WEBVTT - Surveillance: Rapid Recovery With Hatzius 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownwitz. Daily we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.600 and of course, on the Bloomberg Termament. Lawyer Going Far 0:00:30.640 --> 0:00:33.120 Away Jan Hat has made his name at Goldban Sacks 0:00:33.440 --> 0:00:37.120 with a strange phrase called mortgage equity withdrawal. He brought 0:00:37.200 --> 0:00:40.680 market economics to a complete stand still by figuring out 0:00:40.760 --> 0:00:43.920 the flows of our housing market long ago and far 0:00:43.960 --> 0:00:46.440 away in a boom. He is the Golden Sax Chief 0:00:46.440 --> 0:00:49.559 Economist and head of Global Economics. John. We're riveted on 0:00:49.600 --> 0:00:51.440 the FED meeting today. John's going to go to that, 0:00:51.479 --> 0:00:54.320 but I need to go to you on this boom economy. 0:00:54.560 --> 0:00:57.720 You and I have never seen. How does a boom economy? 0:00:57.760 --> 0:01:01.200 How do you perceive? At Golden Sacks, did eight percent 0:01:01.360 --> 0:01:04.880 g d P fades away? Will it be abrupt or 0:01:04.920 --> 0:01:08.319 will it be far more gradual and prosperous than we 0:01:08.400 --> 0:01:13.560 can imagine? I mean, the eight percent forecast is for 0:01:13.720 --> 0:01:16.040 the fourth quarter, and the fourth quarter number in two 0:01:16.040 --> 0:01:20.319 thousand and twenty one, and that's the way the FED 0:01:20.400 --> 0:01:23.319 looks at these numbers as well. We think they will 0:01:23.360 --> 0:01:27.280 obviously upgrade their forecasts sharply as well. We don't think 0:01:27.280 --> 0:01:29.520 as high as that, maybe a little bit over six. 0:01:30.040 --> 0:01:34.160 But in our forecasts two thousand twenty one, very rapid recovery. 0:01:34.200 --> 0:01:37.039 As you say, we've we've never seen these kinds of 0:01:37.040 --> 0:01:40.600 growth rates. But then afterwards, I think the economy is 0:01:40.640 --> 0:01:44.440 going to be much closer to full employment by late 0:01:44.520 --> 0:01:47.840 this year early next year, and so in two thousand, 0:01:47.880 --> 0:01:52.520 twenty two, twenty three we will see no meaningful deceleration. Think, 0:01:53.000 --> 0:01:55.640 you know, maybe three instead of eight on a on 0:01:55.680 --> 0:01:59.240 a que four the Q four basis next year, but 0:01:59.560 --> 0:02:02.640 with an unemployment rate that's then the low four percent 0:02:02.840 --> 0:02:08.040 in all forecasts, and employment rates that have mostly recovered 0:02:08.840 --> 0:02:11.160 the big slot. Just to build on what Tom is 0:02:11.200 --> 0:02:15.200 talking about, this idea of faster and hotter boom but 0:02:15.360 --> 0:02:18.040 a much quicker cycle that Andrew Sheets of Morgan Stanley 0:02:18.080 --> 0:02:20.200 was talking about earlier on the show. What is the 0:02:20.280 --> 0:02:23.840 anatomy of an economy like that? Given the fact that 0:02:23.919 --> 0:02:27.160 markets and frankly economy is often don't move in straight lines, 0:02:27.440 --> 0:02:29.760 that there can be accelerations and there can be busts, 0:02:29.880 --> 0:02:32.600 especially with how high asset prices are. I mean, what 0:02:32.720 --> 0:02:35.440 do you foresee over the next few years as we 0:02:35.480 --> 0:02:39.560 get back to this low flation normal. Well, I think 0:02:39.560 --> 0:02:44.840 we'll see a very frontloaded recovery and then something that's 0:02:44.919 --> 0:02:47.720 more similar to the growth rates that we had pre 0:02:47.960 --> 0:02:52.560 pre pandemic, with potential growth in the two percent range, 0:02:52.600 --> 0:02:55.920 maybe a little bit the law two percent, but that's 0:02:55.960 --> 0:02:58.480 not really the constraint at the moment because we still 0:02:58.520 --> 0:03:02.400 have a lot of spare capacity in the in the economy. 