WEBVTT - Bloomberg Surveillance: Inflation Data Moves Markets 0:00:00.040 --> 0:00:12.879 Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg 0:00:12.960 --> 0:00:16.960 Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join 0:00:17.079 --> 0:00:21.000 us each day for insight from the best in economics, finance, investment, 0:00:21.200 --> 0:00:24.840 and international relations. You can also watch the show live 0:00:25.079 --> 0:00:29.400 on YouTube. Visit the Bloomberg Podcast channel on YouTube to 0:00:29.520 --> 0:00:32.920 see the show weekday mornings from seven to ten am 0:00:32.960 --> 0:00:37.000 Eastern from our global headquarters in New York City. Subscribe 0:00:37.000 --> 0:00:40.360 to the podcast on Apple, Spotify, or anywhere else you 0:00:40.440 --> 0:00:44.600 listen and always I'm Bloomberg Radio, the Bloomberg Terminal, and 0:00:44.640 --> 0:00:47.640 the Bloomberg Business App. Paul, why don't you bring in 0:00:47.640 --> 0:00:49.760 this guy? Let me just say he's my Economist of 0:00:49.760 --> 0:00:53.080 the Year last year. This is a guy who nailed 0:00:53.280 --> 0:00:57.400 intelligent optimism. He not only would say I believe in 0:00:57.440 --> 0:01:00.520 the system, I believe in the post pandemic environment, but 0:01:00.560 --> 0:01:04.240 he said the American economic experiment is vital. That was 0:01:04.280 --> 0:01:06.120 a courageous call eighteen months ago. 0:01:06.280 --> 0:01:08.280 And Tom, we got some pretty good people booking guests 0:01:08.319 --> 0:01:09.600 for us. It makes us look good. I mean we 0:01:09.640 --> 0:01:14.120 had Ira Jersey, now Neil Dutter, Renaissance Macro Research Partners, 0:01:14.160 --> 0:01:16.880 head of the US economic research over there, and Neil, 0:01:16.920 --> 0:01:18.920 I'm going to ask you the question I asked Ira 0:01:19.080 --> 0:01:23.000 Jersey here inflation. I mean, do we have to think 0:01:23.000 --> 0:01:26.399 about it coming back into our economy or are some 0:01:26.480 --> 0:01:28.840 of these recent CPI PPI data is just kind of 0:01:28.880 --> 0:01:30.960 a don't worry about it's gonna be a little sticky 0:01:31.000 --> 0:01:33.399 on on the way down from here. How concerned should 0:01:33.400 --> 0:01:33.640 we be? 0:01:35.680 --> 0:01:39.319 Well, I'm a little bit more concerned today than I 0:01:39.560 --> 0:01:42.400 was maybe a month or two ago. You know, of course, 0:01:42.400 --> 0:01:45.160 it's important to remember that, you know, we are coming 0:01:45.200 --> 0:01:48.520 off a extended period where core inflation was generally coming 0:01:48.520 --> 0:01:53.000 in below consensus forecasts. And you know, now we have 0:01:53.120 --> 0:01:56.920 a month or so where you know, the inflation data 0:01:56.960 --> 0:02:00.200 has generally been surprising to the upside. You know there'd 0:02:00.240 --> 0:02:02.880 be some residual seasonality in the data. I mean we 0:02:02.920 --> 0:02:06.279 saw this last January as well. But I think whenever 0:02:06.320 --> 0:02:08.680 you get numbers like this, it's just important to go 0:02:08.760 --> 0:02:12.560 back to first principles, right And you know, for the FED, 0:02:13.880 --> 0:02:19.280 compensation growth equals inflation plus productivity. That's a fairly standard 0:02:19.320 --> 0:02:22.440 sort of identity in macro And what do we know 0:02:22.480 --> 0:02:25.960 about compensation growth? It's moderating if you look at the 0:02:26.000 --> 0:02:28.480 last employment cost index, it ran about three and a 0:02:28.520 --> 0:02:31.559 half percent at an annual rate. We know that productivity 0:02:31.600 --> 0:02:36.720 is picking up, so I think generally the inflationary impulse 0:02:36.760 --> 0:02:39.679 that's coming out of the labor markets are basically consistent 0:02:39.720 --> 0:02:42.600 with two percent inflation. And at the same time, we 0:02:42.680 --> 0:02:49.520 know that business and household inflation expectations are declining for 0:02:49.680 --> 0:02:52.960 you know, in the short, medium, and longer run. So 0:02:53.040 --> 0:02:57.760 I think that's encouraging for the FED. So January was 0:02:57.760 --> 0:03:00.520 a bad month for inflation that pushed off the timing 0:03:00.720 --> 0:03:04.080 of the first rate cut. But I think it's important 0:03:04.080 --> 0:03:06.519 for people to understand what are we still talking about here. 0:03:06.760 --> 0:03:10.360 We're talking about how much the economy is growing and 0:03:10.400 --> 0:03:12.160 when the FED is going to start cutting rates. 