WEBVTT - Surveillance: Fed In Tough Spot, Lacker Says 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownowitz. Daily we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.160 and of course on the Bloomberg terminal. We continue and 0:00:30.200 --> 0:00:33.720 focus on one fellow reserve. It is the Richmond Fed, 0:00:34.159 --> 0:00:37.599 which has a fabulous history from Black to broad Us 0:00:37.600 --> 0:00:40.959 to Lacquer and now to Barkin. The Richmond Fed one 0:00:40.960 --> 0:00:44.000 of my favorites with the wonderful Tom Humphreys on the 0:00:44.200 --> 0:00:49.040 history of our economy. It's had a wonderful leadership, including 0:00:49.479 --> 0:00:53.520 under Jeffrey Lacker, the former Richmond FED president joins us. Now, Michael, 0:00:53.560 --> 0:00:56.840 it's a different fet, isn't it. Well, it's a different fat, 0:00:56.920 --> 0:00:58.960 It's a different economy and we have learned a lot 0:00:59.320 --> 0:01:02.640 and now we have an do reaction function for the FED, 0:01:02.720 --> 0:01:06.319 which is where I'd like to start. Jeff, you have 0:01:06.480 --> 0:01:11.480 expressed some reservations about this new policy of letting the 0:01:11.520 --> 0:01:14.319 economy run a little hot till we can average inflation, 0:01:14.360 --> 0:01:19.200 because you've expressed concern that that could unmore inflation expectations. 0:01:19.880 --> 0:01:23.280 Do you think that the Fed, in particular J Powell, 0:01:23.319 --> 0:01:25.440 over the last couple of weeks and with his address 0:01:25.480 --> 0:01:29.240 on Friday, maybe UH put a little bit of those 0:01:29.240 --> 0:01:32.520 concerns to rest by emphasizing the fact that the Fed 0:01:32.640 --> 0:01:38.200 is going to stay focused on inflation. UM somewhat, but 0:01:38.280 --> 0:01:41.160 I think UM, I think the Fed's in a tough 0:01:41.200 --> 0:01:45.560 spot the UH the danger that they face from this 0:01:45.640 --> 0:01:50.160 inflation surge. UM, we have inflation on a six month 0:01:50.200 --> 0:01:54.520 basis higher than it's been since nineteen three. The danger 0:01:54.560 --> 0:01:59.280 is that that persists. Rob Kaplan was talking on Friday 0:01:59.320 --> 0:02:02.320 about the then to which businesses were reporting that they 0:02:02.360 --> 0:02:05.760 expect these supply constraints to continue, but then beyond that 0:02:05.800 --> 0:02:09.520 getting embedded in inflation expectations. And I think that's the 0:02:09.639 --> 0:02:14.440 real key risk that UM, the FED is running these days. 0:02:14.480 --> 0:02:17.520 So I was glad to see that Powell addressed that 0:02:17.760 --> 0:02:21.600 in his remarks on Friday. He's and he's done that 0:02:21.680 --> 0:02:25.040 elsewhere as well as trying to assure the public that yes, 0:02:25.120 --> 0:02:28.520 if inflation persists at a high level, we have the 0:02:28.560 --> 0:02:31.520 tools to deal with that. But it's it's somewhat like 0:02:31.600 --> 0:02:35.640 I'm a friend of mine likinged it to um, you know, 0:02:36.360 --> 0:02:39.120 dr telling you you have gang green in your leg 0:02:39.160 --> 0:02:41.200 and don't worry. We have the tools to deal with it. 0:02:41.240 --> 0:02:43.880 But it's you know, the tools are the amputation kit 0:02:44.000 --> 0:02:47.000 and they include a big saw. So it's what we 0:02:47.240 --> 0:02:50.000 went through in the early eighties to get inflation down 0:02:50.120 --> 0:02:53.760 was exceptionally painful, and that's what motivated those of us 0:02:53.760 --> 