1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,800 --> 00:00:23,840 Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:29,880 Speaker 1: and of course on the Bloomberg Terminal. And joining us 6 00:00:29,920 --> 00:00:32,760 Speaker 1: now is someone who understands that one of the great 7 00:00:32,800 --> 00:00:37,879 Speaker 1: engineering marvels of America is in Pennsylvania. He is the 8 00:00:37,960 --> 00:00:42,160 Speaker 1: Senator from Pennsylvania, Pat Toomey, and he knows that Altuna, 9 00:00:42,680 --> 00:00:46,280 Speaker 1: there is a place where the Norfolk Southern Railroad uh 10 00:00:46,400 --> 00:00:50,280 Speaker 1: plane and simple uh makes a loop a turn. To 11 00:00:50,360 --> 00:00:52,760 Speaker 1: see it, folks, is to believe it. And this is 12 00:00:52,800 --> 00:00:56,080 Speaker 1: the Pennsylvania Railroad deep in the heart of his Pennsylvania, 13 00:00:56,480 --> 00:01:00,240 Speaker 1: Pat Toomey. On the railroad strike, the President so us 14 00:01:00,240 --> 00:01:06,839 Speaker 1: that it is Union America. Is it Union America? Uh? Well, 15 00:01:07,080 --> 00:01:09,440 Speaker 1: I'm not sure what exactly he meets by that, but look, 16 00:01:09,560 --> 00:01:12,040 Speaker 1: it's it's good news if we've averted a strike that 17 00:01:12,080 --> 00:01:14,520 Speaker 1: could have cost the economy two billion dollars a day. 18 00:01:14,640 --> 00:01:17,240 Speaker 1: So I'd like to see the details. Let's see if 19 00:01:17,240 --> 00:01:19,840 Speaker 1: this actually is going to hold. It was described by 20 00:01:19,840 --> 00:01:23,360 Speaker 1: the White House as sort of a temporary thing, but 21 00:01:23,560 --> 00:01:26,280 Speaker 1: this would be pretty devastating if the strike went forward. 22 00:01:26,319 --> 00:01:29,360 Speaker 1: So let's hope we've dodged that bullet. This is something 23 00:01:29,400 --> 00:01:31,880 Speaker 1: we rarely touched, Senator, but I must touch it today. 24 00:01:31,959 --> 00:01:34,720 Speaker 1: Kaylee Liones, who does our crypto show, says you must 25 00:01:34,760 --> 00:01:38,320 Speaker 1: do it now with Pat Toomey, and that is bitcoin 26 00:01:38,840 --> 00:01:42,800 Speaker 1: and crypto and the frustration over what the SEC has 27 00:01:42,840 --> 00:01:45,440 Speaker 1: done led by guns. So you'll have hearings on this 28 00:01:45,440 --> 00:01:48,880 Speaker 1: this week. Kenneth rove Off of Harvard University told me 29 00:01:49,000 --> 00:01:53,040 Speaker 1: he was thunderstruck hit how slow regulators have acted in 30 00:01:53,080 --> 00:01:57,280 Speaker 1: the United States. He is definitive on crypto. Have they 31 00:01:57,360 --> 00:02:02,040 Speaker 1: been too slow? So I think the problem is that 32 00:02:02,280 --> 00:02:07,920 Speaker 1: the SEC isn't sharing with us the framework that they're using. Uh. 33 00:02:07,960 --> 00:02:12,040 Speaker 1: The Gary Ginsler famously argues that virtually all crypto tokens 34 00:02:12,080 --> 00:02:15,320 Speaker 1: are securities. I think reasonable people can disagree with that. 35 00:02:16,040 --> 00:02:19,720 Speaker 1: He would exempt bitcoin from that classification, but pretty much 36 00:02:19,720 --> 00:02:22,160 Speaker 1: everything LT says as a security. But then he doesn't 37 00:02:22,160 --> 00:02:25,799 Speaker 1: go on to say how we would apply the existing 38 00:02:25,960 --> 00:02:29,520 Speaker 1: frameworks that we use to regulate securities, issuance and trading 39 00:02:30,040 --> 00:02:34,880 Speaker 1: to a very very new and very different technology, or 40 00:02:34,960 --> 00:02:38,040 Speaker 1: some of these things don't fit, like custody rules, clearance rules, 41 00:02:38,040 --> 00:02:41,640 Speaker 1: these these things don't have any application, and he hasn't 42 00:02:41,639 --> 00:02:44,560 Speaker 1: provided any clarity on that. I think actually Congress should 43 00:02:44,560 --> 00:02:47,400 Speaker 1: step in and provide some guidance. I think crypto is 44 00:02:47,440 --> 00:02:50,320 Speaker 1: sufficiently different. Even if you you want to argue that 45 00:02:50,320 --> 00:02:53,720 Speaker 1: that these tokens are securities, Uh, you go ahead and 46 00:02:53,720 --> 00:02:55,919 Speaker 1: make the argument, but you can't dispute that they're very 47 00:02:55,919 --> 00:02:58,960 Speaker 1: different from a stock or a bond. And therefore Congress 48 00:02:58,960 --> 00:03:01,480 Speaker 1: ought to step in and provide a framework. I'm working 49 00:03:01,520 --> 00:03:03,360 Speaker 1: on that. That's gonna be really hard to get done. 50 00:03:03,639 --> 00:03:07,840 Speaker 1: In the meantime. Chairman Gensler owes us much more clarity 51 00:03:08,200 --> 00:03:12,840 Speaker 1: on how and why he intends to apply SEC regulations. Senator, 52 00:03:12,880 --> 00:03:15,440 Speaker 1: I know that you are retiring from the Senate. You 53 00:03:15,480 --> 00:03:18,520 Speaker 1: plan to go into the crypto industry in private sector. 54 00:03:19,480 --> 00:03:22,919 Speaker 1: I have no such plans whatsoever. I don't have anything 55 00:03:22,960 --> 00:03:25,760 Speaker 1: lined up. I have got no commitments, no offers, nothing. 56 00:03:25,800 --> 00:03:28,600 Speaker 1: I'm not pursuing that until I'm out of office. I've 57 00:03:28,600 --> 00:03:30,600 Speaker 1: got a big job to do. I'm going to run 58 00:03:30,600 --> 00:03:33,440 Speaker 1: through the tape. Do this job, and then come January 59 00:03:33,480 --> 00:03:36,440 Speaker 1: or February next year, I'm sure I'll start having conversations, 60 00:03:36,440 --> 00:03:40,280 Speaker 1: but I have no idea what those conversations will be about. Senator, 61 00:03:40,320 --> 00:03:43,680 Speaker 1: We've got some some data earlier this morning showing a 62 00:03:43,680 --> 00:03:46,240 Speaker 1: lot of resilience in the economy, so much resilience that 63 00:03:46,280 --> 00:03:49,000 Speaker 1: people are suggesting the Fed has to go pretty far 64 00:03:49,080 --> 00:03:51,880 Speaker 1: with respect to rate hikes, including an unemployment rate that 65 00:03:52,040 --> 00:03:56,320 Speaker 1: continues to remain low. Are you comfortable with an unemployment 66 00:03:56,400 --> 00:03:59,160 Speaker 1: rate rising in response to tighter rates if that's what 67 00:03:59,240 --> 00:04:02,960 Speaker 1: it takes to get inflation under control? So so, first, 68 00:04:03,000 --> 00:04:05,520 Speaker 1: let me say I've always been a skeptic about the 69 00:04:05,560 --> 00:04:08,000 Speaker 1: Phillips curve. I'm not convinced that you have to have 70 00:04:08,120 --> 00:04:12,560 Speaker 1: significantly higher unemployment in order to get inflation under control. 