1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com 5 00:00:23,920 --> 00:00:30,880 Speaker 1: and of course on the Bloomberg terminal. David Kelly joins 6 00:00:30,920 --> 00:00:33,440 Speaker 1: us sound JP Morgan Asset Management, and he knows his 7 00:00:33,560 --> 00:00:36,680 Speaker 1: beloved Liverpool finishing strong have be least third in the 8 00:00:36,680 --> 00:00:40,440 Speaker 1: Premier League, certainly doing better than the Tots. And David Kelly, 9 00:00:40,520 --> 00:00:43,360 Speaker 1: you know, well, there's the yellow card in the red card, 10 00:00:43,880 --> 00:00:46,520 Speaker 1: and what you look back is to your Catholic upbringing 11 00:00:46,880 --> 00:00:49,800 Speaker 1: all those bees and sees you earned an attempt to 12 00:00:49,880 --> 00:00:53,040 Speaker 1: a pink card. You do a mid year review and 13 00:00:53,080 --> 00:00:58,280 Speaker 1: you've got a pinkish a plus tone to the American economy. Well, yes, 14 00:00:58,560 --> 00:01:01,960 Speaker 1: and and this latest out of exam results I think 15 00:01:02,040 --> 00:01:05,880 Speaker 1: will if anything improved that we didn't see GDP move up. 16 00:01:05,880 --> 00:01:08,440 Speaker 1: But what we did see as inventories actually felt even 17 00:01:08,480 --> 00:01:11,600 Speaker 1: more in the first quarter than initially reported. And what 18 00:01:11,640 --> 00:01:13,800 Speaker 1: that means is you get a big inventory bounce in 19 00:01:13,840 --> 00:01:16,919 Speaker 1: the second quarter along with everything else, and then obviously 20 00:01:16,959 --> 00:01:20,119 Speaker 1: seeing unemployment claims coming down towards four hundred thousand, there's 21 00:01:20,120 --> 00:01:22,360 Speaker 1: a lot of improvement there. I also very much like 22 00:01:22,440 --> 00:01:26,279 Speaker 1: seeing this growth in capital goods orders, so investment spending 23 00:01:26,280 --> 00:01:28,400 Speaker 1: looks strong. So this is really an economy that is 24 00:01:28,800 --> 00:01:31,920 Speaker 1: just you know, growing in terms of momentum, and you know, 25 00:01:32,000 --> 00:01:34,960 Speaker 1: I think it just does poison pose a question, why 26 00:01:34,959 --> 00:01:37,800 Speaker 1: are interest rates not higher given how strong the economy is? 27 00:01:39,560 --> 00:01:43,840 Speaker 1: What's sixty nine? Um it is someone mysterious. I mean, 28 00:01:44,120 --> 00:01:48,040 Speaker 1: it seems like the fixed income markets are believe the 29 00:01:48,240 --> 00:01:51,559 Speaker 1: very devilish tone coming out of the Federal Reserve. But um, 30 00:01:51,600 --> 00:01:53,600 Speaker 1: I don't know that they should believe the Federal Reserve 31 00:01:53,680 --> 00:01:56,360 Speaker 1: in this because I think when the data change, particularly 32 00:01:56,480 --> 00:02:00,000 Speaker 1: you get those higher inflation numbers, and provided the economy 33 00:02:00,000 --> 00:02:02,160 Speaker 1: continues to recover through the through the fourth quarter of 34 00:02:02,200 --> 00:02:03,920 Speaker 1: this year, I think the Fed is going to change 35 00:02:03,920 --> 00:02:05,760 Speaker 1: it too, and it's gonna taper a little earlier than 36 00:02:05,800 --> 00:02:07,640 Speaker 1: they expecting. Things, going to raise short term rates a 37 00:02:07,680 --> 00:02:09,760 Speaker 1: little earlier than many people expect. So I do think 38 00:02:09,760 --> 00:02:12,639 Speaker 1: we'll see higher long term interest rates by the end 39 00:02:12,639 --> 00:02:14,720 Speaker 1: of the year. It's just surprising we haven't seen more 40 00:02:15,160 --> 00:02:17,440 Speaker 1: so far. You just said you think they'll raise interest 41 00:02:17,560 --> 00:02:21,760 Speaker 1: rates sooner than most people expect. David, when is that, well, 42 00:02:21,760 --> 00:02:23,440 Speaker 1: I think what they're going to do is, first of all, 43 00:02:23,440 --> 00:02:26,760 Speaker 1: I think they'll start tapering bond purchases at the start 44 00:02:26,840 --> 00:02:29,399 Speaker 1: of next year, or maybe even in December of this year, 45 00:02:29,520 --> 00:02:31,280 Speaker 1: and I think they'll have to raise a federal funds 46 00:02:31,360 --> 00:02:35,960 Speaker 1: rate either at the end of two maybe the December 47 00:02:35,960 --> 00:02:40,119 Speaker 1: meeting in two or else the January meeting in three. 48 00:02:40,160 --> 00:02:42,960 Speaker 1: But right now their forecasts, they don't think they're going 49 00:02:43,000 --> 00:02:46,440 Speaker 1: to raise the shorter federal funds rate until four at 50 00:02:46,440 --> 00:02:49,840 Speaker 1: the earliest. I think that's just not realistic, given you know, 51 00:02:49,840 --> 00:02:51,720 Speaker 1: the economy is basically going to be fully healed as 52 00:02:51,760 --> 00:02:53,960 Speaker 1: far as we can see from a macroeconomic perspective by 53 00:02:54,000 --> 00:02:57,480 Speaker 1: early next year, and that just doesn't justify rates at 54 00:02:57,480 --> 00:03:00,799 Speaker 1: close to zero. David. How much does the FED policy 55 00:03:00,919 --> 00:03:03,520 Speaker 1: really hinge on what type of spending plan the US 56 00:03:03,600 --> 00:03:06,799 Speaker 1: government decides to pass? This idea that we're looking right now, 57 00:03:07,120 --> 00:03:09,320 Speaker 1: under the Biden's new budget that was just released, or 58 00:03:09,320 --> 00:03:11,800 Speaker 1: at least as reported by The New York Times, the 59 00:03:11,840 --> 00:03:13,880 Speaker 1: total US debt held by the public would rise to 60 00:03:13,880 --> 00:03:17,440 Speaker 1: a hundred and seventeen percent of the size of the economy. One. 61 00:03:17,720 --> 00:03:20,720 Speaker 1: That's what Tom was talking about earlier. Can the Feds 62 00:03:20,720 --> 00:03:23,320 Speaker 1: start to taper, we're starting to talk about borrowing that 63 00:03:23,440 --> 00:03:27,400 Speaker 1: much more money in the near term. Well, well they'd 64 00:03:27,440 --> 00:03:30,200 Speaker 1: better because you know, we need to figure out how 65 00:03:30,240 --> 00:03:33,560 Speaker 1: do we finance that at normal interest rates, Because for 66 00:03:33,600 --> 00:03:35,680 Speaker 1: as long as you keep interest rates are close to zero, 67 00:03:35,800 --> 00:03:39,000 Speaker 1: you're distorting everything in capital markets. You know, you feed 68 00:03:39,000 --> 00:03:42,000 Speaker 1: good businesses, but you allow bad businesses to stay alive, 69 00:03:42,080 --> 00:03:45,200 Speaker 1: allows speculation to run rampants. So it's very important the 70 00:03:45,200 --> 00:03:47,880 Speaker 1: federal reserve normalizes. And if that means that the federal 71 00:03:47,880 --> 00:03:49,800 Speaker 1: government has to be a little bit more picky about 72 00:03:49,840 --> 00:03:52,200 Speaker 1: what it spends money on, that's probably a good thing. 73 00:03:52,400 --> 00:03:54,800 Speaker 1: So I don't think the federal reserves should get scared 74 00:03:54,800 --> 00:03:57,040 Speaker 1: by the level of the debt. Frankly, they're encouraging this 75 00:03:57,120 --> 00:03:59,720 Speaker 1: growth in debt by keeping rates so low. Well, but 76 00:03:59,760 --> 00:04:02,080 Speaker 1: we're are normal rates at this point. I mean through 77 00:04:02,160 --> 00:04:05,320 Speaker 1: every cycle we were talking about before that that rates 78 00:04:05,320 --> 00:04:08,160 Speaker 1: have come lower and lower, and the more debt you incur, 79 00:04:08,320 --> 00:04:11,360 Speaker 1: the slower growth is so some people, including HSBC is 80 00:04:11,360 --> 00:04:14,240 Speaker 1: Stephen Major says it's a natural path of interest rates. 81 00:04:14,240 --> 00:04:17,000 Speaker 1: If benchmark borrowing costs should be lower for the US 82 00:04:17,080 --> 00:04:20,640 Speaker 1: government just based on that slower growth trajectory. Why is 83 00:04:20,680 --> 00:04:23,800 Speaker 1: that not the case. Well, I don't think it should 84 00:04:23,800 --> 00:04:25,960 Speaker 1: be the case. I think it's it's been caused by 85 00:04:25,960 --> 00:04:29,279 Speaker 1: by a federal reserve which is really flooded the economy 86 00:04:29,320 --> 00:04:31,400 Speaker 1: with liquidity. And the key thing is that flooding with 87 00:04:31,440 --> 00:04:34,680 Speaker 1: liquidity doesn't actually stimulate aggregate demand. I think this is 88 00:04:34,680 --> 00:04:37,839 Speaker 1: what they've missed all along. That's why big reason why 89 00:04:37,720 --> 00:04:40,960 Speaker 1: the last expansion was so slow. But what's a good 90 00:04:41,120 --> 00:04:43,279 Speaker 1: level of interest rates? A normal level, it's got to 91 00:04:43,279 --> 00:04:46,600 Speaker 1: be a positive long term real interest rate. If you 92 00:04:47,120 --> 00:04:49,520 Speaker 1: lend money in the long run, you should get a 93 00:04:49,520 --> 00:04:52,479 Speaker 1: positive return after inflation. If you borrow money in the 94 00:04:52,520 --> 00:04:54,440 Speaker 1: long run, it should because you expect to invest in 95 00:04:54,520 --> 00:04:57,760 Speaker 1: something that will generate a positive return after inflation. If 96 00:04:57,800 --> 00:04:59,600 Speaker 1: you don't have an economy that's operating that way, you've 97 00:04:59,640 --> 00:05:01,919 Speaker 1: got to only that's heading in the wrong direction. And 98 00:05:01,920 --> 00:05:04,440 Speaker 1: so I think at least positive real rates. So that 99 00:05:04,480 --> 00:05:08,000 Speaker 1: means tenure treasury eels well above the rate of inflation, 100 00:05:08,240 --> 00:05:10,599 Speaker 1: which you know, even by the FEDS measure is close 101 00:05:10,640 --> 00:05:12,640 Speaker 1: to three percent year over year based on the numbers 102 00:05:12,640 --> 00:05:14,680 Speaker 1: we're gonna get tomorrow. Dr Kelly, I want to take 103 00:05:14,680 --> 00:05:17,120 Speaker 1: your JP Morgan work in dovetail with your work at 104 00:05:17,160 --> 00:05:19,920 Speaker 1: Putnam years ago with the iconic Bob Goodman who was 105 00:05:19,960 --> 00:05:22,960 Speaker 1: the great optimist, and that is in the sum of 106 00:05:23,000 --> 00:05:27,480 Speaker 1: the David Kelly analysis. Are you worried about the gloom 107 00:05:27,680 --> 00:05:31,599 Speaker 1: of jump conditions given what we're doing with our fiscal 108 00:05:31,640 --> 00:05:35,720 Speaker 1: and monetary policy new theories? Maybe see to the pants 109 00:05:35,720 --> 00:05:39,640 Speaker 1: approach or do you see a smoothness where investors can 110 00:05:40,080 --> 00:05:42,800 Speaker 1: say this will work out, will get to the other 111 00:05:42,839 --> 00:05:46,080 Speaker 1: side of the bridge. Well, I don't. I don't lose 112 00:05:46,279 --> 00:05:48,320 Speaker 1: much sleepover because I think it will take a long 113 00:05:48,400 --> 00:05:51,040 Speaker 1: time for the for any crisis to unfold if we 114 00:05:51,120 --> 00:05:54,239 Speaker 1: have a crisis. But where I don't believe in modern 115 00:05:54,240 --> 00:05:56,800 Speaker 1: monetary theory, I think it's nonsense um and I think 116 00:05:56,800 --> 00:05:59,240 Speaker 1: in the long run, the key thing is if you spend, 117 00:05:59,320 --> 00:06:02,080 Speaker 1: if you run big budget depths, and if it actually 118 00:06:02,080 --> 00:06:04,880 Speaker 1: helps the economy, then this level of debt will cause 119 00:06:04,880 --> 00:06:07,760 Speaker 1: the economy to blow up. It's your modern monetrade theory 120 00:06:07,839 --> 00:06:10,719 Speaker 1: only works if it fails to actually achieve any improvement 121 00:06:10,720 --> 00:06:14,159 Speaker 1: in human welfare. So it's it's it's it's a bad idea. 122 00:06:14,160 --> 00:06:15,640 Speaker 1: I think you've got to try to get to normal 123 00:06:15,640 --> 00:06:18,320 Speaker 1: interest rates. If you set interest rates at the correct level, 124 00:06:18,480 --> 00:06:21,720 Speaker 1: then the economy will operate optimally. David always going to 125 00:06:21,760 --> 00:06:23,560 Speaker 1: get here for you, don't hold back, David Kelly that 126 00:06:23,800 --> 00:06:31,640 Speaker 1: if JP Morgan Asset Management, the chief global strategists right now, 127 00:06:31,720 --> 00:06:34,960 Speaker 1: Peter Cheer joins us from Academy Securities on what we 128 00:06:35,040 --> 00:06:37,640 Speaker 1: see in the markets, Peter, it's the question we've all 129 00:06:37,640 --> 00:06:40,920 Speaker 1: been yammered about. But you're the pro Why are yields 130 00:06:41,080 --> 00:06:46,520 Speaker 1: moving given our fiscal stance, our fiscal numbers. I think 131 00:06:46,520 --> 00:06:48,680 Speaker 1: there's three things. One is the fact continues to buy 132 00:06:48,680 --> 00:06:51,119 Speaker 1: a lot of debts, so that's offsetting it. We're seeing 133 00:06:51,120 --> 00:06:53,599 Speaker 1: corporations able to defease their pension plans so they are 134 00:06:53,680 --> 00:06:56,880 Speaker 1: net sellers of equities to buy debt. And then I 135 00:06:56,920 --> 00:06:58,960 Speaker 1: think just no one really believes that either we're going 136 00:06:59,000 --> 00:07:00,880 Speaker 1: to get the fiscal stimm Tho said, it's full extent 137 00:07:00,920 --> 00:07:05,239 Speaker 1: because that bipartisan feeling is gone. And also quite frankly, 138 00:07:05,279 --> 00:07:07,240 Speaker 1: no one really seems to believe that inflation is going 139 00:07:07,279 --> 00:07:09,880 Speaker 1: to be anything but transitory. I do think it's going 140 00:07:09,920 --> 00:07:11,920 Speaker 1: to be persistent. But right now the market hasn't seen 141 00:07:11,960 --> 00:07:15,040 Speaker 1: inflation for so long that they're downplaying that potential. I 142 00:07:15,080 --> 00:07:17,160 Speaker 1: don't think the number one question has changed that much. 143 00:07:17,400 --> 00:07:19,160 Speaker 1: Pay When it comes to a treasury sell off, How 144 00:07:19,200 --> 00:07:22,640 Speaker 1: self limiting would treasury market set off big? How self 145 00:07:22,680 --> 00:07:25,840 Speaker 1: limiting would it be? I think it would be very limiting. 146 00:07:26,040 --> 00:07:27,800 Speaker 1: You know, when we go back and people want to 147 00:07:27,800 --> 00:07:31,000 Speaker 1: talk about a paper tantrum, you see much much different positioning. 148 00:07:31,000 --> 00:07:32,280 Speaker 1: All you even have to do is look at some 149 00:07:32,320 --> 00:07:33,840 Speaker 1: of the e t f s like an l QT, 150 00:07:33,920 --> 00:07:36,680 Speaker 1: which is along dated investment grade bond t LT lawn 151 00:07:36,760 --> 00:07:40,040 Speaker 1: dated treasuries. They've all had significant outflows, so they market 152 00:07:40,160 --> 00:07:44,160 Speaker 1: is much more prepared for a tapering type event. And 153 00:07:44,320 --> 00:07:46,520 Speaker 1: if the that needed to, they had things like Operation 154 00:07:46,560 --> 00:07:48,840 Speaker 1: Twists that they could pull out. So I think we 155 00:07:48,840 --> 00:07:50,840 Speaker 1: can get to two percent on the tenure of this quarter, 156 00:07:51,080 --> 00:07:53,320 Speaker 1: But it's going to be a struggle and nothing's going 157 00:07:53,360 --> 00:07:56,000 Speaker 1: to gap a lot higher. It's very much under control 158 00:07:56,040 --> 00:07:57,280 Speaker 1: at the moment. Do you think we could see a 159 00:07:57,320 --> 00:07:59,520 Speaker 1: cycle high and I know it certainly days and it's 160 00:07:59,520 --> 00:08:01,360 Speaker 1: hard to make the scalpaid, but you can envision a 161 00:08:01,440 --> 00:08:05,080 Speaker 1: psycho high of two on a tenure. I think we're 162 00:08:05,160 --> 00:08:07,200 Speaker 1: ultimately going to push up towards two and a quarter 163 00:08:07,240 --> 00:08:09,400 Speaker 1: two and a half percent, but that maybe later this year, 164 00:08:09,520 --> 00:08:11,920 Speaker 1: next year, and that's only once I think this inflation 165 00:08:11,960 --> 00:08:15,080 Speaker 1: story becomes embedded. And I'm a little bit suspicious about 166 00:08:15,080 --> 00:08:17,200 Speaker 1: what China was saying today. For example, I do believe 167 00:08:17,280 --> 00:08:20,000 Speaker 1: China is working towards that shift to a domestic economy, 168 00:08:20,360 --> 00:08:23,320 Speaker 1: so they care less about providing us with cheap exports. 