0:02:57.680 who over time have advocated a more preemptive policy. The 0:02:57.720 --> 0:03:01.720 Fed's moved away from that and it's strategy statement last year. 0:03:02.520 --> 0:03:07.080 The risk it runs is that that shift last year 0:03:07.800 --> 0:03:10.400 UM is sort of a kin to going off Breton Woods, 0:03:10.480 --> 0:03:13.800 and and that it it gives people the license to 0:03:13.919 --> 0:03:16.679 believe that there's an entirely new regime in place now 0:03:16.680 --> 0:03:19.800 with regard to inflation. In terms of tools, one of 0:03:19.800 --> 0:03:23.600 the papers presented on Friday at Jackson Hall suggested that 0:03:23.639 --> 0:03:27.600 our star, the level of interest rates that would be neutral, 0:03:28.480 --> 0:03:30.640 is much lower than it had been. So does the 0:03:30.639 --> 0:03:34.160 FED really have tools? Can they raise rates and cut 0:03:34.160 --> 0:03:39.680 off inflation without sending the economy into recession? And I 0:03:39.680 --> 0:03:42.600 think they very clearly can, and um, you know, more 0:03:42.640 --> 0:03:45.240 to the point, I think they can nudge up the 0:03:45.320 --> 0:03:50.040 polar expected policy path um, you know, over the coming year, 0:03:50.080 --> 0:03:51.800 and I expect they're going to have to do that 0:03:52.520 --> 0:03:56.440 to keep inflation expectations contained. Um So, I think they 0:03:56.480 --> 0:03:59.760 have the tools to combat it. I mean, it's the 0:04:00.040 --> 0:04:02.920 blunt we haven't used them in a long time, but 0:04:03.160 --> 0:04:05.520 um yeah, I think the FED has the tools to 0:04:05.560 --> 0:04:09.280 do that if they well, let me put it this way, 0:04:09.320 --> 0:04:13.760 can they go back to jaw jaw to paraphrase Winston 0:04:13.880 --> 0:04:17.720 Churchill and job owed uh the economy into place? Or 0:04:17.800 --> 0:04:22.080 is it going to take action to get wall streets attention? Now? 0:04:22.120 --> 0:04:24.760 I think I think actions have always spoken louder than 0:04:24.800 --> 0:04:29.000 words in this Throughout the seventies, the Fed um loudly 0:04:29.200 --> 0:04:33.440 proclaimed it's uh opposition to inflation and it's desire to 0:04:33.480 --> 0:04:36.839 have inflation be lower. It just didn't take the actions 0:04:36.880 --> 0:04:41.599 to back that up until Volker in one started letting 0:04:41.600 --> 0:04:46.040 interest rates rise and engineered the recession that that brought 0:04:46.520 --> 0:04:51.320 inflation expectations down. Jeff Lacker, Tom Can, good morning to you. 0:04:51.320 --> 0:04:54.359 You mentioned the preemptive nature of a theory and that 0:04:54.560 --> 0:04:56.560 Richmond has led on that. I think of the late 0:04:56.640 --> 0:04:59.880 Marvin good Friend with a cause for concern over inflation, 0:05:00.080 --> 0:05:03.360 the whole shadow Open Market Committee. What we saw out 0:05:03.360 --> 0:05:07.600 of Carnegie Melon as well. Where did the inflation Eastas 0:05:07.640 --> 0:05:12.760 get it wrong? On your watch? So, I think that 0:05:13.120 --> 0:05:16.960 the stability of inflation expectations coming out of the recession 0:05:17.880 --> 0:05:21.200 UM was a bit of surprise, I mean a bit. Um. 0:05:21.480 --> 0:05:25.160 They were a bit more strongly anchored then I and 0:05:25.279 --> 0:05:30.920 several others expected, So the upside risk to inflation didn't emerge. Um. 0:05:30.960 --> 0:05:34.880 I'd point out um at the same time that UH 0:05:35.080 --> 0:05:39.400 inflation doubs were also also missed