WEBVTT - Surveillance: Growth Snap Back with Golub 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.120 and of course on the Bloomberg terminal. This is important. 0:00:30.200 --> 0:00:33.280 It is that every equity strategist has a certain style. 0:00:33.920 --> 0:00:38.480 The acclaim of Jonathan Golloben credit sweet either courageous bull 0:00:38.920 --> 0:00:41.760 or right now with some real reticence is he dives 0:00:41.840 --> 0:00:46.040 into sector analysis over on page five. In page six 0:00:46.080 --> 0:00:48.920 of his reports, he darkens the door this morning. What 0:00:48.960 --> 0:00:51.559 does the sector analysis tell you right now? Well, we 0:00:51.600 --> 0:00:54.200 put out a note this morning on earnings that we're 0:00:54.200 --> 0:00:58.920 having a margin problem in the vast majority of the sectors, 0:00:59.280 --> 0:01:04.080 with the exception of surprisingly consumer discretionary is better, energies better, 0:01:04.400 --> 0:01:08.240 and industrials but shorter. That you're seeing margin contraction um everywhere. 0:01:08.240 --> 0:01:10.600 But if there's a if there's a big sector story, 0:01:10.760 --> 0:01:14.080 it's a tech is really weak compared to everything else, 0:01:14.120 --> 0:01:17.440 so broadly defined tech and that's just not something we're 0:01:17.560 --> 0:01:21.320 used to. The tech is the this earning season. If 0:01:21.400 --> 0:01:24.880 you take tech out or tech broadly, fine, you have 0:01:25.040 --> 0:01:27.959 a five EPs growth this quarter. I mean, who would 0:01:27.959 --> 0:01:30.240 think that tech is a thing that's holding everything back? 0:01:30.480 --> 0:01:32.479 And I think that this continues for longer than we think. 0:01:32.840 --> 0:01:35.360 And this is a hallmark of credit suite, this linkage 0:01:35.360 --> 0:01:38.920 between strategists and your securities analysis. Do you do your 0:01:38.959 --> 0:01:44.280 tech people as a whole feel newsmaking? Layoffs? Can adjust 0:01:44.400 --> 0:01:48.640 those margins? Can they heal that margin deterioration? Um? Well, 0:01:48.720 --> 0:01:51.400 you know, Tommy and we were talking before before we 0:01:51.400 --> 0:01:53.120 went on air, but what's going on in terms of 0:01:53.200 --> 0:01:55.960 layoffs and young people coming into labor market. A lot 0:01:56.000 --> 0:01:59.360 of this was an over exuberance when when we went 0:01:59.360 --> 0:02:02.520 into the pan Emmic and things were so strong, um 0:02:02.560 --> 0:02:06.120 for tech demand. The company's hired as if this was 0:02:06.200 --> 0:02:08.880 a new normal of really of strength and what it 0:02:08.919 --> 0:02:10.799 really is. And this is why text having a hard time. 0:02:11.080 --> 0:02:14.880 It was a pull forward of activity and everyone believed that. 0:02:15.000 --> 0:02:18.120 You know, the investment community bought into it, the companies 0:02:18.160 --> 0:02:21.280 bought into it, and now it's unwinding. Companies are laying 0:02:21.280 --> 0:02:24.000 those workers off. So do we work through this? Yes, 0:02:24.040 --> 0:02:26.440 but we saw this with y two K. It doesn't 0:02:26.480 --> 0:02:28.760 happen in two or three quarters. It takes a little 0:02:28.760 --> 0:02:31.840 bit of time to work through things. Now, White Tuk 0:02:32.440 --> 0:02:34.880 pull forward and you talked about this and go on 0:02:35.120 --> 0:02:37.720 longer than people think, So let's build on that. How 0:02:37.800 --> 0:02:40.880 much did we pull forward? One? And what gives you 0:02:41.000 --> 0:02:42.560 the sense that this can go on a whole lot 0:02:42.600 --> 0:02:44.440 longer than people think? And when you say that, what 0:02:44.520 --> 0:02:49.639 kind of duration are you thinking about? Oh, um, maybe 0:02:49.639 --> 0:02:54.280 this ends up being a six to eight quarter um period. 