Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com
Speaker 1: and of course on the Bloomberg terminal. Right now, without question,
Speaker 1: our theoretical interview of the day, Adam posing with us
Speaker 1: with the Peterson Institute, just terrific analysis of the monetary
Speaker 1: theory behind all of these historic events. Adam, I want
Speaker 1: to take the alphabet soup of aggregate demand, aggregate supply,
Speaker 1: Hicksie and I s l M analysis and throw it
Speaker 1: out the window. What is the theoretical book of Chairman Powell?
Speaker 1: Theoretical book of Chairman palis actually been crety, honestly stated
Speaker 1: by him vice here Claire that nothers. First, you work
Speaker 1: on observables. You don't work on the stars like our
Speaker 1: star or priestar, wait till you see things. Second, that
Speaker 1: means that you do reactive rather than preemptive policy. Third,
Speaker 1: you focus on unemployment, but not unemployment as missioned by you. Three,
Speaker 1: or you sick by labor force participation by what really
Speaker 1: constitutial employment. And fourth that you're assuming that expectations are
Speaker 1: well anchored and not forward looking, you're not going to jump.
Speaker 1: You put those four things together, which he stated very clearly,
Speaker 1: and that gives you the strategy. And I'm posting what's
Speaker 1: so important here is the unknown and what the confidence
Speaker 1: of reading history is in particularly the forty seven boom
Speaker 1: out of World War Two, with all that inflation is
Speaker 1: supply comes on, we behave differently with excessive economic growth.
Speaker 1: What will be the nation's behavior given a seven percent
Speaker 1: g d P I think to seven percent GDP that's
Speaker 1: inherently going to be transitory, is not going to have
Speaker 1: that big an effect. Tom and I realized this is
Speaker 1: somewhat contrariant we are, and this is of course what
Speaker 1: the feed is betting on, which is that this is
Speaker 1: a one time surge. The overshoot does not persistent, and
Speaker 1: the longer term inflation expectations are not persistent. Now, my
Speaker 1: colleagues a Living Blanche Ard Larry Summers are emphasizing two things.
Speaker 1: First that the inflation is going to be pretty high
Speaker 1: as a result of this, and second that the FEDS
Speaker 1: ability to ride this out without raising rates, and to
Speaker 1: raise rates without breaking a lot of stuff is limited,
Speaker 1: and I think that's where the debate is, not how
Speaker 1: much inflation we're going to get. The final point I
Speaker 1: would making this is my own point, is that the
Speaker 1: savings rate I expect to stabilize at a much higher
Speaker 1: rate than it was before the pandemic, just as the
Speaker 1: household savings rate stabilized at a higher rate after the
Speaker 1: global financial crisis. So we're gonna see volatility over the
Speaker 1: next year, and all this talk about pent up savings,
Speaker 1: but it's not ultimately going to leave us spend spend
Speaker 1: spent atam. That final point is really important because I
Speaker 1: think that final point and your view on that variable,
Speaker 1: can be the difference between five six percent GDP growth
Speaker 1: and maybe seven and night, and it can be the
Speaker 1: difference between inflation ripping higher and inflation to your point
Speaker 1: just being a two percent story, Adam, how do you
Speaker 1: come to that conclusion about where the savings are, how
Speaker 1: they'll be spend, and how they'll be drawn down. Thank
Speaker 1: you for saying that, Johnson. And my view is there's
Speaker 1: two components to this. I mean, there's still gonna be
Speaker 1: a transitional dynamic and there is pent up demand in
Speaker 1: one key area of services, which is healthcare, and we're
Speaker 1: already starting to see that from the insurers. There is
Speaker 1: a lot of stuff that mey or may not have
Speaker 1: been elected, that was foregone during the worst of the pandemic.