71 00:04:12,960 --> 00:04:16,280 Speaker 1: But the feds first job has to be a stable dollar. 72 00:04:16,440 --> 00:04:19,840 Speaker 1: We we don't maximize employment over the long haul unless 73 00:04:19,880 --> 00:04:22,560 Speaker 1: you have a stable dollar. I also think Jim Paulson 74 00:04:22,600 --> 00:04:24,680 Speaker 1: on your show earlier this morning made some very very 75 00:04:24,680 --> 00:04:28,039 Speaker 1: important points about all the ways that tightening is occurring 76 00:04:28,400 --> 00:04:31,360 Speaker 1: outside of the FED funds rate per se, that's all 77 00:04:31,360 --> 00:04:35,360 Speaker 1: gonn us work its way into diminishing the pressure on inflation, 78 00:04:35,800 --> 00:04:37,840 Speaker 1: and I'm hoping at Look, the Fed's got a great 79 00:04:37,880 --> 00:04:40,600 Speaker 1: luxury that you don't have in other parts of the world, 80 00:04:41,160 --> 00:04:43,840 Speaker 1: and that is they have the ability to tighten at 81 00:04:43,839 --> 00:04:46,719 Speaker 1: a time when the economy is still very strong, employment 82 00:04:46,800 --> 00:04:50,159 Speaker 1: is very strong. They need to get the inflation job done. Here, 83 00:04:50,200 --> 00:04:55,200 Speaker 1: your senator, I I notice you're sterling academics, you're working 84 00:04:55,279 --> 00:04:57,560 Speaker 1: for an exchange and then you did one of the 85 00:04:57,600 --> 00:05:00,880 Speaker 1: toughest things in the world, which is on a restaurant. 86 00:05:01,000 --> 00:05:04,160 Speaker 1: It is tough, tough, tough. This is a restaurant in Allentown, 87 00:05:04,760 --> 00:05:09,279 Speaker 1: Pennsylvania years ago. People running restaurants right now are getting 88 00:05:09,360 --> 00:05:13,440 Speaker 1: hit over the head totally with inflation, with fixed costs, 89 00:05:13,720 --> 00:05:17,080 Speaker 1: with variable costs that are becoming fixed fixed costs, and 90 00:05:17,120 --> 00:05:21,480 Speaker 1: also the labor conundrum. What is the action we can 91 00:05:21,560 --> 00:05:26,200 Speaker 1: see from the Washington you leave to assist rookies restaurant 92 00:05:26,440 --> 00:05:30,920 Speaker 1: in Allentown. Look, the most important thing is to end 93 00:05:30,960 --> 00:05:35,159 Speaker 1: this volatility, this this upward trajectory. Right. I mean, there's 94 00:05:35,200 --> 00:05:37,599 Speaker 1: some companies are going to be able to easily pass 95 00:05:37,680 --> 00:05:40,400 Speaker 1: on price increases and the inflation is not going to 96 00:05:40,480 --> 00:05:43,239 Speaker 1: be that bigger problem. But a lot of companies can't 97 00:05:43,240 --> 00:05:46,200 Speaker 1: do that, and the small restaurants are a great example. 98 00:05:46,240 --> 00:05:48,800 Speaker 1: People can choose not to eat out, people can eat 99 00:05:48,839 --> 00:05:52,640 Speaker 1: at home. These these small businesses, mom and pop operations, 100 00:05:52,680 --> 00:05:55,680 Speaker 1: restaurants and otherwise are the ones that are most vulnerable. 101 00:05:55,839 --> 00:05:59,160 Speaker 1: That's why I think Congress should stop throwing gasoline on 102 00:05:59,200 --> 00:06:02,159 Speaker 1: the fire. Our democ credic colleagues want more increases and 103 00:06:02,200 --> 00:06:05,960 Speaker 1: more supplemental spending even now, even COVID spending for crying 104 00:06:06,000 --> 00:06:09,080 Speaker 1: out loud that we should not do. And the Fed's 105 00:06:09,120 --> 00:06:11,440 Speaker 1: got to stay the course. I think that's the best 106 00:06:11,760 --> 00:06:15,839 Speaker 1: outcome for our you know, everybody working in our economy. 107 00:06:16,440 --> 00:06:18,560 Speaker 1: Senator to me, thank you so much for joining us. 108 00:06:18,560 --> 00:06:27,560 Speaker 1: Pet to me as the Pennsylvania measured for years in 109 00:06:27,640 --> 00:06:30,800 Speaker 1: the equity markets is Luzanne Saunders, chief investment strategist at 110 00:06:30,839 --> 00:06:33,320 Speaker 1: Charles Swab. She has been a huge value to us. 111 00:06:33,640 --> 00:06:35,560 Speaker 1: She joins us today. Liusien, I'm gonna rip up the 112 00:06:35,560 --> 00:06:38,680 Speaker 1: script and go to something that Mr Farroll said earlier, 113 00:06:38,680 --> 00:06:41,720 Speaker 1: which is the linkage of the bond market to your 114 00:06:41,800 --> 00:06:46,120 Speaker 1: equity space. How linked our bond dynamics right now to 115 00:06:46,240 --> 00:06:48,560 Speaker 1: what we see day to day in the equity market? 116 00:06:49,839 --> 00:06:53,640 Speaker 1: Um only marginally, so I think the bond market, maybe 117 00:06:53,800 --> 00:06:56,520 Speaker 1: especially in this kind of environment, but I think you 118 00:06:56,520 --> 00:07:00,320 Speaker 1: could say this generally tends to have I don't know, 119 00:07:00,360 --> 00:07:06,080 Speaker 1: maybe a more irrational rational not irrational um message about 120 00:07:06,120 --> 00:07:09,039 Speaker 1: what's going on in the economy with inflation. I think 121 00:07:09,040 --> 00:07:12,680 Speaker 1: the equity market can sometimes be a bit more irrational, 122 00:07:12,760 --> 00:07:15,000 Speaker 1: and the two have not been sending the same message, 123 00:07:15,000 --> 00:07:17,360 Speaker 1: and I think the bond market is sending the more 124 00:07:17,400 --> 00:07:20,440 Speaker 1: appropriate message. You didn't see the kind of weakness in 125 00:07:20,520 --> 00:07:23,200 Speaker 1: the equity market that you would have expected when we 126 00:07:23,280 --> 00:07:26,400 Speaker 1: recently saw spreads really picked back up, but I think 127 00:07:26,480 --> 00:07:31,080 Speaker 1: the volatility associated with that would probably be greater with 128 00:07:31,200 --> 00:07:35,320 Speaker 1: any upcoming blowout and spreads if if we get that, 129 00:07:36,960 --> 00:07:40,120 Speaker 1: watch what they do, not what they say. What is 130 00:07:40,200 --> 00:07:44,200 Speaker 1: retail doing now, and for that matter, institutional doing on 131 00:07:44,440 --> 00:07:48,760 Speaker 1: equity flows well in the past month or so, and 132 00:07:48,800 --> 00:07:52,960 Speaker 1: this is broad flows, not just