0:03:02.600 --> 0:03:05.560 There could be future shocks, of course post pandemic. There 0:03:05.600 --> 0:03:08.720 will be future shocks post pandemic, but I think in 0:03:08.760 --> 0:03:12.120 the neo darm it's really about making up the lost 0:03:12.160 --> 0:03:16.200 ground from the from the shock of two thousand and twenty, 0:03:16.240 --> 0:03:18.119 and I think we're all positioned for that. So yeah, 0:03:18.160 --> 0:03:20.760 let's have a clinic approaching this conversation a little bit 0:03:20.840 --> 0:03:23.639 later today the decision, the Summary of Economic Projections, the 0:03:23.680 --> 0:03:27.240 news conference as well, youth forecasting above target inflation then 0:03:27.280 --> 0:03:29.560 above two percent at least in the next three years 0:03:29.560 --> 0:03:32.120 at some point in this SEP that comes out a 0:03:32.160 --> 0:03:36.600 little bit later. Yes, we do expect the two thousand 0:03:36.680 --> 0:03:41.120 twenty three number for core PC to go up a tenth. 0:03:41.640 --> 0:03:45.480 Currently as of December showing two point zero. We think 0:03:45.480 --> 0:03:48.520 that probably goes to two point one percent, could even 0:03:48.560 --> 0:03:50.920 go to two point two percent, but I'd be very 0:03:50.960 --> 0:03:53.600 surprised if it's stayed at two. I think they will 0:03:53.880 --> 0:03:58.120 show something above the medium charm target, and that I 0:03:58.200 --> 0:04:00.880 think is then also going to be a reason to 0:04:01.040 --> 0:04:04.720 show one hike by the end of two vols and 0:04:04.720 --> 0:04:08.040 then twenty three. Again, I'm focusing on the medium projection here, 0:04:08.560 --> 0:04:10.680 and of course it's going to be a range of 0:04:10.720 --> 0:04:14.160 different views that will take some time to you know, 0:04:14.240 --> 0:04:16.400 figure out exactly what it means. But I think the 0:04:16.440 --> 0:04:19.039 first in the first instance, markets are going to be 0:04:19.080 --> 0:04:21.640 focused on the medians. So core p c a at 0:04:21.760 --> 0:04:25.000 two one two two for three, the median dot comes 0:04:25.080 --> 0:04:28.320 up one, one hike for three. Then the news conference 0:04:28.400 --> 0:04:31.239 Jan how do you think the chairman shapes the narrative 0:04:31.279 --> 0:04:34.680 coming off the back of those forecasts. I mean, I 0:04:34.680 --> 0:04:37.920 don't think that the story from from Powell is going 0:04:37.960 --> 0:04:40.599 to be all that different from you know, what he 0:04:40.680 --> 0:04:43.920 said a couple of weeks ago in the in the 0:04:44.040 --> 0:04:48.159 in the Wall Street Journal interview where he basically didn't 0:04:48.200 --> 0:04:52.760 want to provide calendar guidance for either tapering or rate 0:04:52.880 --> 0:04:56.680 hikes because the committee has decided to phrase all this 0:04:56.760 --> 0:04:59.640 and outcome based terms. But he did use quite a 0:04:59.640 --> 0:05:03.880 lot of calendar like language about tapering. He said patient, 0:05:04.520 --> 0:05:07.919 he said sometime. He said that there would be plenty 0:05:07.920 --> 0:05:11.359 of notice before they would start the taper. So to me, 0:05:11.480 --> 0:05:16.000 that says tapering in the next couple of quarters very unlikely. 0:05:16.800 --> 0:05:19.719 Late this year as a possibility, but our best guests 0:05:19.760 --> 0:05:22.640 would be early two thousand and twenty two. What would 0:05:22.680 --> 0:05:25.640 you have to see on to change your forecast for 0:05:25.720 --> 0:05:27.719 longer term inflation at a time when you've got the 0:05:27.720 --> 0:05:30.960 likes of Ray Dalio coming out and saying the cash 0:05:31.080 --> 0:05:33.360 is trash and the longer term bonds are going to 0:05:33.400 --> 0:05:38.359 be worthless in the face of accelerating inflation. Well, I 0:05:38.360 --> 0:05:42.240 think there are a number of things to watch. So 0:05:42.320 --> 0:05:45.880 our baseline scenario is that inflation goes up substantially in 0:05:45.920 --> 0:05:49.359 the in the short term that's driven by lapping the 0:05:49.440 --> 0:05:53.080 big declines of early two thousand and twenty. We got 0:05:53.080 --> 0:05:55.920 we get to two point three percent for CORPC in April, 0:05:56.240 --> 0:05:58.800 then it comes back down, and then after that you 0:05:58.839 --> 0:06:02.560 see sort of a gradual acceleration a little