1 00:00:09,840 --> 00:00:13,800 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm term Keene Jaylie. 2 00:00:13,960 --> 00:00:17,560 Speaker 1: We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:27,159 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. The 5 00:00:27,240 --> 00:00:30,000 Speaker 1: reaction function of the fetters shifted, and I would say 6 00:00:30,000 --> 00:00:32,319 Speaker 1: it goes back about towout month. It already leaked into 7 00:00:32,320 --> 00:00:34,000 Speaker 1: the decision making and if I wanted to make it 8 00:00:34,040 --> 00:00:36,159 Speaker 1: really simple for our audience be on Wall Street. The 9 00:00:36,200 --> 00:00:38,879 Speaker 1: message from the fetters as follows, when things used to 10 00:00:38,920 --> 00:00:42,320 Speaker 1: get better and inflation would pick up, we do something. 11 00:00:42,400 --> 00:00:44,599 Speaker 1: The message from the Fed now is we are going 12 00:00:44,680 --> 00:00:46,840 Speaker 1: to wait, and we've learned some things over the last 13 00:00:46,880 --> 00:00:49,279 Speaker 1: ten years as well. Unemployment can come lower, we can 14 00:00:49,320 --> 00:00:52,440 Speaker 1: accept the higher inflation rate, perhaps north of two percent. 15 00:00:52,760 --> 00:00:55,000 Speaker 1: I think that's the basic message coming from this feed 16 00:00:55,120 --> 00:00:58,000 Speaker 1: now time if things improve, we'll stump, stand back and 17 00:00:58,080 --> 00:01:02,200 Speaker 1: let it continue to improve. Nicely explaining nailed that, John Farrell, 18 00:01:02,320 --> 00:01:04,560 Speaker 1: and that is a good introduction to the Vice Chairman 19 00:01:04,840 --> 00:01:07,320 Speaker 1: of the FED. What this is about is heavy lifting. 20 00:01:07,440 --> 00:01:10,160 Speaker 1: Somebody has to go out and construct a ten of 21 00:01:10,280 --> 00:01:14,800 Speaker 1: fifteen and twenty page paper or speech that actually describes 22 00:01:14,959 --> 00:01:18,360 Speaker 1: the aspirations of a given central bank. It could be 23 00:01:18,360 --> 00:01:22,919 Speaker 1: the Bundesbank, the ECB, whatever. In August thirty one, Richard 24 00:01:22,959 --> 00:01:27,039 Speaker 1: Clarida of Columbia, one of our great monetary theorists, did 25 00:01:27,080 --> 00:01:30,479 Speaker 1: that with ad imposing over at the Peterson Institute. We're 26 00:01:30,480 --> 00:01:33,280 Speaker 1: thrilled at the Vice Chairman can join us this morning 27 00:01:33,560 --> 00:01:38,000 Speaker 1: to really reform and understand where this FED is going 28 00:01:38,040 --> 00:01:41,279 Speaker 1: in a FED after two decents at the last meeting, 29 00:01:41,640 --> 00:01:44,080 Speaker 1: Vice Chairman, thank you so much for joining us. What 30 00:01:44,280 --> 00:01:47,600 Speaker 1: is the aspiration to reflate? How do we get to 31 00:01:47,680 --> 00:01:51,640 Speaker 1: an inflation that is desirable? Well, thank you, Tom and 32 00:01:51,680 --> 00:01:54,320 Speaker 1: happy to do your show. Let's look, we have the 33 00:01:54,400 --> 00:01:57,640 Speaker 1: same goals we've always had. We want maximum employment and 34 00:01:57,680 --> 00:02:00,440 Speaker 1: we want price stability, which we define us to percent 35 00:02:00,480 --> 00:02:03,320 Speaker 1: inflation in the long run. But we recognize that the 36 00:02:03,400 --> 00:02:05,760 Speaker 1: world today looks a lot different than a decade ago, 37 00:02:05,840 --> 00:02:07,760 Speaker 1: and we're spending a lot of time in the US 38 00:02:07,800 --> 00:02:10,840 Speaker 1: and abroad at the lower bound on policy rates. That 39 00:02:10,880 --> 00:02:15,120 Speaker 1: puts downward bias on inflation and upward bias on unemployment. 40 00:02:15,160 --> 00:02:17,880 Speaker 1: So to offset that bias, that new normal that we're 41 00:02:17,919 --> 00:02:21,200 Speaker 1: operating in what we sit in our framework review, is 42 00:02:21,280 --> 00:02:24,560 Speaker 1: that appropriate monetary policy when you come out of recessions 43 00:02:24,560 --> 00:02:27,960 Speaker 1: and into recoveries, will not view two percent as the ceiling. 44 00:02:28,040 --> 00:02:30,600 Speaker 1: We want to actually spend some time above and below 45 00:02:30,680 --> 00:02:35,000 Speaker 1: two percent so we can anchor inflation expectations. We gave 46 00:02:35,040 --> 00:02:38,919 Speaker 1: some very very significant forward guidance in our meeting recently. 47 00:02:38,960 --> 00:02:41,359 Speaker 1: What we said is that we expect we're going to 48 00:02:41,480 --> 00:02:44,239 Speaker 1: keep rates at the current level, which is basically at zero, 49 00:02:44,720 --> 00:02:49,520 Speaker 1: until we've reached maximum employment and until inflation has reached 50 00:02:49,720 --> 00:02:52,760 Speaker 1: two percent, so lower for longer. And we've given some 51 00:02:52,800 --> 00:02:56,919 Speaker 1: observable metrics that will indicate when that liftoff can happen. 52 00:02:57,000 --> 00:02:59,519 Speaker 1: The monasty of the Vice Chairman, hear Folks is simple 53 00:02:59,639 --> 00:03:03,359 Speaker 1: into thousand fourteen, Richard clare To drove forward the phrase 54 00:03:03,760 --> 00:03:07,400 Speaker 1: the new neutral, which was shocking depression at the time. 55 00:03:07,440 --> 00:03:09,640 Speaker 1: I want to go to the robust evolution now you 56 00:03:09,760 --> 00:03:12,079 Speaker 1: and the theorists are going to and what it means 57 00:03:12,120 --> 00:03:15,760 Speaker 1: across our radio and TV audience. And it's real simple here. 58 00:03:16,120 --> 00:03:19,639 Speaker 1: We want to know on the glide path where you 59 00:03:19,800 --> 00:03:23,800 Speaker 1: step in, do you wait ex post until you finally 60 00:03:23,840 --> 00:03:27,639 Speaker 1: see a substantial inflation do you begin to act along 61 00:03:27,680 --> 00:03:30,320 Speaker 1: the way or is there somewhere in between, as Megan 62 00:03:30,400 --> 00:03:33,000 Speaker 1: Green says up at Kennedy, is there a place where 63 00:03:33,040 --> 00:03:38,280 Speaker 1: you see the whites of inflations eyes and you act well. 64 00:03:38,320 --> 00:03:40,480 Speaker 1: As we've said, and I'm let me let me state 65 00:03:40,520 --> 00:03:43,400 Speaker 1: it again. In our meeting, we indicated that we expect 66 00:03:43,440 --> 00:03:45,400 Speaker 1: that rates will be at the current level, which is 67 00:03:45,440 --> 00:03:51,200 Speaker 1: basically zero, until actual observed PC inflation has reached two percent. 68 00:03:51,360 --> 00:03:53,760 Speaker 1: That's at least we could actually keep rates at this 69 00:03:53,880 --> 00:03:56,200 Speaker 1: level even beyond that, but we're not gonna even begin 70 00:03:56,320 --> 00:03:59,400 Speaker 1: to think about lifting off. We expect until we actually 71 00:03:59,440 --> 00:04:02,280 Speaker 1: get observed inflation, and we measured on a year over 72 00:04:02,360 --> 00:04:06,200 Speaker 1: year basis equal to two percent. Also, we want our 73 00:04:06,280 --> 00:04:10,920 Speaker 1: labor market indicators to be consistent with maximum employment in 74 00:04:10,960 --> 00:04:13,960 Speaker 1: the in the labor market, and so we've been very 75 00:04:14,000 --> 00:04:16,480 Speaker 1: clear about that. If you will, that's the whites of 76 00:04:16,520 --> 00:04:20,920 Speaker 1: their eyes. We want to see actual inflation at two percent. So, Richie, 77 00:04:21,000 --> 00:04:23,960 Speaker 1: this is really important. It's fair to say that an 78 00:04:23,960 --> 00:04:27,919 Speaker 1: overshoot of two percent is not a prerequisite for lift off. 79 00:04:28,080 --> 00:04:32,320 Speaker 1: Then it's just two percent. Well, what we've said is 80 00:04:32,440 --> 00:04:35,760 Speaker 1: that inflation in our judgment and looking at a range 81 00:04:35,760 --> 00:04:39,159 Speaker 1: of indicators, needs to be on track to moderately exceed 82 00:04:39,200 --> 00:04:42,320 Speaker 1: two percent for some time. That'll be a judgment that 83 00:04:42,360 --> 00:04:45,080 Speaker 1: we make as we get closer to that number, but 84 00:04:45,120 --> 00:04:47,599 Speaker 1: our guidance is very clear. We want to see actual 85 00:04:47,600 --> 00:04:50,920 Speaker 1: inflation we measured on a year over year basis UM 86 00:04:51,000 --> 00:04:53,200 Speaker 1: at two percent, and we don't want it to be 87 00:04:53,240 --> 00:04:56,120 Speaker 1: a fleeting you know, one quarter and done um. And 88 00:04:56,200 --> 00:04:58,880 Speaker 1: at that point we will assess what is the appropriate 89 00:04:59,480 --> 00:05:02,320 Speaker 1: lift off offend the timing, but that's really down the road. 90 00:05:02,320 --> 00:05:04,200 Speaker 1: It's really the lift off is not until we get 91 00:05:04,240 --> 00:05:08,560 Speaker 1: actual inflation and maximum employment in line with our objectives. 