within equities, but across 133 00:07:53,000 --> 00:07:55,400 Speaker 1: all asset classes, So this is not just specific to 134 00:07:55,520 --> 00:08:00,720 Speaker 1: schwab Um. A big renewed interest in bond fund In fact, 135 00:08:00,760 --> 00:08:03,880 Speaker 1: over the past month you've seen close to a bolt 136 00:08:04,000 --> 00:08:07,400 Speaker 1: inflows have been into not just broad bond funds, but 137 00:08:07,560 --> 00:08:11,200 Speaker 1: government bond funds specifically. And I think that's because you've 138 00:08:11,240 --> 00:08:15,120 Speaker 1: got obviously nom onally yields up, but really yields as well. 139 00:08:15,200 --> 00:08:17,280 Speaker 1: So I think there's a bit of that caution, but 140 00:08:17,360 --> 00:08:20,240 Speaker 1: also taking advantage of the fact that there's income in 141 00:08:20,320 --> 00:08:24,800 Speaker 1: fixed income now, Luca, that's really working out, isn't it. Well, 142 00:08:25,080 --> 00:08:27,360 Speaker 1: I mean it is if you start now, right, But 143 00:08:27,440 --> 00:08:29,720 Speaker 1: if you started six months ago, maybe it would have 144 00:08:29,720 --> 00:08:32,400 Speaker 1: been a different story. Lausanne, we were talking earlier about 145 00:08:32,400 --> 00:08:36,559 Speaker 1: the Ray Dalio call of a decline in broad stock 146 00:08:36,600 --> 00:08:38,880 Speaker 1: index is and he talked about how that's an average 147 00:08:38,920 --> 00:08:40,400 Speaker 1: and you go under the hood and they're more or 148 00:08:40,440 --> 00:08:43,640 Speaker 1: less with the acceptance of any four and a half 149 00:08:43,760 --> 00:08:46,440 Speaker 1: percent Fed funds right now, that's almost what's being priced 150 00:08:46,559 --> 00:08:49,400 Speaker 1: into the Fed funds rate market. Do you agree with 151 00:08:49,400 --> 00:08:52,160 Speaker 1: this assessment of how much war the equity market has 152 00:08:52,200 --> 00:08:56,240 Speaker 1: to fall to be incoherence with that? So, I mean, 153 00:08:56,280 --> 00:09:00,040 Speaker 1: the short and honest answer is, I don't know. I 154 00:09:00,120 --> 00:09:04,040 Speaker 1: don't know whether we've got another downside. I'm not sure 155 00:09:04,120 --> 00:09:07,120 Speaker 1: the fact that I don't know matters all that much. 156 00:09:07,320 --> 00:09:09,880 Speaker 1: Would it? Would it shocked me? No? I think we 157 00:09:09,880 --> 00:09:12,920 Speaker 1: we have had a bit of a retreat invaluation, certainly 158 00:09:12,920 --> 00:09:16,320 Speaker 1: a retreat in valuation is relative to where we started 159 00:09:16,360 --> 00:09:19,080 Speaker 1: two thousand and twenty one, but of course that had 160 00:09:19,120 --> 00:09:22,720 Speaker 1: been valuations have been artificially boosted by virtue of the 161 00:09:22,760 --> 00:09:25,600 Speaker 1: pandemic related plunge and earnings. We've got the recovery and 162 00:09:25,640 --> 00:09:30,240 Speaker 1: earnings that brought valuations down to actually pretty reasonable levels 163 00:09:30,280 --> 00:09:32,439 Speaker 1: at the lows in June, and then they pop back 164 00:09:32,520 --> 00:09:36,120 Speaker 1: up again. Of course, inflation is a variable. Now we've 165 00:09:36,120 --> 00:09:38,800 Speaker 1: got the rolling over in the e earnings estimates, which 166 00:09:38,840 --> 00:09:42,240 Speaker 1: is putting upward pressure allile sequel on valuations. You've got 167 00:09:42,480 --> 00:09:45,839 Speaker 1: high inflation in a zone right now that historically is 168 00:09:45,880 --> 00:09:49,720 Speaker 1: only supported on average a multiple in the eleven to 169 00:09:49,800 --> 00:09:51,840 Speaker 1: twelve range. I'm not suggesting we have to go all 170 00:09:51,880 --> 00:09:54,720 Speaker 1: the way down there, because inflation is on the move 171 00:09:54,760 --> 00:09:57,920 Speaker 1: and the market can discount the To Tom's point, so 172 00:09:57,920 --> 00:10:01,319 Speaker 1: their second derivative rate of change, but the sweet spot 173 00:10:01,360 --> 00:10:05,280 Speaker 1: of zero to two percent an inflation for valuations where 174 00:10:05,360 --> 00:10:08,959 Speaker 1: you've traded on average at an eighteen multiple or so um. 175 00:10:09,000 --> 00:10:12,120 Speaker 1: To John's point about destination, there's a long way to 176 00:10:12,160 --> 00:10:17,000 Speaker 1: go before even just the math allows inflation numbers to 177 00:10:17,080 --> 00:10:20,160 Speaker 1: have a two handle on them. So the valuation story 178 00:10:20,280 --> 00:10:23,120 Speaker 1: still suggests that there's more downside unless they're retreat and 179 00:10:23,160 --> 00:10:27,840 Speaker 1: inflation happens much more quickly, more downside that could potentially 180 00:10:27,880 --> 00:10:31,160 Speaker 1: be more dramatic than perhaps some people are factoring in 181 00:10:31,320 --> 00:10:34,319 Speaker 1: las ane. How close are you the Auxana Aroonov of 182 00:10:34,400 --> 00:10:37,679 Speaker 1: JP Morgan View where she's holding some seventy of her 183 00:10:37,720 --> 00:10:41,600 Speaker 1: portfolio in ultra liquid ass as preparing for a better 184 00:10:41,760 --> 00:10:44,360 Speaker 1: entry point. Well, it depends on who you are as 185 00:10:44,360 --> 00:10:48,520 Speaker 1: an investor. That might be an appropriate strategy to have, 186 00:10:48,679 --> 00:10:50,640 Speaker 1: either if you're trading or in you to trying to 187 00:10:50,720 --> 00:10:53,920 Speaker 1: catch the small, shorter term moves in the market. But 188 00:10:54,120 --> 00:10:56,880 Speaker 1: if you are a long term investor that has a 189 00:10:56,920 --> 00:10:59,520 Speaker 1: fairly high risk tolerance, you don't need the money, you're 190 00:10:59,520 --> 00:11:02,960 Speaker 1: not living on the income associated with what's generated from 191 00:11:02,960 --> 00:11:07,640 Speaker 1: your portfolio, then I'd say you can take a more 192 00:11:07,920 --> 00:11:10,960 Speaker 1: risk tolerant stance. If you are a retiree and you've 193 00:11:10,960 --> 00:11:12,839 Speaker 1: got a nest egg and you're living on the income 194 00:11:12,880 --> 00:11:15,320 Speaker 1: associated with that and you can't afford to lose any 195 00:11:15,360 --> 00:11:17,319 Speaker 1: of the principle, yeah, you want to take a much 196 00:11:17,320 --> 00:11:20,320 Speaker 1: more defensive stance. It really depends on who the investor is, 197 00:11:20,679 --> 00:11:22,679 Speaker 1: not what mine or anybody else's opinion on what the 198 00:11:22,720 --> 00:11:26,040 Speaker 1: market is going to do losing on dollar strength, who 199 00:11:26,120 --> 00:11:28,920 Speaker 1: just hits seven point zero zero? You one per dollar? 