0:03:12.840 --> 0:03:15.320 So let's just go right to that, Neil. You know, 0:03:15.360 --> 0:03:17.360 I think the FED fit chairman j pal did a 0:03:17.400 --> 0:03:19.320 very good job communicating this that you know, in the 0:03:19.400 --> 0:03:22.200 last time he spoke that, all right, March, March really 0:03:22.240 --> 0:03:25.399 isn't in the cars cards, So the markets started discounting May. 0:03:25.800 --> 0:03:27.919 Now it seems like they're the market's pushing this out 0:03:27.919 --> 0:03:29.840 to June, and I guess a data point like today 0:03:30.200 --> 0:03:32.359 would give more ammunition to the folks that are thinking 0:03:32.360 --> 0:03:34.160 about a June cut. 0:03:35.000 --> 0:03:37.760 Yeah, I think that that's probably right. I mean, you know, 0:03:37.880 --> 0:03:41.119 June probably goes up a little bit. But you know, look, 0:03:41.160 --> 0:03:42.880 I mean we could be back here in March or 0:03:42.960 --> 0:03:47.000 April talking about downside surprises to core inflation. Uh, you know, 0:03:47.080 --> 0:03:50.720 in the March data and so and that, and that 0:03:50.800 --> 0:03:54.760 could then push the probabilities of May up. So again, 0:03:54.840 --> 0:03:58.000 I think it's important. It's important for people to understand. 0:03:58.040 --> 0:04:00.400 I think you know, what is the overarching state for 0:04:00.440 --> 0:04:03.200 the year again, it's the economy is growing and the 0:04:03.240 --> 0:04:05.839 feed is probably cutting. I think that's a reasonably good 0:04:05.840 --> 0:04:07.840 backdrop for risk appetity. 0:04:07.920 --> 0:04:08.680 Neil, in an hour. 0:04:08.520 --> 0:04:10.560 Ago when you were in makeup to come on YouTube 0:04:10.600 --> 0:04:14.440 Bloomberg podcast for US, you did a wonderful Renmec thing 0:04:14.480 --> 0:04:18.719 out on Twitter, folks, I'll retweet it Renmec, Renaissance, macro Research. 0:04:18.800 --> 0:04:23.760 It's to some goofy name at r E nmac llc. 0:04:24.040 --> 0:04:28.000 There it is renmc llc. And Neilia said, sentiment matters. 0:04:28.160 --> 0:04:31.320 Green Span agrees with you, and the sentiment right now 0:04:31.400 --> 0:04:33.560 is a bull market. Basically, there's a bid to the 0:04:33.600 --> 0:04:36.960 AI market. Even other things I guess are doing okay? 0:04:37.400 --> 0:04:41.080 How does the sentiment get you out into twenty twenty 0:04:41.120 --> 0:04:44.160 four right now? Is it a bull economy as well 0:04:44.200 --> 0:04:45.040 as a bull market? 0:04:47.400 --> 0:04:49.800 That's my view. I mean, I think when you look 0:04:49.880 --> 0:04:55.880 at sentiment, what you have right now is a simultaneous 0:04:55.920 --> 0:04:59.520 improvement in business and consumer confidence. So it kind of 0:04:59.520 --> 0:05:03.080 reeks very you know of early cycle type dynamics in 0:05:03.120 --> 0:05:05.760 the economy. Obviously, this has been a very unusual cycle 0:05:06.240 --> 0:05:08.839 where you know, certain industries have kind of shut off 0:05:08.920 --> 0:05:12.640 shut turned on at different times, and so you know, 0:05:12.800 --> 0:05:15.520 traditional kind of business cycle rules haven't really worked out 0:05:15.520 --> 0:05:17.760 that well. But right now, what it looks like is, 0:05:18.920 --> 0:05:21.120 after a lengthy period, it seems to be you know, 0:05:21.160 --> 0:05:25.000 we're kind of approaching something closer to normal. And you know, frankly, 0:05:25.040 --> 0:05:28.120 the fact that corporate and consumer confidence is picking up 0:05:28.839 --> 0:05:30.560 at the same time. I mean, that's going to be 0:05:30.600 --> 0:05:34.880 good news I think for the economy, and you know, 0:05:34.920 --> 0:05:37.240 with respect to corporate confidence, that's going to be good 0:05:37.240 --> 0:05:39.000 news I think for business investment spending. 