it. They were afraid 0:05:39.480 --> 0:05:43.239 of dramatic sag and inflation. Jeff, this came up, Jeff, 0:05:43.279 --> 0:05:44.880 this came up over the weekend. And this is a 0:05:44.960 --> 0:05:49.400 critical question in defense of the inflation Easta's the idea 0:05:49.480 --> 0:05:52.359 that the reason we didn't see the inflation is we 0:05:52.480 --> 0:05:57.160 just moved the inflationary impulse over to an increased asset 0:05:57.680 --> 0:06:02.479 allocation and an asset battle of sheet inequities in real estate, 0:06:02.760 --> 0:06:08.000 all the summer properties. Mike McKee can't afford. Sorry about that, Mike, 0:06:08.480 --> 0:06:12.160 Good to be with you, Tom Um. So I think, um, 0:06:12.440 --> 0:06:15.039 what people lost sight of with a huge increase in 0:06:15.080 --> 0:06:19.240 the Fence balance sheet is that the monetary liabilities it 0:06:19.320 --> 0:06:22.240 was pumping in the economy. We're being absorbed by a 0:06:22.279 --> 0:06:28.240 tremendously a tremendously large demand for liquid assets by the 0:06:28.279 --> 0:06:32.520 banking system, driven by the bank's natural reaction to what 0:06:32.640 --> 0:06:37.080 happened in two thousand and eight, but also regulatory um 0:06:37.160 --> 0:06:41.520 you know, impetus provided for them to hold larger liquid buffers, 0:06:41.560 --> 0:06:43.640 and that means that, you know, the demand for money 0:06:43.640 --> 0:06:46.640 is essentially flat at the interest rate on reserves, and yeah, 0:06:46.680 --> 0:06:49.200 we could increase the money supply a lot until we 0:06:49.560 --> 0:06:52.640 start forcing banks to hold more liquidity than they want. 0:06:52.720 --> 0:06:55.440 And we're we were ways away from that, so the 0:06:55.480 --> 0:06:57.960 size of the balance sheet wasn't really doing much for 0:06:58.000 --> 0:07:01.400 the economy. On the flip side of the station debate, Jeff, 0:07:01.520 --> 0:07:03.440 is the employment picture, and we're gonna get a better 0:07:03.440 --> 0:07:05.440 read on that perhaps on Friday. If you were still 0:07:05.440 --> 0:07:07.479 on the Fed, what would you be looking for to 0:07:07.520 --> 0:07:10.800 determine just how much slack or how tight the labor 0:07:10.800 --> 0:07:14.760 market really is. It's a really good question. You know, 0:07:14.800 --> 0:07:18.239 we had all these debates about what maximum employment meant 0:07:18.320 --> 0:07:22.080 or what that number was. It's really a long run, 0:07:22.240 --> 0:07:26.120 long horizon kind of thing. It's like, after all the 0:07:26.520 --> 0:07:30.960 sectoral reallocation has occurred. After all the matching that has 0:07:31.000 --> 0:07:33.520 to go on between people looking for another job, what 0:07:33.640 --> 0:07:35.520 kind of careers are going to be. I want a 0:07:35.560 --> 0:07:37.960 different occupation. I want to be in a restaurant anymore, 0:07:38.480 --> 0:07:42.160 and uh, firms looking for where they're going to find 0:07:42.200 --> 0:07:45.320 someone with the skills that I need. After that process 0:07:45.400 --> 0:07:49.280 plays out, Yeah, maximum employment might be a lower unemployment 0:07:49.360 --> 0:07:52.360 rate we have now, but that takes time, and maximum 0:07:52.360 --> 0:07:57.680 employment in September of it's really close to where we 0:07:57.720 --> 0:08:02.120 are right now. We're really close to September maximum employment. 