200 00:11:29,240 --> 00:11:32,240 Speaker 1: You go back to September of two thousand nineteen, maybe 201 00:11:32,240 --> 00:11:35,120 Speaker 1: a level of seven point one. Ain't something around there 202 00:11:35,600 --> 00:11:38,679 Speaker 1: that brings us to this quarters earnings? Are we at 203 00:11:38,679 --> 00:11:43,560 Speaker 1: a point where FX recalculation for American multinationals is a 204 00:11:43,600 --> 00:11:48,880 Speaker 1: tangible distraction. So the fact that the dollar has been 205 00:11:48,920 --> 00:11:51,960 Speaker 1: so strong the mass suggests that that we should have 206 00:11:52,000 --> 00:11:55,839 Speaker 1: seen a bigger hit to earnings, but there were positive offsets. 207 00:11:55,920 --> 00:11:59,080 Speaker 1: I think multiple hits are likely to come more to 208 00:11:59,120 --> 00:12:02,680 Speaker 1: fruition once we get to third quarter reporting season, the 209 00:12:02,800 --> 00:12:05,600 Speaker 1: dollar being one of them. The fact that we've got 210 00:12:05,640 --> 00:12:08,120 Speaker 1: the demand profile that is weakened at the same time 211 00:12:08,160 --> 00:12:10,320 Speaker 1: that you've got labor costs now as a share of 212 00:12:10,360 --> 00:12:14,600 Speaker 1: revenues to just profit margins uh to full percentage points 213 00:12:14,600 --> 00:12:17,560 Speaker 1: lower than where they are right now. And I think 214 00:12:17,640 --> 00:12:22,079 Speaker 1: just the beginning of this rerating of earnings estimate. So 215 00:12:22,280 --> 00:12:23,800 Speaker 1: we we all thought we'd see it a little bit 216 00:12:23,840 --> 00:12:26,320 Speaker 1: more in the second quarter, although x Energy earnings were 217 00:12:26,440 --> 00:12:28,839 Speaker 1: negative two. I think we're going to see it more 218 00:12:28,840 --> 00:12:32,720 Speaker 1: in earnest in the third quarter. I've aged waiting for 219 00:12:32,800 --> 00:12:35,840 Speaker 1: small cap to pop, and the basic idea is small 220 00:12:35,880 --> 00:12:39,040 Speaker 1: cap mid cap is a domestic feel away from f 221 00:12:39,360 --> 00:12:43,280 Speaker 1: X dynamics. Do you buy the theory? I do, except 222 00:12:43,280 --> 00:12:45,360 Speaker 1: that you've got a lot of lower quality companies and 223 00:12:45,520 --> 00:12:48,480 Speaker 1: some of the bigger small cap index is not least 224 00:12:48,520 --> 00:12:52,280 Speaker 1: being Russell two thousand, and that's where some of the 225 00:12:52,360 --> 00:12:56,360 Speaker 1: zombie companies have been housed and living for a while. 226 00:12:56,480 --> 00:12:59,000 Speaker 1: So that's the rub. Yes, you get that more domestic 227 00:12:59,040 --> 00:13:01,920 Speaker 1: bias in general all to them, but you also have 228 00:13:02,040 --> 00:13:04,880 Speaker 1: a bit of a lower quality profile. Valuations because of 229 00:13:04,920 --> 00:13:08,800 Speaker 1: the underperformance have come in and the valuation spread it 230 00:13:08,960 --> 00:13:12,000 Speaker 1: alone is supportive of small caps, but I think we 231 00:13:12,120 --> 00:13:14,840 Speaker 1: have to weed out some of those really low quality 232 00:13:14,880 --> 00:13:17,960 Speaker 1: companies before I think there can be a call that 233 00:13:18,080 --> 00:13:21,199 Speaker 1: small caps are ready to have a period of sustainable performance. 234 00:13:22,360 --> 00:13:25,120 Speaker 1: Las Anne. Before we let you get on with your morning, 235 00:13:25,240 --> 00:13:26,880 Speaker 1: I have to just give you a victory lap. Your 236 00:13:26,920 --> 00:13:28,600 Speaker 1: Your charts that you put out on Twitter are always 237 00:13:28,679 --> 00:13:31,600 Speaker 1: fabulous and you really pinpoint many of the main issues. 238 00:13:32,080 --> 00:13:34,880 Speaker 1: And I wonder if there is another pivot point data 239 00:13:35,120 --> 00:13:37,560 Speaker 1: entry that we could be watching for. For example, the 240 00:13:37,600 --> 00:13:40,640 Speaker 1: c p I print was a pivot point for the market, 241 00:13:40,679 --> 00:13:42,520 Speaker 1: and I don't mean it in the Fed's way. What's 242 00:13:42,520 --> 00:13:46,839 Speaker 1: the next one, what's the next most important data point? Well, 243 00:13:46,880 --> 00:13:48,319 Speaker 1: it may not be a data point. I think it 244 00:13:48,400 --> 00:13:51,000 Speaker 1: may be what Powell has to say in the press conference. 245 00:13:51,360 --> 00:13:54,240 Speaker 1: You know, the big debate that erupted after the CPI 246 00:13:54,360 --> 00:13:56,439 Speaker 1: report was was it going to be seventy five? Is 247 00:13:56,559 --> 00:13:59,320 Speaker 1: going to be a hundred. We're still leaning towards seventy five, 248 00:13:59,400 --> 00:14:01,400 Speaker 1: just because I'm not sure Powell wants to do shock 249 00:14:01,480 --> 00:14:05,360 Speaker 1: and awe week in advance of of the meeting. I 250 00:14:05,400 --> 00:14:08,360 Speaker 1: think it's more to John's point earlier about you know, 251 00:14:08,400 --> 00:14:10,640 Speaker 1: what's the destination? How long is it going to take 252 00:14:10,760 --> 00:14:14,440 Speaker 1: to get there? But importantly, once we get to the destination, 253 00:14:15,120 --> 00:14:17,560 Speaker 1: are we going to go in and stay for a while? Um. 254 00:14:17,600 --> 00:14:19,640 Speaker 1: I think the you know, the the pivot idea to 255 00:14:19,680 --> 00:14:21,640 Speaker 1: go back to the Fed's meeting, and what the market 256 00:14:21,920 --> 00:14:25,000 Speaker 1: was pricing in in June was that when we got 257 00:14:25,040 --> 00:14:27,680 Speaker 1: to the destination, we'd say hi, and then we turn 258 00:14:27,760 --> 00:14:31,000 Speaker 1: around and go the other way to ray cuts. I 259 00:14:31,040 --> 00:14:33,800 Speaker 1: think the Fed is trying to just put that completely 260 00:14:33,840 --> 00:14:36,840 Speaker 1: to bed, but anything that gives us a better sense 261 00:14:37,000 --> 00:14:41,200 Speaker 1: of um the level of aggressiveness it's likely to continue 262 00:14:41,240 --> 00:14:44,320 Speaker 1: through at least the end of this year, and firming 263 00:14:44,400 --> 00:14:46,240 Speaker 1: up this notion that once