169 00:08:23,360 --> 00:08:25,760 Speaker 1: So I think there's all sorts of inflation stories out 170 00:08:25,760 --> 00:08:28,960 Speaker 1: there away from this commodity rise that people aren't talking 171 00:08:29,080 --> 00:08:32,360 Speaker 1: enough about. And we'll start focusing focusing on the summer. 172 00:08:32,760 --> 00:08:35,160 Speaker 1: So what does that mean in terms of investing? This 173 00:08:35,280 --> 00:08:37,680 Speaker 1: idea that there is a sort of a self limiting 174 00:08:37,720 --> 00:08:41,640 Speaker 1: factor to the treasury UH sell off that could potentially happen, 175 00:08:41,960 --> 00:08:44,120 Speaker 1: And yet we do have price to perfection when you 176 00:08:44,160 --> 00:08:46,360 Speaker 1: look at certain aspects of credit markets and when you 177 00:08:46,360 --> 00:08:49,240 Speaker 1: look at certain slices of equity markets, where are you 178 00:08:49,320 --> 00:08:51,880 Speaker 1: seeing value? You know, I think it's going to be 179 00:08:51,920 --> 00:08:54,800 Speaker 1: about a domestic growth story, right, we are going to 180 00:08:54,840 --> 00:08:57,600 Speaker 1: see supply chains shift. I think there's going to be 181 00:08:57,640 --> 00:09:00,079 Speaker 1: a real push to help build up our five G 182 00:09:00,240 --> 00:09:02,120 Speaker 1: and anything that we're kind of on that tech side 183 00:09:02,320 --> 00:09:05,360 Speaker 1: competing with China, look for infrastructure spending and a real 184 00:09:05,400 --> 00:09:08,440 Speaker 1: domestic focus. So I think that industry is really exciting. 185 00:09:08,600 --> 00:09:10,440 Speaker 1: I think you're gonna see a push to bring back 186 00:09:10,440 --> 00:09:14,480 Speaker 1: a lot more healthcare, you know, medicine's pharmaceuticals that can't 187 00:09:14,480 --> 00:09:16,960 Speaker 1: be all sourced from China given this kind of level 188 00:09:16,960 --> 00:09:20,240 Speaker 1: of friction and competition. So we're gonna see that brought around. 189 00:09:20,240 --> 00:09:24,200 Speaker 1: That's gonna change supply chains, change where things are, you know, made. 190 00:09:24,400 --> 00:09:26,520 Speaker 1: I think that's the real opportunity figuring out what this 191 00:09:26,600 --> 00:09:28,920 Speaker 1: economy is gonna look like in two years with this 192 00:09:28,960 --> 00:09:32,520 Speaker 1: push towards sustainability, with bringing back some of these industries, 193 00:09:32,720 --> 00:09:35,400 Speaker 1: and that's where the real opportunity is going to be. Peter, 194 00:09:35,760 --> 00:09:38,720 Speaker 1: the full faith in credit space is not so much 195 00:09:38,840 --> 00:09:43,120 Speaker 1: yield but the price. There's somebody bidding on this paper. Now, 196 00:09:43,160 --> 00:09:46,120 Speaker 1: you mentioned the government in the US government in as well. 197 00:09:46,400 --> 00:09:50,439 Speaker 1: Do you see within your macro economics that the foreigners 198 00:09:50,559 --> 00:09:53,360 Speaker 1: will walk away and all of a sudden the price 199 00:09:53,640 --> 00:09:59,360 Speaker 1: will drift down and yield will drift up. I think 200 00:09:59,360 --> 00:10:01,560 Speaker 1: we're actually a okay on that even when foreigners are 201 00:10:01,600 --> 00:10:03,959 Speaker 1: stepping away, which is become a little bit more likely 202 00:10:04,040 --> 00:10:06,679 Speaker 1: given that we have the worst negative real yields. I 203 00:10:06,679 --> 00:10:09,640 Speaker 1: always get confused talking about negative real yields, but you 204 00:10:09,679 --> 00:10:12,360 Speaker 1: can actually earn more on an after inflation basis in 205 00:10:12,440 --> 00:10:15,640 Speaker 1: Japan right now, probably even in Germany, which seems bizarre 206 00:10:15,679 --> 00:10:18,480 Speaker 1: given that they have word lower negative yields than usum. 207 00:10:18,559 --> 00:10:20,640 Speaker 1: But it's that real yields. I think it goes away, 208 00:10:20,679 --> 00:10:23,920 Speaker 1: but there's just so much support from corporate pension plans, 209 00:10:23,960 --> 00:10:28,120 Speaker 1: from pension plans in general, from retirees. I don't see 210 00:10:28,160 --> 00:10:30,760 Speaker 1: it getting out of control. People are too positioned for 211 00:10:30,760 --> 00:10:33,520 Speaker 1: it to get out of control. And finally, the FED 212 00:10:33,679 --> 00:10:36,040 Speaker 1: has a lot of tools that it can bring out 213 00:10:36,080 --> 00:10:38,240 Speaker 1: if it starts seeing that risk. So I think we 214 00:10:38,280 --> 00:10:40,439 Speaker 1: see yields go higher, but it's more of base deepening 215 00:10:40,480 --> 00:10:42,880 Speaker 1: and it's relatively gradual and it's not going to be 216 00:10:42,920 --> 00:10:46,120 Speaker 1: an impediment for stock market either. Get back to New 217 00:10:46,200 --> 00:10:47,720 Speaker 1: York City. We need to can't s up it's gonna 218 00:10:47,760 --> 00:10:50,360 Speaker 1: hit from me, sir, account of my security's head of 219 00:10:50,440 --> 00:10:59,839 Speaker 1: MACROI strategy. This is with our question, our conversation of 220 00:10:59,880 --> 00:11:03,160 Speaker 1: the Day on the state of the American economy, high 221 00:11:03,160 --> 00:11:07,800 Speaker 1: frequency economics, Rights, brilliant sharp notes on global economics, interest 222 00:11:07,880 --> 00:11:12,520 Speaker 1: rate dynamics, and with Reveala Ferouki Rights on the American economy. 