92 00:05:09,440 --> 00:05:11,400 Speaker 1: You know, on Wall Street, as always, there's always some 93 00:05:11,440 --> 00:05:14,599 Speaker 1: confusion because there are various FED presidents going around saying 94 00:05:14,600 --> 00:05:16,560 Speaker 1: their own thing. And I think whether it's some confusion 95 00:05:16,680 --> 00:05:18,600 Speaker 1: right now is whether the FED is simply prepared to 96 00:05:18,600 --> 00:05:22,320 Speaker 1: tolerate and overshoot, or at least anticipate one in the future, 97 00:05:22,720 --> 00:05:25,400 Speaker 1: or actually kind of writing policy to drive one. So 98 00:05:25,480 --> 00:05:28,520 Speaker 1: be clear if you can, I'll be very clear. I'll 99 00:05:28,520 --> 00:05:30,919 Speaker 1: be I'll be as clear as I can. We set 100 00:05:30,920 --> 00:05:34,960 Speaker 1: in our new Framework Statement that was unanimously approved in 101 00:05:34,960 --> 00:05:40,680 Speaker 1: in August, that appropriate monetary policy. Following periods when inflation 102 00:05:40,720 --> 00:05:45,279 Speaker 1: has been persistently below two percent, appropriate monetary policy will 103 00:05:45,320 --> 00:05:48,599 Speaker 1: aim for the inflation rate to moderately exceed two percent 104 00:05:49,360 --> 00:05:52,000 Speaker 1: for some time. And that's an important difference with our 105 00:05:52,000 --> 00:05:54,679 Speaker 1: prior framework, in which we thought a two percent ceiling 106 00:05:54,800 --> 00:05:58,480 Speaker 1: was great. We now think that to anchor inflation expectations 107 00:05:58,520 --> 00:06:01,839 Speaker 1: at two percent, we need coming out of recessions to 108 00:06:01,880 --> 00:06:04,800 Speaker 1: spend some time above two percent to balance off those 109 00:06:04,839 --> 00:06:09,200 Speaker 1: times when we've been below. So how do you reconcile 110 00:06:09,320 --> 00:06:14,160 Speaker 1: that with the full costs? It's very simple, Um, and 111 00:06:14,360 --> 00:06:16,400 Speaker 1: I'm glad I'm doing this show to make a very 112 00:06:16,440 --> 00:06:19,840 Speaker 1: obvious but important point. The economy has taken the most 113 00:06:19,880 --> 00:06:23,880 Speaker 1: severe hit since the Great Depression. We had a collapse 114 00:06:23,920 --> 00:06:26,960 Speaker 1: in economic activity, We had a twenty two million increase 115 00:06:27,400 --> 00:06:32,000 Speaker 1: in unemployment, absolutely staggering numbers. The economy now is beginning 116 00:06:32,000 --> 00:06:36,680 Speaker 1: to recover. Our projections, Jonathan, that we released with our 117 00:06:36,760 --> 00:06:40,800 Speaker 1: September sep indicate that our baseline view and it's chair 118 00:06:40,880 --> 00:06:44,440 Speaker 1: pal indicated their risk. But our baseline view is that 119 00:06:44,520 --> 00:06:47,440 Speaker 1: within about three years we're going to get back to 120 00:06:47,560 --> 00:06:50,880 Speaker 1: a very low unemployment rate and inflation at our two 121 00:06:50,920 --> 00:06:55,040 Speaker 1: percent objective in the prior economic downturn that took nine years, 122 00:06:55,440 --> 00:06:59,480 Speaker 1: so we actually see a relative historical experience, um A 123 00:06:59,760 --> 00:07:05,320 Speaker 1: a pretty impressive return in our baseline projection. But that said, 124 00:07:05,680 --> 00:07:09,000 Speaker 1: we have to support the economy to get to full employment, 125 00:07:09,640 --> 00:07:13,240 Speaker 1: to get up to our two percent objective, and at 126 00:07:13,280 --> 00:07:15,800 Speaker 1: that point of course we can then start talking about 127 00:07:15,840 --> 00:07:18,520 Speaker 1: what happens beyond that. But let's don't forget the deep 128 00:07:18,520 --> 00:07:21,480 Speaker 1: hole that the pandemic has put us in the world economy. 129 00:07:21,880 --> 00:07:25,240 Speaker 1: In absolutely so, that's the fact I think you'd appreciate. 130 00:07:25,480 --> 00:07:27,640 Speaker 1: I think you'd appreciate that. For some people, though, because 131 00:07:27,640 --> 00:07:31,280 Speaker 1: it's not in the forecast, they believe that perhaps policies 132 00:07:31,320 --> 00:07:34,760 Speaker 1: not calibrates it appropriately to generate the overshoot, that if 133 00:07:34,760 --> 00:07:38,160 Speaker 1: this FED wants the overshoot over a full constable horizon, 134 00:07:38,720 --> 00:07:42,360 Speaker 1: then they're not doing enough. Well, what we're saying, quite 135 00:07:42,360 --> 00:07:46,120 Speaker 1: simply is that perhaps in a normal recession, or perhaps UH, 136 00:07:46,240 --> 00:07:50,320 Speaker 1: if we were back in February UH, then obviously getting 137 00:07:50,320 --> 00:07:53,840 Speaker 1: too and moderately exceeding two percent would be within our 138 00:07:53,880 --> 00:07:57,000 Speaker 1: forecast horizon. But because of the depth of the shock, 139 00:07:57,120 --> 00:08:00,280 Speaker 1: the economy has to recover, and as I set in 140 00:08:00,360 --> 00:08:04,640 Speaker 1: our baseline that recovery relative to last downturn will will 141 00:08:04,680 --> 00:08:08,400 Speaker 1: occur within about three three plus years. But until we 142 00:08:08,440 --> 00:08:10,920 Speaker 1: get to that point, you know, overshooting is just an 143 00:08:10,960 --> 00:08:14,560 Speaker 1: academic UH point, and we actually want to get the 144 00:08:14,600 --> 00:08:18,120 Speaker 1: economy to two percent inflation and maximum employment and we think, 145 00:08:18,200 --> 00:08:22,840 Speaker 1: along with fiscal support, that that that can happen. Meanwhile, 146 00:08:23,320 --> 00:08:25,600 Speaker 1: fund manager after fund manager has come on this show 147 00:08:25,960 --> 00:08:27,720 Speaker 1: and said that we are a risk of creating an 148 00:08:27,720 --> 00:08:30,480 Speaker 1: asset price bubble, if not having created it already. How 149 00:08:30,480 --> 00:08:35,400 Speaker 1: does that factor into your calculus about when to tighten policy. Well, 150 00:08:35,400 --> 00:08:38,920 Speaker 1: that's a good question. And obviously financial stability is always 151 00:08:38,960 --> 00:08:43,840 Speaker 1: and certainly in the pal fait and important consideration UH financials. 