0:02:54.360 --> 0:02:56.560 I mean, just think about this. You know, Um, you 0:02:56.680 --> 0:02:59.760 bought a laptop because you're now working from home? When 0:02:59.800 --> 0:03:02.880 you buying the replacement for that? Not this year? You 0:03:02.880 --> 0:03:06.160 you went and you my mother started using a streaming 0:03:06.200 --> 0:03:08.640 service for the first time. Is she's signing up for 0:03:08.680 --> 0:03:11.360 the second streaming service now if she wasn't before? And 0:03:11.400 --> 0:03:13.880 it's not and or or you know, the move towards 0:03:13.880 --> 0:03:17.000 global advertising, which was has you know, kind of got 0:03:17.000 --> 0:03:20.000 pulled forward and so it's not as if things are 0:03:20.120 --> 0:03:23.320 the long term trend is necessarily a negative one. But 0:03:23.440 --> 0:03:26.280 there was definitely a bit of exuberance as we went 0:03:26.360 --> 0:03:28.280 to pandemic and it just takes a little while. We're 0:03:28.320 --> 0:03:30.480 also as an investment community, if you look at it, 0:03:30.520 --> 0:03:33.359 you know, hedge funds in particular. Growth in tech has 0:03:33.400 --> 0:03:36.080 been such a huge win from the time that the 0:03:36.120 --> 0:03:38.920 iPhone came out in two thousand eight to now, everybody 0:03:39.000 --> 0:03:42.000 staffed up their tech teams, everybody built processes around it. 0:03:42.320 --> 0:03:44.320 Nobody wants to be a value manager. Every want to 0:03:44.320 --> 0:03:47.280 be a growth manager. And so it takes a little 0:03:47.280 --> 0:03:49.200 while for, you know, for for this to kind of 0:03:49.280 --> 0:03:52.240 set used to this and you've mentioned this, this is 0:03:52.280 --> 0:03:54.280 not what we used to And with that in mind, 0:03:54.560 --> 0:03:55.720 this is the question of the moment. I think for 0:03:55.760 --> 0:03:58.480 a lot of people, how compromises the index story? Because 0:03:58.480 --> 0:04:00.680 what we are used to and what we condict' buy 0:04:00.840 --> 0:04:03.160 is just sitting at the index on the SMP passively 0:04:03.480 --> 0:04:06.480 and being very rewarded for it. How compromises that index 0:04:06.520 --> 0:04:08.440 story gonna beate for how long? I'm not sure it's 0:04:08.480 --> 0:04:11.960 it's compromise. I'll say so. I yesterday, I last night, 0:04:11.960 --> 0:04:14.560 I had dinner with ten head traders at at some 0:04:14.600 --> 0:04:16.400 of the bigger shops, and I said, if you had 0:04:16.400 --> 0:04:21.359 a choice between buying the tech basket cap weighted or 0:04:21.360 --> 0:04:23.760 the tech basket equal weighted, how many would buy the 0:04:23.760 --> 0:04:26.280 cap weighted? What are they say, not one hand went up, 0:04:26.279 --> 0:04:28.160 how many would you buy? The equal weighted all ten 0:04:28.200 --> 0:04:31.160 hands went up? And so there's a lot of great names. 0:04:31.160 --> 0:04:32.760 So if you're if you're trading, if you're looking for 0:04:32.800 --> 0:04:35.560 individual securities, there's a lot of a lot of interesting 0:04:35.600 --> 0:04:38.680 things going on. But these, you know, these really big 0:04:39.080 --> 0:04:41.400 listen to three years ago, all we were talking about 0:04:41.400 --> 0:04:45.960 was moats. These are these are impenetrable businesses, yes, exactly, 0:04:46.000 --> 0:04:47.800 and listen and some of these and they're great, but 0:04:47.960 --> 0:04:51.240 let's let's be honest. They're great businesses. But but there 0:04:51.360 --> 0:04:55.240 doesn't mean that they're impenetrable. So at the dinner last night, 0:04:55.279 --> 0:04:58.560 which I'm sure you slatted through credits zero expenses, did 0:04:58.600 --> 0:05:01.760 you finish is in the old days of credit suites 0:05:01.760 --> 0:05:04.880 with the Hennessey parodies, brandy or did you go a 0:05:04.880 --> 0:05:08.080 different direction now like get out of six package? Oh yeah, 0:05:08.160 --> 0:05:10.320 you know we were drinking light beer and and and 0:05:10.320 --> 0:05:13.400 that was so you know it tell us about this dinner. 