Speaker 1: So I do expect a huge surge in healthcare spending,
Speaker 1: and that catch up is going to be inflation, because
Speaker 1: that's up the pent of the economy. But when we
Speaker 1: think about the savings rate, if you look at the
Speaker 1: history of major shots, you look at the history of
Speaker 1: the twenties and thirties, you look at the history for
Speaker 1: global financial crisis, what tends to happen in the US
Speaker 1: and a lot of other places. This is savings rate
Speaker 1: shoots up, comes back down. There's some messy dynamics, but
Speaker 1: you plet tell at a higher rate of savings. Think
Speaker 1: about young people we all know who twice in ten
Speaker 1: years either have seen their opportunities go away, or known
Speaker 1: people who have the bad luck to graduate high school
Speaker 1: with college in the wrong year. That kind of world,
Speaker 1: these scards you just as our grandparents became thrift blinded
Speaker 1: after the depression. So I expect the household savings rate
Speaker 1: to be up a percent and a half, like to
Speaker 1: six percent when it stabilizes after this crisis. Fascinating. At
Speaker 1: least you're not going to say this is probably one
Speaker 1: of the key variables right now for your round look,
Speaker 1: and I don't think it's been talked about enough. Yeah,
Speaker 1: the idea of spending and how much of this one
Speaker 1: point seven trillion dollars excess savings will be pumped into
Speaker 1: the economy. Adam, there's also a question of the frictions
Speaker 1: in getting people back into the labor market, and there
Speaker 1: was recently a Project Syndicate essay talking of at how
Speaker 1: a lot of jobs got eliminated much faster because of
Speaker 1: the pandemic. And these are the low cost to low
Speaker 1: skill jobs. What are you foreseeing. How much is the
Speaker 1: administration currently doing to ameliorate these frictions, to do training
Speaker 1: programs to help it so that people, particularly on the
Speaker 1: lower end of the income spectrum, can get back into
Speaker 1: the workforce pretty quickly. I think we've got to separate
Speaker 1: two things. You're absolutely right to focus on this issue
Speaker 1: because this is what economists referred to as scarring and
Speaker 1: this is the question both for inflation but also for
Speaker 1: human welfare. How much of the workforce can quickly come
Speaker 1: back to full employment if the FED lights it. M
Speaker 1: and I would say it's a mixed bag to be
Speaker 1: perfectly honest. On the one hand, what we're seeing is
Speaker 1: labor force scarring in the US actually isn't as bad
Speaker 1: as we think. Human scarring like the children missing school
Speaker 1: or people missing medical care is very real. But the
Speaker 1: ability of lower income people in the US when giving
Speaker 1: the opportunity to find work is actually quite high. New
Speaker 1: research computerson done by my colleagues that me and ghn
Speaker 1: clough and co authors avas Young have been looking at
Speaker 1: entrepreneurship and we've seen a surprising surgeon entrepreneurship in the
Speaker 1: small business sector. There's more resilience there. That doesn't mean
Speaker 1: people shouldn't look after them, but there is more resilience
Speaker 1: there and less scarring. That said, when you look at
Speaker 1: what's in the American Rescue Package or whatever it's called,
Speaker 1: the big package that just came from the Biden administration
Speaker 1: and Congress, most of it is short term and some
Speaker 1: of it is going to be about trying to extend
Speaker 1: the lifetime of jobs in restaurants, in hospitality and airlines
Speaker 1: that may not be there for the long term, and
Speaker 1: so it goes kind of the other way. We still
Speaker 1: need more investment a couple of percentage a year, frankly,
Speaker 1: in what the Europeans call active labor market policies, helping
Speaker 1: to match people and make them more mobile to get
Speaker 1: to new jobs. Okay, but this is a really important point, Adam,
Speaker 1: because it seems to be that you're saying this is
Speaker 1: irregardless of the pandemic, and this is regardless of the pandemic,
Speaker 1: irrespective of it. This is an important point. The idea
Speaker 1: here that the infrastructure plan cannot necessarily be billed as
Speaker 1: an extra stimulus to pull the economy out of the
Speaker 1: student out of the pandemic, but rather a shift in
Speaker 1: the economy and a way for the US to win
Speaker 1: in a world that's evolving towards five G and A
Speaker 1: and a different technology. Is that accurate in terms of
Speaker 1: what the US ought to be doing with infrastructure? He said,
Speaker 1: I think you're right that what we've got and what
Speaker 1: I'm trying to get across is the infrastructure broadly, and
Speaker 1: that means such things as as heavy duty just building bridges.