152 00:08:43,960 --> 00:08:46,959 Speaker 1: We get regular briefings on financial stability. We issue it 153 00:08:47,040 --> 00:08:50,960 Speaker 1: twice yearly reports, so we're very attentive and attuned to 154 00:08:51,080 --> 00:08:53,679 Speaker 1: that risk. But it's also important to remember, Lisa, you know, 155 00:08:53,720 --> 00:08:56,240 Speaker 1: we have a dual mandate assigned from Congress, which is 156 00:08:56,559 --> 00:09:00,520 Speaker 1: maximum employment and price stability. UH. If hype tthetically we 157 00:09:00,559 --> 00:09:04,360 Speaker 1: were to become concerned that financial stability put our maximum 158 00:09:04,400 --> 00:09:07,560 Speaker 1: employment and price stability goals at risk, then we would 159 00:09:07,600 --> 00:09:10,000 Speaker 1: have to factor that in. But Lisa, we also believe 160 00:09:10,440 --> 00:09:13,800 Speaker 1: that monetary policy raising or lowering rates is a pretty 161 00:09:13,840 --> 00:09:17,240 Speaker 1: blunt instrument, and our inclination and our preference at the 162 00:09:17,240 --> 00:09:21,440 Speaker 1: FED is to work with other agencies on regulations, supervision, 163 00:09:21,480 --> 00:09:26,199 Speaker 1: bank liquidity, and other dimensions than than than simply raising 164 00:09:26,280 --> 00:09:29,200 Speaker 1: or lowering rates to deal with financial stability. I guess 165 00:09:29,240 --> 00:09:31,520 Speaker 1: another way of asking this is how effective can the 166 00:09:31,559 --> 00:09:35,520 Speaker 1: FED be without more fiscal support? Without another round in Washington, 167 00:09:35,600 --> 00:09:39,400 Speaker 1: d C. That's substantial, that injects direct aid to companies, 168 00:09:39,480 --> 00:09:44,120 Speaker 1: to individuals. Well, the share pell indicated, and we all believe, 169 00:09:44,280 --> 00:09:47,160 Speaker 1: we do believe obviously fiscal policies for the Congress and 170 00:09:47,200 --> 00:09:50,000 Speaker 1: the and the executive branch. But when asked, what we'll 171 00:09:50,040 --> 00:09:53,560 Speaker 1: say is we do think that additional fiscal support will 172 00:09:53,600 --> 00:09:57,520 Speaker 1: likely be needed. I think it's very clear that the 173 00:09:57,559 --> 00:10:01,319 Speaker 1: Cares Act, which which passed in March, was really historic 174 00:10:02,000 --> 00:10:06,160 Speaker 1: government response to a historic crisis. Three trillion dollar package 175 00:10:06,640 --> 00:10:11,440 Speaker 1: UH provided significant support to the economy. The economy has 176 00:10:11,480 --> 00:10:14,600 Speaker 1: made a lot of progress, Lisa, About eleven million jobs 177 00:10:14,600 --> 00:10:17,480 Speaker 1: have returned, but there's still a deep hole. We still 178 00:10:17,480 --> 00:10:19,320 Speaker 1: have a very high rate of unemployment. We have a 179 00:10:19,320 --> 00:10:21,920 Speaker 1: lot of small and medium sized businesses that are suffering 180 00:10:22,160 --> 00:10:25,199 Speaker 1: and so yes, additional fistical support will likely be needed. 181 00:10:25,679 --> 00:10:27,520 Speaker 1: Vice Chairman, I want to go back to your work 182 00:10:27,559 --> 00:10:30,000 Speaker 1: with Girdler and Galley of years ago. This is a 183 00:10:30,080 --> 00:10:32,840 Speaker 1: claimed work from the ninety nineties which talk about the 184 00:10:32,920 --> 00:10:36,600 Speaker 1: dynamics of our system away from static models of the 185 00:10:36,640 --> 00:10:42,480 Speaker 1: previous century. Vice Chairman Clarada, We have been shocked by one, two, three, 186 00:10:42,960 --> 00:10:45,800 Speaker 1: once in a lifetime events. And the one that I 187 00:10:45,920 --> 00:10:48,160 Speaker 1: don't see in the literature, which has been a theme 188 00:10:48,200 --> 00:10:52,000 Speaker 1: of John Farroll, myself and Lisa Bramowitz, is the new 189 00:10:52,080 --> 00:10:57,320 Speaker 1: digital dominance. Our nation is being crushed by the shocks 190 00:10:57,400 --> 00:11:02,080 Speaker 1: of technology in DSG models and what you're grinding through 191 00:11:02,200 --> 00:11:04,920 Speaker 1: day to day at the FED. How do you adapt 192 00:11:05,280 --> 00:11:09,480 Speaker 1: to the shock of this new digital dominance? Tom, you 193 00:11:09,520 --> 00:11:12,640 Speaker 1: know it's a great point and um and that the 194 00:11:12,720 --> 00:11:16,720 Speaker 1: quick bottom line is that improvements in technology and productivity 195 00:11:16,920 --> 00:11:20,080 Speaker 1: are disinflationary. That is, if you don't offset them, they 196 00:11:20,120 --> 00:11:23,360 Speaker 1: tend to push inflation down. Interesting and Claria Galla Gertly 197 00:11:23,400 --> 00:11:25,080 Speaker 1: we pointed that out that you need to run a 198 00:11:25,160 --> 00:11:30,080 Speaker 1: very accommodative policy otherwise you get deflation with technology. And 199 00:11:30,120 --> 00:11:32,600 Speaker 1: so that is a factor that has been imparting downward 200 00:11:32,679 --> 00:11:37,200 Speaker 1: bias to inflation. I think technology, along with globalization, along 201 00:11:37,240 --> 00:11:39,400 Speaker 1: with the new neutral as you called it, all are 202 00:11:39,440 --> 00:11:44,480 Speaker 1: working together to create disinflationary pressures across the globe that 203 00:11:44,559 --> 00:11:46,720 Speaker 1: at the FED that we're trying to that we're trying 204 00:11:46,760 --> 00:11:50,760 Speaker 1: to offset with our policy framework. It's important Vice Chairman 205 00:11:50,800 --> 00:11:53,400 Speaker 1: to know that people are listening. A gentleman named Michael 206 00:11:53,480 --> 00:11:56,720 Speaker 1: Michael McKee emails in and says, look, there seems to 207 00:11:56,720 --> 00:12:00,439 Speaker 1: be a fiscal fiscal divide here between Bolder of St. 208 00:12:00,480 --> 00:12:02,960 Speaker 1: Louis and poll and I know that everybody's got their 209 00:12:03,000 --> 00:12:06,320 Speaker 1: own opinion, as Lisa and John mentioned, But the fiscal 210 00:12:06,520 --> 00:12:10,160 Speaker 1: urgency right now, how do you fold the shock of 211 00:12:10,200 --> 00:12:14,480 Speaker 1: an increasing deficit, the delta, the marginal, the first derivative 212 00:12:14,520 --> 00:12:17,480 Speaker 1: of fiscal shock. How do you fold that into your 213 00:12:17,520 --> 00:12:21,640 Speaker 1: FED model? How urgent is it to get that fiscal space, 214 00:12:21,760 --> 00:12:25,640 Speaker 1: that advantageous space. Well, again, that that's a decision for 215 00:12:25,679 --> 00:12:28,160 Speaker 1: the executive in the legislative branch. What I what I 216 00:12:28,200 --> 00:12:31,599 Speaker 1: will say about that is the the economy is recovering robustly, 217 00:12:31,960 --> 00:12:34,680 Speaker 1: but we're still in a deep hole. So it's important 218 00:12:34,760 --> 00:12:36,920 Speaker 1: and I'm sure Mike knows this that we are recovering, 219 00:12:36,960 --> 00:12:39,520 Speaker 1: We're growing, and growth will probably be very rapid in 220 00:12:39,559 --> 00:12:42,600 Speaker 1: the third quarter, but the whole is very deep um 221 00:12:42,679 --> 00:12:44,720 Speaker 1: and at a point where you've got a deep hole, 222 00:12:44,800 --> 00:12:48,640 Speaker 1: high unemployment, and you have, like the US does, fiscal space, 223 00:12:49,040 --> 00:12:52,360 Speaker 1: it is appropriate to use that, you know, longer term. 224 00:12:52,440 --> 00:12:55,439 Speaker 1: Obviously the US needs to get back on a sustainable 225 00:12:55,480 --> 00:12:58,000 Speaker 1: fiscal path, but you don't want to start that in 226 00:12:58,040 --> 00:13:00,760 Speaker 1: the midst of the worst eco. I'm a kit in 227 00:13:01,000 --> 00:13:04,680 Speaker 1: in ninety years. Richard Clarida, thank you so much, John Farrell, 228 00:13:04,760 --> 00:13:07,520 Speaker 1: Lisa Bramins, I really thank you for this. Follow onto 229 00:13:07,520 --> 00:13:10,480 Speaker 1: your important paper of August thirty one. He is the 230 00:13:10,600 --> 00:13:17,559 Speaker 1: vice Chairman of the Federal Reserve System. The old Court 231 00:13:17,760 --> 00:13:20,160 Speaker 1: all as far gone with thrilled that Mike Schumacher how 232 00:13:20,160 --> 00:13:24,080 Speaker 1: could join us this morning. Michael is the enthusiasm for 233 00:13:24,160 --> 00:13:29,880 Speaker 1: equities a foundational belief in his chair. Vice Chairman Clarada says, 234 00:13:29,880 --> 00:13:33,000 Speaker 1: our recovery in three to three plus years is that 235 00:13:33,080 --> 00:13:36,640 Speaker 1: the core foundation of equity ownership. No, I think the 236 00:13:36,679 --> 00:13:39,319 Speaker 1: core foundation is pretty simple. It's the central banks that 237 00:13:39,440 --> 00:13:41,920 Speaker 1: you're back when the FED came in, when