Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app. Let's get
Speaker 1: right to it. We have to do that with the
Speaker 1: important economic data coming up as well, and we're thrilled
Speaker 1: to bring you from our studios in New York on
Speaker 1: radio and television worldwide. Matthew Lozette, Chief US economist at
Speaker 1: Deutsche Bank. Matt, thank you so much for joining us
Speaker 1: in studio with his data coming out is well. You
Speaker 1: nailed the win of it. Absolutely nailed not only the
Speaker 1: vector of the call and this on GDP and recession
Speaker 1: and not nbeer recession, but the idea of a slowdown.
Speaker 1: But you nailed where everybody got wrong, the immediacy of recession.
Speaker 1: And you said, no, do you stick with that? Now?
Speaker 1: When is the win of any kind of slowdown that
Speaker 1: we see? Yeah? I think the recent data we've seen
Speaker 1: over the past several months. If anything, I think gives
Speaker 1: you greater confidence in that kind of timeline. Certainly the
Speaker 1: economy has momentum. Now. What we've seen from the jobs reports,
Speaker 1: or retail sales or some of the survey data bottoming
Speaker 1: and picking back up all tells you. I think that
Speaker 1: Q one growth should be solid. It's certainly above trend,
Speaker 1: we think. I think that the ongoing narrative that we
Speaker 1: hear from the FED about this kind of gradual slowdown
Speaker 1: and growth over the coming quarters doesn't really seem to
Speaker 1: fit with the data that we have. I think that
Speaker 1: that narrative likely has to change. But at the same time,
Speaker 1: we've seen from an inflation perspective, is a lot less
Speaker 1: disinflation than we thought late last year. We see core
Speaker 1: inflation picking back up over the coming months. We think
Speaker 1: that leads the FED to be more aggressive. We have
Speaker 1: a five point six percent terminal rate, which I think
Speaker 1: then builds into the hard landing wrestles later. Well, let's
Speaker 1: talk about the hand landing risks. Where do you have
Speaker 1: to downturn on the Canada? Difficult to do, but just
Speaker 1: to set up the conversation, no doubt, it's difficult to do.
Speaker 1: We currently have it in Q four. We've gone Q
Speaker 1: three Q four. It's but always been a second half
Speaker 1: story for us. I think it's a few things. One,
Speaker 1: you know, we do expect the FED to be more aggressive.
Speaker 1: The market has repriced the terminal rate a lot, but
Speaker 1: I think not enough yet. I think we would probably
Speaker 1: see the market repriced at higher on upcoming inflation data.
Speaker 1: And then you have a number of things in the
Speaker 1: second half of the year. Households lose their excess savings.
Speaker 1: I think that leads to household fragility. You obviously have
Speaker 1: a debt ceiling, which could lead to financial condition tightening
Speaker 1: and weaker government spending. So there's a lot of risks
Speaker 1: as we look out into Q three. You're at five
Speaker 1: to sixty now, right we are. So I'm gonna write,
Speaker 1: do you find this upside risk to that view? Look
Speaker 1: with the data as it is today, I do think
Speaker 1: that there's upside risks that view. If you look at
Speaker 1: the labor market, and I think it's really important. It's
Speaker 1: not just the latest data points, because we should take
Speaker 1: the January data with some grain of salt. Given weather,
Speaker 1: seasonal adjustment factors. We had meaningful upward revisions to household
Speaker 1: income in the Q four of last year. You've had
Speaker 1: inflation data which was revised up meaningfully in Q four.
Speaker 1: So I think as you look at the FED, I
Speaker 1: don't think that they will really have any evidence of
Speaker 1: disinflation by the May meeting. They may only have a
Speaker 1: month or two by the July meeting, and really it's
Speaker 1: a question of, you know, ken they tighten financial conditions enough.
Speaker 1: I think we heard concerns about that in the minutes yesterday.
Speaker 1: I want to take into that a little bit more
Speaker 1: upside surprise to five point six percent. Is that because
Speaker 1: long and variable lags isn't a thing, and it like
Speaker 1: we're already seeing basically the effect of the tightness, and
Speaker 1: that just isn't tight enough at a five percent or
Speaker 1: a five point five percent, Or is this that this
Speaker 1: is a less interest rate sensitive economy that needs to
Speaker 1: have a much bigger shock. Yeah. I think there's two
Speaker 1: lags that we probably want to talk about. There's what
Speaker 1: the FED does and what happens with monetary policy to
Speaker 1: financial conditions. I think that lag has been very quick
Speaker 1: and tight. We saw it reflected in mortgage rates. Financial
Speaker 1: conditions actually tightened very quickly, and then there's the lag
Speaker 1: of that financial condition tightening onto the economy. I think
Speaker 1: that's where you know, we are probably seeing economy that's
Speaker 1: more resilient. You have the excess savings, we still think
Speaker 1: it's one trillion dollars. You've had state in local governments
Speaker 1: that we're sending out checks, so there's been this latent
Speaker 1: stimulus in the system. At the same time, you have
Speaker 1: a labor market that's undersupplied, which I think is making
Speaker 1: it very resilient to the tightening so far. So I
Speaker 1: think those two lags have different lag structures, but the
Speaker 1: one where it hits the economy that's taking longer than
Speaker 1: I think we've seen in the past. Is there a
Speaker 1: sense that there is a level at which the economy
Speaker 1: would break or that could really put a major halt
Speaker 1: on an economic trajectory that still seems to have momentum. Look,
Speaker 1: I'll be quite honest, I think we don't know what
Speaker 1: level that is. And I think that's in part the
Speaker 1: idea that there's upside risks to the terminal rate. You know,
Speaker 1: going back a year ago, if you would have said
Speaker 1: that we'd have a five percent handle on the Fed
Speaker 1: funds rate, and we'd be contemplating whether or not the
Speaker 1: economy being in a recession. I think that'd be almost
Speaker 1: preposterous conversation to be having. As we continue to price
Speaker 1: higher financial conditions. You know they're tight, they've tightened, but
Speaker 1: I don't think they're tight enough to achieve the fed
Speaker 1: dual mandate objectives. And so I think we have to
Speaker 1: be open minded and humble about where that terminal rate
Speaker 1: is actually going to be. I want to take the
Speaker 1: heritage Deutsche Bank. And this goes back to thirteen years now,
Speaker 1: to raging debate at the time off of Duley, Garber
Speaker 1: and folkirts Land out David leading all of your research effort,
Speaker 1: and there was a titanic debate about China's savings and
Speaker 1: China flow. Paul McCauley was involved in this, Brad sets
Speaker 1: are in others. I want to bring that to the
Speaker 1: domestic right now. Not the unknown with China, but what's
Speaker 1: the unknown for Matt Lozzetti in the American economic experiment
Speaker 1: right now? What's the mystery out there for you three
Speaker 1: four or five years out? So I think three four
Speaker 1: or five years out there's this really interesting conversation about
Speaker 1: what the neutral that funds rate is likely to be.