Speaker 1: That needs shifting the green composition and the carbon intensity
Speaker 1: of our economy, and that means the human infrastructure of
Speaker 1: making the best use of our people. That infrastructure is
Speaker 1: a long term issue, and that is something requires sustained spending,
Speaker 1: things that people can count on, things that businesses can
Speaker 1: plan for, and that requires financing that is not going
Speaker 1: to be paid for it how to debt on an
Speaker 1: ongoing basis, even if in general we would like to
Speaker 1: pay with debt for high return projects. Because of the
Speaker 1: amount we've had to spend for the for the stimula
Speaker 1: for the pandemic recovery, we've got to look at how
Speaker 1: to finance that over the long term. If we get
Speaker 1: back to a world where we're confident there's not going
Speaker 1: to be a recurrence in pandemics and we have a
Speaker 1: process in the Congress that actually works, then you can
Speaker 1: start talking about these are net positive investments and so
Speaker 1: we can finance them over time. Adam, that was a
Speaker 1: clinic and we always enjoy your time, so it's great
Speaker 1: to catch up and posting that the President of the
Speaker 1: Peterson Institute. What we are seeing now, folks, and this
Speaker 1: is so important, is our team at Bloomberg Surveillance trying
Speaker 1: to get us the best guests on the moment on inflation.
Speaker 1: It is David Rosenberg claimed at Maryland years ago for
Speaker 1: the partition of inflation the subsectors of inflation the dynamics,
Speaker 1: and David Rosenberg of Rosenberg Research has been heated in
Speaker 1: his disagreement on the certitude of a higher inflation. Mr
Speaker 1: Rosenberg joins us this morning. David, in our comments before
Speaker 1: this interview, you went right to the heart of the matter,
Speaker 1: which is it's assumed supply will come on in a
Speaker 1: boom economy. You disagree. Well, actually think that the supply
Speaker 1: with the lag is going to come back. Obviously demand Look,
Speaker 1: we had a demand implosion last year, a temporary bout
Speaker 1: of deflation as the demand created, you know, much faster
Speaker 1: than the supply did. Now this demand is going to
Speaker 1: come back at a faster rate than the supply side will.
Speaker 1: But look, it's all very temporary. I don't think that
Speaker 1: supply chains have been in disrepair for a permanent time
Speaker 1: period here. And of course we have the base effects
Speaker 1: that we're going to work off of in the next
Speaker 1: several months, and inflation will probably get the three and
Speaker 1: a half percent, maybe even a bit higher. Core will
Speaker 1: probably test two and a half percent. But again I
Speaker 1: think it's just it's very temporary. And I guess that
Speaker 1: my comment would be that, look, the we've seen this
Speaker 1: before from the treasury market, UH, that it often will
Speaker 1: shoot first and ask questions later. We had we had
Speaker 1: ten of these huge checkups in yields from oh nine
Speaker 1: to two thousand nineteen. We had several inflation scares, whether
Speaker 1: there were some commodities and oil and Barack Obama's infrastructure package,
Speaker 1: all the euphoria around the tax cuts, UH, and really
Speaker 1: the big story for the last cycle was that core
Speaker 1: inflation peaked at its lowest level in recorded history. So
Speaker 1: the question is, you know, are you going to focus
Speaker 1: on the trees? Are you going to focus on the
Speaker 1: forest past the trees? And right now the markets focused
Speaker 1: on the trees. But I think the surprise will be
Speaker 1: by the end of the year, um, how low inflation
Speaker 1: and cor inflation is going to be after we get
Speaker 1: through this temporary spout. Let's focus on the map as well,
Speaker 1: And I think you're the perfect guest to do this with,
Speaker 1: so we appreciate having you on the program this morning.