0:05:13.480 --> 0:05:15.279 That's what I wanted. Well, you know it's it's we 0:05:15.400 --> 0:05:16.960 do this, we do this a fair beat. I mean 0:05:17.000 --> 0:05:19.680 next week it's your job. Yeah. But well, and if 0:05:19.720 --> 0:05:23.080 I look at where my ideas come from UM. So 0:05:23.360 --> 0:05:26.560 last night was ten head traders. Next week we're doing UM. 0:05:26.760 --> 0:05:29.760 Ten guys were either hedge fund founders or c I 0:05:29.839 --> 0:05:32.440 O at some of the want from you seriously? I 0:05:32.440 --> 0:05:34.880 mean we're making jokes about Kinna, forget about that. What 0:05:34.920 --> 0:05:36.800 do they want to know for you? What's the mystery 0:05:36.839 --> 0:05:40.039 for traders and hedge funds tycoons when they talk to John? 0:05:40.320 --> 0:05:43.560 If the expectations right now are for weaker If you 0:05:43.600 --> 0:05:46.920 look at strategist forecast this this maybe the weakest year 0:05:47.160 --> 0:05:49.760 I can I can remember in terms of forecasts. So 0:05:49.800 --> 0:05:51.839 the question is if you can't make this, if you 0:05:51.839 --> 0:05:54.520 can't make money to simply by jumping into the market 0:05:54.520 --> 0:05:57.120 and riding up a beta trade, how do you play 0:05:57.160 --> 0:05:59.640 the game? Where? Where's where's that edge that you get 0:05:59.640 --> 0:06:04.520 in this environment? Because because everyone around the table really 0:06:04.560 --> 0:06:07.719 struggled last year, managers had a really hard time, especially 0:06:07.720 --> 0:06:11.080 a hedge funds, So momentum traders have a harder time 0:06:11.120 --> 0:06:13.880 in this environment. We think there's gonna be a big movement. 0:06:14.279 --> 0:06:16.680 Last year the whole story was value people weren't there. 0:06:16.960 --> 0:06:20.800 We think the growth snaps back this year. There's a John, 0:06:20.800 --> 0:06:22.839 why you only at if you think you get that 0:06:22.839 --> 0:06:26.720 growth snap back given the white singer this index. Um, Well, 0:06:26.760 --> 0:06:28.560 there's a couple of things. One is is that this 0:06:28.600 --> 0:06:32.120 will be a rare year that earnings are down. I'm 0:06:32.160 --> 0:06:34.520 in the non recessionary camp, and we could talk about that, 0:06:34.720 --> 0:06:36.280 but I think this is gonna be the rare year 0:06:36.320 --> 0:06:39.040 that earnings are down in a non recessionary year, and 0:06:39.120 --> 0:06:41.400 it's because of margins. I would take this earning season. 0:06:41.800 --> 0:06:44.360 Revenues are up four and a half, margins down eight 0:06:44.400 --> 0:06:48.440 and a half. I don't remember an environment where we 0:06:48.480 --> 0:06:52.680 saw that much that much pressure st Okay Street, bat 0:06:53.520 --> 0:06:57.520 Will Street challenged Main Street. Okay, well you know it's this, Yeah, 0:06:57.560 --> 0:07:00.240 I guess, But I mean, look at what last year was. 0:07:00.800 --> 0:07:04.400 Wages went up slower than cp I, so companies didn't 0:07:04.440 --> 0:07:06.159 have to pay higher wages, but they got to move 0:07:06.160 --> 0:07:09.360 on pricing. That's a beautiful corporate environment. This year, wages 0:07:09.400 --> 0:07:12.040 are gonna be sticky. CPI coming down. They're paying the 0:07:12.040 --> 0:07:15.280 employees more, they can't pass it on, and so the 0:07:15.280 --> 0:07:19.040 the consumer, the individual is better off this year relative 0:07:19.040 --> 0:07:22.080 to companies. Last year, it was the opposite. Companies were 0:07:22.120 --> 0:07:23.800 better off. Want to take about that recession code. If 0:07:23.800 --> 0:07:25.200 you can stand at a bit longer. Tom and I 0:07:25.280 --> 0:07:26.960 just have one question. Can we come to the dinner 0:07:27.400 --> 0:07:30.600 next week? While we're getting an invite to the dinner, 0:07:31.000 --> 0:07:37.560 we can host well listen at least it has to like, 0:07:37.640 --> 0:07:43.200 you know, check our barrashness at the door. Though she 0:07:43.240 --> 0:07:45.080 can have the she can have the cone yak at 0:07:45.080 --> 0:07:47.600 the end. You just have to check this is this 0:07:47.640 --> 0:07:50.040 is important. I mean, if you're a Credit Suite stiner 0:07:50.040 --> 0:07:53.320 with Golub, you're getting one Oaks d V in your 0:07:53.400 --> 0:07:57.280 Coneyak and it's a splendid a copy. Could you give 0:07:57.320 --> 0:07:59.080 me a price on that? I I don't have a 0:07:59.120 --> 0:08:03.000 price that I get there right now. Good morning Zurich. John, 0:08:03.000 --> 0:08:05.240 I'm gonna full sate stars for a few momentutes. We're 0:08:05.280 --> 0:08:07.600 with Jonathan Gold. We're gonna continue right now, Global Wall 0:08:07.600 --> 0:08:10.000 Street giving a nice response with this a gentleman from 0:08:10.040 --> 0:08:12.480 Credit Sweez, John, I'm gonna go back, and of course 0:08:12.520 --> 0:08:15.200 we have to use the dal Jones Industrial average in 0:08:15.240 --> 0:08:19.040 honor of lou ru Kaiser seventy four. The bottom World's 0:08:19.080 --> 0:08:21.120 coming to an end sort of like now, sort of 0:08:21.160 --> 0:08:26.200 like sev the Doo six sixteen to eight fifty two 0:08:26.840 --> 0:08:29.600 and the next year we enjoyed going from eight fifty 0:08:29.640 --> 0:08:32.960 two topping out above one thousand. We were up thirty 0:08:33.000 --> 0:08:36.439 eight percent off the gloom of the seventy three seventy 0:08:36.440 --> 0:08:39.760 four Pittsburgh's Gonna Die recession. Is that where we are 0:08:39.840 --> 0:08:43.520 right now? You know what I would love to you know, 0:08:43.559 --> 0:08:46.240 I think what every strategist wants to see is that 0:08:46.360 --> 0:08:49.280 the FED crashes this thing. We get a really hard recession, 0:08:49.640 --> 0:08:51.880 get a V shape bounce, and you get a normal cycle. 0:08:52.280 --> 0:08:54.760 And I think, I mean, you know, we're talking about 0:08:54.960 --> 0:08:58.480 just a moment ago, how the strategy is, expectations for 0:08:58.520 --> 0:09:01.559 this year as week as you know, as we can see. 0:09:01.920 --> 0:09:05.040 And I think that the idea of a soft landing 0:09:05.840 --> 0:09:08.319 is way more likely than people think. But it's not 0:09:08.440 --> 0:09:11.160 something to get excited about because it also means that 0:09:11.200 --> 0:09:14.600 you're looking at anemic returns with a lot of volatility. 0:09:14.600 --> 0:09:18.319 But landing, does that express out to a thirty percent up? Like? 0:09:21.559 --> 0:09:23.240 I don't? I don't think so. I think that what 0:09:23.280 --> 0:09:27.120 you're looking at here is the FED doesn't raise rates 0:09:27.280 --> 0:09:30.320 enough to crush the Listen. Here's here's what people are 0:09:30.320 --> 0:09:33.319 getting wrong in this inflation story. It's the headline CPI 0:09:33.480 --> 0:09:36.920 is falling, but wages are not falling, services are not falling, 0:09:36.920 --> 0:09:38.920 and rents are not falling. It's goods that are falling, 0:09:39.160 --> 0:09:42.839 which means that we're not really addressing the underlying cause 0:09:42.880 --> 0:09:45.800 of this thing. So the market gets is getting very 0:09:45.800 --> 0:09:48.240 exuberant that the Fed is going to pause. They're not 0:09:48.240 --> 0:09:51.120 pausing because they're stopped. They're pausing because they need more data. 0:09:51.160 --> 0:09:53.080 They want to slow this down. It's any bit the 0:09:53.240 --> 0:09:56.520 streets looking at the wrong The market sees falling inflation, 0:09:56.600 --> 0:09:59.280 they're getting really excited about that. But it's good and 0:09:59.320 --> 0:10:01.600 that's that's a comps issue. It's a it's a one 0:10:01.679 --> 0:10:03.880 off thing. It's not that we've gotten rid of inflation, 0:10:03.920 --> 0:10:07.040 it's we've gotten ridden that component temporarily. And so what 0:10:07.120 --> 0:10:09.280 I think you're gonna see, like last year, a lot 0:10:09.360 --> 0:10:12.000 of chop without a lot of upward movement. And that's 0:10:12.040 --> 0:10:14.199 a hard time. You're saying this before. It's a hard 0:10:14.320 --> 0:10:17.800 investment environment for for most people, especially those are shorter 0:10:18.080 --> 0:10:19.840 the epicenter. Though, if your coal at is that you 0:10:19.880 --> 0:10:22.480 think recession is avoidable, you think we will avoid that. 0:10:22.600 --> 0:10:25.800 What gives you the indication that we will. The big 0:10:25.840 --> 0:10:29.200 