we get there, we're going 264 00:14:46,280 --> 00:14:48,480 Speaker 1: to stay there for a while. I think that's the 265 00:14:48,520 --> 00:14:52,600 Speaker 1: next important message coming for the market. Last, just aboutance 266 00:14:52,640 --> 00:14:54,720 Speaker 1: speaking sense with me at the moment, Lasa, because I 267 00:14:54,720 --> 00:14:59,840 Speaker 1: haven't heard of the song would and Rhyan before. Just right, 268 00:15:00,280 --> 00:15:12,080 Speaker 1: that's you're nailing it with Spotify, like OK, I'm sorry, 269 00:15:12,360 --> 00:15:25,040 Speaker 1: thank you joining us right now. Remember if Stiglets, blanch 270 00:15:25,080 --> 00:15:28,040 Speaker 1: Flower and Powell retired from the Folks Circle, David blanch 271 00:15:28,120 --> 00:15:31,960 Speaker 1: Flower joins us professor of Economics at Dartmouth College and 272 00:15:32,000 --> 00:15:34,960 Speaker 1: of course formerly with the Bank of England as well. 273 00:15:35,080 --> 00:15:38,440 Speaker 1: Professor Blanchflower, thank you so much for joining us. The 274 00:15:38,520 --> 00:15:42,960 Speaker 1: basic idea is a public official Jerome Powell, Joe Stiglets, 275 00:15:43,000 --> 00:15:45,840 Speaker 1: and Dean Baker right it up there, wrong, wrong, wrong, 276 00:15:46,400 --> 00:15:50,080 Speaker 1: and you're nuanced. You don't have the view of Stiglets. 277 00:15:50,640 --> 00:15:56,040 Speaker 1: Don't raise rates. There's more to it. Describe your stance here. Well, 278 00:15:56,080 --> 00:15:59,200 Speaker 1: a couple of things. I was looking at GDP growth 279 00:15:59,320 --> 00:16:05,400 Speaker 1: yesterday and since there have only been a few periods 280 00:16:05,480 --> 00:16:08,320 Speaker 1: that have been negative growth all of them. Every one 281 00:16:08,400 --> 00:16:11,320 Speaker 1: of them has been as part of a thing where 282 00:16:11,360 --> 00:16:14,800 Speaker 1: the NBR is called recession two thousand and one, two 283 00:16:14,840 --> 00:16:17,520 Speaker 1: thousand and eight, two thousand twenty. This is the fourth one. 284 00:16:17,920 --> 00:16:20,680 Speaker 1: The US appears to be in recession and the NBR 285 00:16:20,840 --> 00:16:23,800 Speaker 1: is likely to call recession at the start of the year. 286 00:16:24,000 --> 00:16:27,520 Speaker 1: The UK is probably in recession now to also in 287 00:16:27,640 --> 00:16:30,640 Speaker 1: two thousand and eight, Inflation in August two thousand and 288 00:16:30,720 --> 00:16:34,680 Speaker 1: eight was five point six percent. By August two thousand 289 00:16:34,680 --> 00:16:38,240 Speaker 1: and nine it was minus two percent. We've had two 290 00:16:38,880 --> 00:16:42,560 Speaker 1: months of zeros on the CPI. If you get that, 291 00:16:43,000 --> 00:16:47,000 Speaker 1: if you get that continuing forward, you'll actually get to 292 00:16:47,160 --> 00:16:51,800 Speaker 1: point three percent inflation by next June, with every expectation 293 00:16:51,880 --> 00:16:54,640 Speaker 1: that the number will be lower. So my view is 294 00:16:54,640 --> 00:16:57,120 Speaker 1: that actually you're in a recession. The likelihood is that 295 00:16:57,200 --> 00:17:01,560 Speaker 1: inflation is actually tumbling very fast, and in those circumstances, 296 00:17:01,600 --> 00:17:04,480 Speaker 1: forget the rhetoric, you would actually be cutting rates. And 297 00:17:04,480 --> 00:17:05,760 Speaker 1: the other one if you look at the Bank of 298 00:17:05,760 --> 00:17:08,760 Speaker 1: England's forecast, the Bank of England is forecasting in the 299 00:17:08,880 --> 00:17:11,840 Speaker 1: UK that in two thousand and twenty four there's a 300 00:17:12,800 --> 00:17:18,159 Speaker 1: probability of being below one and probability being negative. So 301 00:17:18,200 --> 00:17:20,480 Speaker 1: the reality is that what are people looking at the 302 00:17:20,560 --> 00:17:25,919 Speaker 1: expectations of inflations? What, David, we're looking what we're looking 303 00:17:25,960 --> 00:17:28,640 Speaker 1: at and we're all working off of our models from 304 00:17:28,680 --> 00:17:32,679 Speaker 1: another time. And whether it's stochastic moves in inflation twice 305 00:17:32,680 --> 00:17:37,080 Speaker 1: from forty seven to fifty two, or its vocal one, 306 00:17:37,119 --> 00:17:41,600 Speaker 1: whatever anyone's model is or belief, can we utilize those 307 00:17:41,760 --> 00:17:48,119 Speaker 1: models given the multiple huge impulses of a pandemic. Well, 308 00:17:48,200 --> 00:17:51,000 Speaker 1: I actually taught us a fantastic question. I teach a 309 00:17:51,000 --> 00:17:55,240 Speaker 1: class at Dartmouth called Pandemics and Financial Crisis, and I 310 00:17:55,280 --> 00:17:57,680 Speaker 1: think the story you have to look at is great 311 00:17:57,720 --> 00:18:02,040 Speaker 1: war followed by a pandemic excuse me, followed by a 312 00:18:02,040 --> 00:18:06,320 Speaker 1: financial crisis and then deflation and high unemployment. What are 313 00:18:06,359 --> 00:18:11,240 Speaker 1: we seen in the last dozen years financial crash, pandemic war? 314 00:18:11,920 --> 00:18:16,280 Speaker 1: So that's the reality. Anything since n tells you nothing 315 00:18:16,280 --> 00:18:19,560 Speaker 1: about how the world is sending banks weren't negative, they 316 00:18:19,600 --> 00:18:22,639 Speaker 1: weren't doing QI. Perhaps the reality is that we have 317 00:18:22,720 --> 00:18:26,080 Speaker 1: to look back at the period where there was crash pandemic. 318 00:18:26,280 --> 00:18:31,600 Speaker 1: We've had crash pandemic, supply shots, earthquakes, have hurricanes coming 319 00:18:31,640 --> 00:18:34,399 Speaker 1: to Florida, which causes that the shot to the housing market. 320 00:18:34,480 --> 00:18:37,280 Speaker 1: So the reality is that we should look at history, 321 00:18:37,480 --> 00:18:39,760 Speaker 1: and in fact, the class has been actually looking at 322 00:18:39,920 --> 00:18:42,840 Speaker 1: the history of inflation. What happened after the Black Death, 323 00:18:43,080 --> 00:18:47,399 Speaker 1: what happened after the eruption of Mcano. That may be 324 00:18:47,520 --> 00:18:50,760 Speaker 1: the model you need to look at. With all due respect. 