Speaker 1: It does plan too a little bit about the global
Speaker 1: saving story, and I think it's really about what are
Speaker 1: we seeing today that is simply reflecting unique circumstances around
Speaker 1: the pandemic, or what is it something that is more structural.
Speaker 1: I think some things that we know that might be
Speaker 1: more structural. I think inflation is going to be structurally
Speaker 1: higher going forward. You know, we have all these shifts
Speaker 1: going on, demographic forces, deglobalization, you have climate change policy.
Speaker 1: All these things I think are at the margin least
Speaker 1: are going to be inflationary. I think you also have
Speaker 1: a world where maybe fiscal policy in the US has
Speaker 1: not structurally changed in an easier direction, but I think
Speaker 1: globally we might see that shifting in a more easier direction,
Speaker 1: and I think that does lift the neutral rate for
Speaker 1: the feed as we look at you see that coming
Speaker 1: from Europe, China? Where do you see that coming from?
Speaker 1: So I think we have in Europe, we have defense spending,
Speaker 1: you have climate change policy. In China, you likely have
Speaker 1: a shift away from domestic savings in their economy over time.
Speaker 1: In the US, it's a more up in question. You know,
Speaker 1: we have a debt sailing debate that that's going to
Speaker 1: be happening in the second half of this year. Could
Speaker 1: this lead to fiscal or trenchmen It seems pretty likely
Speaker 1: to put death sentence in there in China savings just
Speaker 1: to keep his job focus. Landau was watching are you
Speaker 1: getting questions on that debt saving debate yet? Or a
Speaker 1: people avoiding it? Is it you trying to talk to
Speaker 1: clients about it or clients trying to talk to you.
Speaker 1: It's clients trying to talk to us at the moment.
Speaker 1: I would say that the past few it was more
Speaker 1: we have to come up against it, you have to
Speaker 1: see it reflected in the bill market, and then everybody
Speaker 1: starts to focus on it. I think this time around
Speaker 1: there's been a lot more focused early on Maybe it's
Speaker 1: you know, what was going on with this speaker leadership votes.
Speaker 1: It's very clear that I think from both sides that
Speaker 1: they're they're kind of entrenched in their views at this
Speaker 1: point and that it will be an issue, and so
Speaker 1: I think that there has been greater focus on it
Speaker 1: this time around. You think for it not to be
Speaker 1: an issue, it needs to become an issue. And what
Speaker 1: I mean by that they need to push it far
Speaker 1: enough that something happens in markets for them to back
Speaker 1: a white Is that way you see this guy. I
Speaker 1: don't see any way that either side should back down
Speaker 1: from their view unless it becomes an issue where financial
Speaker 1: conditions begins to tighten. The problem we've all got is
Speaker 1: it's an issue for like somewhere else further out, and
Speaker 1: they cant delay selects in the summer sea into the summer.
Speaker 1: It's such a frustrating discussion to have if there is one.
Speaker 1: A group of economists over at Jeffreys put out this
Speaker 1: note basically saying some of the sell off you've seen
Speaker 1: in bills with gilds rising above five percent in the
Speaker 1: short end could be tied to some of this death
Speaker 1: sailing debate. Muhammadalaran came out and he basically was like, no,
Speaker 1: it's not, it's all the fact, but you know this
Speaker 1: is the issue. It's sort of like, how do you
Speaker 1: game that out? Because even the reaction function in markets,
Speaker 1: what is it is it to go into short term
Speaker 1: decks it's safe. I mean the irony around how the
Speaker 1: market would even respond when issue that seems to pay
Speaker 1: the play every single time, We'll say it is different
Speaker 1: this time anyway, core PC a little bit hotter for
Speaker 1: the fourth quarter. Tom, that's another reader that four point
Speaker 1: three percent jobless claims expected to climb higher. They did not.
Speaker 1: They declined to one ninety two from a revised one
Speaker 1: ninety five. What do you make of that GDP price
Speaker 1: index up as well? And just to the amateur take,
Speaker 1: I'd take us to add up GDP annualized plus the
Speaker 1: GDP price index and I got nominal GDP of six
Speaker 1: point six percent, if I Matt Laszoti math is correct.
Speaker 1: And I'm sorry, John, that's a that's that's what keeps
Speaker 1: you going when you've got nominal GDP at that level. Matt,
Speaker 1: we've got to come to you on that. Matt Lasotti
Speaker 1: from Deutsche Bank alongside us, Can we just start with
Speaker 1: that number, one hundred and ninety two thousand, Your thoughts
Speaker 1: on it. I mean, it's remarkable. I mean it's remarkable
Speaker 1: that the FETT tightened as much as they have and
Speaker 1: you don't see a labor market that is really certainly
Speaker 1: not shedding labor. It's not coming into better balance as
Speaker 1: the ft had hoped for. UM. I think the revisions
Speaker 1: to the recent data you've had, plus the latest data
Speaker 1: show really no weakening at all. I would highlight the
Speaker 1: core PC number there as well, uppard revisions. I think
Speaker 1: it likely reflects the seasonal adjustment that we saw in
Speaker 1: the CPI now getting reflected in the core PC data
Speaker 1: as well. You get that if plus a point five
Speaker 1: reading tomorrow, I think we're you know, the ten minutes.
Speaker 1: The sentence that I focused on the most was you know,
Speaker 1: there's concern if they don't tighten sufficiently that progress on
Speaker 1: inflation could halt. I think that with the revisions to
Speaker 1: the data, with the incoming data that we're seeing, there
Speaker 1: has to be a question about whether or not they
Speaker 1: are tightened sufficiently, and whether or not, with the market
Speaker 1: is pricing right now, is tightening sufficiently. After pay Rose,
Speaker 1: I spoke to a lot of people that said that
Speaker 1: was more noise than signal in the January data. Based
Speaker 1: on the data we've had in the last couple of weeks,
Speaker 1: do you think it was most signal the noise. Look,
Speaker 1: I don't think we're going to print five hundred thousand
Speaker 1: jobs per month on average, so there's there's no doubt
Speaker 1: the headline, there's no doubt a lot of noise there.