223 00:11:12,800 --> 00:11:15,440 Speaker 1: She joins us this morning, Reveal, I've really been looking 224 00:11:15,480 --> 00:11:17,520 Speaker 1: forward to this. You move from a ten percent boom 225 00:11:17,520 --> 00:11:21,480 Speaker 1: economy down to something in the vicinity of five percent economy. 226 00:11:21,559 --> 00:11:24,840 Speaker 1: When you and Karl Weinberg look at that sudden shock 227 00:11:25,000 --> 00:11:29,079 Speaker 1: of deceleration from a boom economy, what are the inertial 228 00:11:29,160 --> 00:11:34,400 Speaker 1: forces we're gonna experience as we slow down? Good morning, 229 00:11:34,440 --> 00:11:36,240 Speaker 1: Thank you for having me. So, you know, there are 230 00:11:36,240 --> 00:11:39,480 Speaker 1: a lot of dynamics and play over here. What we're 231 00:11:39,520 --> 00:11:41,960 Speaker 1: looking at right now is you know, peak growth rate, 232 00:11:42,000 --> 00:11:44,560 Speaker 1: which we expect to be around ten percent in the 233 00:11:44,600 --> 00:11:47,800 Speaker 1: second quarter. But after that is where the uncertainty lies. 234 00:11:47,840 --> 00:11:50,480 Speaker 1: We don't really know what a post pandemic economy looks like, 235 00:11:50,720 --> 00:11:56,600 Speaker 1: what we expect as a decederation as these fiscal measures expire. Uh, 236 00:11:56,640 --> 00:11:59,080 Speaker 1: and you know, if there is a lot of uncertainty 237 00:11:59,559 --> 00:12:02,880 Speaker 1: about how the labor market proceeds from here, and I 238 00:12:02,920 --> 00:12:05,640 Speaker 1: think until we get to that point, until we get 239 00:12:05,679 --> 00:12:08,160 Speaker 1: to say September you know, there is a lot of 240 00:12:08,240 --> 00:12:12,360 Speaker 1: uncertainty surrounding what will happen in the second half. It's 241 00:12:12,559 --> 00:12:14,960 Speaker 1: it's an interesting dynamic because we can't really say that 242 00:12:14,960 --> 00:12:17,160 Speaker 1: we're going to go back to a two percent or 243 00:12:17,160 --> 00:12:20,200 Speaker 1: whether we're going to keep above potential. What we'll see 244 00:12:20,240 --> 00:12:24,360 Speaker 1: class officers do. How will corporations adapted adjust to a 245 00:12:24,440 --> 00:12:30,080 Speaker 1: decelerated economy we've never witnessed before. Well, I think, you know, 246 00:12:30,200 --> 00:12:33,280 Speaker 1: there's been a lot of preparation for this. It's not 247 00:12:33,320 --> 00:12:35,160 Speaker 1: like this is going to be a surprise. We don't 248 00:12:35,200 --> 00:12:37,920 Speaker 1: expect to grow at a ten percent growth rate. That's 249 00:12:38,040 --> 00:12:41,640 Speaker 1: you know, it's not exactly possible without uh, you know, 250 00:12:41,760 --> 00:12:46,120 Speaker 1: continued support from fiscal and monetary policy. So I don't 251 00:12:46,160 --> 00:12:48,440 Speaker 1: think this is going to be a shock. It's just 252 00:12:48,520 --> 00:12:51,480 Speaker 1: going to be an adjustment. And again, we are still 253 00:12:51,520 --> 00:12:53,760 Speaker 1: looking at a pretty strong growth rate with a lot 254 00:12:53,760 --> 00:12:58,320 Speaker 1: of uncertainty surrounding that. Outlook, Rubella, let's talk about taper, 255 00:12:58,360 --> 00:13:00,960 Speaker 1: and I just talk about talking about Kathy Joe and 256 00:13:00,960 --> 00:13:03,520 Speaker 1: said yesterday I came on and she said that actually 257 00:13:03,559 --> 00:13:07,720 Speaker 1: the bond market is responding logically to taper talk, which 258 00:13:07,720 --> 00:13:10,280 Speaker 1: means yields down price higher. This is now when people 259 00:13:10,320 --> 00:13:13,280 Speaker 1: are expecting. They were expecting the FED to allow yields 260 00:13:13,320 --> 00:13:16,520 Speaker 1: to climb. Yet the indication is that if they taper 261 00:13:16,600 --> 00:13:19,800 Speaker 1: some of the stimulus, it leads to slower growth, Which 262 00:13:19,960 --> 00:13:22,040 Speaker 1: is is this time different or we're going to fall 263 00:13:22,040 --> 00:13:27,520 Speaker 1: back into that traditional paradigm. So what we're really seeing is, uh, 264 00:13:27,640 --> 00:13:30,079 Speaker 1: the confidence in the FED right and what they're doing 265 00:13:30,120 --> 00:13:32,120 Speaker 1: and what they are messaging. That is what this is 266 00:13:32,160 --> 00:13:35,120 Speaker 1: all about. So if the FED wanted to avoid a 267 00:13:35,200 --> 00:13:38,160 Speaker 1: taper tantrum, this is exactly what they're accomplishing, and the 268 00:13:38,240 --> 00:13:41,200 Speaker 1: messaging has been actually very good so far. I was 269 00:13:41,200 --> 00:13:43,880 Speaker 1: surprised to see mention of tapering in the minutes, but 270 00:13:44,080 --> 00:13:47,280 Speaker 1: it seems to me that that is exactly what they're doing. 271 00:13:47,480 --> 00:13:51,240 Speaker 1: Is is really preparing for a range of possibilities. If 272 00:13:51,280 --> 00:13:54,480 Speaker 1: things are stronger than expected, that the markets will expect 273 00:13:54,480 --> 00:13:56,920 Speaker 1: that the FED will start talking about different But if 274 00:13:56,960 --> 00:13:59,600 Speaker 1: things are not, then you know it's a more delayed process. 