above two 0:06:02.560 --> 0:06:05.479 percent by two thousand twenty three, and then somewhere in 0:06:05.520 --> 0:06:08.760 the two and a quarter percent range beyond that, maybe 0:06:08.800 --> 0:06:11.400 a little bit above. So relative to that sort of 0:06:11.400 --> 0:06:15.800 baseline scenario, if you had, you know, a sharp increase 0:06:15.839 --> 0:06:18.920 in inflation expectations, that would certainly be a warning sign, 0:06:19.640 --> 0:06:22.960 probably something that would have to be visible in a 0:06:23.080 --> 0:06:27.400 number of indicators, not just break evens in the bond 0:06:27.480 --> 0:06:31.479 market or or or or household expectations, but but a 0:06:31.520 --> 0:06:34.680 combination of that. You'd certainly be focused on that. If 0:06:34.680 --> 0:06:37.960 you had a really big overheating of the economy with 0:06:38.600 --> 0:06:41.800 you know, employment rates that are far beyond the sort 0:06:41.839 --> 0:06:44.000 of cyclical heights that we've seen in the in the 0:06:44.040 --> 0:06:47.000 past couple of decades, yeah, I think then you'd be 0:06:47.000 --> 0:06:50.760 more worried about bigger wage rice spirals. In our forecast, 0:06:51.080 --> 0:06:55.400 we basically see the sizeable current output gap, the slack 0:06:55.480 --> 0:06:59.960 in the economy being filled in and maybe beyond normal, 0:07:00.040 --> 0:07:02.640 but not dramatically. But if that try not be wrong, 0:07:02.839 --> 0:07:05.919 then obviously we'd have to do that. You're reading my 0:07:05.960 --> 0:07:08.200 mind exactly, And this goes back to the hallmark work 0:07:08.200 --> 0:07:10.240 at Dudley mckelviy you and the rest of the Goldman 0:07:10.320 --> 0:07:14.360 Sex team. Is there a complete underestimation of the elasticity 0:07:14.400 --> 0:07:17.360 of supplies coming on You get a boom economy, the 0:07:17.400 --> 0:07:21.200 animal spirits pick up, the output cap closes up, and 0:07:21.240 --> 0:07:25.880 that's a good and normal thing, right, Yes, absolutely, that's 0:07:25.920 --> 0:07:28.560 a good and normal thing. And there can be too 0:07:28.640 --> 0:07:31.400 much of a good thing, of course, that's that's always 0:07:31.400 --> 0:07:34.520 a possibility you have to consider in our forecasts. It 0:07:34.600 --> 0:07:37.280 doesn't it's not too much of a good thing, it's 0:07:37.400 --> 0:07:40.680 it is a good thing. But I also think you 0:07:40.760 --> 0:07:44.480 make a good point about the potential for supply to 0:07:45.080 --> 0:07:47.240 you know, proved to be a little bit stronger than 0:07:47.400 --> 0:07:50.080 people have built in. I think that's a good point 0:07:50.080 --> 0:07:53.640 as well. And so far the supply side information that 0:07:53.680 --> 0:07:56.640 we've gotten during the pandemic has been I think better 0:07:56.720 --> 0:07:59.560 than than most people would have expected a year ago 0:07:59.720 --> 0:08:02.240 and my months ago. Yeah, we gotta squeeze one more 0:08:02.280 --> 0:08:04.560 in for Chairman Pound in this news conference for you, 0:08:04.680 --> 0:08:06.760 how Michael McKee out a question for the chairman what 0:08:06.880 --> 0:08:08.440 is it right now top of the mind for the 0:08:08.440 --> 0:08:14.080 team of government. I think asking about the you know, 0:08:14.520 --> 0:08:19.320 threshold for for for rate hikes in terms of you 0:08:19.360 --> 0:08:22.080 know where core PC inflation is. I think that is 0:08:22.120 --> 0:08:24.800 going to be the biggest questions or people. Of course 0:08:24.840 --> 0:08:28.320 I've focused on the on the dot plot per se, 0:08:28.400 --> 0:08:32.440 but but even more so perhaps on where rate hikes 0:08:32.480 --> 0:08:35.880 are as a function of where the where the inflation 0:08:35.960 --> 0:08:39.720 numbers are. So, for example, if you had two point 0:08:39.840 --> 0:08:43.640 zero for core PC and the hike, that would be 0:08:43.679 --> 0:08:46.280 viewed as very hawk ish. If you had two point 0:08:46.320 --> 0:08:49.280 two or two point three percent for CORPC and the hike, 0:08:49.400 --> 0:08:52.920 that would actually be pretty devilish. And so I think 0:08:53.000 --> 0:08:56.240 getting into that that relationship, I think it's going to 0:08:56.240 --> 0:08:59.360 be important. John. What's so important here again is I've 0:08:59.360 --> 0:09:01.559 got to get the hats look going. I mean, I'm 0:09:01.559 --> 0:09:08.960 working on it right now. It's the problem. Put it 0:09:08.960 --> 0:09:12.199 back on a catch up. We want to do it again. 