:41.960 thirteen so far. So in that episode, we had a 0:17:42.080 --> 0:17:46.480 really big surge in real rates, Inflation expectations fell pretty considerably, 0:17:46.960 --> 0:17:49.280 and at least temporarily, we you know, we had some 0:17:49.359 --> 0:17:53.359 serious upward pressure on credit risk spreads, the big commodity 0:17:54.040 --> 0:17:57.560 uh fall off as well. Um, and then you know, 0:17:57.640 --> 0:17:59.520 in the run up to the two thousand and fifteen 0:17:59.640 --> 0:18:03.040 rate even even more severe on the much more severe 0:18:03.040 --> 0:18:06.399 on the commodity side. UH. So this is not playing 0:18:06.400 --> 0:18:08.880 out in the same way at least so far, and 0:18:09.240 --> 0:18:12.639 it's been very very well telegraphed. And so maybe the 0:18:12.720 --> 0:18:16.120 focus on the potential taper tantrum means that it simply 0:18:16.160 --> 0:18:20.240 doesn't play out in the two thousands thirteen fashion this time. 0:18:20.520 --> 0:18:22.959 So if it's well telegraphed, it maybe doesn't present that 0:18:23.080 --> 0:18:25.600 large of a downside risk. So what could be the 0:18:25.600 --> 0:18:31.120 potential biggest downside catalyst for this market? I I do 0:18:31.240 --> 0:18:35.600 think that the downside catalyst for the market would probably 0:18:35.640 --> 0:18:37.840 be on the valuation side. I don't think we're going 0:18:37.880 --> 0:18:40.359 to see a big liquidity shock, and I think earnings 0:18:40.359 --> 0:18:42.400 are going to be okay as long as the economy 0:18:42.840 --> 0:18:46.840 stays relatively strong. But in a strong economy scenario where 0:18:46.880 --> 0:18:51.119 the Titans you still could have you know, upward pressures 0:18:51.160 --> 0:18:54.000 on on rates. It might not come as a sudden shock, 0:18:54.640 --> 0:18:57.399 but you know, over time, I think, you know, the 0:18:57.440 --> 0:19:00.280 tenure Deald is right, We're gonna be gravitating North word 0:19:00.600 --> 0:19:03.280 and you know, and that should put downward pressure on 0:19:04.080 --> 0:19:07.200 UH stock market multiples. Earnings could make for some of that, 0:19:07.240 --> 0:19:10.879 but you know, we're sort of overdue here with the 0:19:10.920 --> 0:19:17.160 broad into indicies for some kind of at least period. Michael, 0:19:17.200 --> 0:19:21.200 Let's go back to University of Wisconsin microeconomics. One O. One. 0:19:21.760 --> 0:19:25.560 Let's look at the supply curve dynamics. We have a 0:19:25.600 --> 0:19:29.960 supply shock folded into a labor market right now. All 0:19:30.040 --> 0:19:33.400 sorts of theories here shifts this that the other thing. 0:19:33.880 --> 0:19:36.520 Do you believe that there's a suppleness to the American 0:19:36.560 --> 0:19:40.080 economy where we will adapt and adjust and get back 0:19:40.119 --> 0:19:46.200 to normal supply dynamics. I think we are adjusting, h 0:19:46.320 --> 0:19:49.800 Tom It It doesn't happen overnight, UM, But the labor 0:19:49.920 --> 0:19:53.120 market is on the rebound now. Obviously, we still do 0:19:53.240 --> 0:19:58.119 have these supply side dislocations that are ahead wind. You know, 0:19:58.160 --> 0:20:00.840 we can certainly see that anyone that's and out there 0:20:00.880 --> 0:20:04.080 and dealing with the services industries knows that the labor 0:20:04.119 --> 0:20:07.760 shortage problems are still their services flow. And you know 0:20:07.760 --> 0:20:10.960 it's difficult to hold onto employees help wanted signs all 0:20:11.000 --> 0:20:14.960 over the place, UM, and the delta variant certainly does 0:20:15.000 --> 0:20:17.640 not help that. But you know, we're going to get 0:20:17.680 --> 0:20:20.200 to the delta variants and the economy is going to 0:20:20.240 --> 0:20:23.919 stay relatively open. Uh as school starts up. That should 0:20:23.920 --> 0:20:28.679 ease some of these concerns about childcare, the extended jobless benefits. 0:20:29.040 --> 0:20:31.480 I know there's a debate about the impact, but those 0:20:31.520 --> 0:20:35.639 are you going to wrap up this fall? Um? And 0:20:36.000 --> 0:20:38.119 you know that means the labor market is going to 0:20:38.200 --> 0:20:40.880 continue to be on the upswing here, both in terms 0:20:40.920 --> 0:20:44.480 of job games and labor force increases. What's your twelve 0:20:44.520 --> 0:20:47.120 lon's GDP call? I mean, we've got people coming down 0:20:47.160 --> 0:20:50.000 six and a half percent, maybe even some gloomy or 0:20:50.040 --> 0:20:53.880 the Fed obviously much more cautious. What is your call? 0:20:54.320 --> 0:20:58.800 On GDP twelve buns forward. Yeah, our our call is 0:20:58.880 --> 0:21:03.320 solidly above end for next year. So keep in mind that, 0:21:03.520 --> 0:21:06.160 you know, trend growth that the US is fully employed 0:21:06.280 --> 0:21:09.360 is only going to be about two real four nominal, 0:21:09.840 --> 0:21:11.760 So we're gonna we're gonna be at least a few 0:21:11.800 --> 0:21:15.000 inter faces points above that straight in the next year 0:21:15.040 --> 0:21:18.240 and maybe even beyond, depending on, you know, the timing 0:21:18.720 --> 0:21:21.639 magnitude of FED tightening. So above trend growth means the 0:21:21.720 --> 0:21:25.200 labor market continues to tighten, and it likely means some 0:21:25.359 --> 0:21:28.800 upward pressure on long term interest rates, at least from 0:21:28.880 --> 0:21:31.120 from where we are now. So that's that's the call 0:21:31.240 --> 0:21:36.440 without giving you a spastic pointy solidly above trend. Michael Darter, 0:21:36.760 --> 0:21:39.280 stay dry, Michael Darter caught in the rain this weekend? 0:21:39.320 --> 0:21:48.840 Really right in the heart? Is it? Henry or on release? Yeah? Okay, 0:21:55.560 --> 0:21:57.879 right now, she's not a vice ADMOI we'll talk with 0:21:58.000 --> 0:22:01.240 sober Klein. Michael biology us to JOHNS Hopkins in the 0:22:01.280 --> 0:22:04.200 course of the Bloomberg School of Public Health. So we're 0:22:04.480 --> 0:22:06.439 just we're thrilled to have you on today, and I 0:22:06.520 --> 0:22:09.880