325 00:18:50,880 --> 00:18:52,760 Speaker 1: A lot of people are looking at their grossery dolls, 326 00:18:52,840 --> 00:18:55,399 Speaker 1: a lot of people are looking at their rents. A 327 00:18:55,440 --> 00:18:58,320 Speaker 1: lot of people are looking at how much it costs 328 00:18:58,359 --> 00:19:00,240 Speaker 1: to go on a trip and saying a hood tell 329 00:19:00,400 --> 00:19:02,399 Speaker 1: or go on a plane. And these are the things 330 00:19:02,440 --> 00:19:05,000 Speaker 1: that are the anecdotal notes that are not saying that 331 00:19:05,040 --> 00:19:08,000 Speaker 1: inflation is slowing down and that next year it won't either, 332 00:19:08,040 --> 00:19:11,439 Speaker 1: because people are still spending on these items. So what 333 00:19:11,680 --> 00:19:14,520 Speaker 1: is your concern. How high of an inflation rate would 334 00:19:14,520 --> 00:19:17,520 Speaker 1: you be able to tolerate over five years? Let's say 335 00:19:17,640 --> 00:19:19,960 Speaker 1: that would allow you to say, look, even if it 336 00:19:20,040 --> 00:19:23,840 Speaker 1: only gets down to four percent, we're still winning. Well, 337 00:19:23,880 --> 00:19:26,080 Speaker 1: the reason we have inflation the last two months has 338 00:19:26,080 --> 00:19:29,639 Speaker 1: been no inflation, so that everything's been driven by base effects, 339 00:19:29,680 --> 00:19:33,040 Speaker 1: and as we move forward, the large base effects drop out. First, 340 00:19:33,320 --> 00:19:38,080 Speaker 1: no one denies. Second that inflation hurts people, but the evidences. 341 00:19:38,119 --> 00:19:40,080 Speaker 1: I've written about it, and the new papers are coming 342 00:19:40,119 --> 00:19:45,439 Speaker 1: out now. A one percentage point rise in unemployment increases 343 00:19:45,480 --> 00:19:48,640 Speaker 1: pain by ten times more than a one percentage point 344 00:19:48,720 --> 00:19:51,200 Speaker 1: rise in inflation, partly for the reason I just told 345 00:19:51,240 --> 00:19:54,320 Speaker 1: you that inflation plummets, we're going to see a plummet 346 00:19:54,359 --> 00:19:57,440 Speaker 1: to probably zero within nine or ten months. My guests 347 00:19:57,440 --> 00:20:00,760 Speaker 1: would be unless there's unless there's another war, unless there's 348 00:20:00,800 --> 00:20:04,200 Speaker 1: another wave of the pandemic. So the reality is that 349 00:20:04,400 --> 00:20:09,560 Speaker 1: inflation disappears, unemployment doesn't. So you're creating a situation which 350 00:20:09,640 --> 00:20:12,879 Speaker 1: is worse. So, yes, it's true that inflation hurts people. 351 00:20:13,119 --> 00:20:17,040 Speaker 1: The question is is the solution that you're creating worse 352 00:20:17,119 --> 00:20:20,720 Speaker 1: than The answer is, undoubtedly, that's true. So it takes 353 00:20:20,800 --> 00:20:23,879 Speaker 1: much longer to get rid of unemployment. Unemployment hurts the 354 00:20:23,960 --> 00:20:27,840 Speaker 1: unemployed and hurts everybody. Despite what the rhetoric says, all 355 00:20:27,840 --> 00:20:32,359 Speaker 1: the evidence, it's completely wrong. There are a lot of 356 00:20:32,359 --> 00:20:35,520 Speaker 1: people who say that unemployment is not a goal, but 357 00:20:35,560 --> 00:20:38,879 Speaker 1: it may be an necessary side effect, and just that 358 00:20:38,920 --> 00:20:41,360 Speaker 1: it would rise a little bit, a little bit being 359 00:20:41,400 --> 00:20:43,240 Speaker 1: the key, and those are the projections that we're seeing 360 00:20:43,240 --> 00:20:45,359 Speaker 1: from the FED. That there's slack in the market, people 361 00:20:45,640 --> 00:20:48,159 Speaker 1: who have savings who have not gone back into the 362 00:20:48,240 --> 00:20:51,600 Speaker 1: labor market gotten jobs because they don't have to. How 363 00:20:51,600 --> 00:20:53,560 Speaker 1: do you push back against that and say that this 364 00:20:53,640 --> 00:20:56,120 Speaker 1: labor market is not nearly as tight as people think, 365 00:20:56,359 --> 00:20:59,840 Speaker 1: and that the unemployment right rate could rise much more considerably. 366 00:21:00,119 --> 00:21:03,399 Speaker 1: Then they're certainly counting on. Well, let's go back. If 367 00:21:03,440 --> 00:21:05,960 Speaker 1: you go back to September two thousand and eight, the 368 00:21:06,000 --> 00:21:08,879 Speaker 1: same discussion was going on. The FED said, all you 369 00:21:08,960 --> 00:21:12,080 Speaker 1: care about is inflation. We don't think the recession is coming. 370 00:21:12,320 --> 00:21:16,159 Speaker 1: Actually the unemployment rate then, well it went to deflation. 371 00:21:16,240 --> 00:21:18,800 Speaker 1: And you know nine I told you unemployment went to 372 00:21:18,880 --> 00:21:22,600 Speaker 1: ten percent after they said that nothing was coming. There 373 00:21:22,640 --> 00:21:26,280 Speaker 1: was no recession. So the reality is these people missed 374 00:21:26,320 --> 00:21:29,040 Speaker 1: the Great recession, So how can we trust them. The 375 00:21:29,119 --> 00:21:32,200 Speaker 1: reality is that unemployment is going to rise, and if 376 00:21:32,200 --> 00:21:34,880 Speaker 1: you look at the labor market that the employment rate 377 00:21:35,400 --> 00:21:38,119 Speaker 1: is about seven million jobs below where it was in 378 00:21:38,160 --> 00:21:41,040 Speaker 1: two thousands. So I take a complete contry view to that. 379 00:21:41,200 --> 00:21:44,400 Speaker 1: But you shouldn't trust what says they missed it last time. 380 00:21:44,560 --> 00:21:46,560 Speaker 1: They said it was all about inflation last time, and 381 00:21:46,600 --> 00:21:49,199 Speaker 1: it wasn't. An unemployment went to ten percent, which is 382 00:21:49,320 --> 00:21:52,400 Speaker 1: every expectation it will do the cause by the Fed 383 00:21:52,440 --> 00:21:57,000 Speaker 1: and the conversations you've been having with everybody, whether folks David, 384 00:21:57,000 --> 00:21:59,960 Speaker 1: blanche Far, Dartmouth College, on Bloomberg Radio and Bloomberg tell 385 00:22:00,080 --> 00:22:03,200 Speaker 1: Vision David, of course you study I think you taught 386 00:22:03,240 --> 00:22:07,280 Speaker 1: ten years ago at Dartmouth Blanche Flower and supply side Economics. 387 00:22:07,440 --> 00:22:10,359 Speaker 1: I think four people signed up for the course. Tell 388 00:22:10,400 --> 00:22:18,720 Speaker 1: me about trustians supply side economics, tell me about theory. Yeah, well, 389 00:22:18,880 --> 00:22:21,840 Speaker 1: my classes are waitlisted these days. I have to tell you, 390 00:22:21,880 --> 00:22:23,640 Speaker 1: I've got people out in the gazoo trying to come 391 00:22:23,680 --> 00:22:26,040 Speaker 1: to the well. I think the reality it's pretty interesting. 