Speaker 1: Just the composition of the inflation basket and the dominant
Speaker 1: factors within that, and how you expect those forces to
Speaker 1: evolve in the coming year. Well, look, I think it's
Speaker 1: as that you had mentioned on the stilly set, we're
Speaker 1: going to be getting some goods inflation. We've already seen
Speaker 1: that already, the lagged impact of the prior weakness in
Speaker 1: the dollar, the run up in commodities, although they're not
Speaker 1: a very big share of the CPI or the core uh,
Speaker 1: they're still going to spill over. The service aside is
Speaker 1: going to be I think what's most important. And we've
Speaker 1: talked before about the dominance of shelter and the rental components,
Speaker 1: but that's really just looking at the being count on
Speaker 1: the bottom up basis. The reality is this, when you're
Speaker 1: looking at what ultimately drives inflation, commodities and even the
Speaker 1: things we're talking about today like the huge spike and
Speaker 1: the silly sed prices and decked again again, that's manufacturing.
Speaker 1: I think again that's going to be very temporary. That
Speaker 1: doesn't tell you were inflation is going to be in
Speaker 1: twelve months or in five years. Yeah. I was just
Speaker 1: gonna say, the key is the labor market, and people
Speaker 1: tend to forget there was everybody's focused on inflations. They
Speaker 1: don't realize I guess that the set has a dual mandate,
Speaker 1: and people look at this forecast of a three and
Speaker 1: a percent unemployment rate, you know, three years from now,
Speaker 1: and they think, oh, well, we're going back to full employment. Um,
Speaker 1: but that's not really what it's saying. I mean, you
Speaker 1: can look at a six point two percent unemployment rate
Speaker 1: right now and say, boy, that's not so bad. But
Speaker 1: you've got to remember over four million people of up
Speaker 1: the labor force in the past year, and we knew
Speaker 1: actually adjust for those people that left who could be
Speaker 1: unemployed if they came back into the labor market, if
Speaker 1: they don't find a job, the real unemployment rate is
Speaker 1: actually close to nine. So just show me a cycle
Speaker 1: and entire cycle, not two months, not three months, not
Speaker 1: for must show me a cycle of inflation that didn't
Speaker 1: involve we will wages accelerating beyond productivity growth. That's what
Speaker 1: I'm waiting for. When that happens, I'll change in my call.
Speaker 1: But I'm not changing my call because of Philly said
Speaker 1: prices or because of what the THERB index is doing.
Speaker 1: It's going to come from the labor markets. It's you're thinking,
Speaker 1: it's very much in live with the Federal Reserve. Then,
Speaker 1: so when it comes to the labor market, what are
Speaker 1: the data points do you think we should be focusing on,
Speaker 1: because the Federal Reserve ultimately is looking at the same place. Look, unfortunately,
Speaker 1: they only tell you, you know, the U three unemployment rate.
Speaker 1: Let's only tell you when people jump on the bandwagon.
Speaker 1: Oh well, look at this four and a half percent
Speaker 1: year and three and a half percent by three. It's
Speaker 1: not that simple, uh, you know, So I would say
Speaker 1: that let's look at the U six. Let's look at
Speaker 1: the broadest measure of unemployment, and it's eleven point one percent.