275 00:13:59,640 --> 00:14:03,080 Speaker 1: So it's really uh, I do think it's different this time, 276 00:14:03,400 --> 00:14:06,320 Speaker 1: and I think what what the feds objective right now 277 00:14:06,559 --> 00:14:09,680 Speaker 1: is managing expectations and they're doing a great job with that. 278 00:14:09,840 --> 00:14:12,320 Speaker 1: We keep talking about how boring it is this week, 279 00:14:12,360 --> 00:14:15,840 Speaker 1: and how it's even boring amid a pivotal moment in 280 00:14:15,880 --> 00:14:18,400 Speaker 1: the economy. What are we looking for? What are we 281 00:14:18,480 --> 00:14:21,960 Speaker 1: waiting for to determine the trajectory of whether it's very 282 00:14:22,000 --> 00:14:24,080 Speaker 1: hot or whether it's a little bit cooler than people 283 00:14:24,080 --> 00:14:27,680 Speaker 1: are currently pricing in. Well, it's all about the consumer, 284 00:14:27,800 --> 00:14:30,280 Speaker 1: it's all about the labor market, it's all about incomes. 285 00:14:30,320 --> 00:14:32,680 Speaker 1: So what we're seeing right now is the effect of 286 00:14:32,720 --> 00:14:35,080 Speaker 1: what has happened so far, and what we have to 287 00:14:35,120 --> 00:14:38,080 Speaker 1: consider is that we are starting We started the third 288 00:14:38,120 --> 00:14:40,000 Speaker 1: quarter on a very high base, so even if we 289 00:14:40,040 --> 00:14:42,560 Speaker 1: had very little progression, we would have still seen a 290 00:14:42,640 --> 00:14:45,440 Speaker 1: very strong growth growth rate, which we expect to see now. 291 00:14:45,960 --> 00:14:49,080 Speaker 1: Now what happens beyond that is a very different thing. 292 00:14:49,200 --> 00:14:52,800 Speaker 1: We saw a huge deceleration last year because when fiscal 293 00:14:52,840 --> 00:14:55,200 Speaker 1: measures expired, But this time around we will be in 294 00:14:55,200 --> 00:14:58,160 Speaker 1: a different situation, hopefully because the labor market will have 295 00:14:58,200 --> 00:15:00,520 Speaker 1: made progress and we have made a huge proggress on 296 00:15:00,560 --> 00:15:03,840 Speaker 1: the health front. So while there's a lot of uncertainty, 297 00:15:03,880 --> 00:15:06,120 Speaker 1: you know, our focus remains on the labor market. Because 298 00:15:06,120 --> 00:15:08,560 Speaker 1: if you think that is the FEDS focus as well, 299 00:15:08,720 --> 00:15:12,040 Speaker 1: they would rather tolerate a little bit of inflation for 300 00:15:12,120 --> 00:15:14,760 Speaker 1: a little bit of better outcome on the libor market. 301 00:15:14,800 --> 00:15:16,240 Speaker 1: I mean reveal. I know you don't want to talk 302 00:15:16,240 --> 00:15:17,640 Speaker 1: about this, but you know I don't want to get 303 00:15:17,640 --> 00:15:20,240 Speaker 1: you in the Carl Weinberg time out chair. Let's link 304 00:15:20,320 --> 00:15:23,280 Speaker 1: Carl's work together with your work. And that is the 305 00:15:23,320 --> 00:15:26,840 Speaker 1: trade deficit, the fiscal deficit as well. Do you see 306 00:15:26,840 --> 00:15:30,640 Speaker 1: any relief there? Do you just assume an expanding trade 307 00:15:30,680 --> 00:15:36,760 Speaker 1: deficit to GDP a stable or expanding fiscal deficit to GDP. Well, 308 00:15:36,880 --> 00:15:39,560 Speaker 1: if you think about the trade deficit right now, what 309 00:15:39,640 --> 00:15:42,600 Speaker 1: we're seeing are imbalances, right, I mean, the US economy 310 00:15:42,720 --> 00:15:45,720 Speaker 1: is open to the European economy is getting there, not 311 00:15:45,840 --> 00:15:48,640 Speaker 1: quite there. So therefore you have, you know, goods deficit 312 00:15:48,680 --> 00:15:51,480 Speaker 1: in the record. I do expect some adjustment back as 313 00:15:51,560 --> 00:15:55,080 Speaker 1: other economies reopen. So I don't expect that this trade 314 00:15:55,120 --> 00:15:57,920 Speaker 1: deficit issue is going to be us, you know, it's 315 00:15:58,000 --> 00:16:00,520 Speaker 1: just going to persist. I do think we're going to 316 00:16:00,560 --> 00:16:04,000 Speaker 1: see adjustments, but uh, you know on the on the 317 00:16:04,960 --> 00:16:10,160 Speaker 1: on the fiscal on the deficit side, uh, budget deficit side. 318 00:16:10,200 --> 00:16:13,760 Speaker 1: I do think that what happens with these negotiations is 319 00:16:13,840 --> 00:16:16,880 Speaker 1: very important, and especially when we look at you know, 320 00:16:17,520 --> 00:16:20,200 Speaker 1: the Widen administrations push that this is not going to 321 00:16:20,240 --> 00:16:23,040 Speaker 1: be a deficit finance. This is going to be uh, 322 00:16:23,080 --> 00:16:24,960 Speaker 1: you know, this is going to be paid for. So 323 00:16:25,280 --> 00:16:27,280 Speaker 1: you know, there's a lot of uncertainty. But I do 324 00:16:27,360 --> 00:16:30,040 Speaker 1: think that we could come out on the other side 325 00:16:30,040 --> 00:16:32,400 Speaker 1: of this, you know, maybe not as in bad a 326 00:16:32,480 --> 00:16:35,440 Speaker 1: situation as a lot of people are expecting. Before we 327 00:16:35,520 --> 00:16:37,880 Speaker 1: let you go over about two hours away from the 328 00:16:37,880 --> 00:16:41,480 Speaker 1: initial jobless claims that we get every week, increasingly they 329 00:16:41,520 --> 00:16:43,800 Speaker 1: are going down, and yet people say that they're very 330 00:16:43,880 --> 00:16:46,120 Speaker 1: noisy and markets tend not to trade off them. Are 331 00:16:46,120 --> 00:16:49,160 Speaker 1: they basically useless as any kind of indicator at this point? 