surprise this year is that if the consumer gets what 0:10:29.320 --> 0:10:31.760 looks like, let's say a five percent raise, or or 0:10:31.800 --> 0:10:35.080 for that matter, retiree gets an eight point one percent cola, 0:10:35.200 --> 0:10:37.600 so they're they're getting a lot more money. And we 0:10:37.760 --> 0:10:40.880 end the year with you know, two and a half 0:10:40.960 --> 0:10:43.320 or two percent inflation, which is roughly what the break 0:10:43.400 --> 0:10:46.480 evens are saying, or the Bloomberg surveys saying, this will 0:10:46.520 --> 0:10:51.360 be a great year for consus consumer purchasing power. Their 0:10:51.400 --> 0:10:54.160 wages are going up higher than inflation, and in that 0:10:54.280 --> 0:10:56.719 environment you've seen now we're six months in a row 0:10:57.280 --> 0:10:59.840 of consumer confidence rising, and we're going to see that 0:11:00.040 --> 0:11:03.120 all year long this year, and that well, we'll just 0:11:03.160 --> 0:11:05.920 think about it. Jobs are abundant, your raise is going 0:11:05.960 --> 0:11:08.400 to be running at three percent above your cost of 0:11:08.559 --> 0:11:11.319 you know, a cost of purchasing things, um, and that 0:11:11.480 --> 0:11:14.280 is going to keep us out of this recession. Now, 0:11:14.720 --> 0:11:18.959 from a profit perspective, companies have to pay those higher 0:11:18.960 --> 0:11:21.520 wages and don't get pricing power. So you have this 0:11:21.600 --> 0:11:24.920 weird thing that consumers, Okay, the recession gets pushed off, 0:11:25.480 --> 0:11:28.800 but corporate profits are really in emic, and investors are 0:11:28.840 --> 0:11:30.560 shaking their head because they don't know what to do 0:11:30.600 --> 0:11:34.720 with it. So pick a sector discretion ary, Yes, West discretionary. 0:11:34.720 --> 0:11:38.200 In that world, UM, if you are a company that 0:11:38.320 --> 0:11:41.640 like a retailer, that has a lot of labor, you're 0:11:41.640 --> 0:11:43.840 gonna have a harder time. If you have a business model, 0:11:44.480 --> 0:11:48.880 UM that is less labor intense, you you do pretty nicely. 0:11:48.920 --> 0:11:50.320 You know. I took the down Maath that we were 0:11:50.400 --> 0:11:57.120 just doing here in percent in ninete and that obscures 0:11:57.120 --> 0:12:00.320 that over a forty nine year period without diving ends, 0:12:00.520 --> 0:12:03.480 the DOW or the SMP was up five point four percent. 0:12:03.760 --> 0:12:06.440 You overlay on dividend reinvestment. I get it when you 0:12:06.480 --> 0:12:08.199 go to work or when you have a fancy dinner 0:12:08.240 --> 0:12:11.160 with ten fancy people like John Farrow. Is it a 0:12:11.200 --> 0:12:15.040 single digit return world for you? Or can we get 0:12:15.080 --> 0:12:18.520 back to nine or ten or eleven a small double 0:12:18.559 --> 0:12:21.480 digit return? It's a lower return world you. So we 0:12:21.520 --> 0:12:24.040 talked about what what was the group saying. I surveyed 0:12:24.080 --> 0:12:26.280 the group. I asked how many of you have taken 0:12:26.360 --> 0:12:29.600 some of your equity money personally and moved it towards 0:12:29.640 --> 0:12:33.360 something that looks like a bond, and I you know, 0:12:33.800 --> 0:12:36.040 the majority of the table said, how do you not? 0:12:36.440 --> 0:12:39.840 And it doesn't mean they weren't saying I'm panicked about equities. 0:12:40.320 --> 0:12:43.360 But if you can get you know, after tax equivalent 0:12:43.400 --> 0:12:46.120 a four and a half percent on IMMUNI bond, do 0:12:46.160 --> 0:12:48.440 you put something and is that attractive compared to a 0:12:48.480 --> 0:12:52.280 world where where you're looking at negative art? Does anybody 0:12:52.320 --> 0:12:54.440 in the dinner look at the Dow Jones Industrial average 0:12:54.440 --> 0:12:57.000 and the only look at the standard force five? Yeah? 0:12:57.320 --> 0:12:59.679 Only you know, I don't want to say dinosaur, but oh, 0:12:59.760 --> 0:13:02.839 you know there's not a lot of people. Can I 0:13:02.880 --> 0:13:04.719 have that on the record? Can you actually just say that, 0:13:04.760 --> 0:13:08.040 because I'd love that. It's a less MP t K 0:13:08.559 --> 0:13:13.160 you know that that's all lessence with But the SMP story, 0:13:13.360 --> 0:13:15.480 and I want to finish on this because it is important, 0:13:15.720 --> 0:13:18.640 has become the dominant story, particularly over the last decade, 0:13:18.640 --> 0:13:22.360 because it's rewarded investors so handsomely. You mentioned the equal weight. 