Speaker 1: Right now, You're not gonna squeeze inflation on any durable
Speaker 1: basis within eleven p U six unemployment rate. And so
Speaker 1: I'll tell you if I see evidence that it's going
Speaker 1: to pull down towards or below eight percent, that would
Speaker 1: be a telltale sign that work the employeed economy. Uh,
Speaker 1: if I start noticing, okay, and again this is looking
Speaker 1: at inflation broadly speaking, top down that we have to
Speaker 1: see real wasge growth exceed productivity. That will put more
Speaker 1: gurmal upper pressure on inflation, not commodity. And so really
Speaker 1: those are the data points that I'm looking at right now, David,
Speaker 1: what's the concern among economists that they've failed to get
Speaker 1: the depth of the downturn in the wake of the pandemic,
Speaker 1: then the depth or the incredible surge that we got
Speaker 1: in in the recovery. The idea here that we could
Speaker 1: see employment pick up much more quickly than we have
Speaker 1: ever before. I mean, how much does that change your
Speaker 1: outlook based on inflation? Okay, Well, you know there's a
Speaker 1: lot of assumptions there that employment is going to come
Speaker 1: back a lot more uh than was you know, previously thought.
Speaker 1: And of course employment is going to come back. But
Speaker 1: you know, the one thing that went up significantly last
Speaker 1: year at a time when we got the worst GDP number, UH,
Speaker 1: This n is business spending on automation UH and on
Speaker 1: software UH and on AI. And I think that a
Speaker 1: lot of business that realized this productivity actually boomed last
Speaker 1: year in a horrible year for the economy. Question is, therefore,
Speaker 1: you know, how many of these jobs are going to
Speaker 1: come back? Does anybody really believe that everything is going
Speaker 1: to come back, you know, in one month or two
Speaker 1: months or three months. This pandemic is not over. The
Speaker 1: vaccination rollout is very encouraging. We're winning, We're really winning
Speaker 1: the battle. But you know, I think there's a lot
Speaker 1: of assumptions. Let's look what's happened in the Europe for example.
Speaker 1: UM So, I don't think that everything is going to
Speaker 1: come back. Things will come back, but in a staggered way.
Speaker 1: It's not going to be like a snap of a finger. Now,
Speaker 1: let's not make any mistake here. We have tremendous physical stimulus.
Speaker 1: If we didn't have that UM nine hundred billion dollar
Speaker 1: package that was signed on December twenty seven, I can
Speaker 1: tell you just looking at the pattern of retail sales,
Speaker 1: we were heading into a first quarter GDP contraction. So
Speaker 1: right now, what does the vitality in the economy When
Speaker 1: you think about it, it's really vaccine and fiscal stimulus basically.
Speaker 1: And the Fed's quite right on this that the fiscal
Speaker 1: stimulus is all very transitory, so it gives you this
Speaker 1: initial jump in the data, but there's no fiscal multiplier here. Uh.
Speaker 1: And what I found very interesting was that when you
Speaker 1: look beyond this year's big boom in the economy, what
Speaker 1: does the FED really do to three on its GDP growth?
Speaker 1: It barely. So the fatis they're telling you this, and
Speaker 1: he's right, this is all temporary. Now, keep in mind
Speaker 1: one thing. I know that the market right now is
Speaker 1: pushing the FED and testing the FED and assuming that
Speaker 1: the FED is going to be forced in the moving
Speaker 1: rate earlier full year earlier. But here's what I'll say,
Speaker 1: because pal spells that everything in their forecast is predicated
Speaker 1: on policy remaining where it is for the next several years.
Speaker 1: They basically told you this is our forecast based on
Speaker 1: us on policy today, but but on rags staying in policy,
Speaker 1: stating story com for an extended period. So they're basically
Speaker 1: telling you that, you know, post this year. And look,
Speaker 1: we we've had these economic booms before, go back to
Speaker 1: nineteen eighty four. We had the same growth rate in
Speaker 1: nineteen four, going back to nineteen I mean, it's a
Speaker 1: very rare event to get say six or seven growth,
Speaker 1: incredibly unique. We've got to leave it there. Unfortunately, it's
Speaker 1: always great to get you on the show. Come back soon,
Speaker 1: Sir David Rosenberg of Rosenberg researched, and I'm going to
Speaker 1: rip up the script here. I know Lisa and John
Speaker 1: want to get to China with Dan tann Obami is
Speaker 1: truly are expert on sanctions, Dan, we have putin Biden.