0:05:39.120 --> 0:05:42.440 So where's your blended nominal GDP called twelve months forward? 0:05:42.640 --> 0:05:45.120 Are you at five percent nominal or is it a 0:05:45.120 --> 0:05:47.120 more normal three point four percent? 0:05:49.320 --> 0:05:51.159 I love how you went out to the second decimal 0:05:51.200 --> 0:05:51.840 place there. 0:05:52.279 --> 0:05:55.359 Well, that's raady hunting. Okay, first, let me explain this 0:05:55.440 --> 0:05:58.960 on television. We go to one decimal point on YouTube, 0:05:58.960 --> 0:06:03.200 Bloomberg podcast two decibel points at least, I'm mateo screaming time, 0:06:03.279 --> 0:06:04.800 go to three? Where are we? 0:06:05.640 --> 0:06:07.400 So I guess you could say I'm at four point 0:06:07.400 --> 0:06:08.960 seventy five to five point two five. 0:06:08.960 --> 0:06:09.880 How's that look at? 0:06:09.880 --> 0:06:10.040 That? 0:06:10.040 --> 0:06:13.200 That's nice? I mean, that's a solid nominal. 0:06:13.279 --> 0:06:15.200 One more question for his done this? All right? 0:06:15.200 --> 0:06:17.520 So Neil, real quick here the labor market. That's another 0:06:17.680 --> 0:06:19.760 pretty strong pillar in this economy. How do you think 0:06:19.760 --> 0:06:21.240 about the US labor market going forward? 0:06:24.200 --> 0:06:27.160 I think right now the main story is that labor 0:06:27.240 --> 0:06:30.719 markets are sluggish relative to what we're seeing in the 0:06:30.880 --> 0:06:32.919 in growth. I mean, so either you believe that we 0:06:33.040 --> 0:06:37.839 have this sort of massive productivity boom in the first quarter, 0:06:39.440 --> 0:06:41.919 or you know, you should expect hours to pick up 0:06:41.960 --> 0:06:44.000 a little bit. You know. The truth is is that 0:06:44.040 --> 0:06:46.840 aggregate hours work, so that's the sum product of jobs 0:06:46.839 --> 0:06:49.360 in the work week. It's basically been flat for the 0:06:49.440 --> 0:06:52.640 last three months or so, and during that time, the 0:06:52.680 --> 0:06:56.040 economy has been growing, you know, at a reasonably solid case, 0:06:56.160 --> 0:07:01.719 you know, something slightly about two percent to lengthen you know, 0:07:01.760 --> 0:07:04.000 I think particularly in the manufacturing, So I say that's 0:07:04.000 --> 0:07:07.359 probably something that will happen at inventory's restock. 0:07:07.720 --> 0:07:09.680 Neil Dunet, thank you so much. Neils done it there 0:07:09.680 --> 0:07:12.400 with Ren Mack. And again we'll get that really nice 0:07:12.440 --> 0:07:14.520 sentiment displayed. 0:07:14.000 --> 0:07:15.760 That he did. We'll put that on Twitter and try 0:07:15.760 --> 0:07:16.840 to get the LinkedIn. 0:07:26.960 --> 0:07:30.240 Shorting us now with Bessemwheer of course for years with 0:07:30.320 --> 0:07:33.520 Bridgewater now part of the Bretonwoods Committee, we are thrilled 0:07:33.560 --> 0:07:35.560 to get a brief from Rebecca Patterson. 0:07:35.880 --> 0:07:41.960 Rebecca to begin, are we beyond the pandemic? Oh? 0:07:42.000 --> 0:07:45.920 I love that question. I mean obviously no, because I 0:07:45.960 --> 0:07:47.800 know what you're saying. We're never going to be on 0:07:47.840 --> 0:07:51.400 the pandemic. It's just becoming a flu that's going to 0:07:51.480 --> 0:07:54.200 have variations and it could come back in forms we 0:07:54.200 --> 0:07:57.160 can't even imagine right now. So no, But from an 0:07:57.160 --> 0:07:59.120 economic point of view, which is where I think you're 0:07:59.120 --> 0:08:02.440 coming from, Tom, and it's the lack of electricity, it 0:08:02.480 --> 0:08:08.880 makes me thinks more slowly. Yeah, I think we are. 0:08:09.080 --> 0:08:11.280 I think we can say that now. Does that mean 0:08:11.400 --> 0:08:14.920 everything is completely normalized again? No, right, But are we 0:08:15.040 --> 0:08:17.760 back to really kind of business as usual from a 0:08:17.800 --> 0:08:19.600 macro point of view, yes. 0:08:19.680 --> 0:08:20.280 I can't say. 0:08:20.320 --> 0:08:24.360 There's no one in my universe folks who shifted from 0:08:24.400 --> 0:08:28.640 the quiet of Bestsemmer Trust over the cacophony of Bridgewater. 