0:08:02.360 --> 0:08:06.360 We can't we can't get maximum unemployment much above where 0:08:06.360 --> 0:08:09.440 it's it's going to be in September. So um, I 0:08:09.480 --> 0:08:11.800 think that you have to keep in mind the dynamic 0:08:11.880 --> 0:08:17.400 process in which labor markets. Heal some recent research by 0:08:17.440 --> 0:08:22.080 Bob Hall and Marianna kudlak Um in that regard is 0:08:22.600 --> 0:08:25.080 painting a very different picture of labor markets. You think 0:08:25.080 --> 0:08:29.760 of the unemployment ratist shooting up in a a recession 0:08:29.880 --> 0:08:33.920 coming down, but you know, uh, it looks like it 0:08:34.000 --> 0:08:38.960 just comes down at the same pace every every expansion. Jeff, 0:08:39.040 --> 0:08:41.800 you were very much an inflation used to when you 0:08:41.840 --> 0:08:45.000 were on the board, and I'm wondering if you've seen 0:08:45.679 --> 0:08:49.439 what the current FED seems to be arguing that inflation 0:08:49.559 --> 0:08:53.720 dynamics have changed, uh, and there is, as j Pal 0:08:53.800 --> 0:08:59.760 said on Friday, a natural disinflation in the global economy. 0:09:02.240 --> 0:09:06.720 I'm not sure i'd buy it. Um what people have 0:09:06.840 --> 0:09:12.440 been uh increasing the weight they place on um inflation 0:09:12.480 --> 0:09:15.600 expectations and inflation dynamics over the last couple of decades. 0:09:15.640 --> 0:09:18.360 I know, you know, early two thousands people thought it 0:09:18.400 --> 0:09:22.240 was all sort of a backward looking process. The important 0:09:22.280 --> 0:09:24.760 thing to remember and think the thing people neglect about 0:09:24.760 --> 0:09:27.600 inflation expectations. People talk about it as if it's some 0:09:28.679 --> 0:09:33.760 exogenous external force of nature or else some collective psychological 0:09:34.600 --> 0:09:38.520 whim or something. It's really expectations about what the FED 0:09:39.360 --> 0:09:42.920 is going to do in the near future. And so 0:09:43.240 --> 0:09:46.600 when you look at inflation expectations, that's really credibility of 0:09:46.640 --> 0:09:51.240 the FED, and that can change. And the process by 0:09:51.280 --> 0:09:55.400 which that shifts and changes over time is not one 0:09:55.440 --> 0:10:00.320 that's deeply deeply understood in the economics profession. So Lecker, 0:10:00.440 --> 0:10:02.520 thank you so much. With VCU and of course the 0:10:02.600 --> 0:10:05.640 former president of the Richmond FED, thank you, thank you 0:10:05.720 --> 0:10:13.479 so much. We've got the perfect guest for you. Kitchens 0:10:13.760 --> 0:10:16.800 of Society General. We spoke to his people last night 0:10:17.080 --> 0:10:19.320 and they said he would make an appearance with us, 0:10:19.360 --> 0:10:22.520 even though his arsenal struggles there. Kid, let me start 0:10:22.600 --> 0:10:25.200 with the first important question of the week. If Harry 0:10:25.280 --> 0:10:29.240 Kane and Ronaldo joined Arsenal, would that help? No, we 0:10:29.280 --> 0:10:31.800 can't defend the goal scoring is less of a problem 0:10:31.880 --> 0:10:34.920 unless one of them places full back. It's been sport 0:10:35.000 --> 0:10:36.800 to say the least. Kid, let's get started in a 0:10:36.880 --> 0:10:40.160 serious matter here. It is the summer doldrums, but it's 0:10:40.240 --> 0:10:43.160 not What are you looking for? How do you frame 0:10:43.160 --> 0:10:46.920 a set up to maybe a more active September in October? 