Speaker 1: They're eight hundred seventy miles between Crimea in Moscow. This
Speaker 1: is really getting serious. This language, the genetic and moral
Speaker 1: code of sanctions. What sanctions are we going to see
Speaker 1: from the White House? Thanks Tom, and we we've seen
Speaker 1: sanctions as of late related to the poisoning of navalny.
Speaker 1: There's additional restrictions that are about to come into effect
Speaker 1: to restrict exports of certain technology goods from the US
Speaker 1: to Russia, and an impending sanctions program next week related
Speaker 1: to election meddling. I think the question though, that the
Speaker 1: market needs to be caused as enough. You know, if
Speaker 1: sanctions are designed to force a change in behavior with Russia,
Speaker 1: they've been extremely ineffective if you think about where these
Speaker 1: programs began, trying to get Russia to return Crimea to Ukraine,
Speaker 1: which is pretty clear at this point is not going
Speaker 1: to happen. There's consistent theme here, though, Dan, whatever we
Speaker 1: talk about, and you're right to bring up in the
Speaker 1: middle of the last decade we all remember covering get
Speaker 1: so little has changed when it comes to Europe. Little
Speaker 1: has changed to the relationship the energy relationship specifically between
Speaker 1: Germany and Russia as well, and that's a consistent theme
Speaker 1: when it comes to Russia. When it comes to China, Dan,
Speaker 1: what can the US do about that and what do
Speaker 1: you anticipate that will try to do about that? So
Speaker 1: it's unclear. There were some moves made in the last
Speaker 1: administration to attempt to thwart nord Stream too, and a
Speaker 1: little bit left over in the Biden administration, although frankly
Speaker 1: nord Stream too was nearly completed, so sanctions at this
Speaker 1: point would have been somewhat moved. I think trying to
Speaker 1: get allies more on side for human rights issues and
Speaker 1: trying to tie that back to the broader geopolitical agenda
Speaker 1: will probably be more productive than attempting to go after
Speaker 1: the energy sector, especially with Europe so dependent on Russia. UM,
Speaker 1: but it's pretty clear there was a missed opportunity on
Speaker 1: nord Stream to where the US really could have gained
Speaker 1: allied support to try and stop the efforts to complete
Speaker 1: the construction. All right, so let's move away from Russia
Speaker 1: and go to China. Given the fact that we're getting
Speaker 1: that meeting, that two day meeting an anchorage, is there
Speaker 1: anything likely to come of this or is it just
Speaker 1: going to be rhetoric yet again, the wide administration reiterating
Speaker 1: a lot of what Trump frankly did and said in
Speaker 1: our approach to China. Yeah, I mean I have this
Speaker 1: vision of some opening that's like Frankistance's best of this,
Speaker 1: where everyone begins to air their grievances. I mean, certainly,
Speaker 1: this has been an interesting week. You've got sanctions that
Speaker 1: were just applied on additional Chinese law makers under the
Speaker 1: Hong Kong Autonomy Act for the further crackdown on the
Speaker 1: election process in Hong Kong. Although you did have last
Speaker 1: week a win, so to speak for a Chinese technology
Speaker 1: company where an injunction was filed in the U S
Speaker 1: Court that essentially reverse the restriction and investing on US
Speaker 1: markets in that security. But then you also have shinjanang
Speaker 1: Um and some of the human rights sanctions that are
Speaker 1: now being levied by the EU on top of what
Speaker 1: the US has done. I think the the issue here
Speaker 1: is largely how will China respond? And they've built out
Speaker 1: their own sanctions programs. They build out law that enables
Speaker 1: UH penalties related to compliance with foreign sanctions. Really U
Speaker 1: S sanctions domestically, but I think looking for some sort
Speaker 1: of common ground is probably the best path forward on
Speaker 1: some of these issues. But there's quite a bit of
Speaker 1: room between these parties down. These sanctions come out, these
Speaker 1: policies change, and you spend a lot of time with
Speaker 1: corporates multinationals trying to make sure they're in compliance with them.