other central 238 00:13:41,960 --> 00:13:45,840 Speaker 1: banks came in back in March and announced program after program, 239 00:13:45,840 --> 00:13:48,160 Speaker 1: just about every day there was something new. They made 240 00:13:48,200 --> 00:13:50,440 Speaker 1: it pretty clear that they were taking out really some 241 00:13:50,520 --> 00:13:53,040 Speaker 1: of the awful scenarios. That's why we think the risk 242 00:13:53,080 --> 00:13:55,640 Speaker 1: assets have done so well. On top of that, you've 243 00:13:55,679 --> 00:13:59,000 Speaker 1: got the FED in various central banks buying corporate bonds 244 00:13:59,000 --> 00:14:01,360 Speaker 1: and whatnot. So that's the big push. It's not the 245 00:14:01,400 --> 00:14:04,000 Speaker 1: long term economic you will that push continue? Will you 246 00:14:04,040 --> 00:14:06,440 Speaker 1: still to get central bank aid that can elevate and 247 00:14:06,440 --> 00:14:09,800 Speaker 1: sustain stock valuations. You can get central banks that at 248 00:14:09,880 --> 00:14:12,160 Speaker 1: least promised to stay on hold for a very long time, 249 00:14:12,320 --> 00:14:14,200 Speaker 1: as the Fed has done. And there's Richard Claire they 250 00:14:14,200 --> 00:14:16,400 Speaker 1: emphasized a few minutes ago on your show, Tom, But 251 00:14:16,960 --> 00:14:20,720 Speaker 1: when you think about additional policies, it's difficult to see 252 00:14:20,760 --> 00:14:23,600 Speaker 1: a lot of incremental work. So, sure, the Fed could 253 00:14:23,600 --> 00:14:26,680 Speaker 1: buy more bonds, maybe that happens. The Fed can make 254 00:14:26,680 --> 00:14:29,480 Speaker 1: promises to keep rates low for an even longer period 255 00:14:29,520 --> 00:14:32,680 Speaker 1: of time, Perhaps the ECB can wrap up its quantitative easing. 256 00:14:32,840 --> 00:14:35,440 Speaker 1: But in terms of something radically new, it's hard to 257 00:14:35,480 --> 00:14:38,680 Speaker 1: see where they will come from. Meanwhile, in fiscal fiscal talk, 258 00:14:38,760 --> 00:14:40,640 Speaker 1: Land in Washington, d C not making a lot of 259 00:14:40,640 --> 00:14:43,680 Speaker 1: progress as Tom was talking about, and as those talks 260 00:14:43,760 --> 00:14:46,520 Speaker 1: drag on, inflation expectations over the next five to ten 261 00:14:46,640 --> 00:14:50,640 Speaker 1: years is just sagging. It's just bled downward, the steady 262 00:14:50,880 --> 00:14:54,720 Speaker 1: drip lower. Is this really the main driver and inflation here? 263 00:14:54,800 --> 00:14:58,480 Speaker 1: Fiscal support and really the FED is not really that 264 00:14:58,560 --> 00:15:02,280 Speaker 1: capable of juicing price increases from here at least it's interesting. 265 00:15:02,360 --> 00:15:05,840 Speaker 1: We look at inflationary expectations in general and think about 266 00:15:05,880 --> 00:15:09,160 Speaker 1: it from market's perspective. We typically focus on break evens 267 00:15:09,160 --> 00:15:11,400 Speaker 1: from tips. You know, it sounds a bit are keen, 268 00:15:11,520 --> 00:15:14,040 Speaker 1: but in general they're driven by two things. One is 269 00:15:14,080 --> 00:15:16,760 Speaker 1: their risk on assets. So as equities have gone up 270 00:15:16,760 --> 00:15:19,480 Speaker 1: over the last six months, tips break evens have gone 271 00:15:19,520 --> 00:15:22,080 Speaker 1: up with them. That's all well and good. And secondly, 272 00:15:22,120 --> 00:15:24,800 Speaker 1: they respond to realized inflation. And I think that's the 273 00:15:24,920 --> 00:15:27,680 Speaker 1: second point is when you're hitting on realized inflation, doesn't 274 00:15:27,720 --> 00:15:31,240 Speaker 1: look like it's going up dramatically anytime soon, maybe somewhat 275 00:15:31,280 --> 00:15:34,000 Speaker 1: next year, and that until it really picks up quite 276 00:15:34,000 --> 00:15:36,440 Speaker 1: a bit, is going to make it tough for inflation 277 00:15:36,520 --> 00:15:39,960 Speaker 1: expectations broadly to increase. Mike I said earlier on that 278 00:15:40,040 --> 00:15:42,160 Speaker 1: this bond market was just a title snooze. We've been 279 00:15:42,160 --> 00:15:44,520 Speaker 1: stuck in the middle of this range for so long. 280 00:15:44,560 --> 00:15:47,200 Speaker 1: You've been looking for those high yields for quite a 281 00:15:47,200 --> 00:15:49,240 Speaker 1: while now, you and I've been talking about it for months, 282 00:15:49,240 --> 00:15:52,000 Speaker 1: it feels like years. Mikey still have that view of 283 00:15:52,040 --> 00:15:54,360 Speaker 1: that opinion. We think yields go up, John, but we're 284 00:15:54,400 --> 00:15:56,800 Speaker 1: not in the camp anymore. They go up dramatically, So 285 00:15:56,960 --> 00:15:58,960 Speaker 1: for instance, only flesh that out by the end of 286 00:15:58,960 --> 00:16:01,240 Speaker 1: this year. We say that in your yield gets the 287 00:16:02,120 --> 00:16:05,600 Speaker 1: basis points something like that next year very dependent on 288 00:16:05,600 --> 00:16:08,040 Speaker 1: the past for COVID and of course the elections, but 289 00:16:08,160 --> 00:16:10,360 Speaker 1: in terms of the baseline, so you want a quarter 290 00:16:10,440 --> 00:16:13,040 Speaker 1: to one fifty and in terms of get into even 291 00:16:13,120 --> 00:16:15,880 Speaker 1: ninety basis points this year, that that to us seems 292 00:16:15,920 --> 00:16:19,520 Speaker 1: pretty simple. If you get a move in the election 293 00:16:19,600 --> 00:16:22,520 Speaker 1: toward Trump, that should probably do it right there. And 294 00:16:22,600 --> 00:16:24,840 Speaker 1: if by some chance Trump would win, you can see 295 00:16:24,920 --> 00:16:28,440 Speaker 1: yields go dramatically higher. So there's certainly a scenario that 296 00:16:28,480 --> 00:16:30,400 Speaker 1: gets there. But I agree with you, it's been awfully 297 00:16:30,400 --> 00:16:32,280 Speaker 1: calmed in the bond market for a long time now. 298 00:16:32,600 --> 00:16:34,320 Speaker 1: My reason I asked the question, I just wonder if 299 00:16:34,320 --> 00:16:37,680 Speaker 1: you rethinking the outlook for the US economy and the 300 00:16:37,720 --> 00:16:40,280 Speaker 1: Federal Reserve and policymakers not just to the Fed but 301 00:16:40,320 --> 00:16:44,040 Speaker 1: also fiscal authorities. Their ability to generate a recovery that 302 00:16:44,160 --> 00:16:47,160 Speaker 1: actually leads to high yields on a sustained basis, actually 303 00:16:47,240 --> 00:16:50,960 Speaker 1: leads to a hiking cycle now may seem obsurd, but 304 00:16:51,000 --> 00:16:54,120 Speaker 1: we've seen this play out in Europe in Japan. Why 305 00:16:54,120 --> 00:16:55,840 Speaker 1: can't it play out in the United States as well? 306 00:16:56,000 --> 00:16:58,280 Speaker 1: We could? Who could wind up in a situation here 307 00:16:58,280 --> 00:17:00,520 Speaker 1: where yields to stay low for a very a long time. 308 00:17:00,640 --> 00:17:03,680 Speaker 1: Think about Mario drags Ternam at ECB eight years at 309 00:17:03,720 --> 00:17:06,560 Speaker 1: the Helm. He never hiked. Now Powell's already hyped a 310 00:17:06,560 --> 00:17:09,560 Speaker 1: few times, but still you can imagine a case where 311 00:17:09,960 --> 00:17:13,000 Speaker 1: there just is no traction economically. Now, let's hope that's 312 00:17:13,000 --> 00:17:16,280 Speaker 1: not true. One benefit to US US has versus Europe 313 00:17:16,280 --> 00:17:18,959 Speaker 1: and Japan, for sure, is the economy is much more 314 00:17:19,000 --> 00:17:22,120 Speaker 1: flexible here, a lot more flexible labor rules, etcetera. So 315 00:17:22,560 --> 00:17:25,679 Speaker 1: in terms of ramping up, it's probably the US generally 316 00:17:25,680 --> 00:17:27,760 Speaker 1: a little bit farther ahead, but we haven't seen a 317 00:17:27,880 --> 00:17:30,200 Speaker 1: kick in just yet, Mike. Earlier in the show, John 318 00:17:30,240 --> 00:17:31,840 Speaker 1: was saying that he needs a red bull as he 319 00:17:31,840 --> 00:17:33,760 Speaker 1: looks at the bond market, and he's not alone a 320 00:17:33,760 --> 00:17:36,400 Speaker 1: lot of people saying they need some stimulus to get 321 00:17:36,400 --> 00:17:39,200 Speaker 1: through the day. In looking at the snoozer that is 322 00:17:39,240 --> 00:17:42,080 Speaker 1: the bond market. If there is a breakout and yields 323 00:17:42,119 --> 00:17:44,760 Speaker 1: one way or another, where do you see it going 324 00:17:44,840 --> 00:17:47,760 Speaker 1: which direction? Up or down? We think it's more likely 325 00:17:47,800 --> 00:17:49,919 Speaker 1: to go up. Lasta but I'll have you out of that, 326 00:17:50,240 --> 00:17:52,880 Speaker 1: and that is that if the election results are a 327 00:17:52,920 --> 00:17:55,840 Speaker 1: real mess, and if they're delayed for a couple of weeks, 328 00:17:56,600 --> 00:18:00,159 Speaker 1: we think yields could drop dramatically and very quickly. In in 329 00:18:00,080 --> 00:18:02,760 Speaker 1: in that case, it's useful people look back to two thousand, 330 00:18:02,840 --> 00:18:06,040 Speaker 1: but putting it in today's context, we think the tenure yield, 331 00:18:06,040 --> 00:18:07,840 Speaker 1: if the results are delayed by a couple of weeks, 332 00:18:07,880 --> 00:18:11,280 Speaker 1: could fall towards forty basis points. So that would be 333 00:18:11,320 --> 00:18:13,280 Speaker 1: a wake up call for sure, probably worthy of a 334 00:18:13,280 --> 00:18:15,000 Speaker 1: red bull or two really for a lot of people. 335 00:18:16,080 --> 00:18:20,280 Speaker 1: Michael Schumacher, they're moving the red bull debate forward as well. Michael. 336 00:18:20,320 --> 00:18:22,560 Speaker 1: It's all great, and you know, I look at the 337 00:18:22,560 --> 00:18:24,639 Speaker 1: FED policy and the hope and the prayer, but the 338 00:18:24,720 --> 00:18:28,240 Speaker 1: great conundrum out there is is Lisa brilliantly mentioned the 339 00:18:28,359 --> 00:18:32,919 Speaker 1: Vice chairman Clarida this fear of asset bubbles is a 340 00:18:32,960 --> 00:18:37,480 Speaker 1: consumer discretionary stock with a thirty two pe. The definition 341 00:18:37,520 --> 00:18:41,040 Speaker 1: of an asset bubble doesn't sound particularly cheap. Does it 342 00:18:41,400 --> 00:18:44,840 Speaker 1: have a red bull a lot of interest rate? Exactly? No, 343 00:18:44,920 --> 00:18:48,480 Speaker 1: I'm asking you seriously here. I mean, these valuations are extraordinary. 344 00:18:48,800 --> 00:18:52,480 Speaker 1: And the Lisa's question, Steve Roaches brought this up as well. 345 00:18:52,520 --> 00:18:56,600 Speaker 1: Are these asset bubbles? It's the bubble term is interesting. 346 00:18:56,640 --> 00:18:59,240 Speaker 1: People talked about it quite a bit. It's hard to 347 00:18:59,280 --> 00:19:01,439 Speaker 1: define it what exactly as a bubble. Not to me, 348 00:19:01,520 --> 00:19:06,199 Speaker 1: a bubble is something where prices explode upward with no 349 00:19:06,320 --> 00:19:09,959 Speaker 1: type of fundamentals and no clear link to policy changes. 350 00:19:10,240 --> 00:19:11,879 Speaker 1: And what we've had in the last six months is 351 00:19:11,920 --> 00:19:14,680 Speaker 1: a little bit different because policy shifts have really boosted 352 00:19:14,760 --> 00:19:17,879 Speaker 1: us as dramatically. So I'd say it's too soon to 353 00:19:17,920 --> 00:19:21,000 Speaker 1: tell the Federal Reserve of the ECB that they've really 354 00:19:21,480 --> 00:19:23,880 Speaker 1: put forth a bubble, but that could happen in six 355 00:19:24,000 --> 00:19:26,680 Speaker 1: or twelve months. There's another way of looking at this, Mike. 356 00:19:26,760 --> 00:19:29,240 Speaker 1: The idea that we reach a certain point where low 357 00:19:29,320 --> 00:19:32,080 Speaker 1: yields in and of themselves are no longer an excuse 358 00:19:32,160 --> 00:19:34,560 Speaker 1: to go into riskier assets, and we've got a flavor 359 00:19:34,600 --> 00:19:36,920 Speaker 1: of that earlier this week with the threat of no 360 00:19:37,040 --> 00:19:40,320 Speaker 1: fiscal support from Washington d C. Are we reaching that 361 00:19:40,400 --> 00:19:44,479 Speaker 1: tipping point if inflation expectations continue to go down? Yes, 362 00:19:44,640 --> 00:19:46,879 Speaker 1: is interesting, Lisa, and talking to our traders, one of 363 00:19:46,920 --> 00:19:49,040 Speaker 1: them is a really good way to put at Andrew Fretcher. 364 00:19:49,119 --> 00:19:52,520 Speaker 1: He says, Look, nobody really wants to buy thirty year 365 00:19:52,560 --> 00:19:56,360 Speaker 1: treasuries at one fifty or ten year treasuries at seventy 366 00:19:56,359 --> 00:19:58,919 Speaker 1: basis points, but some people simply have to do it. 367 00:19:59,359 --> 00:20:01,360 Speaker 1: So the way that think about it, perhaps is how 368 00:20:01,359 --> 00:20:04,480 Speaker 1: many investors or headers out there's still really have to 369 00:20:04,480 --> 00:20:06,879 Speaker 1: do that trade? And I would think the number is 370 00:20:06,960 --> 00:20:10,880 Speaker 1: dropping pretty dramatically. Someone might much smarter than May. In fact, 371 00:20:10,920 --> 00:20:12,800 Speaker 1: a few people much smarter than Mace At the price 372 00:20:12,840 --> 00:20:16,480 Speaker 1: of financial stability was eternal vigilance, and I just wondered 373 00:20:16,520 --> 00:20:19,280 Speaker 1: this new reaction function of the FED whether it's sacrifices 374 00:20:19,680 --> 00:20:23,840 Speaker 1: some of that vigilance. Well, it's I would say, it's 375 00:20:23,880 --> 00:20:26,880 Speaker 1: a slow look at vigilant sur job because the Fed 376 00:20:26,960 --> 00:20:29,679 Speaker 1: will still care certainly about the path of inflation, but 377 00:20:30,400 --> 00:20:33,600 Speaker 1: it does mean, it's a lot less interested in fluctuations, 378 00:20:33,680 --> 00:20:36,120 Speaker 1: meeting to meeting, quarter to quarter, that sort of thing. 379 00:20:36,280 --> 00:20:38,840 Speaker 1: So you make a good point, probably not going to 380 00:20:38,960 --> 00:20:41,560 Speaker 1: have as much of a ruckas around every press conference 381 00:20:41,640 --> 00:20:45,480 Speaker 1: or every commentary from j Paul Richard clarative, but it 382 00:20:45,520 --> 00:20:47,439 Speaker 1: will be more evident what path the feed is on. 383 00:20:47,520 --> 00:20:50,359 Speaker 1: Well in advance, Mike rant to catch up as always 384 00:20:50,359 --> 00:20:52,280 Speaker 1: going to see in might shootmak of that of last 385 00:20:52,320 --> 00:20:58,440 Speaker 1: fago on this bond market and fed policy. Let's bring 386 00:20:58,440 --> 00:21:01,280 Speaker 1: in Victoria Fernandis show we crossed my Global Investments chief 387 00:21:01,359 --> 00:21:03,760 Speaker 1: market strategy. She joins us. Right now, Victory, great to 388 00:21:03,800 --> 00:21:06,639 Speaker 1: catch up with you, as always, walk me through that 389 00:21:06,680 --> 00:21:10,720 Speaker 1: you've identified the same thing, the volatility. What's behind the 390 00:21:10,720 --> 00:21:14,320 Speaker 1: pickup involved that we're seeing right now in equities? Yeah, John, 391 00:21:14,359 --> 00:21:16,320 Speaker 1: I mean it goes to what you guys are saying, 392 00:21:16,320 --> 00:21:19,359 Speaker 1: there's volatility in the markets, but we think the underlying 393 00:21:19,400 --> 00:21:22,639 Speaker 1: fundamentals are still strong. So the volatility we see in 394 00:21:22,680 --> 00:21:25,200 Speaker 1: the future is really going around the election time. Those 395 00:21:25,200 --> 00:21:28,920 Speaker 1: October futures which encompasses November three, we've seen a lot 396 00:21:28,920 --> 00:21:33,199 Speaker 1: of movement there, so obviously increased of COVID cases in 397 00:21:33,240 --> 00:21:35,280 Speaker 1: the UK and in