332 00:16:50,280 --> 00:16:53,640 Speaker 1: It's it's really I mean, we we still follow it, 333 00:16:53,720 --> 00:16:55,320 Speaker 1: but they're like you said, there is a lot of 334 00:16:55,360 --> 00:16:58,360 Speaker 1: noise in the data. It's really surprising. It's puzzling why 335 00:16:58,920 --> 00:17:01,720 Speaker 1: we would see four thousand people get laid off each week, 336 00:17:01,760 --> 00:17:04,120 Speaker 1: and you know, these filings what we are looking at 337 00:17:04,240 --> 00:17:07,399 Speaker 1: is the continuing claim sample. They are also you know, 338 00:17:07,960 --> 00:17:11,600 Speaker 1: extremely high, but we do see value in it, you know, 339 00:17:11,680 --> 00:17:14,800 Speaker 1: in terms of the you know, it's a high frequency indicator, 340 00:17:15,200 --> 00:17:18,240 Speaker 1: but I do play less less weight on it because 341 00:17:18,280 --> 00:17:21,000 Speaker 1: of the fact that it doesn't really seem to be 342 00:17:21,000 --> 00:17:25,119 Speaker 1: connecting right now with what's happening with the economy. Okay, 343 00:17:25,280 --> 00:17:27,560 Speaker 1: of high frequency it can almost the chief US economist. 344 00:17:27,560 --> 00:17:35,280 Speaker 1: We've gotta leave it there. We get lucky with a 345 00:17:35,320 --> 00:17:39,119 Speaker 1: gentleman from Arkansas on the second Congressional District, the Republican 346 00:17:39,160 --> 00:17:42,160 Speaker 1: French will joins us on four or five other topics, 347 00:17:42,160 --> 00:17:45,879 Speaker 1: which you discard to talk about six trillion dollars, a 348 00:17:45,960 --> 00:17:48,879 Speaker 1: trillion here, a trillion there. Congressman Hill, I want you 349 00:17:48,960 --> 00:17:51,480 Speaker 1: to go all ever dirks and on us and give 350 00:17:51,520 --> 00:17:55,040 Speaker 1: me forget about modern monetary theory, give me the modern 351 00:17:55,160 --> 00:18:00,600 Speaker 1: French kill theory about how all Americans adapt to a 352 00:18:00,760 --> 00:18:06,440 Speaker 1: hundred sevent total debt of g d P ten years out. 353 00:18:06,640 --> 00:18:11,280 Speaker 1: Can we do this? Tom Lisa, good to be with you. 354 00:18:11,400 --> 00:18:13,880 Speaker 1: We haven't seen that since the end of World War two, 355 00:18:13,920 --> 00:18:17,800 Speaker 1: when America was fifty of global GDP, and that debt 356 00:18:18,160 --> 00:18:21,200 Speaker 1: way over g d P was a result of fighting 357 00:18:21,200 --> 00:18:25,399 Speaker 1: and winning a world war. Now we have embedded deficits 358 00:18:25,600 --> 00:18:28,920 Speaker 1: for all the out years from our social safety net 359 00:18:29,000 --> 00:18:32,520 Speaker 1: systems and by government growing as a percentage of GDP. 360 00:18:33,119 --> 00:18:36,240 Speaker 1: I don't believe it's sustainable, and my biggest concerns are 361 00:18:36,920 --> 00:18:40,359 Speaker 1: the potential for creating inflation once again going back to 362 00:18:40,480 --> 00:18:44,680 Speaker 1: high inflation expectations. Secondly, the value of the dollar connected 363 00:18:44,720 --> 00:18:48,480 Speaker 1: to that obviously, and the ability of servicing that debt 364 00:18:48,560 --> 00:18:54,719 Speaker 1: as interest rates inevitably rise from their historically below zero 365 00:18:54,880 --> 00:18:58,600 Speaker 1: level today. Other than winning in two thousand twenty two, 366 00:18:58,640 --> 00:19:03,800 Speaker 1: what is the appropriate Republican response to this budget is proposed? 367 00:19:03,840 --> 00:19:07,200 Speaker 1: And again I don't mean the one year fiscal budget, Congressmen, 368 00:19:07,320 --> 00:19:14,320 Speaker 1: but the idea out ten years. What's a cogent GOP response. Well, look, 369 00:19:14,400 --> 00:19:19,040 Speaker 1: starting in nineteen before the pandemic, as you will recall, 370 00:19:19,160 --> 00:19:22,840 Speaker 1: the budget for discretionary spending was essentially flat. In fact, 371 00:19:22,840 --> 00:19:26,960 Speaker 1: it declined in real terms. So Congress has the ability 372 00:19:27,400 --> 00:19:31,800 Speaker 1: to control discretionary spending and better reform our mandatory spending 373 00:19:31,800 --> 00:19:35,159 Speaker 1: programs like Medicare and Social Security. And we need to 374 00:19:35,359 --> 00:19:40,000 Speaker 1: come back to reality after the pandemic, Tom focus our spending, 375 00:19:40,200 --> 00:19:44,280 Speaker 1: target our spending, reform our mandatory spending programs, and in 376 00:19:44,320 --> 00:19:47,520 Speaker 1: my view as a House Republican, not expand the role 377 00:19:47,600 --> 00:19:51,560 Speaker 1: of government in our daily lives, which this budget does 378 00:19:52,040 --> 00:19:55,280 Speaker 1: in spades. There is a question though, about useful spending 379 00:19:55,320 --> 00:19:58,120 Speaker 1: and the idea that sometimes if you spend, you generate 380 00:19:58,160 --> 00:20:01,560 Speaker 1: more growth. We saw that certainly from the nineteen nineties 381 00:20:01,600 --> 00:20:04,240 Speaker 1: and the Clinton era. We've seen this over time. If 382 00:20:04,280 --> 00:20:08,080 Speaker 1: you borrow, you can actually generate a more positive future. 