0:13:22.679 --> 0:13:24.240 If you had to pick the tech sector right now, 0:13:24.240 --> 0:13:26.199 would you take it market can't waited or equal weight? 0:13:26.240 --> 0:13:28.280 That was a conversation you were having about these investors 0:13:28.280 --> 0:13:30.360 at these hedge funds. Can you tell me about where 0:13:30.360 --> 0:13:32.400 you'd leave that story now? At the index level on 0:13:32.400 --> 0:13:34.600 the SMP five hundred, would you want a market cap 0:13:34.679 --> 0:13:37.400 waited exposure, waiting for the tech snap back that you're 0:13:37.400 --> 0:13:39.840 looking for. Would you want something more equal way? How 0:13:39.880 --> 0:13:42.400 would you get your exposure? I don't have a bias 0:13:42.559 --> 0:13:46.360 against a cap way to benchmark, but but the outlook 0:13:46.760 --> 0:13:48.840 has to be for the at least the next twenty 0:13:48.880 --> 0:13:50.840 four months has to be an equal way that benchmark 0:13:50.920 --> 0:13:54.240 does does better. And and it's because I think that 0:13:54.360 --> 0:13:57.319 some of these larger companies it's harder for them to 0:13:57.440 --> 0:14:00.960 deliver an above average growth rate given their size, you know, 0:14:01.000 --> 0:14:04.760 in perpetuity um but um, and I think that you know, 0:14:04.800 --> 0:14:07.360 there are areas that are smaller in the benchmark. Energy 0:14:07.400 --> 0:14:11.280 for example, underrepresenting the benchmark really low p. If energy 0:14:11.400 --> 0:14:15.160 does well, the capwaight to benchmark will lack. And so yeah, 0:14:15.200 --> 0:14:16.560 you have to you have to go that way, John, 0:14:16.559 --> 0:14:20.360 this was great, Lovett. What restaurant we picking? What cuisine? 0:14:20.880 --> 0:14:24.200 What did you choose? He's thinking he's picking take castend 0:14:24.240 --> 0:14:26.600 to drinks, So we choose about That's what he always does. 0:14:26.800 --> 0:14:29.640 Usually at the hotel, it's always a hotel bomb. What 0:14:29.800 --> 0:14:33.360 is it with you in the hotel? They're just really 0:14:33.400 --> 0:14:37.000 good service as a general rule, they're quiet and critically 0:14:37.080 --> 0:14:39.160 with a lot of the conversations I have, particularly with 0:14:39.240 --> 0:14:42.400 the wonderful people of Bloomberg LP. You know, I don't 0:14:42.400 --> 0:14:45.000 want to be sitting next to somebody taking notes from 0:14:45.440 --> 0:14:48.400 you know somebody. I mean, they're just quieter. They're unlike 0:14:48.640 --> 0:14:51.320 the trashy disco scenes you're going. You said, I got 0:14:51.360 --> 0:14:53.600 to the discuss to like, you know, they got the 0:14:53.600 --> 0:14:58.840 ball going around and they're downs. Have you that the 0:14:59.160 --> 0:15:14.280 thin the thin high you can miss Andrew Holland Horse 0:15:14.400 --> 0:15:18.240 with a spectacular call last year on a regime of 0:15:18.360 --> 0:15:21.880 higher interest rates, and that's where we are, except it's 0:15:21.880 --> 0:15:24.400 City group. They went from fifty beeps to a quarter 0:15:24.480 --> 0:15:29.120 of a percent beeps on the February first derby. So 0:15:29.160 --> 0:15:31.760 what this is about is Holland Horse that U c 0:15:32.000 --> 0:15:34.840 l A learning that one day at u c l A. 0:15:34.920 --> 0:15:38.320 They actually taught John Maynard Keynes. When the facts change, 0:15:38.360 --> 0:15:42.160 I change in Holland Horse said, what do you do? 0:15:42.360 --> 0:15:45.240 What did you do yesterday to go from fifty beeps 0:15:45.680 --> 0:15:48.200 to beeps? Well thanks a lot of time. Yeah, that's right. 