392 00:22:26,040 --> 00:22:28,760 Speaker 1: I've written endlessly about trust in the sense that the 393 00:22:29,000 --> 00:22:31,960 Speaker 1: things that they've written about which has improved the supply side, 394 00:22:32,080 --> 00:22:34,960 Speaker 1: go for growth, change the remit of the Bank of England, 395 00:22:35,040 --> 00:22:38,600 Speaker 1: do tax cuts and corporation tax cuts. That's all very well. 396 00:22:38,840 --> 00:22:40,960 Speaker 1: None of it's going to have an effect on the 397 00:22:41,080 --> 00:22:44,360 Speaker 1: ordinary person who can't pay their bills. And that's how 398 00:22:44,400 --> 00:22:46,600 Speaker 1: the reality is going to hit. All we've heard is 399 00:22:46,640 --> 00:22:49,040 Speaker 1: an announcement in the last couple of days fire the 400 00:22:49,080 --> 00:22:53,480 Speaker 1: boss of the Treasury and raise the cap on bankers bonuses. Well, 401 00:22:53,640 --> 00:22:56,240 Speaker 1: this is going to be the only anti populist government 402 00:22:56,240 --> 00:23:00,520 Speaker 1: you've ever seen, because reality hits this week as bills 403 00:23:00,560 --> 00:23:03,159 Speaker 1: coming to people campaign and as pubs clothes. So the 404 00:23:03,200 --> 00:23:06,280 Speaker 1: supply side is all very well, but the same people 405 00:23:06,280 --> 00:23:09,560 Speaker 1: have been So the reality is that what are you 406 00:23:09,600 --> 00:23:13,600 Speaker 1: gonna do by Christmas? And I've heard zero. I have 407 00:23:13,640 --> 00:23:16,760 Speaker 1: observed a Blanche Flower lecture, folks, and it's quite something 408 00:23:16,840 --> 00:23:21,000 Speaker 1: to see the aisles absolutely jammed at Dartmouth and Douglas Arrowing, 409 00:23:21,040 --> 00:23:25,080 Speaker 1: the giant of trade sitting in the front row. Say 410 00:23:25,119 --> 00:23:27,920 Speaker 1: the least Danny, thank you so much next time called 411 00:23:27,960 --> 00:23:35,560 Speaker 1: the football. He is with Dartmouth College. Someone who knows 412 00:23:35,600 --> 00:23:40,399 Speaker 1: this is Kathleen wis Johnson, chiefs economist at Outford Economics. Kathy, 413 00:23:40,400 --> 00:23:43,399 Speaker 1: and I would suggest the rhetorical debate right now is 414 00:23:43,400 --> 00:23:47,200 Speaker 1: the strength and the spirit of the American consumer taking 415 00:23:47,240 --> 00:23:51,439 Speaker 1: an aggregate or maybe the halves booming, maybe the bottom 416 00:23:51,480 --> 00:23:53,760 Speaker 1: of the rung helping the halves get along with life 417 00:23:54,080 --> 00:23:57,239 Speaker 1: and the middle class flat on their back. Which is 418 00:23:57,280 --> 00:24:01,800 Speaker 1: it into this FED meeting? What is this of American consumption? 419 00:24:03,000 --> 00:24:04,800 Speaker 1: Hid Tom? And at least I happy to be with you. 420 00:24:05,200 --> 00:24:09,160 Speaker 1: Um So you know, looking through these numbers, um, it 421 00:24:09,160 --> 00:24:12,440 Speaker 1: looks as if we lost some momentum for the consumer overall, 422 00:24:12,840 --> 00:24:16,520 Speaker 1: particularly that core retail control number that might talk about. 423 00:24:16,880 --> 00:24:19,600 Speaker 1: That's one that we look at because that feeds directly 424 00:24:19,600 --> 00:24:23,280 Speaker 1: into consumer spending and GDP UM and and that did 425 00:24:23,400 --> 00:24:26,080 Speaker 1: look a bit slower UM, and that's sort of in 426 00:24:26,160 --> 00:24:29,680 Speaker 1: line with what we're thinking is um, we're gonna see 427 00:24:30,400 --> 00:24:33,280 Speaker 1: less ability to tap into those excess savings. Really you 428 00:24:33,359 --> 00:24:36,720 Speaker 1: talk about the different cohorts, will the lower and middle 429 00:24:36,760 --> 00:24:40,280 Speaker 1: class have really probably extinguished all of their excess savings 430 00:24:40,280 --> 00:24:42,800 Speaker 1: were really lies, you know, two trillioners, So which is 431 00:24:42,840 --> 00:24:45,920 Speaker 1: sizable is really with upper income households which are less 432 00:24:45,960 --> 00:24:48,720 Speaker 1: likely to use it to tap into that. So the 433 00:24:49,119 --> 00:24:51,720 Speaker 1: key is going forward, and then the mix of everything 434 00:24:51,960 --> 00:24:55,960 Speaker 1: is is really the labor market, because if we're correct 435 00:24:56,040 --> 00:24:57,840 Speaker 1: when we're thinking, the labor market is going to start 436 00:24:57,840 --> 00:24:59,760 Speaker 1: to slow here and that's what the Fed Reserve wants. 437 00:25:00,119 --> 00:25:02,560 Speaker 1: That's gonna hurt income and then eventually is going to 438 00:25:02,640 --> 00:25:05,760 Speaker 1: slow consumer spending. It more. Lisa, how do you slow 439 00:25:05,800 --> 00:25:09,520 Speaker 1: a labor market with claims? That's exactly where I wanted 440 00:25:09,560 --> 00:25:11,880 Speaker 1: to go, and Kathy, that's where I wanted to pick 441 00:25:11,960 --> 00:25:13,800 Speaker 1: up that right, now we are looking at a labor 442 00:25:13,840 --> 00:25:16,080 Speaker 1: market that's incredibly strong, and the latest numbers that we 443 00:25:16,119 --> 00:25:20,760 Speaker 1: saw with the unemployment filings just confirms that, suggesting there 444 00:25:20,800 --> 00:25:23,679 Speaker 1: really is not that much slack in this labor market. 445 00:25:23,800 --> 00:25:28,080 Speaker 1: What's your sense of how that's going to change? Yeah, 446 00:25:28,119 --> 00:25:30,880 Speaker 1: and you know you're you're correct, And it really does 447 00:25:30,920 --> 00:25:33,480 Speaker 1: put the Federal Reserve in a tight spot. I think 448 00:25:33,520 --> 00:25:36,840 Speaker 1: what it means is they type more, ultimately, because what's 449 00:25:36,880 --> 00:25:39,879 Speaker 1: going to happen if the labor market doesn't loosen and 450 00:25:39,960 --> 00:25:42,439 Speaker 1: weaken as we think and we do think that will happen. Um, 451 00:25:42,480 --> 00:25:44,440 Speaker 1: the Federal Reserve just us to do more. They need 452 00:25:44,480 --> 00:25:48,679 Speaker 1: to bring wage growth down because um, it's service job 453 00:25:48,920 --> 00:25:54,040 Speaker 1: wage growth that's really driving core services in the CPI report, right, 454 00:25:54,080 --> 00:25:56,760 Speaker 1: And ultimately that's what the user has to start to 455 00:25:56,760 --> 00:26:00,879 Speaker 1: bring lower. This is something that drives our listeners and 456 00:26:00,960 --> 00:26:06,600 Speaker 1: viewers and nuts. We want a institutional government policy to 457 00:26:06,880 --> 00:26:11,879 Speaker 1: diminish wage growth? Is that what we really want. It 458 00:26:11,920 --> 00:26:14,639 Speaker 1: doesn't sound great, but at the end of the day, 459 00:26:15,359 --> 00:26:18,600 Speaker 1: it's overheating. It's it's too fast for the economy's own good. Right, 460 00:26:18,720 --> 00:26:22,159 Speaker 1: That's the problem for the medium to long term pre pandemic. 