0:08:28.760 --> 0:08:31.440 There's no one, and she lived to tell the tale. 0:08:31.720 --> 0:08:36.280 Let's go conservative first, Rebecca, quiet money, three or five 0:08:36.360 --> 0:08:40.480 year return money. How do they participate in this bull market? 0:08:41.880 --> 0:08:44.679 Well, you know, it was interesting yesterday we got data 0:08:44.720 --> 0:08:48.600 from ICI just showing fun flows and what struck me 0:08:49.320 --> 0:08:53.160 is that two things. One, in the week through February fourteenth, 0:08:53.200 --> 0:08:57.160 we saw forty three billion dollars leaving money markets, and 0:08:57.480 --> 0:08:59.679 obviously not all of that's going to equities, but it 0:08:59.720 --> 0:09:02.560 is redeployed, and I think a lot of that is 0:09:02.600 --> 0:09:05.920 to your point, the slower money, right, money that's being reallocated. 0:09:05.960 --> 0:09:08.000 We're going to put a little more risk in the market, 0:09:08.040 --> 0:09:10.400 whether that's equities, maybe we're going to go out the 0:09:10.440 --> 0:09:13.360 curve on bonds. But the other data point from that 0:09:13.440 --> 0:09:17.240 report that was striking was the amount still in money markets, 0:09:17.280 --> 0:09:21.320 which is around six trillion with a T and obviously 0:09:21.360 --> 0:09:22.959 not all of that will leave, but as we get 0:09:23.000 --> 0:09:25.680 closer to the point where the Feds lowering interest rates 0:09:25.679 --> 0:09:28.800 and those money markets are looking less attractive. I think 0:09:28.840 --> 0:09:31.960 that's going to be an ongoing support for markets. Maybe 0:09:32.000 --> 0:09:34.400 it's not the everything rally to the same degree we 0:09:34.440 --> 0:09:37.160 saw late last year, but it is an important measure 0:09:37.200 --> 0:09:41.920 of support that can keep equities going from here. Globally, 0:09:41.960 --> 0:09:43.480 but I think particularly in the US. 0:09:44.240 --> 0:09:46.120 You know, Rebecca, I was kind of a time and 0:09:46.160 --> 0:09:49.079 place where that's sixty forty portfolio kind of made a 0:09:49.120 --> 0:09:51.760 lot of sense to me. Sixty percent stocks, forty percent bonds, 0:09:51.760 --> 0:09:55.080 and then boy, you know, twenty twenty two came along 0:09:55.320 --> 0:09:58.320 and just got crushed because you couldn't there's no place 0:09:58.320 --> 0:10:00.439 to hide a fixed income. A litt bit of better 0:10:00.480 --> 0:10:03.640 performance last year in fixed income thanks to November December, 0:10:04.040 --> 0:10:06.160 but this year we're just kind of back into the soup. 0:10:06.920 --> 0:10:09.439 How do you think about fixing come into a balanced 0:10:09.600 --> 0:10:11.040 longer term portfolio. 0:10:12.360 --> 0:10:16.520 Yeah, I still think bonds and I'm talking about treasuries, 0:10:17.280 --> 0:10:22.079 high quality corporates have a role in a longer term portfolio. 0:10:22.640 --> 0:10:25.599 I appreciate the point on the last few years performance. 