Speaker 1: But when you look at the broad labor market data.
Speaker 1: If you looked at the Jolts data, you know a
Speaker 1: few days before that job opening is picking up initial
Speaker 1: jobless claims. Everything is telling you the labor market that
Speaker 1: has momentum and that is tight. I look at just
Speaker 1: the equation, why we'll see plus I plus G plus nx.
Speaker 1: Can we guestimate any of those factors? Given we're coming
Speaker 1: out of a pandemic with a Biden stimulus. I am
Speaker 1: so fortunate I'm not doing what Peter Hooper's told you
Speaker 1: to do, which is actually try to guestimate this. What's
Speaker 1: your confidence in guestimating forward? Look, it's it's always difficult.
Speaker 1: I think it's it's even more difficult in the current environment.
Speaker 1: As I look at those Q four GDP numbers, the
Speaker 1: downgraded consumption is meaningful. We were actually close to zero
Speaker 1: growth in private domestic demand already, meaning if you were
Speaker 1: to look at housing consumption and capex and so, it
Speaker 1: does look like from those numbers you had even probably
Speaker 1: a sharper slowdown in domestic demand growth in Q four.
Speaker 1: But I think the data we've had since then is
Speaker 1: suggestive that was a temporary blip. It was around the
Speaker 1: period where we think financial conditions were hitting the economy
Speaker 1: probably most significantly, and if the Fed does not continue
Speaker 1: to engineer conditions that are tight enough, you have an
Speaker 1: economy that I think is likely to pick back up
Speaker 1: and a labor market that is unlikely to listen. Does
Speaker 1: that mean that there's another fifty basis point on the table.
Speaker 1: I think you know it's not the optimal choice from
Speaker 1: their perspective. If they ratch it up to fifty basis points,
Speaker 1: we get back into this process of how do you
Speaker 1: get back down from fifty to twenty five? And if
Speaker 1: you only want to go one or two, it's going
Speaker 1: to be very difficult to do that by the mayor
Speaker 1: June meetings. I could think for the March meeting, if
Speaker 1: they need to deliver a hawker's surprise, you always kind
Speaker 1: of have that free card of the dot plot. The
Speaker 1: dot plot is able to signal their intentions. They could
Speaker 1: show a FED funds terminal rate that's higher than what
Speaker 1: the market has priced in holding it for longer. And
Speaker 1: the messaging I think is really important here. If they
Speaker 1: were simply to talk down financial conditions, as as the
Speaker 1: minutes did a little bit, I think that that would happen.
Speaker 1: It is critical, this is original. Since when does a
Speaker 1: central bank quote unquote talk down financial conditions? I actually
Speaker 1: looked at that than us and them literally bore the
Speaker 1: pass back just talken about talking about it. And the
Speaker 1: Schwartz didn't talk about it, The Georgia School didn't talk
Speaker 1: about it. You Cela didn't talk about it. How do
Speaker 1: they quote unquote talk down financial conditions? Look, I think
Speaker 1: we're in a in a Obviously, the past decade decond
Speaker 1: and a half is a new period of communications from
Speaker 1: central banks. It is guiding towards their expectations of what
Speaker 1: they want to do in order to bring about financial
Speaker 1: conditions that will achieve their objectives. And so they always
Speaker 1: should be asking the question, is the market interpreting our
Speaker 1: signals as we want them to be interpreting them? And
Speaker 1: are we achieving financial conditions that will achieve our Doctor Phil,
Speaker 1: except it's doctor Matt. But the interesting thing is is
Speaker 1: that actually this fed has less power than it has
Speaker 1: for a long time, simply because the data is what
Speaker 1: the data is, and they have to respond accordingly, and
Speaker 1: the market is trading off the data, it's not necessarily
Speaker 1: trading off the rhetoric that we're hearing from the Federal Reserve. So, Matt,
Speaker 1: when you take a look at what we're seeing, especially
Speaker 1: at the upside revision to the core PC, is there
Speaker 1: a sense that we could end the year with even
Speaker 1: a four handle on inflation or a five handle on
Speaker 1: the overall headline, something significantly above where people are projecting. Look,
Speaker 1: you don't have too much confidence in an inflation has
Speaker 1: been very difficult to forecasts. I think it's just unlikely
Speaker 1: given what we know what's going to happen with rent
Speaker 1: and oere. We know that in the back half of
Speaker 1: this year, those two really important components are going to
Speaker 1: be trending down. That said, you know we have a
Speaker 1: three three COREPC forecast for the end of the year.
Speaker 1: The Fed's forecasts of three and a half, which was
Speaker 1: laughed out, I think a few months ago, looks a
Speaker 1: lot more plausible given the data that we're seeing, and
Speaker 1: you're an environment where you don't want to discount upside
Speaker 1: risks to inflation, particularly if the labor market is not
Speaker 1: going to be listening. Matt. Communication from the Fed over
Speaker 1: the last ten years changed, and we've talked about that.
Speaker 1: They started to manage financial conditions in a much more direct,
Speaker 1: transparent way. But that's uncle because the nature of the
Speaker 1: economy changed over the last several decades. It became much
Speaker 1: more financialized. Because of the financialization of the economy, we
Speaker 1: also thought that when they started to raise interest rates
Speaker 1: to your point earlier on, that it would hit the
Speaker 1: economy much faster. The communications changed, the nature of transmission
Speaker 1: has changed through to financial market. It's everything tightens up.
Speaker 1: I just think I have to sit here and sit
Speaker 1: here now and say, there's so much we don't know.
Speaker 1: Because to your point, if you told me twelve months ago,
Speaker 1: told anyone five hand or FED funds guess where unemployment is,
Speaker 1: they would not have said three point four percent. They
Speaker 1: wouldn't have said claims at two hundred thousand. So do
Speaker 1: you think we need to be a little bit more
Speaker 1: and not you because we get along. This is not
Speaker 1: directed at you. Do you think we need to be
Speaker 1: a little bit more humble about what we don't know
Speaker 1: about what's happening with the FED here? And do you
Speaker 1: think they need to be as well? Absolutely? I mean
Speaker 1: we're in an environment of significant uncertainty about the outlook
Speaker 1: of a lot of data, volatility of mixed signals from
Speaker 1: the typically very reliable leaning indicators that we would look at.