0:10:48.559 --> 0:10:51.200 I think you know, we have to get away from 0:10:51.240 --> 0:10:55.120 being driven just by the FED tape of story. Um, 0:10:55.160 --> 0:10:58.280 so you know the the other currents will take over. 0:10:58.480 --> 0:11:02.280 I'll be interested, Oh, what's happening outside the United States? 0:11:02.760 --> 0:11:05.480 Only in the sense that things change if other parts 0:11:05.480 --> 0:11:08.280 of the world start to see recovery. If you started 0:11:08.280 --> 0:11:11.160 to get better data in Europe coming through relative to 0:11:11.200 --> 0:11:13.280 the States, that could change things a little bit. But 0:11:13.280 --> 0:11:15.520 but while we're bogged down with this idea of not 0:11:15.640 --> 0:11:17.959 even when does the FED start to slow its asset 0:11:18.000 --> 0:11:20.520 purchases down? But what does that mean about when they're done? 0:11:20.520 --> 0:11:22.120 And what does that mean about when rate rice has 0:11:22.160 --> 0:11:24.880 come and they're not going to come to three? So hey, 0:11:25.040 --> 0:11:27.160 what are we going to do in two? You know, 0:11:27.160 --> 0:11:28.680 we have to we have to get past that, that 0:11:28.679 --> 0:11:31.400 whole story. But I think you know, there's there's geopolitics 0:11:31.440 --> 0:11:34.800 coming up. The comment situation is is is either going 0:11:34.840 --> 0:11:36.800 to improve or or it's going to become a real 0:11:36.960 --> 0:11:41.680 economic factor again, so that that's not static. Um and um. 0:11:41.720 --> 0:11:44.520 You know, the the range of forecasts for Friday's peril 0:11:44.600 --> 0:11:47.840 numbers over on your side of the pond is huge, 0:11:48.320 --> 0:11:50.880 So we will get surprised by this. We we don't 0:11:50.920 --> 0:11:52.800 have a handle on the place of job creation really, 0:11:52.880 --> 0:11:55.520 we just guess kit taking a step back, it seems 0:11:55.520 --> 0:11:57.720 like the market is saying that the taper is a 0:11:57.800 --> 0:12:00.720 non event. Is that what we're seeing that basically Fed 0:12:00.800 --> 0:12:04.800 Chair J. Powell has successfully made tapering the one billion 0:12:04.840 --> 0:12:08.760 dollars of monthly bomb purchases an entirely non event from markets. 0:12:09.760 --> 0:12:11.839 It should be. I mean, in a sense, the whole 0:12:11.880 --> 0:12:14.200 idea of the table was the you know, the FED 0:12:14.320 --> 0:12:16.880 slows down its asset purchases at the same time as 0:12:16.880 --> 0:12:20.720 the government spends less money and the needs to issue 0:12:21.080 --> 0:12:24.800 fewer bombs. So who cares, right, Because what what we've 0:12:24.800 --> 0:12:27.480 done is we is the United States finance the pandemic 0:12:27.559 --> 0:12:31.680 with the government handing out checks paid for by issuing 0:12:31.720 --> 0:12:35.560 debt that was brought by the Fed. Just unwind the process. 0:12:35.679 --> 0:12:38.760 Just stop paying out checks and stop stop buying the bombs, 0:12:38.800 --> 0:12:41.040 and then and then we can get back to discussing 0:12:41.640 --> 0:12:45.080 important stuff, which is did all these checks create savings? 