Europe is going to be driving that. 398 00:21:35,480 --> 00:21:38,160 Speaker 1: We've talked before about how the volatility in the market 399 00:21:38,240 --> 00:21:41,320 Speaker 1: is really driven by COVID more than anything else. Talks 400 00:21:41,320 --> 00:21:44,040 Speaker 1: of vaccine, we had fires are out yesterday talking about 401 00:21:44,080 --> 00:21:47,000 Speaker 1: their vaccine trials. J and J made their announcement this 402 00:21:47,040 --> 00:21:50,159 Speaker 1: morning about their Phase three trial that they're doing. And 403 00:21:50,240 --> 00:21:53,040 Speaker 1: obviously you tie in with some of that the fact 404 00:21:53,080 --> 00:21:55,200 Speaker 1: that now you have a Supreme Court issue and is 405 00:21:55,240 --> 00:21:57,159 Speaker 1: that going to push some of the stimulus that you 406 00:21:57,160 --> 00:22:00,000 Speaker 1: guys were talking about further down the road and now 407 00:22:00,200 --> 00:22:05,160 Speaker 1: leads to again increased volatility, although underlying economic fundamentals seem 408 00:22:05,240 --> 00:22:08,199 Speaker 1: to be trending. Okay, Victoria, I want to congratulate you 409 00:22:08,240 --> 00:22:10,960 Speaker 1: on your research note. Did you talk about a Barbell 410 00:22:11,119 --> 00:22:14,240 Speaker 1: strategy where you're talking about holding onto the high flying 411 00:22:14,320 --> 00:22:17,720 Speaker 1: text and adding to it as well? Why are so 412 00:22:17,880 --> 00:22:21,119 Speaker 1: few people talking about that? You know, it seems that 413 00:22:21,160 --> 00:22:23,960 Speaker 1: a lot of investors tend to want to go all 414 00:22:24,040 --> 00:22:27,280 Speaker 1: in on a sector and they really find themselves chasing 415 00:22:27,320 --> 00:22:30,320 Speaker 1: the market and chasing those headlines. That's a very dangerous 416 00:22:30,320 --> 00:22:32,760 Speaker 1: position to be in. We like to take that longer 417 00:22:32,880 --> 00:22:35,399 Speaker 1: term perspective, and so if you do that you have 418 00:22:35,520 --> 00:22:38,679 Speaker 1: to say look longer term, Yes, these names have really 419 00:22:38,760 --> 00:22:41,680 Speaker 1: moved up. We've seen that with the high flying tech 420 00:22:41,800 --> 00:22:44,200 Speaker 1: names that you mentioned, but we think there's still more 421 00:22:44,320 --> 00:22:47,480 Speaker 1: runway for them, not just because of COVID, but because 422 00:22:47,480 --> 00:22:49,960 Speaker 1: of the way things have changed on a permanent basis. 423 00:22:50,119 --> 00:22:51,720 Speaker 1: We know people are going to go back to work, 424 00:22:51,960 --> 00:22:53,919 Speaker 1: but you're still going to need more broadbands, You're going 425 00:22:53,960 --> 00:22:57,000 Speaker 1: to need more data infrastructure. There's things that people are 426 00:22:57,040 --> 00:23:00,800 Speaker 1: doing like telemedicine. They're going to continue, so keep some 427 00:23:00,880 --> 00:23:03,520 Speaker 1: of those names there, but we all are looking at 428 00:23:03,520 --> 00:23:06,080 Speaker 1: the recovery process. We are looking at some of those 429 00:23:06,320 --> 00:23:08,800 Speaker 1: staple names and cyclical names that you should have in 430 00:23:08,840 --> 00:23:12,119 Speaker 1: your portfolio to increase your exposure across the board. For 431 00:23:12,160 --> 00:23:15,760 Speaker 1: a longer term investor, a Barbell strategy is what keeps 432 00:23:15,800 --> 00:23:19,080 Speaker 1: your portfolio from being too volatile. A lot of investors 433 00:23:19,160 --> 00:23:22,880 Speaker 1: Victoria come on this program reassert their confidence in an 434 00:23:22,920 --> 00:23:26,040 Speaker 1: ongoing rally over the longer term in equities, and they 435 00:23:26,080 --> 00:23:28,840 Speaker 1: cite the credit markets as being well behaved as a 436 00:23:28,840 --> 00:23:32,119 Speaker 1: reason for that confidence. Yourself mentioned that in a recent note, 437 00:23:32,359 --> 00:23:34,760 Speaker 1: and yet we have seen a number of pretty big 438 00:23:34,800 --> 00:23:38,080 Speaker 1: outflows from the largest high yield bond et F of late, 439 00:23:38,200 --> 00:23:41,080 Speaker 1: we're starting to see credit spreads creep up just a 440 00:23:41,080 --> 00:23:44,160 Speaker 1: little bit. At what point do you start to pay attention? Well, 441 00:23:44,160 --> 00:23:46,119 Speaker 1: I think you have to constantly pay attention to that 442 00:23:46,160 --> 00:23:48,400 Speaker 1: credit market. I mean, you guys were talking about how 443 00:23:48,440 --> 00:23:51,480 Speaker 1: the tenure treasury has been closing at sixty sixty seven 444 00:23:51,480 --> 00:23:54,520 Speaker 1: basis points continuously, and if you look at the technicals 445 00:23:54,560 --> 00:23:57,359 Speaker 1: on the treasury market, you've got that triangle forming and 446 00:23:57,400 --> 00:23:59,480 Speaker 1: it seems kind of like a coil that's starting to 447 00:23:59,520 --> 00:24:01,520 Speaker 1: wind up. And I'm not sure whether we're gonna see 448 00:24:01,600 --> 00:24:04,119 Speaker 1: rates shoot higher or shoot lower, but I think we're 449 00:24:04,160 --> 00:24:06,360 Speaker 1: getting to a point where we're gonna see some movement. 450 00:24:06,680 --> 00:24:09,439 Speaker 1: Then we'll see credit markets move as well. But you 451 00:24:09,520 --> 00:24:12,119 Speaker 1: have to watch and see, especially with earnings coming up 452 00:24:12,480 --> 00:24:15,520 Speaker 1: um next month, what we think we're gonna see from 453 00:24:15,560 --> 00:24:18,040 Speaker 1: these companies. Are they going to report some strong balance 454 00:24:18,040 --> 00:24:20,840 Speaker 1: sheets like we saw out of Nike last night. If so, 455 00:24:20,960 --> 00:24:22,720 Speaker 1: then maybe you see a little more strength in that 456 00:24:22,760 --> 00:24:25,400 Speaker 1: credit market as some of the fear starts to come back. 457 00:24:25,720 --> 00:24:28,560 Speaker 1: The numbers from Nike absolutely phenomenal. In the commentary as well, 458 00:24:28,600 --> 00:24:31,119 Speaker 1: we can thrive in this environment, Victoria, how difficult is 459 00:24:31,119 --> 00:24:34,159 Speaker 1: it to find the winners the other people haven't already identified. 460 00:24:34,200 --> 00:24:36,439 Speaker 1: It just feels like everyone is already in the same trade. 461 00:24:37,000 --> 00:24:38,919 Speaker 1: It does feel like that to an extent. But I 462 00:24:38,920 --> 00:24:41,439 Speaker 1: think it all comes down to that fundamental analysis that 463 00:24:41,520 --> 00:24:43,840 Speaker 1: you have to do on these companies. Like we said, 464 00:24:43,840 --> 00:24:46,600 Speaker 1: don't go all in on a particular sector. Find those 465 00:24:46,680 --> 00:24:48,720 Speaker 1: names where they have the strong balance sheets. We talked 466 00:24:48,720 --> 00:24:51,800 Speaker 1: a minute ago about broadband Charter Communication is a great 467 00:24:51,840 --> 00:24:54,399 Speaker 1: example of that. They're using their free cash flow to 468 00:24:54,520 --> 00:24:57,120 Speaker 1: pay down their debt. Look for companies that are doing 469 00:24:57,160 --> 00:25:00,320 Speaker 1: things like that during this time period to strength their 470 00:25:00,400 --> 00:25:03,880 Speaker 1: position so they'll be solid during volatility. You can see 471 00:25:03,920 --> 00:25:05,919 Speaker 1: it in names like McCormick. You can see it in 472 00:25:05,960 --> 00:25:08,560 Speaker 1: bigger names like Walmart that people are used to. So 473 00:25:08,600 --> 00:25:12,240 Speaker 1: that fundamental analysis for us finding those low net debt 474 00:25:12,359 --> 00:25:15,240 Speaker 1: levels on companies, that's going to be key. What about 475 00:25:15,320 --> 00:25:19,480 Speaker 1: their ratios, the pe multiple, price to cash flow, It's 476 00:25:19,560 --> 00:25:22,879 Speaker 1: just stunning where these are set. These are not nifty fifty. 