Speaker 1: But as you said at the start of this conversation,
Speaker 1: the automate gulf of policy makers is to change behavior.
Speaker 1: And it comes back to a question. I know you've
Speaker 1: been asked many times, and I'm sure increasingly so more recently,
Speaker 1: do you think sanctions actually work? So I do think
Speaker 1: sanctions work, but I think multilateral sanctions work, especially when
Speaker 1: you're talking about issues um in the human rights space
Speaker 1: of China, and I do think this is where you
Speaker 1: could end up seeing a much stronger multilateral response to
Speaker 1: try and deal with some of the forced labor challenges
Speaker 1: in China. You just saw yesterday a few other technology
Speaker 1: companies have suspended the use of some production manufacturing companies
Speaker 1: due to the forced labor in shin Chang. You may
Speaker 1: end up seeing between multilateral response and actually corporate action
Speaker 1: where companies are voluntarily winding down production in a part
Speaker 1: of China that had been hugely productive for years. You
Speaker 1: could end up seeing some movement, But I think it's
Speaker 1: similar to what we saw with the Trump administration, where
Speaker 1: the East was trying to go alone. The Biden administrations
Speaker 1: trying to return to multi eyelateralism, which one of the
Speaker 1: most recent best example is getting rond of the negotiating
Speaker 1: teable a few years ago. Obviously you saw that gut
Speaker 1: blown up in the last administration, but I think multilateralism
Speaker 1: can work in these issues. Catch ups downtown of Boum
Speaker 1: have a Wiman Pounder and head of America's Anti financial
Speaker 1: crime right now, too quick, Michael Darter with us with
Speaker 1: them camp partners. For those you on radio, you need
Speaker 1: to know that joining us this morning. Clause on the
Speaker 1: left on the couch sleeping, the Wimer on her and
Speaker 1: Mr Darta on the right as well. Michael. I want
Speaker 1: to work off Greg Jensen's note at Bridgewater today on
Speaker 1: a core fear of our listeners and viewers, and that
Speaker 1: is that we will have this debt, We will monetize
Speaker 1: the debt as we have since Roman times, and that
Speaker 1: will lead to a pernicious inflation. Is that inflation good
Speaker 1: for equity? Markets. Well, Tom, I think we have the
Speaker 1: answer to that, which is no. So if you're truly
Speaker 1: in an easy money environment, meaning higher nominal growth to
Speaker 1: the extent that you're getting higher inflation, discount rates will
Speaker 1: go up. We're seeing that with higher expected inflation and
Speaker 1: market PE ratios, all other things equal will go down.
Speaker 1: And you're seeing that, I think most visibly in tech
Speaker 1: stucts in the Nasdaq one hundred, which is falling on
Speaker 1: its face here for a lack of a better term,
Speaker 1: with higher market interest rates. Well, those corporations adjust to
Speaker 1: the reality of collapsing ratios, I think, so, I mean,
Speaker 1: I I believe a previous guest pointed out the fact
Speaker 1: that in a V shaped boom, reflationary and then ultimately inflationary,
Speaker 1: profits are also going to go up. And so that
Speaker 1: is one way for PE ratios to adjust down. But
Speaker 1: the other way is through lower equity prices. And you
Speaker 1: know we're seeing a you know, a combination of folks.