0:10:25.679 --> 0:10:28.120 I think the last fews were the exception, not the rule, 0:10:28.559 --> 0:10:30.319 but in the short term. If we look over the 0:10:30.400 --> 0:10:33.680 next six months, a lot's going to depend on what's 0:10:33.679 --> 0:10:36.480 happening at the short end. How quickly the Fed does 0:10:36.520 --> 0:10:38.880 decide to lower rates. Obviously that's going to feed through 0:10:38.880 --> 0:10:43.320 the whole curve longer term. While there might be a 0:10:43.400 --> 0:10:46.240 higher settling rate for yields, right if we have some 0:10:46.240 --> 0:10:50.439 of these structural inflation forces that push up inflation, push 0:10:50.559 --> 0:10:53.280 up the Fed's neutral rate, it's so called our star. 0:10:53.960 --> 0:10:56.240 You know, we might be looking at slightly higher rates 0:10:56.280 --> 0:11:01.000 for yields, but at the same time, if they're stable, 0:11:01.520 --> 0:11:04.320 you can still make good money off them. We don't 0:11:04.320 --> 0:11:06.679 need yields to come down constantly like we had over 0:11:06.720 --> 0:11:09.160 the last few decades, which was lovely to make money 0:11:09.200 --> 0:11:11.199 and bonds and to use them as a diversifire. 0:11:11.320 --> 0:11:13.839 Rebecca Pattison with us, of course, with a good brief 0:11:13.880 --> 0:11:16.400 here into March into the rest of two thousand and 0:11:17.360 --> 0:11:20.320 twenty four, we're on YouTube Bloomberg Podcast. Thank you for 0:11:20.360 --> 0:11:22.640 signing up. I'm out in the chat there. I'm learning 0:11:22.679 --> 0:11:26.160 a lot about Aruba. The chat's fired up about Aruba 0:11:26.559 --> 0:11:29.520 that in a moment Apple car play, I don't think 0:11:29.520 --> 0:11:30.800 they have Apple CarPlay in a room. 0:11:30.960 --> 0:11:33.000 I'm not sure, don't think so. Apple car play with 0:11:33.080 --> 0:11:35.000 us is well, Rebecca. 0:11:35.160 --> 0:11:38.480 Our complex derivative strategies like interest rate parody, and I 0:11:38.520 --> 0:11:42.640 do not want you to talk about Bridgewater portfolios. That's unfair. 0:11:43.160 --> 0:11:47.960 But our complex derivative strategies by sophisticates now a way 0:11:48.000 --> 0:11:50.840 to create alpha or is it just a plain old 0:11:50.920 --> 0:11:53.480 vanilla buy it and own it market? 0:11:58.440 --> 0:12:02.640 I think that risk parody strategies trying to equate the 0:12:02.720 --> 0:12:06.360 risk in bonds and stocks and have a portfolio that 0:12:06.400 --> 0:12:09.520 can do well in different environments. Again, the last few years, 0:12:09.559 --> 0:12:12.840 with that rise in bond yields, I think that tested 0:12:12.880 --> 0:12:16.000 those strategies. But if you look at them over the 0:12:16.040 --> 0:12:20.160 last thirty forty years, they have performed very well. And 0:12:20.360 --> 0:12:23.400 so and it's important to remember, you know, when we're 0:12:23.400 --> 0:12:25.920 talking about this, I think what you're getting at, Tom 0:12:25.960 --> 0:12:30.880 really is having some leverage in bond markets. But these strategies, remember, 0:12:30.920 --> 0:12:34.800 aren't just about bonds using leverage. It's also about equities 0:12:34.840 --> 0:12:39.360 and commodities and credit and emerging market assets. So you're 0:12:39.400 --> 0:12:42.959 really looking at a pretty diversified portfolio here, and all 0:12:43.000 --> 0:12:45.880 those components are going to perform differently at different points. 0:12:45.880 --> 0:12:47.920 In time. If you hold it for a while, right, 0:12:48.000 --> 0:12:51.040 the correlations go to one for everything in moments of distress, 0:12:51.360 --> 0:12:54.800 but over the longer term in different economic environments. I 0:12:54.800 --> 0:12:58.679 think having that diversification and using some derivatives to get there, 0:12:58.720 --> 0:13:00.679 I think can be a successful strategy. 0:13:00.840 --> 0:13:05.440 Getting afterthought to empty the dishwasher is a correlation to one. 0:13:05.640 --> 0:13:06.680 It doesn't happened yet. 0:13:06.880 --> 0:13:10.360 So, Rebecca, how do you think about investment opportunities maybe 0:13:10.440 --> 0:13:14.679 outside the US. It's just kind of this economic exceptionalism 0:13:14.800 --> 0:13:18.000 of the US relative to say Europe and Asia, certainly China. 0:13:18.600 --> 0:13:21.160 I'm wondering are there opportunities outside of the US From 0:13:21.200 --> 0:13:22.200 an investment perspective. 