0:09:13.840 --> 0:09:25.079 Thank you. There's some important stuff there. We decided a 0:09:25.160 --> 0:09:27.160 number of days ago that our team would go out 0:09:27.160 --> 0:09:29.640 and get the best voices we can. Yantius will join 0:09:29.720 --> 0:09:31.640 us here in a bit. As we move forward to 0:09:31.679 --> 0:09:35.160 the FED Show two PM this afternoon, we start Strong 0:09:35.400 --> 0:09:38.800 or Strongest with Glenn Hubbard of Columbia University to say 0:09:38.920 --> 0:09:42.400 is professor of economics, former consul of Economic Advisors. Chairman, 0:09:42.760 --> 0:09:45.000 doesn't do credit to what he did at the Columbia 0:09:45.040 --> 0:09:49.640 Business School. Is his his tenure there is well. He 0:09:49.840 --> 0:09:53.880 is the most articulate supply side conservative out there. And 0:09:53.920 --> 0:09:56.600 we start strong with Glenn Hubbard. Diana Hubbard, I am 0:09:56.640 --> 0:09:59.520 thrilled to have you on the show to talk about 0:09:59.559 --> 0:10:03.680 the assumption that growth will save us. Your lawyer, colleague, 0:10:03.720 --> 0:10:07.439 Joe Stiglets, would say, over time, over the years, we 0:10:07.480 --> 0:10:11.760 can grow our way out of a five standard deviation deficit. 0:10:12.080 --> 0:10:16.679 Does that math work Well, it really doesn't. For two reasons. 0:10:16.800 --> 0:10:20.439 We will grow very rapidly this year six plus percent. 0:10:20.559 --> 0:10:22.920 That's a challenge for the BED to change its own 0:10:23.040 --> 0:10:27.840 forecast going forward. With the fiscal impulse reversed, we're back 0:10:27.880 --> 0:10:31.240 to more normal rates of growth. Second point, A lot 0:10:31.280 --> 0:10:34.720 of our problems in fiscal policy are a programs that 0:10:34.840 --> 0:10:39.040 just grow on autopop so called entitlement programs. Growth alan 0:10:39.200 --> 0:10:41.640 doesn't save you there. We are going to have to 0:10:41.640 --> 0:10:45.679 have some kind of fiscal consolidation in spending, in taxes 0:10:45.800 --> 0:10:48.560 or dare I say it, inflation. Glen Hoummard, I remember 0:10:48.559 --> 0:10:51.240 in August Thursday of two thousand seven, where we all 0:10:51.280 --> 0:10:54.280 looked at four standard deviation three month T bill four 0:10:54.360 --> 0:10:58.000 standard deviation lieb or we're way out over that, We're 0:10:58.000 --> 0:11:02.479 out to a medical chart of moving on our fiscal policy. 0:11:02.880 --> 0:11:06.480 Does its signal crisis that we're out near six standard 0:11:06.480 --> 0:11:11.280 deviations on deficit to GDP? I don't think it signals 0:11:11.320 --> 0:11:13.640 a crisis, but I think it signals a warning. It's 0:11:13.640 --> 0:11:16.720 not a crisis to the extent this is largely one 0:11:16.840 --> 0:11:20.240 time borrowing, although even there it needs to be smart, 0:11:20.320 --> 0:11:22.880 which I can't entirely say for what we what we've 0:11:22.920 --> 0:11:25.680 just done. Going forward, though, we have to have a 0:11:25.720 --> 0:11:29.079 more sustainable fiscal policy, and that requires taking a hard 0:11:29.160 --> 0:11:33.240 look at promises we're making. For example, many promises being 0:11:33.240 --> 0:11:37.120 made in American Rescue Plan Act aren't paid for going forward. 