Speaker 1: You have an unprecedented environment, and where you have households
Speaker 1: which are still sitting on a substantial amount of excess savings,
Speaker 1: where a labor market seems to be structurally undersupplied. You know,
Speaker 1: how all those things work out, and how the lick
Speaker 1: structure of monetary policy to the economy works out is
Speaker 1: all key sources of uncertainty. I think for the FED
Speaker 1: view is that it means they need to see evidence
Speaker 1: that things are moving in the right direction to be
Speaker 1: able to back off. We just don't have that evidence
Speaker 1: at the moment. Is there anything stimulative about being able
Speaker 1: to earn money from your cash? Look that if you
Speaker 1: looked at it just within that margin, I think you
Speaker 1: would say yes. The bigger picture is, as the FED
Speaker 1: titans monetary policy. We've seen what happens to mortgage rates,
Speaker 1: We've seen what's happened to the housing market. We see
Speaker 1: rising delinquencies on autos. So I don't think raising rates
Speaker 1: is stimulative. I think that component of it could be.
Speaker 1: But the bigger pictures is certainly that a titan's financial
Speaker 1: condition that's straight at the School of Dramatis did he
Speaker 1: message you. That's exactly the kind of thing in dream
Speaker 1: mattis tost about. But you have to think, if suddenly
Speaker 1: you can make five percent on your cash, then it's
Speaker 1: you know, free money. You can play with it, you
Speaker 1: can do things, etc. And then is there something stimulative,
Speaker 1: especially if you're not seeing the weakness, if you've got
Speaker 1: locked in mortgage rates, if you've got a lot of
Speaker 1: these other costs that have already been immunized. I'm just
Speaker 1: wondering reverse argum as an argument people might when we
Speaker 1: have negative interest rates exactly. Yeah, but that's what I'm saying.
Speaker 1: But it wasn't Spring geekin all my kitivity. But he
Speaker 1: was sparing some people to double down to try and
Speaker 1: save more, exactly. So why couldn't you make the argument
Speaker 1: potentially that it could have the opposite effect. I don't know.
Speaker 1: It's just something to throw out there, something to talk about,
Speaker 1: something to think about, because I just don't think we've
Speaker 1: got a cliff. I think that that's correct any of this.
Speaker 1: I wonder if the federal zev's even got the toes
Speaker 1: to bring inflation dat towards target without just absolutely smashing
Speaker 1: this economy to paces, which is what Mohammed's talking about.
Speaker 1: I think that a lot of people are wondering what
Speaker 1: it looks like when you cross them. I mentioned three
Speaker 1: percent inflation of Matte Lozetti tomorrow PCE deflator top line
Speaker 1: point four point one point one. I do a quick
Speaker 1: three month annualized, you get a two point four zero percent.
Speaker 1: That's how you get what's the value right now of
Speaker 1: a three month annualized review by guys like you, when
Speaker 1: you're wedded in the chairman's wedded to month month year
Speaker 1: over year. Is there a value to looking at ninety
Speaker 1: days annualized? Absolutely? I think you know, we know a
Speaker 1: lot of the year over year is being inflated by
Speaker 1: very strong prince that we had last year. You want
Speaker 1: to be looking at the shorter term trends to see gospel,
Speaker 1: to see what to see what they're showing. And that's
Speaker 1: where I really think the revisions were important. So at
Speaker 1: the February meeting, the Fed core CPI was three point
Speaker 1: one percent annualized, they found out it was actually four
Speaker 1: point two four point three percent annualized. And you're getting
Speaker 1: a pickup in inflation on top of that, and so
Speaker 1: I think you've completely changed the trajectory of what it
Speaker 1: looked like at the end of last year. That's such
Speaker 1: a strong point, Matt, thanks for that, Mattless Eddie Attebank,
Speaker 1: a wise man said to us a number of weeks ago,
Speaker 1: if you're not paying attention, if you're not confused, you're
Speaker 1: not paying attention. That was dune In Emmanuel of Ever,
Speaker 1: Corny joins us around the table. We're going to catch
Speaker 1: up with him in just a moment. Features up by
Speaker 1: about a half of one percent on the SMP Tom
Speaker 1: coming off a four day losing streak and trying to
Speaker 1: bounce exactly, trying to bounce Nastac one hundred up nine
Speaker 1: tenths of a percent, trying to bounce Vis comes in
Speaker 1: twenty three to twenty one, breaches twenty two, twenty one
Speaker 1: point eighty six. But I think it's right. Trying is
Speaker 1: the right equity energy this morning, and keep him one
Speaker 1: eye on the bond market, maybe two, maybe two one morning.
Speaker 1: The yex pushing Harrik and Lisa approaching high a year,
Speaker 1: and it's not just absolute nominal yields, but you're also
Speaker 1: looking at real year as a ten year real yield
Speaker 1: hitting the highest level of the year. Basically going back
Speaker 1: to early January. At what point have we gotten the
Speaker 1: full reset in stocks that we're feeling in bonds? Have
Speaker 1: we priced in the full pace of rate hiking even
Speaker 1: with some of the recent weakness. Let's we're through these markets.
Speaker 1: I don't want to leave you waiting, Julian, just you know,
Speaker 1: itch into speates here we left at home. You just
Speaker 1: look like this on sm F five hundred and a
Speaker 1: half of one percent, yields coming up a couple of
Speaker 1: basis points three ninety three ninety one on a US
Speaker 1: ten year and euro dollar earlier this morning, if you're
Speaker 1: just tuning in euros on CPI Lisa coming in at
Speaker 1: a record high on core and revised upward after the
Speaker 1: German mystery figures that they got in. Here's what we're
Speaker 1: looking at today. At thirty am, we get US initial
Speaker 1: jobs claims plus the second read of the fourth quarter
Speaker 1: GDP in the United States, initial jobs claims expected to
Speaker 1: come in still near historic lows. Again, where is that's
Speaker 1: loosening in the labor market that a lot of people
Speaker 1: are asking for? It has not shown up yet. At
Speaker 1: twelve pm from US Commerce Secretary Gina Raimondo, She's talking
Speaker 1: about chips. She's talking about developing more technology in the
Speaker 1: United States. I want to hear what she says about China.