0:13:24.320 --> 0:13:26.880 I think there will continue to be opportunities outside the 0:13:27.000 --> 0:13:31.640 US as investors are squeamish about China and looking for 0:13:31.679 --> 0:13:35.800 other emerging markets to get diversification. We've seen capital going 0:13:35.800 --> 0:13:39.480 to places like Mexico, India, to a degree Indonesia. I 0:13:39.480 --> 0:13:43.760 think that's likely to continue barring some material negative change 0:13:43.760 --> 0:13:47.160 in their economic outlook. China is trying to get a 0:13:47.200 --> 0:13:50.120 little bottom in right now in their stock market thanks 0:13:50.160 --> 0:13:53.680 to the so called National Team government entities buying. I 0:13:53.720 --> 0:13:57.120 am very wary of going there, thinking that you've got 0:13:57.120 --> 0:14:00.520 a sustainable rally ahead of US. Japan has been the winner. 0:14:00.559 --> 0:14:02.960 I mean Japan if you hedged out your currency risk 0:14:03.000 --> 0:14:06.240 of fifteen percent year to date, so blowing away the 0:14:06.320 --> 0:14:10.000 United States. And I think those flows could continue. But 0:14:10.080 --> 0:14:12.520 I would be a little more cautious from here, not 0:14:12.679 --> 0:14:14.959 just because we've had an insane rally for the last 0:14:15.080 --> 0:14:17.320 month and a half, but when you think about what's 0:14:17.400 --> 0:14:22.280 driven this, big part of it has been strong economies overseas, 0:14:22.560 --> 0:14:27.600 China's slowing, Europe slowing, the US probably this year relatively speaking, slowing, 0:14:28.280 --> 0:14:31.400 and a big driver has been the yen. Yen above 0:14:31.440 --> 0:14:34.560 one point fifty against the dollar. How much further can 0:14:34.600 --> 0:14:37.360 the yen go, not just because of possible intervention to 0:14:37.360 --> 0:14:39.920 push back from Japan, but also a shift in their 0:14:39.960 --> 0:14:43.880 monetary policy, and most likely the Fed's not raising rates again. 0:14:44.200 --> 0:14:48.600 So I think from here the Japan rally is likely 0:14:48.680 --> 0:14:52.040 to slow. And the question is, if you're not in 0:14:52.120 --> 0:14:53.800 it yet, do you want to put money in it? 0:14:54.160 --> 0:14:56.760 Maybe you get some diversification, but I think the return 0:14:56.960 --> 0:14:59.480 profile from here looks relatively more limited. 0:15:00.000 --> 0:15:02.840 Important Commissary, we'll get Rebecca Patterson on you to extend 0:15:02.840 --> 0:15:07.800 this conversation, particularly paul a jump condition stronger yen would 0:15:07.800 --> 0:15:11.320 maybe upset the apple Cart. Rebecca Patterson for years with 0:15:11.400 --> 0:15:14.760 best Summer in Bridgewater with the Brettonwoods Committee. Thank you, 0:15:19.680 --> 0:15:22.240 stever shudos wanted in the door. We're gonna go wonky 0:15:22.320 --> 0:15:24.640 on you right now, folks. And this is like the 0:15:24.680 --> 0:15:27.640 brain tease for the Friday before President's Day weekend. 0:15:28.800 --> 0:15:29.600 Ambiguity. 0:15:29.720 --> 0:15:33.920 Okay, it's owned by Douglas North of Washington University's Saint Louis. 0:15:33.920 --> 0:15:36.320 He won the Nobel Prize for it, and that's sort 0:15:36.360 --> 0:15:40.520 of an institutional economics thing. But to me, ambiguity is 0:15:40.560 --> 0:15:44.480 if something moves, it can go this way or that way. 0:15:44.560 --> 0:15:47.160 And that's where we are right now with interest rates, 0:15:47.680 --> 0:15:53.760 in that something's moved in that rates are higher, inflation's 0:15:53.920 --> 0:15:56.760 higher or that, and there's this worry we're all gonna 0:15:56.800 --> 0:15:58.720 die if the Fed doesn't. 0:15:58.440 --> 0:15:59.760 Cut interest rates in March. 0:16:00.360 --> 0:16:03.400 But the ambiguity is if rates move higher, that's sign 0:16:03.400 --> 0:16:06.840 of a strong economy and they can't cut rates well 0:16:06.880 --> 0:16:08.320 because it's a strong economy. 