0:11:37.480 --> 0:11:40.079 Ask what are we gonna do about alright now? Recent 0:11:40.080 --> 0:11:43.120 Washington Post article that you wrote with Alan Blinder, you 0:11:43.120 --> 0:11:45.880 said there are good reasons for running large deficits now 0:11:45.960 --> 0:11:48.319 as long as the spending is well targeted. I get 0:11:48.360 --> 0:11:50.319 the sense that you have some criticisms about what was 0:11:50.400 --> 0:11:53.320 just passed at one point nine trillion dollar stimulus. What 0:11:53.600 --> 0:11:57.400 in there is targeted do you think is appropriate? And 0:11:57.440 --> 0:12:00.920 what do you think is not? Why think a smaller 0:12:00.920 --> 0:12:03.720 bill probably would have done the trick. About a trick, 0:12:03.800 --> 0:12:07.960 I mean making sure we've shored up unemployment insurance, modest 0:12:08.000 --> 0:12:12.960 aid to states, aid to businesses for continuity. Those sorts 0:12:12.960 --> 0:12:15.760 of things make sense to me. Writing checks to people 0:12:15.800 --> 0:12:18.280 who didn't lose their jobs and his wages didn't go 0:12:18.360 --> 0:12:23.319 down is hardly targeting, and it risks ruining firepower for later. 0:12:23.760 --> 0:12:25.640 And of course, part of what's in the bill has 0:12:25.800 --> 0:12:28.600 little to do with the pandemic and is a set 0:12:28.600 --> 0:12:31.000 of social policies. And they may be good, they may 0:12:31.040 --> 0:12:33.560 be bad, but they're not really part of a stimulus, 0:12:34.000 --> 0:12:37.480 limiting firepower for later. Are you talking about possibly the 0:12:37.480 --> 0:12:40.840 Fed's hand being forced with higher inflation than expected? Are 0:12:40.880 --> 0:12:44.040 you talking about it sucking the oxygen out of Washington, 0:12:44.120 --> 0:12:47.520 d C for infrastructure spending in other initiatives. I'm talking 0:12:47.559 --> 0:12:50.080 more of the ladder. I don't expect to fit there 0:12:50.080 --> 0:12:53.200 will be a transitory burst in inflation. I don't expect 0:12:53.200 --> 0:12:55.880 the FED to confront and inflation and crisis as a 0:12:55.960 --> 0:12:58.480 result of this. I think it's a warning and communication 0:12:58.600 --> 0:13:01.200 is important, but I do think it puts at risk 0:13:01.440 --> 0:13:05.680 other physical agenda's President Biden might have, whether it's physical infrastructure, 0:13:05.760 --> 0:13:09.240 whether it's training initiatives to help workers prepare for a 0:13:09.280 --> 0:13:12.200 new economy, all of that could be put at risk 0:13:12.240 --> 0:13:15.400 because of overdoing it here, Glenn, pre pandemic, we lived 0:13:15.400 --> 0:13:17.640 in a world that was very, very shallow growth, and 0:13:17.640 --> 0:13:20.760 it was a very extended cycle as well, low trend growth, 0:13:21.040 --> 0:13:23.760 low inflation, certainly not the kind of inflation to worry about. 0:13:24.080 --> 0:13:26.000 Is there anything in this bill that really disrupts the 0:13:26.080 --> 0:13:28.800 existing trend before the pandemic? Coming out of the pandemic, 0:13:30.000 --> 0:13:31.880 I don't think so much A built this bill, but 0:13:31.960 --> 0:13:34.280 I do think we could be on the verge of 0:13:34.360 --> 0:13:38.800 much better productivity growth going forward, which would presage a 0:13:38.880 --> 0:13:42.240 better growth rate. The risk in this bill and what 0:13:42.480 --> 0:13:46.400 follows on, is that a combination of excessive spending in 0:13:46.480 --> 0:13:50.000 some areas and tax increases to pay for it limit 0:13:50.080 --> 0:13:52.000 that growth. I think that's the risk we're going to 0:13:52.080 --> 0:13:53.960 hear about in the next couple of years. The reason 0:13:53.960 --> 0:13:56.400 I asked this, Glen, is because the last cycle was 0:13:56.440 --> 0:13:59.200 so long and so shallowed, and I'm trying to understand 0:13:59.440 --> 0:14:01.840 as we move three, this one really quickly, particularly in 0:14:01.880 --> 0:14:04.600 financial markets, and if we see that snap back just 0:14:04.679 --> 0:14:07.120 as fast, whether we need to be prepared for short 0:14:07.160 --> 0:14:09.640 psychos again and maybe look past the history of the 0:14:09.679 --> 0:14:12.760 last ten years and looked at what came before. Well, 0:14:12.760 --> 0:14:15.400 I think a law will depend on how policy response 0:14:15.440 --> 0:14:18.960 has developed. So after the global financial prices crisis, we 0:14:19.000 --> 0:14:22.920 did have a fairly sluggish and eventually large policy response, 0:14:23.160 --> 0:14:27.480 but it