0:12:45.080 --> 0:12:47.240 Did all these create checks create demand? Did all these 0:12:47.280 --> 0:12:50.920 checks create inflation somewhere out there with all these bottlenecks 0:12:50.960 --> 0:12:52.760 and things like that, And I think that's what we're 0:12:52.760 --> 0:12:55.600 going to find out. But the focus is on can 0:12:56.000 --> 0:12:59.559 can the US government have spent this much money getting 0:12:59.559 --> 0:13:03.240 the on me to recover this fast from the pandemic 0:13:04.200 --> 0:13:08.920 without without some inflation that's stickier than the legged than 0:13:08.960 --> 0:13:10.840 the FED is going to feel comfortable with. And we're 0:13:10.840 --> 0:13:12.600 going to find that out over the next six months 0:13:12.600 --> 0:13:14.560 in a big way, I think, you know. Okay, speaking 0:13:14.600 --> 0:13:17.240 of being this far from the pandemic, it is interesting 0:13:17.240 --> 0:13:19.080 that people are saying that when we taper, we have 0:13:19.240 --> 0:13:22.199 to go faster given how far into this we are 0:13:22.280 --> 0:13:25.080 eighteen months or so. How are you thinking about a 0:13:25.120 --> 0:13:29.160 pace of a taper um. Well, you know that the 0:13:29.200 --> 0:13:32.960 consensus view on tapering is you reduce. You reduce the 0:13:33.160 --> 0:13:37.320 pace by ten billion each FMC meeting instead of the 0:13:37.400 --> 0:13:41.439 five billion for treasuries that they did in twenty fourteen, 0:13:42.000 --> 0:13:45.760 and that takes a year. Now you could go every month, 0:13:46.440 --> 0:13:49.400 you could try more. In a sense, it should be 0:13:49.400 --> 0:13:52.400 possible to go fast because the Treasury is going to 0:13:52.679 --> 0:13:55.120 be issuing less debt into it, so you're you know, 0:13:55.160 --> 0:13:57.040 you've got you kind of got things lined up. The 0:13:57.080 --> 0:13:59.560 only difficulty would be if we started to get seriously 0:13:59.559 --> 0:14:02.960 worried out the inflation data and the strength of the 0:14:02.960 --> 0:14:04.960 economy at the same time as they're tapering, and then 0:14:05.000 --> 0:14:06.800 the bond market is going to struggle and that kind 0:14:06.800 --> 0:14:09.920 of catches us where we are. It's really easy, it's 0:14:10.000 --> 0:14:13.400 really easy to to taper without yields going up if 0:14:13.440 --> 0:14:16.000 inflation is low and the economy is not growing too fast. 0:14:16.360 --> 0:14:18.720 But if you if you lose control of the story 0:14:19.080 --> 0:14:21.880 while you're doing it, it can get pretty messy. So 0:14:22.200 --> 0:14:24.640 I think they'll I mean, I would go as fast 0:14:24.680 --> 0:14:27.720 as the market let me go once I started, because 0:14:27.720 --> 0:14:30.280 it buys me a degree of freedom. But you have 0:14:30.360 --> 0:14:32.880 to be market lead. You know, if you if you 0:14:32.960 --> 0:14:36.040 cut back your your purchases by ten billion one month 0:14:36.480 --> 0:14:39.200 um and yields back up study basis points in the 0:14:39.240 --> 0:14:42.000 first week, you know you kind of you go and 0:14:42.080 --> 0:14:44.680 have a scratch of your head pretty quickly. Thank you 0:14:44.720 --> 0:14:47.480 so much, greatly appreciated. A good conversation to start the 0:14:47.520 --> 0:14:50.840 week for me, society General and the chief Foreign Exchange 0:14:50.880 --> 0:14:58.440 Strategies right now is the most important conversation of the 0:14:58.520 --> 0:15:01.600 day and even of the week. For those that are saying, 0:15:01.640 --> 0:15:05.120 you know, lose the fancy talk, just give me some courage. 0:15:05.560 --> 0:15:09.040 Robert Doll for decades has done just that, a storied 0:15:09.480 --> 0:15:13.200 career in the equity markets with cross market global investments, 0:15:13.240 --> 0:15:17.160 and Bob Doll I love within your research. Note you say, look, 0:15:17.320 --> 0:15:22.520 we've got to invest in a quote a still good economy. 