0:16:08.880 --> 0:16:11.120 You're right in indicating the fact that the economy is 0:16:11.160 --> 0:16:13.880 doing better than anybody anticipates. And I think that's a 0:16:13.920 --> 0:16:16.800 critical component here, and the reason why it's doing is 0:16:16.800 --> 0:16:19.440 the economy is much less sensitive to short term interest 0:16:19.480 --> 0:16:22.240 rates and it's ever been before because nobody really borrows 0:16:22.240 --> 0:16:24.240 at the front end of the curve anymore, even banks. 0:16:24.560 --> 0:16:27.280 Banks are not involved in making long term loans anymore. 0:16:27.280 --> 0:16:29.320 Everything is then securitized. They do a lot of thirty 0:16:29.400 --> 0:16:33.360 day revolvers, and everything gets put into the securities securitized 0:16:33.360 --> 0:16:36.400 product market and redistributed and atomized and split around the 0:16:36.400 --> 0:16:39.840 investor community. So the reality is the very front end 0:16:39.880 --> 0:16:41.880 of the curve doesn't have the bang it used to 0:16:41.920 --> 0:16:43.280 for the economy. 0:16:43.640 --> 0:16:44.200 Paul got it in. 0:16:44.400 --> 0:16:46.040 I know you want to dive in here seriously, but 0:16:46.120 --> 0:16:49.560 I gotta go there. You said securitized. My theory is 0:16:49.640 --> 0:16:53.640 the financialization of a system has made most of the 0:16:53.680 --> 0:16:57.560 gains of the stimulus in the finance boom coming out 0:16:57.600 --> 0:17:01.000 of COVID go to the halves have knots or flat 0:17:01.040 --> 0:17:01.640 on our back. 0:17:02.200 --> 0:17:02.880 Is that close? 0:17:03.280 --> 0:17:05.840 Well, I mean there is a certain degree of that. 0:17:05.880 --> 0:17:09.639 I mean, the big thing that's hurt the lower income households, 0:17:09.640 --> 0:17:12.400 which you're getting at, is the upward movement and inflation 0:17:13.240 --> 0:17:14.800 that really eroded away. 0:17:14.840 --> 0:17:16.000 They're purchasing power. 0:17:16.280 --> 0:17:19.159 The wealth effect is always going to gravitate up the 0:17:19.200 --> 0:17:22.520 income chain. But the real real damage that was done 0:17:22.560 --> 0:17:26.040 to lower income households was basically the rise in inflation, 0:17:26.320 --> 0:17:28.720 which even though we're talking about inflation rates coming down 0:17:28.760 --> 0:17:32.440 from nine percent to three percent type environment OG, that's great, 0:17:32.680 --> 0:17:35.120 the reality is prices haven't gone down, right, So these 0:17:35.119 --> 0:17:36.920 people still have the sticker shock when they go to 0:17:36.960 --> 0:17:39.520 the grocery store. And that's the end result problem. Their 0:17:39.560 --> 0:17:42.720 wages haven't kept up with it. Real discretionary income in 0:17:42.760 --> 0:17:44.480 this country has actually dropped. 0:17:44.560 --> 0:17:47.480 So that's exactly right. And that's if I'm a politician, 0:17:47.520 --> 0:17:50.399 if I'm the Biden administration, that's the tough cell I have. 0:17:50.640 --> 0:17:52.320 You know, I have a tough argument to make out there, 0:17:52.400 --> 0:17:54.840 because prices still are higher for a lot of folks, 0:17:54.880 --> 0:17:57.239 for a lot of items. That being said, if I'm 0:17:57.280 --> 0:18:00.280 the Federal Reserve, I'm kicking back here. We need to 0:18:00.359 --> 0:18:03.320 rush for a rate cut here, do I No, they 0:18:03.359 --> 0:18:05.320 never really needed to rush. I mean, we had a 0:18:05.359 --> 0:18:07.680 tight labor market number one, which is what they want 0:18:07.680 --> 0:18:09.920 to say because they want to try to maximize social 0:18:09.920 --> 0:18:11.600 welfare to take the politics out of it. They want 0:18:11.640 --> 0:18:14.120 to maximize social welfare, give them the credit that they 0:18:14.160 --> 0:18:14.879 probably deserve. 0:18:15.480 --> 0:18:18.400 That's number one. Number two, the inflation story is still 0:18:18.440 --> 0:18:21.480 not back to target, and it doesn't show any sign 0:18:21.520 --> 0:18:23.720 of quickly getting back to target. So why would you 0:18:23.720 --> 0:18:25.040 do anything the apple. 0:18:24.800 --> 0:18:28.280 Cart dovetail your work with dominic constant, I mean constant 0:18:28.320 --> 0:18:30.000 you know's taken off the next five days. 0:18:30.080 --> 0:18:31.600 It's like a a Ruber or whatever. 