didn't really reset business people's expectations. Fairly anti 0:14:27.560 --> 0:14:31.560 business regulatory and tax agenda, And so the question is 0:14:31.720 --> 0:14:34.120 will we do that again? I hope not, and I 0:14:34.160 --> 0:14:37.160 don't necessarily think so. I think President Biden has a 0:14:37.200 --> 0:14:40.560 somewhat different agenda, but we'll have to see. Glenn Harberg, 0:14:40.680 --> 0:14:44.960 can we close the inequality that we have? Can we 0:14:45.040 --> 0:14:50.480 close the pandemic induced inequality given modern technology? This is 0:14:50.520 --> 0:14:52.840 something you did at the business school. You lead on 0:14:52.880 --> 0:14:56.760 this for years. We completely understand the technic would not 0:14:56.920 --> 0:15:00.960 understand the technological impulse right now. Are we asking for 0:15:01.040 --> 0:15:06.040 too much from our authorities to close the inequality gap? No? 0:15:06.200 --> 0:15:07.760 I don't think we are. I don't think we can 0:15:07.840 --> 0:15:09.840 quote close it, but I think we can start by 0:15:09.880 --> 0:15:13.040 asking a big question. Given the technological changes, you put 0:15:13.040 --> 0:15:17.320 In and also globalization have disadvantaged some kinds of workers 0:15:17.360 --> 0:15:20.280 while they've advantage most of the rest of us. What 0:15:20.360 --> 0:15:22.800 can we do about that? If I were President Biden 0:15:22.840 --> 0:15:26.880 thinking about quote, infrastructure, I would think about preparing people, 0:15:27.400 --> 0:15:31.280 So that would be focusing on community college and focusing 0:15:31.320 --> 0:15:35.240 on distress communities in a meaningful way. That to me 0:15:35.520 --> 0:15:39.240 is preparation to compete. That's what Adam spitballs all right, Glenn, 0:15:39.440 --> 0:15:42.680 Just to wrap this all together, the underlying fear and markets, 0:15:42.720 --> 0:15:45.440 the underlying debate is really on inflation. And you touched 0:15:45.480 --> 0:15:47.280 on this earlier where you said that you do see 0:15:47.280 --> 0:15:49.120 this more as a transitory phase, or at least that 0:15:49.120 --> 0:15:51.200 that's how the feder will look at it. What would 0:15:51.240 --> 0:15:53.400 you see or what would you have to see to 0:15:53.560 --> 0:15:56.120 shift your opinion to say this time really is different 0:15:56.120 --> 0:16:00.000 in terms of a new inflationary regime where suddenly prices 0:16:00.040 --> 0:16:02.440 start going up at a substantially faster clip for a 0:16:02.480 --> 0:16:06.080 prolonged period. Well, I think exactly as you said, you 0:16:06.200 --> 0:16:08.920 need to see working its way through the system that 0:16:09.080 --> 0:16:12.600 sustained priced increases at all levels and wage pressures to 0:16:12.680 --> 0:16:15.280 follow it. But I'm more worried about in the near 0:16:15.480 --> 0:16:18.400 term is a spill over in the financial fraud in 0:16:18.480 --> 0:16:22.720 the markets more than goods prices and services prices getting 0:16:22.720 --> 0:16:24.880 out of hand. Glenn, always great to catch up, so 0:16:25.040 --> 0:16:27.080 appreciate your time. Thanks for being with us, Glen Hubbard. 0:16:27.080 --> 0:16:29.880 They're the former Council of Economic Advisors chairman, and of 0:16:29.920 --> 0:16:39.840 course Columbia University Professor of economics Andrew Sheets joins us. 0:16:39.840 --> 0:16:42.160 Now more Can Stanley, chief cross assets strategist. That's not 0:16:42.160 --> 0:16:44.440 where we'll start, and true, we're going to start with 0:16:44.440 --> 0:16:46.520 the cycle because you guys have put out a note 0:16:46.520 --> 0:16:48.120 in the last twenty four hours and I touched on 0:16:48.160 --> 0:16:50.760 with Mike Wilson, your colleague, yesterday, and I think it's 0:16:50.920 --> 0:16:54.080 really really important to understand that you are already talking 0:16:54.120 --> 0:16:57.240 about mid cycle dynamics in this market before this economy 0:16:57.320 --> 0:17:02.840 is even reopened and gotten started. Yeah. Thanks, Well, good morning, 0:17:03.000 --> 0:17:06.320 um everyone. And