Speaker 1: Will that be in the speech or will that be
Speaker 1: the subtext that we hear basically under a lot of
Speaker 1: the innuendo that she discusses. And today we hear some
Speaker 1: more FED speak because we you know, it's another day
Speaker 1: that's not a quiet period. Atlanta FED President Raphael Bosk
Speaker 1: is speaking at ten fifty am. San Francisco FED Mary
Speaker 1: Daily at two pm. Is FED speak taking on less
Speaker 1: importance John at a time when the data is so confusing,
Speaker 1: and it all is about the data, not about the
Speaker 1: nuances of which member and what voting pattern. Without a doubt,
Speaker 1: it's the data that closed the gap between the FED
Speaker 1: projections and where the market was at a stand of
Speaker 1: the year. They can talk about knock cutting go what
Speaker 1: they like. Ultimately, investors kind of understand, I say, kind
Speaker 1: of understand the reaction functioned if the FED and of
Speaker 1: responded to that economic data, pay rolls, retail, sus CPIPPI
Speaker 1: take your pick and push the terminal right high. Well,
Speaker 1: and the reaction function, let's be clear, has kind of
Speaker 1: shifted a little bit over time. So there's this issue, okay,
Speaker 1: inflations number one. But people are basically believing that the
Speaker 1: FED will be more hawkish if the data is more aggressive,
Speaker 1: and they won't be if it weren't in period. What
Speaker 1: happened to the disinflationary process starting? I didn't see it
Speaker 1: anywhere in the minutes. Maybe it's already ended. It's kind
Speaker 1: of bizarre, isn't it. Usually the chairman's meant to reflect
Speaker 1: the consensus whatever that might be on the committee in
Speaker 1: the news conference, and then if he doesn't interview somewhere
Speaker 1: or testifies, he can talk about his own thoughts on matters.
Speaker 1: That performance in the news conference sounds even stranger now
Speaker 1: going over those minutes from yesterday. I would agree. At
Speaker 1: the same time, I wonder how much the disinflation was
Speaker 1: his I hear you, Emmanuel laughing, But you're raising a
Speaker 1: great point. Was that the massaging to take out all
Speaker 1: the disinflationary talk or was that a Joe Powell issue
Speaker 1: and not necessarily a committee issue? Okay, Julian's with us
Speaker 1: said that four time. So hello, Julian, Well you should
Speaker 1: just start with you straight away. Do that more often.
Speaker 1: You've got a line here in your research that says
Speaker 1: the path to our year round forty one fifty price
Speaker 1: target is lower than higher. Why is it lower than higher? So,
Speaker 1: if you think about coming into the beginning of the year,
Speaker 1: there were three reasons the market had done as well
Speaker 1: as it had done until a week and a half ago.
Speaker 1: Number one, the positioning was incredibly barished. We all knew
Speaker 1: that there was epic tax laws selling, which is why
Speaker 1: the stocks that were the biggest sellers, the ones that
Speaker 1: really had the weakest performance, are all the ones that
Speaker 1: rebounded that's been neutralized. The second thing is, as you
Speaker 1: alluded to a moment ago, is inflation. The benefits of
Speaker 1: the decline in inflation where now at the bumpy path,
Speaker 1: and the question is are we plateauing? We don't think
Speaker 1: we are, but the market has discounted the benefits of
Speaker 1: the initial fallen inflation. And then, of course, the third
Speaker 1: element here is this whole idea that the combination of
Speaker 1: the inflation reaction and the price action in the equity
Speaker 1: markets themselves have caused people to believe that the soft
Speaker 1: lending is now the base case. So at the end
Speaker 1: of the year December, remember the market was falling apart.
Speaker 1: Everyone was kind of pessimistic eighty percent chance of a
Speaker 1: recession in the next year. We think that numbers around thirty.
Speaker 1: You look at New York Fed measures, that number is
Speaker 1: closer to fifty seven. So that to us is overdiscounted.
Speaker 1: Whether it happens or not, it's overdiscounted. And this is
Speaker 1: a probabilistic world. So we do think that the path
Speaker 1: is shifted to potentially lower before we start moving. Benjamin
Speaker 1: the Borrowed City Group talks about United Kingdom disinflation like
Speaker 1: ede Heiman of evercore Issi talks about US disinflation. What
Speaker 1: do stocks do if we get ede Heiman's sub three
Speaker 1: percent disinflation? So in the long run that's going to
Speaker 1: be extremely beneficial. But I think again, and part of
Speaker 1: this environment is parsing between the short run, the medium term,
Speaker 1: and the long term. With the short term having been
Speaker 1: this incredible rip in the stocks that we're most sold
Speaker 1: over the last several weeks, we would say in the
Speaker 1: medium term that a consequence of inflation starting towards that
Speaker 1: path is going to be the growth slowdown that frankly,
Speaker 1: you know, the FED wants because that's how the labor
Speaker 1: market cools off, and then ultimately when we get to
Speaker 1: that point, that's when the benefits of inflation kick in
Speaker 1: a lower inflation, but that is often into the future.
Speaker 1: At this point, let's translate this into a stock market call.
Speaker 1: Given the fact that at the end of last year
Speaker 1: a lot of the pessimism came from this expectation of
Speaker 1: margin compression, We've gotten earnings, massive margin compression. Why has
Speaker 1: that not been priced in more significantly? Again, and this
Speaker 1: is something that we all talked about very frequently last year.
Speaker 1: The price action sets the narrative. So you had two
Speaker 1: consecutive quarters of EPs reductions and the stock market rallied
Speaker 1: in the face of that. And so given the positionitioning
Speaker 1: and the price action, there is a tolerance for it.
Speaker 1: But from our point of view, this whole idea of
Speaker 1: multiple expansion happening before the economic downturn, however shallow and
Speaker 1: we do expect to shallow downturn, doesn't really add up.