0:18:31.840 --> 0:18:34.080 Ra shudos work in here, but dovetail the two of 0:18:34.119 --> 0:18:37.800 you or constum said, look, they got super restrictive faster 0:18:37.880 --> 0:18:38.560 than they thought. 0:18:38.960 --> 0:18:40.640 Are we still super restrictive? 0:18:41.680 --> 0:18:44.440 No, we're not super restrictive. And the reason for that 0:18:44.520 --> 0:18:47.720 really comes down to the fact that short term rates 0:18:47.720 --> 0:18:50.880 are not being transmitted into the financial sector the way 0:18:50.920 --> 0:18:53.680 they used to be. That's really the critical piece of 0:18:53.720 --> 0:18:56.040 the equation. Take take a look at the average household 0:18:56.040 --> 0:18:59.880 into average household, they've financed most of their debt into very, 0:19:00.119 --> 0:19:03.680 very long duration liabilities. You look at their debt servicing costs, 0:19:03.680 --> 0:19:06.400 there's still at exceptionally low levels, lowest levels we've seen 0:19:06.520 --> 0:19:08.880 since the FED began publishing the data in seventy nine. 0:19:09.160 --> 0:19:11.000 I know where I was in seventy nine. I'm looking 0:19:11.040 --> 0:19:13.280 around the room, I don't think Lisa remembers anything about 0:19:13.280 --> 0:19:17.800 financial markets to Bob Marley, Yeah, So the reality is, 0:19:18.000 --> 0:19:19.840 you know, seventy nine is a long time ago. And 0:19:19.840 --> 0:19:22.000 then when you look at the level of household short 0:19:22.080 --> 0:19:27.320 term debt, okay, it's at exceptionally low levels. Their duration 0:19:27.440 --> 0:19:29.680 structure is very, very long. So the net result it 0:19:29.760 --> 0:19:32.119 is not having the effect that you would have on 0:19:32.160 --> 0:19:34.640 the household sector. The corporate sector is even worse. Their 0:19:34.640 --> 0:19:37.040 debt service burdens back in the nineteen seventy two nineteen 0:19:37.080 --> 0:19:39.920 seventy three area. I know where I was there again too, Tom, 0:19:39.960 --> 0:19:45.160 do you remember where you were? I. So the reality 0:19:45.200 --> 0:19:48.400 of the situation is these are incredible performances. And when 0:19:48.400 --> 0:19:50.520 you look at you talk to a CFO of any 0:19:50.840 --> 0:19:52.520 company in this country, and you talk to them about, 0:19:52.640 --> 0:19:55.600 you know, their debt servicing costs and the impact that 0:19:55.800 --> 0:19:58.679 the higher rates are having now on their ability to 0:19:58.760 --> 0:20:02.560 raise money. The answer is very very little impact because 0:20:02.600 --> 0:20:05.800 most of their debt is long duration, it's at very 0:20:05.880 --> 0:20:08.760 very low yield levels, and on average, corporate America is. 0:20:08.720 --> 0:20:11.560 Actually paying down debt. You've talked about this eight times. 0:20:11.680 --> 0:20:12.919 What is tech doing? 0:20:13.400 --> 0:20:16.080 Because like a free lunch exactly even the big tech 0:20:16.119 --> 0:20:18.960 comes coming into the bond market and borrowing. So, Steve, 0:20:19.320 --> 0:20:21.160 one of the stories we were talking about earlier today 0:20:21.280 --> 0:20:25.040 was when do we start worrying about the national debt 0:20:25.200 --> 0:20:28.760 and the deficits? We just have a story. The interest 0:20:28.840 --> 0:20:30.760 on our debt is now going to be greater than 0:20:30.840 --> 0:20:34.600 defense spending this year. I mean, is this now? I've 0:20:34.600 --> 0:20:37.160 heard this my entire lifetime, and we just keet kicking 0:20:37.160 --> 0:20:40.040 the can down the road. I'm looking for something to 0:20:40.240 --> 0:20:41.280 derail this economy? 0:20:41.320 --> 0:20:41.879 Is that something? 0:20:42.400 --> 0:20:42.639 You know? 0:20:43.440 --> 0:20:46.040 You got to remember the desire of people to buy 0:20:46.160 --> 0:20:48.600 toward the willingness of people to buy treasury debt comes 0:20:48.640 --> 0:20:50.800