I think that's a really important theme. Obviously, 0:17:06.359 --> 0:17:08.879 there are some near term events, key events today that 0:17:08.920 --> 0:17:10.719 are going on that matter a lot for the market, 0:17:11.240 --> 0:17:13.080 but we do think it's s important to step back 0:17:13.280 --> 0:17:16.320 and think about this cycle. And I do think there 0:17:16.320 --> 0:17:19.840 are a lot of reasons why this cycle could burn hotter, 0:17:20.560 --> 0:17:22.879 but because of that also burned shorter. And that's a 0:17:22.960 --> 0:17:25.080 key theme from us at Morgan Stanley. That's what what 0:17:25.320 --> 0:17:27.720 my colleague Michael Wilson was talking about the other day. 0:17:28.320 --> 0:17:30.479 And I think that means that, you know, the market 0:17:30.640 --> 0:17:34.520 might have to transition from early cycle trades and investment 0:17:34.560 --> 0:17:38.400 strategies to mid cycle or even late cycle strategies much 0:17:38.480 --> 0:17:40.600 faster than one would have done in kind of past 0:17:40.920 --> 0:17:44.159 past market cycles. Andrew, do you agree with me that 0:17:44.320 --> 0:17:46.159 the heart of the matter to the take it to 0:17:46.200 --> 0:17:50.280 the House of Gorman is the calculation by Ellen Zetner 0:17:50.440 --> 0:17:53.440 of when and how the g d P fade occurs. 0:17:53.760 --> 0:17:58.080 That's really the first order condition here, isn't it? Well? 0:17:58.119 --> 0:18:00.800 I I do, and I so think you know, to 0:18:00.840 --> 0:18:03.040 a point you guys were mentioning earlier. I think there 0:18:03.119 --> 0:18:06.960 is a lot of unprecedented um elements of this, right. 0:18:06.960 --> 0:18:10.360 I think you have in some ways a really unique 0:18:10.640 --> 0:18:14.239 demand and supply shock happening together. Right. If I think, 0:18:14.280 --> 0:18:17.320 if you think about that demand curve, you have a 0:18:17.400 --> 0:18:20.399 record high savings rate, You've had a record amount of 0:18:20.400 --> 0:18:23.840 physical stimulus put into the economy in the form of 0:18:24.160 --> 0:18:27.359 checks and other other transfers, and then you have a 0:18:27.359 --> 0:18:29.440 lot of people who for the first time will be 0:18:29.520 --> 0:18:32.639 able to consume goods and services that they have not 0:18:32.680 --> 0:18:35.560 been able to consume before and might be more more willing, 0:18:35.640 --> 0:18:38.600 might be less price sensitive to doing that. So, you know, 0:18:38.680 --> 0:18:41.720 ellen Is Forecasting has an above consensus kind of eight 0:18:41.760 --> 0:18:45.760 point one percent growth number for for for this year. Um, 0:18:45.800 --> 0:18:49.000 you know, we we we're very optimistic around the US 0:18:49.080 --> 0:18:51.440 growth outlook. But but indeed, I think some of the 0:18:51.520 --> 0:18:54.320 question for the outyears is does that start to come 0:18:54.600 --> 0:18:56.679 does that start to come back? And then also I 0:18:56.720 --> 0:19:01.080 think for companies, you know, a very normal cycle dynamic 0:19:01.240 --> 0:19:05.640 is that as the cycle progresses, sometimes you get margin pressure. 0:19:05.680 --> 0:19:08.840 These costs that come through with the economic expansion start 0:19:08.880 --> 0:19:11.159 to hit the bottom line. And so whereas early in 0:19:11.160 --> 0:19:14.200 the cycle, things like small caps do very very well 0:19:14.240 --> 0:19:16.960 because they have very strong operating leverage, they start to 0:19:17.000 --> 0:19:19.359 do less well as the cycle progresses because of some 0:19:19.400 --> 0:19:22.320 of those cost pressures. Andrew, this is a fantastic explanation 0:19:22.680 --> 0:19:24.960 of how we can see that incredible growth that you're 0:19:25.040 --> 0:19:27.920 calling for the Goldman Sacks is calling for well, also 0:19:28.040 --> 0:19:30.960 not seeing long term inflation pick up. When you say 0:19:31.000 --> 0:19:33.840 burn hotter but burn shorter, there is a question when 0:19:33.880 --> 0:19:36.160 do treasury is ten ure Treasury has become a buy 0:19:36.560 --> 0:19:39.679 because of the expectations