477 00:25:22,920 --> 00:25:27,359 Speaker 1: This is almost once in a lifetime valuations. No, you're right, Tom, 478 00:25:27,400 --> 00:25:29,800 Speaker 1: and you you do have to pay attention to those numbers. 479 00:25:29,960 --> 00:25:31,720 Speaker 1: But I think a lot of that too I mean, 480 00:25:31,760 --> 00:25:34,000 Speaker 1: we've got rates that are so low right now, that 481 00:25:34,080 --> 00:25:36,439 Speaker 1: cost of capital is so low, then when you go 482 00:25:36,520 --> 00:25:38,840 Speaker 1: when you look at some of the pe earnings, I'm 483 00:25:38,880 --> 00:25:42,280 Speaker 1: not sure that that's a valid valuation component at this point. 484 00:25:42,520 --> 00:25:45,000 Speaker 1: We like to look at free cash flow. We like 485 00:25:45,160 --> 00:25:47,720 Speaker 1: to look at the management that people have in place. 486 00:25:48,000 --> 00:25:50,240 Speaker 1: Those are some of the key ratios that we're looking 487 00:25:50,280 --> 00:25:52,920 Speaker 1: at in regards to cash flows um in order to 488 00:25:52,960 --> 00:25:56,000 Speaker 1: see if a company can withstand the volatility that we 489 00:25:56,040 --> 00:26:00,200 Speaker 1: anticipate we're gonna see over the coming quarter. Nickti goot 490 00:26:00,200 --> 00:26:02,639 Speaker 1: to say it right to have from you across my 491 00:26:02,760 --> 00:26:12,240 Speaker 1: global investments. Why now Andrew Holland Horst joins the City Group, 492 00:26:12,800 --> 00:26:16,000 Speaker 1: their global markets chief US economist. And we get lucky 493 00:26:16,080 --> 00:26:19,080 Speaker 1: today because Holland Horst was at u c l A 494 00:26:19,320 --> 00:26:23,160 Speaker 1: under the giant Roger Farmer. And what's so important here 495 00:26:23,320 --> 00:26:27,400 Speaker 1: is Farmer Holland Horst was an important paper ages ago 496 00:26:28,160 --> 00:26:31,320 Speaker 1: on what Richard Clarida is best known for. I'm not 497 00:26:31,359 --> 00:26:33,080 Speaker 1: gonna go into it right now. It's a lot of 498 00:26:33,119 --> 00:26:36,600 Speaker 1: theoretical mumbo jumbo. But Andrew Holland Horst has had the 499 00:26:36,600 --> 00:26:42,639 Speaker 1: privilege of diving into the minutia of dynamic models of 500 00:26:42,720 --> 00:26:46,280 Speaker 1: guessing what the future would be with that knowledge. Andrew 501 00:26:46,320 --> 00:26:50,120 Speaker 1: Holland Horst, and you're wonderful work with Professor Farmer. Does 502 00:26:50,119 --> 00:26:52,160 Speaker 1: a FED to have a clue what it's doing trying 503 00:26:52,200 --> 00:26:55,840 Speaker 1: to reshape its model into a new reality at the 504 00:26:55,920 --> 00:26:59,399 Speaker 1: zero bound? Yeah, it's it's a great way to introduce it. 505 00:26:59,600 --> 00:27:01,600 Speaker 1: And let me to say Roger Farmer was a great 506 00:27:01,640 --> 00:27:03,919 Speaker 1: mentor at u c l A and very grateful for 507 00:27:03,960 --> 00:27:06,880 Speaker 1: the privilege of working with him. Um. But but this 508 00:27:07,040 --> 00:27:11,680 Speaker 1: idea of trying to marry the theory with how you 509 00:27:11,720 --> 00:27:14,520 Speaker 1: actually get to an operational monetary policy, I think is 510 00:27:14,560 --> 00:27:18,160 Speaker 1: exactly exactly what we're talking about right now. So theoretically 511 00:27:18,200 --> 00:27:20,440 Speaker 1: it makes a lot of sense to think about having 512 00:27:20,480 --> 00:27:23,520 Speaker 1: a moderate overshoot of the two percent target. You're trying 513 00:27:23,520 --> 00:27:28,120 Speaker 1: to get inflation expectations more stably around two percent. But operationally, 514 00:27:28,440 --> 00:27:30,040 Speaker 1: how do you go about doing that? And that's why 515 00:27:30,040 --> 00:27:31,480 Speaker 1: I think we have a lot of agreement on on 516 00:27:31,520 --> 00:27:35,000 Speaker 1: the theory actually, and less agreement about operationally what we're 517 00:27:35,000 --> 00:27:37,600 Speaker 1: going to do next. What the operationally here is is 518 00:27:37,680 --> 00:27:41,080 Speaker 1: John Farrell would eloquently stay just get out of crystal ball. 519 00:27:41,720 --> 00:27:45,919 Speaker 1: What's what's the new crystal ball for the FED? And 520 00:27:45,960 --> 00:27:48,560 Speaker 1: so I think what they've told us is maybe a 521 00:27:48,600 --> 00:27:51,880 Speaker 1: little bit less of the peering into the crystal ball 522 00:27:51,960 --> 00:27:54,600 Speaker 1: and more of just looking at the conditions on the 523 00:27:54,600 --> 00:27:56,760 Speaker 1: ground as they are. And that's partly because we spent 524 00:27:56,880 --> 00:27:58,760 Speaker 1: so much time if you go back five years or 525 00:27:58,800 --> 00:28:01,920 Speaker 1: ten years ago, thinking about what's the natural rate of unemployment? 526 00:28:01,960 --> 00:28:04,440 Speaker 1: Is there a way that we can kind of deduce 527 00:28:04,560 --> 00:28:06,840 Speaker 1: that from what we're seeing in the economy, And then 528 00:28:06,880 --> 00:28:09,200 Speaker 1: as we get to a low enough unemployment rate, then 529 00:28:09,240 --> 00:28:11,920 Speaker 1: we know we're getting to where there will be inflationary pressure, 530 00:28:12,080 --> 00:28:14,480 Speaker 1: and you kind of do the backwards induction and you're 531 00:28:14,560 --> 00:28:17,040 Speaker 1: raising rates as soon as unemployment is getting close to 532 00:28:17,040 --> 00:28:21,240 Speaker 1: that number. The issue with that is, although theoretically the 533 00:28:21,320 --> 00:28:25,160 Speaker 1: natural rate of unemployment is a great idea, empirically it's 534 00:28:25,160 --> 00:28:27,400 Speaker 1: hard to identify. So so you end up in this 535 00:28:27,440 --> 00:28:29,600 Speaker 1: strange scenario which we kind of lived through over the 536 00:28:29,640 --> 00:28:32,720 Speaker 1: last decade, where you're just constantly revising down that natural 537 00:28:32,800 --> 00:28:34,800 Speaker 1: rate of unemployment and then saying, well, actually, I think 538 00:28:34,880 --> 00:28:37,159 Speaker 1: maybe we can go further. So there's kind of been 539 00:28:37,160 --> 00:28:39,640 Speaker 1: a recognition at the FED not to play that game 540 00:28:39,680 --> 00:28:42,000 Speaker 1: this time. Around UM and just to say let's not 541 00:28:42,160 --> 00:28:45,840 Speaker 1: respond until we really see evidence that inflation is picking up. Andrew, 542 00:28:45,880 --> 00:28:47,520 Speaker 1: that's given us a ton of clarity have a right 543 00:28:47,560 --> 00:28:50,600 Speaker 1: policy and the reaction function and what they would and 544 00:28:50,600 --> 00:28:52,560 Speaker 1: wouldn't do. Have you got any clarity on the q 545 00:28:52,680 --> 00:28:55,160 Speaker 1: A program. Yeah, I think that's really that where we're 546 00:28:55,240 --> 00:28:57,760 Speaker 1: looking for there to be more guidance, and I think 547 00:28:57,800 --> 00:29:01,120 Speaker 1: that that's really been done almost purposeful where things are 548 00:29:01,120 --> 00:29:04,640 Speaker 1: going well right now. Obviously the big dislocations in the 549 00:29:04,680 --> 00:29:07,000 Speaker 1: market from a few months ago have been cured UM 550 00:29:07,000 --> 00:29:09,920 Speaker 1: where we saw a lot of illiquidity and treasury markets UM. 551 00:29:09,960 --> 00:29:12,120 Speaker 1: So now there is a shift from you know, you're 552 00:29:12,120 --> 00:29:17,040 Speaker 1: not just trying to continue market functioning in a healthy way, 553 00:29:17,080 --> 00:29:20,080 Speaker 1: you're trying to actually support the economy UM. And exactly 554 00:29:20,120 --> 00:29:22,120 Speaker 1: how much they're going to do, what the composition is 555 00:29:22,160 --> 00:29:24,160 Speaker 1: going to be, with the maturity structure is going to be. 556 00:29:24,240 --> 00:29:25,840 Speaker 1: Those are all decisions that they need to make, but 