461 00:26:22,280 --> 00:26:24,280 Speaker 1: Wages were running three percent year of a year. Now 462 00:26:24,280 --> 00:26:26,120 Speaker 1: you can argue me that was low, but now we're 463 00:26:26,200 --> 00:26:29,159 Speaker 1: five percent and we don't have the productivity games to 464 00:26:29,200 --> 00:26:31,199 Speaker 1: go along with that. UM, So you can see a 465 00:26:31,200 --> 00:26:34,880 Speaker 1: corporate profit margin squeeze and that's what's going to lead 466 00:26:34,920 --> 00:26:38,720 Speaker 1: to to slower labor and employment growth. Really, right, Kathy 467 00:26:38,840 --> 00:26:41,160 Speaker 1: taking over something we haven't talked about, and it's it's 468 00:26:41,200 --> 00:26:44,560 Speaker 1: odd that we haven't done that from across the Atlantic, 469 00:26:44,680 --> 00:26:48,000 Speaker 1: and that is x s M trade. Does trade in 470 00:26:48,119 --> 00:26:52,480 Speaker 1: any way exports and imports? Does it devolve into the 471 00:26:52,520 --> 00:26:59,159 Speaker 1: FED discussion announced Wednesday? Please a minor role, m I. 472 00:26:59,520 --> 00:27:03,240 Speaker 1: You know we're still largely a closed economy compared to 473 00:27:03,280 --> 00:27:06,240 Speaker 1: other countries. Now, we will see some knock on effects 474 00:27:06,240 --> 00:27:09,040 Speaker 1: from the recession. We believe it's going to unfold in Europe. Right, 475 00:27:09,119 --> 00:27:12,440 Speaker 1: that looks more than likely at this point. But it's 476 00:27:12,480 --> 00:27:14,919 Speaker 1: really the confidence that's going to have a confidence effect 477 00:27:14,920 --> 00:27:17,320 Speaker 1: on CEO S not so much a direct impact. Right. 478 00:27:17,359 --> 00:27:20,359 Speaker 1: If you look at European exports, um, you know, for 479 00:27:20,440 --> 00:27:24,040 Speaker 1: the U s UH it accounts for two of our GDP, 480 00:27:24,200 --> 00:27:27,200 Speaker 1: so it's pretty small. UM. I think the bigger issue 481 00:27:27,240 --> 00:27:29,919 Speaker 1: maybe for the FED, and they won't talk probably about it. 482 00:27:29,920 --> 00:27:32,480 Speaker 1: But it's the strength of the dollar, right, and and 483 00:27:32,520 --> 00:27:35,280 Speaker 1: that's um. There's good news and bad news. The good 484 00:27:35,280 --> 00:27:38,399 Speaker 1: news is it helps bring inflation down. Bad news it 485 00:27:38,480 --> 00:27:42,200 Speaker 1: hurts multi national companies, whether they repatreat the earnings back 486 00:27:42,520 --> 00:27:44,359 Speaker 1: to the u S right. So it just answer the 487 00:27:44,400 --> 00:27:46,560 Speaker 1: idea that we think eventually companies are gonna have to 488 00:27:46,600 --> 00:27:51,240 Speaker 1: pull back on the hiring range. So I want to 489 00:27:51,280 --> 00:27:53,639 Speaker 1: go back Kathy before we let you go. It's the 490 00:27:53,640 --> 00:27:57,000 Speaker 1: philosophical point the Danny blanche Flower of dart Math raised, 491 00:27:57,000 --> 00:27:59,800 Speaker 1: where he said that there is an asymmetry of risk, 492 00:28:00,119 --> 00:28:02,200 Speaker 1: that FED chair J. Powell is looking at it wrong, 493 00:28:02,280 --> 00:28:05,240 Speaker 1: and that if we get unemployment higher, which is essentially 494 00:28:05,280 --> 00:28:08,040 Speaker 1: by design with some of these rate policies, that it 495 00:28:08,040 --> 00:28:10,760 Speaker 1: will become entrenched and it will be a bigger loss 496 00:28:10,840 --> 00:28:14,080 Speaker 1: for the economy than just leaving rates low for longer. 497 00:28:14,520 --> 00:28:19,680 Speaker 1: What's your view, Well, no one wants people to to 498 00:28:19,800 --> 00:28:22,119 Speaker 1: lose a job, right and to see the unemployment rate 499 00:28:22,160 --> 00:28:24,760 Speaker 1: go up. But the worst outcome I believe it would 500 00:28:24,760 --> 00:28:27,800 Speaker 1: be if we see inflation remain elevated to the medium 501 00:28:27,920 --> 00:28:30,840 Speaker 1: long term. It just obscures, right, It gets in the 502 00:28:30,880 --> 00:28:33,840 Speaker 1: way of business decisions um and and it really does 503 00:28:33,960 --> 00:28:38,040 Speaker 1: put pain disproportionately on the lower income households. UM. They're 504 00:28:38,040 --> 00:28:41,720 Speaker 1: facing much higher inflation rates than the rest. So it's 505 00:28:41,720 --> 00:28:43,680 Speaker 1: a little bit of pain in the near term. Hopefully 506 00:28:43,760 --> 00:28:46,080 Speaker 1: it's it's a mild recession, but it does look like 507 00:28:46,600 --> 00:28:49,440 Speaker 1: wards recession, and the Fed's gonna it's going to take 508 00:28:49,480 --> 00:28:52,200 Speaker 1: that bet right, They're gonna say mild recession or recession 509 00:28:52,240 --> 00:28:56,000 Speaker 1: is better than having inflation. Linger on, Kathleen, Thank you 510 00:28:56,040 --> 00:28:59,440 Speaker 1: so much, Kathy bust John School this with Oxford Economics 511 00:28:59,440 --> 00:29:02,200 Speaker 1: and Nuance there on some of the dynamics that we 512 00:29:02,240 --> 00:29:07,360 Speaker 1: are seeing. This is the Bloomberg Surveillance Podcast. Thanks for listening. 513 00:29:07,720 --> 00:29:11,040 Speaker 1: Join us live weekdays from seven to ten am Eastern 514 00:29:11,280 --> 00:29:15,360 Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from 515 00:29:15,400 --> 00:29:20,640 Speaker 1: six to nine am for insight from the best in economics, finance, investment, 516 00:29:20,800 --> 00:29:25,800 Speaker 1: and international relations. And subscribe to the Surveillance Podcast on 517 00:29:25,920 --> 00:29:29,720 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on 518 00:29:29,840 --> 00:29:33,960 Speaker 1: the terminal. I'm Tom Keene and this is Bloomberg