Speaker 1: We'd rather see that multiple expansion coming out of the
Speaker 1: short and shallow recession that Anheimer's forecasting. A number of
Speaker 1: years ago, Judie and I went for lunch. I believe
Speaker 1: it was Greek Greek food. It was very good, and
Speaker 1: he said to me said, Johnny needs to be watching
Speaker 1: what's hand him in volatility. And then we had vold
Speaker 1: mcgeddon in early twenty eighteen, and again now and now
Speaker 1: this conversation of vol mcgeddon two point zero. Thank for America,
Speaker 1: say that this warning of vol mcgeddon two point zero,
Speaker 1: which was presented by Marko Kolanovitch of JP Morgan recently
Speaker 1: be of a sets overblown. Can you talk to us
Speaker 1: about what that so called vold mcgeddon two points I
Speaker 1: might look like and whether that warning is overblown, overblown
Speaker 1: to the third power in our opinion. Okay, here's the setup, right,
Speaker 1: What zero days expiration options do is actually increase volatility
Speaker 1: intra day, but if you look at the last several weeks,
Speaker 1: it's decreased it in inter day. Right, So so basically
Speaker 1: you have zigs and zags from nine thirty till four
Speaker 1: o'clock that at the end of the day, because the
Speaker 1: options expire, it's all neutralized. And that is a recipe
Speaker 1: for books staying balance, no force selling, no force, volatility squeezes.
Speaker 1: It's not gonna have. You could lecture on that at
Speaker 1: San Diego. I mean, they're the land of this statistic
Speaker 1: that was brilliant inter day. You know, it drives me
Speaker 1: nuts how people conflate intra day vaal with inter day vall.
Speaker 1: Let's take it out longer. When will you know that
Speaker 1: Ed Hyman's write about disinflation? You reads report just like
Speaker 1: we do. He said he planted you at his office
Speaker 1: like back, you're so far back in the cheap seats
Speaker 1: you're looking at, you know, Brooklyn and Queens. But but
Speaker 1: when you find only get to read Ed's report, how
Speaker 1: do you distill the win of it? When do we
Speaker 1: get that disinflation? Well, we actually think it is still
Speaker 1: part of the subtext right now. So I agree our
Speaker 1: proprietary surveys are showing that actually some of the shelter
Speaker 1: costs are continuing to subside, contrary to what we saw
Speaker 1: last week from the FEDS, you know, the shelter component.
Speaker 1: We're seeing wages really start to moderate. They're still elevated.
Speaker 1: But all of this really in our view, and the
Speaker 1: goods part we all know that that's an open that's
Speaker 1: that's well known. So frankly, I think it's some of
Speaker 1: the more. You know, the monthly data has got another
Speaker 1: month or two of choppiness, and then I think you're
Speaker 1: going to continue to subside, perhaps more gently than you.
Speaker 1: John the pros on this and this I learned it
Speaker 1: from Ed Hyman. He was a firm called you weren't there.
Speaker 1: You weren't CJ. Lawrence where you Hyman was at C. J.
Speaker 1: Lawrence And he's screaming about three months annualized. We look
Speaker 1: at month over month and granted it's important hour year
Speaker 1: over year, and there's different ways Britain calculates it different
Speaker 1: than we do. Adults look at the three months of
Speaker 1: data and then annualize it out and those numbers on
Speaker 1: inflation out are not in the perception of the market.
Speaker 1: They're low numbers for a couple of months ago than
Speaker 1: they do now. Yeah, I just changed. I just looked
Speaker 1: at the thirty year mortgage rate and you know, I
Speaker 1: just I was gonna buy and I can't. Jadi and
Speaker 1: Hapasis the office at the moment of people coming in,
Speaker 1: we want to know, Yeah, there's getting busier. Is it
Speaker 1: three day week? Four day week? It has been consistently
Speaker 1: a four day week, and I think there's a little
Speaker 1: bit more cross over there. But the really good thing
Speaker 1: is is that the client engagement is better. I've got
Speaker 1: a full travel schedule in March, and I think that's
Speaker 1: a you're traveling below fifty ninth Street, below and above
Speaker 1: and on planes. Are you finding that you're more productive
Speaker 1: if post pandemic? Are you seeing more clients than you
Speaker 1: did pre pandemic just by not being in the office
Speaker 1: so much? Has it working out well? Well? Zoom is
Speaker 1: a remarkable thing, you know, it's it's it. You can
Speaker 1: go back to back to back to back. But again
Speaker 1: maybe it's old school whatever. There's no stuff suit for
Speaker 1: in person. Hold on a second, John, you're just steadily
Speaker 1: arguing for a four day work week. You find that
Speaker 1: you're more productive. You're basically saying, you know that people
Speaker 1: you know should be allowed to have either forty weekly.
Speaker 1: You say that's what was going on? Think a productive
Speaker 1: in general? How dare you? I am Jenny, and thank you,
Speaker 1: Thank you. Get to see you buddy as always, Jennet Manuel,
Speaker 1: I've ever cool and the shortlist for vice chairman. Laura
Speaker 1: Rahim joins us right now, chief US economist FS Investments
Speaker 1: as well. Laura, I want to go to a great
Speaker 1: phrase you've got on savings momentum in the income you
Speaker 1: have said it's going to be difficult to get the recession.
Speaker 1: Matt Lozetti joins us later, who was called for a longer,
Speaker 1: farther outpoint of recession, and all of that, to me,
Speaker 1: hinges on what John Farrell just mentioned, which is housing.
Speaker 1: Does housing put us into recession? This is actually a
Speaker 1: very unique business cycle, and I am happy that we're
Speaker 1: talking about housing because it's just one example of how
Speaker 1: no business cycle ever truly repeats itself. I think something
Speaker 1: when we look at the impact of higher rates, housing
Speaker 1: is clearly ground zero in terms of activity. But when
Speaker 1: you look at GDP, when you look at the things
Speaker 1: that the FETE is really monitoring when they think about recession,
Speaker 1: employments one of them. And we often think that when
Speaker 1: housing falls like this, you would see a lot of
Speaker 1: layoffs in the construction sector, and we haven't seen that really.