Speaker 1: So profits will be strong this year, but I do
Speaker 1: think that equity markets are going to struggle. They've already
Speaker 1: priced in a V rebound. But what's not fully appreciated
Speaker 1: at this juncture. In my opinion, is the potential for
Speaker 1: long term interest rates to continue moving up, for inflation
Speaker 1: rates to go up, and then we're looking at the
Speaker 1: prospect of higher tax rates on corporations and capital gains
Speaker 1: and defense that's probably going to be forced to start
Speaker 1: tightening monetary policy next year. Not in Mike. This is
Speaker 1: really important. And this leads to a big question, which
Speaker 1: is the weakness that we're seeing in the NASDAC. Will
Speaker 1: it persist and kind of bleed over into other areas
Speaker 1: of the equity markets that continue to be bit up
Speaker 1: and resilient in the face of higher yields. That's a
Speaker 1: great question. I think it will persist. I mean the
Speaker 1: forward valuations on the NASDAC, and this incorporates the big
Speaker 1: rise already in expected earnings, are almost six above what
Speaker 1: the average was for the last six years of the
Speaker 1: last cycle. And some of are arguing that that can
Speaker 1: be justified based on where the rate structure is and
Speaker 1: where liquidity is, but we're even priced to perfection based
Speaker 1: on liquidity, and liquidity itself is above the pre COVID trajectory,
Speaker 1: and even adjusting for rates which are rapidly re converging
Speaker 1: with what we saw before the pandemic um. You know,
Speaker 1: the market's expensive, in particular tech stocks in the Nasdaq
Speaker 1: one UH continue to be over their skis on the
Speaker 1: valuation basis, and so some caution is warranted. Yes, the
Speaker 1: outlook is very favorable and earnings are going to be strong,
Speaker 1: but these valuations are are likely to continue coming in
Speaker 1: in our opinion. All right, So that's about the NASDAC story.
Speaker 1: How about the rest of the university idea that there
Speaker 1: is more room to run based on the lagging gains
Speaker 1: that we saw lagging behind the big tech I mean,
Speaker 1: do you see that being hampered as well at some
Speaker 1: point in very well would be. I mean even some
Speaker 1: of the so called value sectors have had a pretty
Speaker 1: appreciable run here since last summer, so their valuations have
Speaker 1: come up as well. But I think that the risks
Speaker 1: are far lower because the valuations are are lower. So
Speaker 1: I think this idea of a rotation um makes sense.
Speaker 1: But you know, with higher valuations, the expected future returns
Speaker 1: also should be lower. That's the way things typically work.
Speaker 1: And I think you know where there is danger is
Speaker 1: in some of these markets that have been swept up
Speaker 1: into a speculative frenzy, not just of the nazac one
Speaker 1: trading at a double digit price to sales ratio, that's
Speaker 1: certainly danger. But the spack market, the so called Reddit
Speaker 1: trades crypto. So these would be areas I think. Is
Speaker 1: interest rates adjust higher that we can expect to see
Speaker 1: a lot of volatility. What do you expect to see
Speaker 1: from larger company, more traditional corporate officers, Not people do
Speaker 1: one specks or Reddit or the rest of it, but
Speaker 1: a given toothpaste company or a given ball bearing company, whatever,
Speaker 1: whatever the sector is, Michael, what do you how do
Speaker 1: you think those corporate officers will respond to this historic
Speaker 1: moment of say eight percent g d P. Yeah, I mean,
Speaker 1: I think that the good news is that we are
Speaker 1: going to get a very strong v rebound in GDP
Speaker 1: and in jobs. Um, the other side of that is
Speaker 1: with that strong the rebound in some potential overheating will
Speaker 1: have higher inflation and higher market interest rates. And so
Speaker 1: you know, it's a push and a pull. The push
Speaker 1: from strong profitability and strong businesses and then the poll
Speaker 1: from higher market interest rates and lower valuation. So that's
Speaker 1: what I think. You know, the the prototypical corporate officer
Speaker 1: is going to have to deal with this year Data Yo.
Speaker 1: Always look in South smooth. It's tried to catch up
Speaker 1: sick Oh why Michael Data. M Campound is chape economist
Speaker 1: and market strategy. This is the Bloomberg Surveillance Podcast. Thanks
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