0:15:48.200 --> 0:15:50.160 When the facts change, you do change. And I think 0:15:50.480 --> 0:15:52.680 we saw in the data a little bit of softness 0:15:52.800 --> 0:15:56.440 in the price data. Certainly we've had software core CPI 0:15:56.560 --> 0:15:59.800 readings UM and then Producer Price Index usually doesn't get 0:15:59.800 --> 0:16:02.600 a lot of attention. It definitely got our attention. That 0:16:02.680 --> 0:16:05.240 was a little bit softer Also, UM, it means core 0:16:05.280 --> 0:16:07.600 pc inflation is going to be a little bit softer. 0:16:07.680 --> 0:16:11.200 So I think there's enough softer price and wage data 0:16:11.280 --> 0:16:14.680 for this FED two. I think the way they're feeling 0:16:14.720 --> 0:16:18.800 now is comfortable that they've may be done enough or 0:16:18.840 --> 0:16:23.080 getting close to having done enough. I am quite uncomfortable 0:16:23.200 --> 0:16:24.920 that they've actually done enough here, and I think we're 0:16:24.920 --> 0:16:27.160 gonna see that in some of the upcoming data. Let's 0:16:27.160 --> 0:16:31.240 talk about the uncomfortable reality of the X axis and economics. 0:16:31.240 --> 0:16:35.760 So you've adjusted for February one, but the cumulative path 0:16:36.000 --> 0:16:39.280 out into two thousand twenty three, does that still give 0:16:39.320 --> 0:16:43.040 you your high newsmaking terminal rate. So we're still at 0:16:43.040 --> 0:16:46.520 five to five fifty on the terminal rate, And I 0:16:46.560 --> 0:16:50.560 would just highlight relative to what I'm hearing FED officials 0:16:50.560 --> 0:16:54.600 talk about relative to what markets are pricing, it would 0:16:54.600 --> 0:16:57.320 seem to me that that is at the lower end 0:16:57.600 --> 0:17:00.440 of what would be a reasonable terminal poll see rate 0:17:00.520 --> 0:17:03.120 for this Federal reserve. So it's it's very possible. It's 0:17:03.120 --> 0:17:04.879 our base case that they're getting to this, you know, 0:17:05.200 --> 0:17:08.240 five point two five to five point five percent range um. 0:17:08.280 --> 0:17:10.720 But just like your previous guest was talking about, if 0:17:10.760 --> 0:17:13.320 we see wage growth that picks back up again, and 0:17:13.680 --> 0:17:15.359 we think it will over the course of this year, 0:17:15.720 --> 0:17:19.159 if we see service inflation that stays sticky, then we 0:17:19.240 --> 0:17:22.359 may see this federal reserve reassessing is that really the 0:17:22.400 --> 0:17:25.840 appropriate policy rate to get to. So, although we're hearing 0:17:25.880 --> 0:17:29.239 Fed officials saying we're gonna stay the course um, and 0:17:29.280 --> 0:17:31.080 it maybe makes sense to move at a slower pace 0:17:31.200 --> 0:17:33.920 now to figure out where that that rate is, will 0:17:33.960 --> 0:17:39.080 we really be seeing the policy response that you need 0:17:39.280 --> 0:17:41.840 to slow down the economy sufficiently to loosen the labor 0:17:41.840 --> 0:17:44.600 market tearing down inflation. I don't know if Phil Bower, 0:17:44.680 --> 0:17:47.880 who founded Modern City Group economics, on to Catherine Man 0:17:47.880 --> 0:17:50.720 and on to you, but I'm going to suggest Professor Bowder, 0:17:50.840 --> 0:17:54.239 studied as a W. Phillips curve over at LC a 0:17:54.280 --> 0:17:57.040 long time ago, linked this to unemployment. And if I 0:17:57.080 --> 0:17:59.920 get holland Horst gloom of a higher rate, what is 0:18:00.160 --> 0:18:03.480 due to the unemployment rate and the societal change that 0:18:03.520 --> 0:18:06.159 will bring Yeah, So I think that that is something 0:18:06.200 --> 0:18:08.679 that I think FED officials need to be really honest 0:18:08.720 --> 0:18:11.119 about when they talk to the public. The idea that 0:18:11.200 --> 0:18:15.399 the way monetary policy works is through things like the 0:18:15.480 --> 0:18:18.680 unemployment rate. It is by slowing down the economy, is 0:18:18.720 --> 0:18:21.800 by creating slack in the economy, and is damping demand 0:18:21.880 --> 0:18:25.520 through those channels. So if you think that this