383 00:20:08,560 --> 00:20:11,840 Speaker 1: What is the distinction between good spending and bad spending 384 00:20:11,920 --> 00:20:14,760 Speaker 1: right now? Well, first of all, I think there's a 385 00:20:14,840 --> 00:20:19,160 Speaker 1: rational level of spending too much, too fast, on two 386 00:20:19,720 --> 00:20:23,199 Speaker 1: on too many things that are not rational spending. And 387 00:20:23,240 --> 00:20:27,320 Speaker 1: you look at the nineteen nineties, President Bush and President 388 00:20:27,359 --> 00:20:30,520 Speaker 1: Clinton had some modest tax increases, that's true, but you 389 00:20:30,600 --> 00:20:34,000 Speaker 1: also had the peace dividend as the Soviet Union unraveled, 390 00:20:34,160 --> 00:20:36,679 Speaker 1: and it allowed President Clinton to work with Congress to 391 00:20:36,760 --> 00:20:39,560 Speaker 1: balance the budget by the end of the decade. And 392 00:20:39,600 --> 00:20:43,359 Speaker 1: they did that through reform, including mandatory spending programs and 393 00:20:43,160 --> 00:20:47,440 Speaker 1: and other social spending. So again, it's targeting, it's reformed 394 00:20:47,440 --> 00:20:50,600 Speaker 1: those programs, it's look at ways to build our country. 395 00:20:51,000 --> 00:20:53,040 Speaker 1: And when it comes to infrastructure, that would be a 396 00:20:53,119 --> 00:20:56,720 Speaker 1: rational spending of public money that needs to be done 397 00:20:56,760 --> 00:20:59,920 Speaker 1: in a targeted way, with a principal focus on things 398 00:21:00,000 --> 00:21:03,760 Speaker 1: that are really in need of repair and reform. Inflation 399 00:21:03,760 --> 00:21:05,280 Speaker 1: has been an interesting debate, and that was one of 400 00:21:05,320 --> 00:21:08,840 Speaker 1: the biggest arguments against running the deficit this deeply a 401 00:21:08,840 --> 00:21:10,520 Speaker 1: lot of people have come out and said they're worried 402 00:21:10,560 --> 00:21:14,959 Speaker 1: about inflation. Has become a bibararity sort of polarizing debate 403 00:21:15,040 --> 00:21:18,040 Speaker 1: in Washington. How much inflation are you looking at that 404 00:21:18,080 --> 00:21:19,880 Speaker 1: would be too much? I mean, are you looking at 405 00:21:19,920 --> 00:21:24,920 Speaker 1: specific thresholds that would create a problem for the economy. Well, 406 00:21:24,920 --> 00:21:28,040 Speaker 1: we have sharp increases in commodity prices. You look at 407 00:21:28,119 --> 00:21:32,480 Speaker 1: lumber being the worst, perhaps, and President Chairman Pal hopes 408 00:21:32,560 --> 00:21:35,760 Speaker 1: that these are transitory. But other members of the Open 409 00:21:35,800 --> 00:21:38,760 Speaker 1: Market Committee, like President Kaplan of the Dallas Bank, are 410 00:21:38,800 --> 00:21:41,960 Speaker 1: concerned that if this gets out of hand, we will 411 00:21:42,000 --> 00:21:46,200 Speaker 1: once again to get into a nine seventies inflation expectation 412 00:21:46,520 --> 00:21:49,880 Speaker 1: situation where instead of trying to cut costs and improve 413 00:21:49,960 --> 00:21:54,480 Speaker 1: productivity at businesses, we just raise prices and suggest that 414 00:21:54,560 --> 00:21:57,320 Speaker 1: up and down the supply chain. If we in bed that, 415 00:21:57,520 --> 00:22:01,000 Speaker 1: we're in trouble on inflation. If we don't, it's transitory. 416 00:22:01,200 --> 00:22:03,720 Speaker 1: The french Hill, one of your charms is you actually 417 00:22:03,760 --> 00:22:07,720 Speaker 1: have fairly close selections, unlike so many other people in Congress. 418 00:22:07,760 --> 00:22:12,880 Speaker 1: French Hill fifty Joyce Elliot in the last go around, 419 00:22:13,160 --> 00:22:15,679 Speaker 1: Republicans are gonna win in two thousand and twenty two. 420 00:22:15,720 --> 00:22:18,920 Speaker 1: A lot of experts tell us here, you're the kind 421 00:22:18,920 --> 00:22:24,320 Speaker 1: of district that's critical for them to sustain themselves to victory. Again, 422 00:22:24,600 --> 00:22:27,600 Speaker 1: what do you need to do to get your district 423 00:22:27,680 --> 00:22:31,119 Speaker 1: to take a more conservative stance? How do you sell 424 00:22:31,160 --> 00:22:36,280 Speaker 1: that to America? Well, look, I think Americans are so rational. 425 00:22:36,320 --> 00:22:39,320 Speaker 1: We operate off the kitchen table, We operate around our 426 00:22:39,359 --> 00:22:43,480 Speaker 1: companies with our employees, and it's about using math and rationality. 427 00:22:43,560 --> 00:22:46,399 Speaker 1: And we think borrowing money at the rate the Biden 428 00:22:46,440 --> 00:22:50,080 Speaker 1: administrations proposing it and expanding government is not really a 429 00:22:50,200 --> 00:22:53,560 Speaker 1: shared value by most American families. So I think it's 430 00:22:53,600 --> 00:22:57,240 Speaker 1: tugget targeting tom and budget priorities, and that's what we 431 00:22:57,280 --> 00:22:58,879 Speaker 1: need to be focused on, is we come out of 432 00:22:58,880 --> 00:23:02,000 Speaker 1: this pandemic. French show, thank you so much, greatly appreciate it. 433 00:23:02,000 --> 00:23:06,760 Speaker 1: From the second Districts. This is the Bloomberg Surveillance Podcast. 434 00:23:07,000 --> 00:23:10,359 Speaker 1: Thanks for listening. Join us live weekdays from seven to 435 00:23:10,440 --> 00:23:14,520 Speaker 1: ten AMI Eastern on Bloomberg Radio and on Bloomberg Television 436 00:23:14,880 --> 00:23:18,880 Speaker 1: each day from six to nine am for insight from 437 00:23:18,920 --> 00:23:23,479 Speaker 1: the best in economics, finance, investment, and international relations. And 438 00:23:23,560 --> 00:23:28,680 Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg 439 00:23:28,760 --> 00:23:32,480 Speaker 1: dot com, and of course, on the terminal. I'm Tom Keene, 440 00:23:32,480 --> 00:23:34,480 Speaker 1: and this is Bloomberg.