to this reversion to a slow 0:19:39.720 --> 0:19:43.040 growth world of perhaps even a downturn on the heels 0:19:43.040 --> 0:19:47.879 of this very fast and very hot expansion. Yeah, no, 0:19:47.960 --> 0:19:50.280 I think that's absolutely the right question. So so at 0:19:50.280 --> 0:19:53.040 the moment, you know, our our asset allocation is still 0:19:53.119 --> 0:19:57.400 underweight duration. That being said, are our interest rate strategists, 0:19:57.400 --> 0:20:00.200 you know are forecasting the US tenure to in the 0:20:00.280 --> 0:20:03.080 year at at one point seven percent, so we're very 0:20:03.119 --> 0:20:06.120 close to that number. So I certainly think it's it's 0:20:06.160 --> 0:20:08.680 the right question to ask. And as the yield curve 0:20:08.760 --> 0:20:13.320 is steepened, that the carry the economics of holding treasuries 0:20:13.440 --> 0:20:15.760 is getting a lot better. So you know, I do 0:20:15.800 --> 0:20:18.280 think there's important things to watch. Obviously what we get 0:20:18.320 --> 0:20:22.040 today and what we get out of this question around 0:20:22.400 --> 0:20:25.639 the SLR exemption as I think important, but also I 0:20:25.680 --> 0:20:27.600 think stepping back, I mean to me, one of the 0:20:27.600 --> 0:20:32.119 most fascinating charts is in the entire market is what 0:20:32.240 --> 0:20:35.439 the break even expectation curve looks like. And at the 0:20:35.520 --> 0:20:38.000 moment you know that is the FED could not ask 0:20:38.320 --> 0:20:41.640 for a better set of break even expectations. Inflation expectations 0:20:41.720 --> 0:20:44.439 right there, they're high over the next five years, but 0:20:44.480 --> 0:20:47.000 then they're lower over the next ten years, they're lower 0:20:47.000 --> 0:20:49.639 over the next thirties. So that is not telling the 0:20:49.680 --> 0:20:53.040 story of inflation run out of control. And I think 0:20:53.080 --> 0:20:55.320 that's important for the bond you know, for the bond 0:20:55.320 --> 0:20:58.280 buying story, because I think, you know, essential to kind 0:20:58.280 --> 0:21:00.680 of bonds being a buy for some of those those 0:21:00.760 --> 0:21:03.240 yield curve dynamics to come into play, is the idea 0:21:03.320 --> 0:21:04.879 that we're not going to get something to run out 0:21:04.920 --> 0:21:07.160 of control. I think certainly at the moment, the inflation 0:21:07.200 --> 0:21:09.320 curve is still forecasting and we've got to go to this. 0:21:09.400 --> 0:21:11.439 John Ferrell mentioned it earlier. I mean, I look at 0:21:11.480 --> 0:21:15.560 the heritage of John Randolphin Brown Ultimate Frisbee. Andrew, did 0:21:15.640 --> 0:21:19.960 you do a Brown Ultimate when you were there? I did. 0:21:20.080 --> 0:21:23.960 I'm I'm happy, happy to say I did very good. 0:21:24.040 --> 0:21:26.760 Andrew Sheets, thank you so much, and thank you all 0:21:26.760 --> 0:21:38.440 American Brown Texas was a really important match. Said right now, 0:21:38.440 --> 0:21:40.680 on this FED day, we get perspective from a former 0:21:40.720 --> 0:21:43.399 governor of the Fellow Reserve System, Randall Krosner, at the 0:21:43.520 --> 0:21:47.080 Chicago Booth School, and he has steeped in the history 0:21:47.080 --> 0:21:50.480 of Chicago, from Night to Stigler onto Milton Friedman and 0:21:50.600 --> 0:21:53.639 all of the good work of the modern age. Randy, 0:21:53.720 --> 0:21:57.920 we have fought a pandemic war. Out of World War Two, 0:21:58.000 --> 0:22:02.199 we had fourteen percent inflation, and in nineteen forties seven, 0:22:02.600 --> 0:22:06.040 all of a sudden one percent inflation five six years 0:22:06.119 --> 0:22:10.800 later in nineteen fifty three, the inflation of Trueman. Can 0:22:10.840 --> 0:22:13.800 it be the inflation of Powell? Where we get back 0:22:13.840 --> 0:22:17.960 to normal quicker than we think? Well, I don't think 0:22:18.000 --> 0:22:21.040 that we are going to be seeing some inflationary pressure. 0:22:21.520 --> 0:22:26.240 We certainly see a very very strong, extraordinarily strong fiscal 0:22:26.280 --> 0:22:30.639