is 0:18:25.560 --> 0:18:29.199 an economy where demand is outstripping supply, you will need 0:18:29.240 --> 0:18:31.840 to lean against that with higher policy rates, and that 0:18:31.920 --> 0:18:34.399 probably will increase the unemployment. Right now, they have that 0:18:34.440 --> 0:18:37.040 in their forecast, but they have the unemployment rate coming 0:18:37.080 --> 0:18:39.160 up to maybe four and a half percent. When you're 0:18:39.200 --> 0:18:42.960 running substantially above target inflation, we still are, even though 0:18:42.960 --> 0:18:45.320 we've had a few months of software core inflation, we 0:18:45.320 --> 0:18:49.280 still are substantially above target. You probably need that unemployment 0:18:49.359 --> 0:18:51.720 rate to move further than four and a half percent. 0:18:51.760 --> 0:18:53.320 So we're probably going to need to see a five 0:18:53.359 --> 0:18:56.720 percent plus unemployment rate to bring inflation down. Um, sort of, 0:18:56.880 --> 0:19:00.119 can we be hopeful? Could we be hoping that going 0:19:00.200 --> 0:19:02.400 to get a better scenario where the unemployment rate doesn't 0:19:02.400 --> 0:19:04.399 need to move as high? Certainly, And you know, I 0:19:04.400 --> 0:19:06.320 think I would hope for that. Everybody would hope for that. 0:19:06.560 --> 0:19:10.560 But the honest answer to your question, the basic macroeconomics 0:19:10.920 --> 0:19:13.639 is that to bring wage growth down you need to 0:19:13.680 --> 0:19:15.800 loosen the labor. But we gotta remember the gentleman from 0:19:15.920 --> 0:19:18.320 U c O. A. Alan Meltzer wrote a modest three 0:19:18.359 --> 0:19:20.159 thousand page history. You're the only one I know is 0:19:20.240 --> 0:19:22.959 read it is Mike McKee, And they come on, Andrew, 0:19:23.200 --> 0:19:26.240 if we societally coming out of this pandemic shift from 0:19:26.240 --> 0:19:28.600 three and a half percent up to the Holland Horse 0:19:28.720 --> 0:19:35.040 five percent, there's gonna be a societal scream about that. Politically, 0:19:35.200 --> 0:19:37.600 how does a fellow reserve adapt to that? Yeah? I 0:19:37.600 --> 0:19:39.439 think this is This is one of the reasons that 0:19:39.920 --> 0:19:42.560 central banks globally and in the US have been made 0:19:42.600 --> 0:19:45.359 independent and the idea that they're supposed to operate outside 0:19:45.359 --> 0:19:48.960 of politics because politically this is a very difficult thing 0:19:49.080 --> 0:19:53.040 to do. Now. The education that needs to happen. Is 0:19:53.080 --> 0:19:56.159 it happening now with these speeches in the silly micro 0:19:56.320 --> 0:19:58.399 parlor game that we're doing. I don't think so. I 0:19:58.400 --> 0:20:01.080 don't think so that that and so so. First, you know, 0:20:01.160 --> 0:20:05.399 be honest, there were large errors and policy making that 0:20:05.480 --> 0:20:09.160 led to much too high inflation we're now recovering from 0:20:09.160 --> 0:20:11.639 that period of time, and the recovery from that period 0:20:11.680 --> 0:20:14.040 of time means much tighter monetary policies. So we're in 0:20:14.080 --> 0:20:17.119 a bad position, right We should acknowledge that, now that 0:20:17.160 --> 0:20:18.760 you're in this bad position, how you're going to get 0:20:18.760 --> 0:20:22.440 out of it. We could say, let's just accept higher 0:20:22.480 --> 0:20:25.080 inflation r and this was in some ways, this is 0:20:25.119 --> 0:20:27.680 what happened in the nineteen seventies, so we know from 0:20:27.680 --> 0:20:31.840 that experience that that actually leads to worse longer term outcomes. 0:20:32.160 --> 0:20:38.560 So if we try to pivot too strongly towards worrying 0:20:39.000 --> 0:20:42.560 about issues regarding growth and unemployment, of course we care 0:20:42.560 --> 0:20:45.040 about those things, but the bigger risk right now is inflation. 0:20:45.240 --> 0:20:46.639 And that's why it's been interesting in the in the 0:20:46.640 --> 0:20:49.640 FED speak right, because we've heard FED officials saying, yes, 0:20:49.680 --> 0:20:53.240