Speaker 1: So it's just one small example of how the dynamics
Speaker 1: this time around are really different. The labor scarcity that
Speaker 1: you're experiencing in construction remains a lot of these projects
Speaker 1: have long legs, and maybe they were put off a
Speaker 1: couple of years ago because they couldn't even find the
Speaker 1: products to actually build these homes. That's a little bit
Speaker 1: of a cool desact on. But it's just a way
Speaker 1: to say that. You know, in every recession, we go
Speaker 1: into it thinking, you know, looking at our past prior
Speaker 1: business cycles, pulling out the playbook, and you just really
Speaker 1: have to rethink it every time. And that's why, you know,
Speaker 1: we have to think about what the FET is trying
Speaker 1: to accomplish. That is to slow the economy down, and
Speaker 1: our economy naturally wants to grow. It needs to kind
Speaker 1: of break something to get it off those growth rails,
Speaker 1: and we still haven't done that yet, even with such
Speaker 1: a big hit housing. I think we all feel, well,
Speaker 1: the famous rom GDP now index, everybody looks at that.
Speaker 1: Where's the momentum right now? Laura, I mean, are we
Speaker 1: going to do a Q four equivalency forward in Q one,
Speaker 1: Q two, Q three? I still it's still it's still
Speaker 1: based in consumption, an unemployment rate at three point four percent.
Speaker 1: We're going to get the personal income and spending data
Speaker 1: you know, later in the week, but the income data
Speaker 1: are just not going to really or they're not going
Speaker 1: to fall until we get some meaningful change in employment.
Speaker 1: And with the three point four percent unemployment, right you
Speaker 1: just don't get a recession. They need to move the
Speaker 1: needle on employment as part of their inflation wage goals
Speaker 1: and then getting those back to two percent. But for now,
Speaker 1: I think you're just continuing to see that momentum coming
Speaker 1: from the household, from household spending, which is much more
Speaker 1: income based than wealth driven. Lauren, how much do you
Speaker 1: have faith with the long and variable legs to think
Speaker 1: that perhaps we just haven't seen the effect of the
Speaker 1: rate hikes and that if the FED doesn't hike rates further,
Speaker 1: leaves them where they are, it'll be enough to bring
Speaker 1: down inflation. Well, this is one of the paradoxes. You
Speaker 1: fix the mortgage market, which was the problem of the
Speaker 1: last business cycle, and now you've kind of taken that
Speaker 1: piece away from monetary policy. With homes and mortgage prices
Speaker 1: mortgage payments lawed in, You're just not going to see
Speaker 1: monetary policy have the immediate impact on spending like you
Speaker 1: did during the two thousand five rate high cycles. So
Speaker 1: you know, I'm not saying that a recess is a
Speaker 1: foregone conclusion. I think the GDP outlook for twenty twenty
Speaker 1: three remains stagnant, probably zero point seven for the entire year.
Speaker 1: The first half of that probably one point five percent growth.
Speaker 1: But at the end of the day, you know, you're
Speaker 1: really seeing an economy that is grinding along, and the
Speaker 1: FED is going to continue to have to push against
Speaker 1: a lot of momentum that plays out of recorders. Well,
Speaker 1: this raise suspector of potentially much higher terminal rates than
Speaker 1: people expected, especially the lack of sensitivity in areas like housing.
Speaker 1: How much have you ratcheted up your expectation from perhaps
Speaker 1: not the Phillips curve kind of models that people are
Speaker 1: talking about with eight percent types of terminal yields, but
Speaker 1: something above that five and a half percent of the
Speaker 1: market's gaming out. I mean, Lisa, it happens so rarely
Speaker 1: that I'm right that I have to crow when I am.
Speaker 1: But I've been saying for a long time that I
Speaker 1: think they're going to have to go above five percent,
Speaker 1: and as high as even five fifty. I think. You
Speaker 1: know that has been something that has been clearer because
Speaker 1: you know, while they absolutely need to slow the pace
Speaker 1: of rate heights, they were basically raising rates with their
Speaker 1: eyes shut last year. You know, they need to now
Speaker 1: be a little more thoughtful, be more methodical. But we
Speaker 1: just the economy had so much momentum going into it,
Speaker 1: and I think, you know, also fighting against these market
Speaker 1: expectations of rate cuts, which I think they've very effectively done,
Speaker 1: and the markets have I think, had to come to
Speaker 1: terms with the FED. I think really at this time
Speaker 1: around strong sentiment that they are going to need to
Speaker 1: stay higher for longer. I think the data change that conversation,
Speaker 1: not the FEDS fake the data. From the start of
Speaker 1: the year, we've been talking about residential real estate. Lara,
Speaker 1: can we talk about commercial real estate just briefly. We
Speaker 1: had this headline, this story in the last twenty four
Speaker 1: hours that an office landlord controlled by PIMCO has defaulted
Speaker 1: on about one point seven billion dollars of mortgage notes
Speaker 1: across seven buildings. Laura, what's going on there? I Commercial
Speaker 1: real estate is also interest rate sensitive, so we're going
Speaker 1: to see some of these valuations be impacted. Remember, there
Speaker 1: are just so many fewer data points, and the data
Speaker 1: is lagging in that sector more than it is for
Speaker 1: the residential sector. So I think we're going to start
Speaker 1: seeing headlines like this, But it is a sector where
Speaker 1: you're seeing such diffuse performance. We know that office space
Speaker 1: is going to be challenged, especially in the major metropolitan areas.
Speaker 1: But that's why, you know, I think for investors we
Speaker 1: need to look in other areas. We need to look
Speaker 1: at industrial, we need to continue to look at you know,
Speaker 1: the to some degree even some belt states regionally, we
Speaker 1: need to look at multi family. I think there are
Speaker 1: a lot of areas where we've continued to underbuild in
Speaker 1: this sector since the Great Recession, so there's still some
Speaker 1: there's still a lot of room for returns there. But
Speaker 1: at the end of the day, you just need to
Speaker 1: access that differently. It's not a sector that I think
Speaker 1: we're going to see as uniform move invaluations as we
Speaker 1: have seen in residential real estate. Lara, this was great
Speaker 1: Laura of FS Investments joining us now as someone expert
Speaker 1: on the granularity of China away from the headlines, Leland
Speaker 1: Miller to say his chief executive officer of China Beije
Speaker 1: Book International, doesn't describe the ability. Leland, what does a
Speaker 1: symbolism you see if a year ago mister Putin's talking
Speaker 1: a football field away on a table to mister Lavrov
Speaker 1: versus what we observed. I believe it was yesterday between
Speaker 1: Putin basically playing bridge with mister Wang of China. What
Speaker 1: is the symbolism of how close they were yesterday talking
Speaker 1: to each other. Well, the imagery is perfect for this.