557 00:29:25,880 --> 00:29:29,320 Speaker 1: I think that's probably a December or later UM decision, 558 00:29:29,680 --> 00:29:31,240 Speaker 1: And for now things are going well, so they've just 559 00:29:31,320 --> 00:29:33,680 Speaker 1: kind of left things where they are. Vice Chair Richard 560 00:29:33,680 --> 00:29:36,320 Speaker 1: Clamada on this program in twenty three minutes time. Andrew right, 561 00:29:36,320 --> 00:29:38,800 Speaker 1: the first question for us, what would you ask? I 562 00:29:39,080 --> 00:29:40,880 Speaker 1: think what I'd really like to know is is really 563 00:29:40,920 --> 00:29:43,520 Speaker 1: going back to to to what Tom was asking about initially, 564 00:29:43,560 --> 00:29:46,360 Speaker 1: which is, Okay, we know that the FED is very 565 00:29:46,400 --> 00:29:49,840 Speaker 1: likely to keep rates low for a considerable period of time. Um, 566 00:29:49,840 --> 00:29:51,680 Speaker 1: we know that they want to see some evidence that 567 00:29:51,720 --> 00:29:55,160 Speaker 1: inflation is picking up. But what does that evidence look like? 568 00:29:55,240 --> 00:29:57,040 Speaker 1: And I think that's something that Chair Powell was asked 569 00:29:57,080 --> 00:29:58,800 Speaker 1: in the press conference and we didn't really get a 570 00:29:58,800 --> 00:30:02,280 Speaker 1: clear answer about. I'm not sure that there's really agreement 571 00:30:02,400 --> 00:30:04,719 Speaker 1: within the committee, so that there's kind of agreement at 572 00:30:04,760 --> 00:30:07,160 Speaker 1: a very high level on the idea that, yes, we 573 00:30:07,200 --> 00:30:10,000 Speaker 1: want to get inflation stably at two percent, we want 574 00:30:10,000 --> 00:30:12,960 Speaker 1: to see inflation expectations moving higher. But but what would 575 00:30:13,000 --> 00:30:16,040 Speaker 1: it actually take. Let's let's imagine a scenario where as 576 00:30:16,080 --> 00:30:19,240 Speaker 1: it has been, data continues to surprise to the upside, 577 00:30:19,480 --> 00:30:22,840 Speaker 1: the recovery continues, inflation is close to two percent again. 578 00:30:22,880 --> 00:30:24,760 Speaker 1: And actually, I mean, if we're looking at the data 579 00:30:24,840 --> 00:30:26,360 Speaker 1: right now and it looks like in April will be 580 00:30:26,720 --> 00:30:29,160 Speaker 1: above two percent, it's a base effect, but but will 581 00:30:29,160 --> 00:30:31,240 Speaker 1: be above two percent in April or May, So maybe 582 00:30:31,240 --> 00:30:34,560 Speaker 1: a more interesting discussion there. But what what exactly does 583 00:30:34,560 --> 00:30:36,840 Speaker 1: that FED reaction function look like? What would it take 584 00:30:36,880 --> 00:30:38,920 Speaker 1: to get to that first hype Andrew aside from the 585 00:30:38,960 --> 00:30:41,800 Speaker 1: evidence of the FED needs to see on the fiscal side, 586 00:30:41,800 --> 00:30:44,280 Speaker 1: they definitely are requesting, at least FED Chair J. Powell's 587 00:30:44,280 --> 00:30:47,880 Speaker 1: requesting more fiscal support from Washington. And yet from the 588 00:30:47,960 --> 00:30:51,040 Speaker 1: UK we're hearing that they're not necessarily going to continue 589 00:30:51,040 --> 00:30:53,480 Speaker 1: the furlough program. And there's a similar kind of sentiment 590 00:30:53,520 --> 00:30:56,239 Speaker 1: here in the US. Does the economy move more like 591 00:30:56,320 --> 00:30:58,560 Speaker 1: a motor boat or a barge? In other words, if 592 00:30:58,560 --> 00:31:01,880 Speaker 1: policymakers get this wrong and there is a downturn in 593 00:31:01,920 --> 00:31:04,320 Speaker 1: the economy, how quickly can they act to prop it 594 00:31:04,360 --> 00:31:06,480 Speaker 1: back up? So so there there is a lot of 595 00:31:06,520 --> 00:31:08,720 Speaker 1: momentum once you start moving one way, and I think 596 00:31:08,720 --> 00:31:10,560 Speaker 1: that the good news is at the direction of travel 597 00:31:10,720 --> 00:31:14,200 Speaker 1: right now is in the upward direction. So you have 598 00:31:14,320 --> 00:31:17,960 Speaker 1: that positive momentum behind you. You also have this issue 599 00:31:18,080 --> 00:31:21,040 Speaker 1: or this positive development where because the income support has 600 00:31:21,040 --> 00:31:23,120 Speaker 1: been so great over the last few months, we've had 601 00:31:23,240 --> 00:31:26,080 Speaker 1: a substantial amount of savings, about a trillion in savings 602 00:31:26,080 --> 00:31:28,239 Speaker 1: that households have done, so that even if we have 603 00:31:28,360 --> 00:31:32,000 Speaker 1: some of this fiscal slowed down, households can come in 604 00:31:32,040 --> 00:31:34,440 Speaker 1: with that savings and continue to spend. But now to 605 00:31:34,520 --> 00:31:37,240 Speaker 1: your point, if you're actually thinking about, well, this isn't 606 00:31:37,280 --> 00:31:39,680 Speaker 1: going to get done pre election, and it's not going 607 00:31:39,720 --> 00:31:41,280 Speaker 1: to get done in the lame duck. I think it 608 00:31:41,320 --> 00:31:42,640 Speaker 1: will by the time we get to the end of 609 00:31:42,640 --> 00:31:45,080 Speaker 1: this year. But let's say it doesn't get done even 610 00:31:45,120 --> 00:31:47,560 Speaker 1: through the end of then you can start moving in 611 00:31:47,600 --> 00:31:50,239 Speaker 1: the other direction, and then the momentum is going against you, 612 00:31:50,240 --> 00:31:52,520 Speaker 1: and that's a much harder place to climb out of 613 00:31:52,760 --> 00:31:54,800 Speaker 1: if we do not get another round of fiscal support. 614 00:31:54,880 --> 00:31:57,160 Speaker 1: How long will it be before we hit that two 615 00:31:57,360 --> 00:32:00,880 Speaker 1: average target of the fens I think it will likely 616 00:32:00,920 --> 00:32:03,120 Speaker 1: be longer. I mean again, we're kind of looking in 617 00:32:03,160 --> 00:32:05,360 Speaker 1: the short term here where we can get to a 618 00:32:05,480 --> 00:32:07,880 Speaker 1: level above two percent. But remember we still have the 619 00:32:07,920 --> 00:32:10,960 Speaker 1: unemployment rate at and eight point four percent, and that's 620 00:32:10,960 --> 00:32:12,680 Speaker 1: with a lot of people that have actually dropped out 621 00:32:12,680 --> 00:32:14,560 Speaker 1: of the labor force, so a lot of slack that's 622 00:32:14,600 --> 00:32:16,880 Speaker 1: out there. Um, you really would like to see more 623 00:32:16,920 --> 00:32:19,880 Speaker 1: fiscal and I would say that the positive the positive 624 00:32:19,920 --> 00:32:23,120 Speaker 1: here is that you do have bipartisan agreement that more 625 00:32:23,160 --> 00:32:25,760 Speaker 1: fiscal is necessary. You have the FED saying more fiscal 626 00:32:25,800 --> 00:32:27,640 Speaker 1: as necessary. So it's atually quite different than where we 627 00:32:27,640 --> 00:32:30,360 Speaker 1: were in say, two thousand eleven or two thousand and twelve, 628 00:32:30,400 --> 00:32:32,000 Speaker 1: when there was a real debate about should we do 629 00:32:32,040 --> 00:32:35,080 Speaker 1: more physical Everyone kind of agrees we should do more fiscal. Unfortunately, 630 00:32:35,120 --> 00:32:36,800 Speaker 1: the politics is standing in the way of that right 631 00:32:36,800 --> 00:32:39,720 Speaker 1: now and the priorities have changed. Andrew Grant to catch up, 632 00:32:39,760 --> 00:32:43,200 Speaker 1: Sir Andrew Hollandhollt City Group Global Market is chief US economist. 633 00:32:43,600 --> 00:32:47,800 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 634 00:32:47,840 --> 00:32:53,160 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 635 00:32:53,200 --> 00:32:57,440 Speaker 1: platform you prefer. I'm on Twitter at Tom Keane. Before 636 00:32:57,480 --> 00:33:00,760 Speaker 1: the podcast, you can always catch US World one. I'm 637 00:33:00,800 --> 00:33:01,680 Speaker 1: Bloomberg Radio.