Speaker 1: I mean, you have China making no bones about being
Speaker 1: closer and closer to Russia, particularly as Russia's encountered way
Speaker 1: more problems than anyone expect at the beginning. So I
Speaker 1: think there's there's no question right now that from a
Speaker 1: you know, China is all in on Russia's side form
Speaker 1: the perspective of their support. The question is are they
Speaker 1: crossing red lines in the background, And that has become
Speaker 1: It wasn't an issue, you know, the first first six
Speaker 1: months of the war. Now there are reports that they
Speaker 1: might be willing to cross lines in terms of providing
Speaker 1: goods to Russia, providing lethal arms. That that takes us
Speaker 1: in an entirely different direction. Is the backdrop here a
Speaker 1: recovery after pandemic for China? Ever, core ISSI suggest, as
Speaker 1: others do, we could see buoyant five even Dare I
Speaker 1: say six percent GDP? Do you agree? I do agree. Look,
Speaker 1: there will be a cyclical bounce back in China starting
Speaker 1: in the second quarter. I think people have made too
Speaker 1: much of a baby indicators in January and February. Oh,
Speaker 1: or you know the story should be more bullish. Are
Speaker 1: less bullish? The recovery will start no earlier than March,
Speaker 1: you know, possibly April, and then you're going to see
Speaker 1: a real recovery because businesses will get back at it.
Speaker 1: You know, they told us last year they didn't want
Speaker 1: to invest, they didn't want to borrow, they didn't want
Speaker 1: to hire. Well now they're going to do some of that,
Speaker 1: and there will be some measure of revenge spending, revenge
Speaker 1: consumer spending as well. The questions when you get to
Speaker 1: the second half of the year, how much policies support
Speaker 1: the government wants to lay on top of what will
Speaker 1: already be an organic recovery. So you absolutely have the ability.
Speaker 1: You're bouncing off terrible numbers for twenty twenty two. The
Speaker 1: numbers will be good. There will be a recovery in
Speaker 1: China in twenty twenty three. The question is is this
Speaker 1: more than two to four quarters? We don't think so.
Speaker 1: Laden is there's a lot of attention at the moment
Speaker 1: now on the auto market, given what's been happening with
Speaker 1: Tesla and other brands. Are you saying that Chinese consume
Speaker 1: it tend more and more to domestic brands within China. Oh,
Speaker 1: it's sort of hard to read through the noise of COVID.
Speaker 1: I mean, in general, yes, I think that that's that's
Speaker 1: the inclination. But you know, you have a big problem
Speaker 1: where you know the world wasn't exporting much during a
Speaker 1: time where China's exporters were running full throttle for the
Speaker 1: last three years. So as we get into the post
Speaker 1: COVID era, we'll be able to tell that more. But
Speaker 1: but certainly when you look at cars and you look
Speaker 1: at some developments in ev technology and battery technology, the
Speaker 1: Chinese are dominating, so there will be an inclination to
Speaker 1: buy home on some of these things, and maybe maybe
Speaker 1: a lot of things. We've been trying to sort of
Speaker 1: decipher the change in Jijimping's tone over the past year.
Speaker 1: You talked about how the red lines they didn't want
Speaker 1: to cross they now seem more willing to cross. And
Speaker 1: what is the implication from the underlying economy. Is it
Speaker 1: youth unemployment going up? Is it this sense a frustration
Speaker 1: with the administration. Is there something going on that can
Speaker 1: give us a sense of why there's been this shift.
Speaker 1: There has been a shift, but I think it's a
Speaker 1: mistake to call the game changer. A lot of people
Speaker 1: in Wall Street are saying there was never a desire
Speaker 1: by Jijimping to run the property sector from its heights
Speaker 1: in the pre COVID down to zero. There was always
Speaker 1: going to be a little bit of a roller coaster ride.
Speaker 1: And the way that we describe this was they need
Speaker 1: to cull the herd and then ventilate. Cull the herd
Speaker 1: to take out weak firms. Would ventilate before they take
Speaker 1: out the strong firms, before cash flow drives up, before
Speaker 1: contagion spreads. So you're in a ventilation part of the sector.
Speaker 1: If they think the risky companies are still doing risky
Speaker 1: things they need to be handled, then we're going to
Speaker 1: go back into that part of the cycle. So this
Speaker 1: is a this is a relatively gradual process to minimize
Speaker 1: properties a growth driver. The fact that we're seeing, you know,
Speaker 1: a relaxation of the three lines that's happening right now.
Speaker 1: But that doesn't mean that Chijinping has suddenly decided his
Speaker 1: policy of the past three years is wrong. I don't
Speaker 1: think he has. Although going forward, do you think that
Speaker 1: this is a sign that perhaps the Chinese economent has
Speaker 1: insulated itself enough from the US, from other nations that
Speaker 1: they can withstand sanctions or any consequences put on the
Speaker 1: nation as a response to crossing other readlines, say with Russia.
Speaker 1: Depends on the sanctions. So I would say that you
Speaker 1: know the sanctions that we were used to, you know, three, five,
Speaker 1: ten years ago. Sure they're baby sanctions, sanctions on individuals, sanctions,
Speaker 1: baby sanctions on banks. The kinds of sanctions we're looking
Speaker 1: at right now are big economic warfare tools. Foreign direct
Speaker 1: product rule can take out the Chinese tech sector, could
Speaker 1: take out major Chinese companies. This is the This is
Speaker 1: the question about whether China will actually move forward with
Speaker 1: violating the big bank sanctions, giving Russia tools in Ukraine,
Speaker 1: giving Russia arms in Ukraine. If they do that, the
Speaker 1: President Biden's going to have a very big mess on
Speaker 1: his hands because in order not to hollow out the
Speaker 1: credibility of these really powerful sanctions, which were intended for
Speaker 1: China in the first place, if you really look at it,
Speaker 1: then he has to fall through and crack down on
Speaker 1: companies that are violating. But that could cause a bigger
Speaker 1: bruhaha with China this year, which is something he's been
Speaker 1: trying to avoid. So if the Chinese are behaving badly
Speaker 1: right now, and we don't know yet but there are
Speaker 1: leaks that they are, then then this could go in
Speaker 1: a very negative direction this year and quickly. This is
Speaker 1: a very tense moment. Lela thank you, sir, day in
Speaker 1: the middle of that of the China basebook International. Right
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