0:15:22.560 --> 0:15:27.880 What does stocks do in a still good economy? They 0:15:27.960 --> 0:15:31.440 generally go up. Tom uh. You know, a good economy 0:15:31.520 --> 0:15:34.720 means good earnings and so the path of LEAs resistance 0:15:34.800 --> 0:15:37.880 has been and likely will continue to be to the upside. 0:15:38.160 --> 0:15:40.600 That does not mean there aren't flies in an ointment. 0:15:40.600 --> 0:15:42.880 I can give you a list but the path of 0:15:43.000 --> 0:15:45.680 least resistance is still higher. Tom. You know that, Bob, 0:15:45.880 --> 0:15:47.960 the flies an ointment, Let's go right there, because that's 0:15:47.960 --> 0:15:50.720 how I roll. I mean, honestly, what material fly in 0:15:50.760 --> 0:15:53.440 the ointment are you looking at that potentially could disrupt 0:15:53.440 --> 0:15:56.200 things in a way that people are not expecting. Well, 0:15:56.280 --> 0:15:58.440 if they're all at the margin. You all just talked 0:15:58.480 --> 0:16:01.520 about coronavirus and in the delta variant that that that 0:16:01.680 --> 0:16:05.480 is one. But inside the market, earnings estimates for the 0:16:05.560 --> 0:16:09.000 third quarter peaked in early August and they're off a 0:16:09.040 --> 0:16:11.920 little bit. That's after four quarters were right. During the 0:16:12.000 --> 0:16:15.440 quarter of the earnings estimates kept going up. Brett's the 0:16:15.520 --> 0:16:18.880 average stock peaked in June. What's that telling us? Its 0:16:18.920 --> 0:16:21.360 telling us the markets get a little tired. So I 0:16:21.400 --> 0:16:26.200 can find flies and annointment are the material ones? Great question, Bob? 0:16:26.240 --> 0:16:28.760 Can you answer the question for me? Can we get 0:16:28.760 --> 0:16:35.120 a reflationary cyclical trade if bond yields don't rise? Uh? 0:16:35.160 --> 0:16:37.880 That's the million dollar question. If you dropped me on 0:16:37.920 --> 0:16:40.800 the planet and told me everything except where the tangy 0:16:40.840 --> 0:16:43.720 year and asked me to guess, I guess a lot 0:16:43.800 --> 0:16:47.000 higher than one thirty something going on the bond market 0:16:47.000 --> 0:16:51.960 when the SUP has the same yield as a tenure treasury. Um. Uh, 0:16:52.200 --> 0:16:54.880 we need to watch that carefully. That has that you 0:16:55.120 --> 0:16:57.880 has to go up. Uh in my view to have 0:16:57.960 --> 0:17:01.080 this cyclical trade. To come back on, Bob Dol, you 0:17:01.160 --> 0:17:04.880 have fought against the pendulum of flies in the ointment 0:17:05.119 --> 0:17:08.320 for decades. In decades you have said you have to 0:17:08.359 --> 0:17:12.240 participate in the foundation of that, Bob Doll, is it 0:17:12.400 --> 0:17:17.320 corporations will adjust? Do you observe and in what way 0:17:17.359 --> 0:17:23.920 do you observe corporations adjusting into two thousand twenty two. Well, 0:17:23.480 --> 0:17:26.080 I'll start look in the rear view mirror. First. If 0:17:26.119 --> 0:17:28.919 you had told me they're more companies in the SMP 0:17:29.040 --> 0:17:32.720 five dred that would benefit from COVID, then would be hurt. 0:17:32.800 --> 0:17:35.040 I wouldn't have believe you wanted to get. But that's 0:17:35.040 --> 0:17:39.760 exactly what's happened. Corporations are figuring out how to morph. Uh. 0:17:39.800 --> 0:17:43.480 They're dealing with very low interest rates. Uh. They've learned 0:17:43.480 --> 0:17:47.399 how to raise prices in environment where pricing power is 0:17:47.480 --> 0:17:51.400 coming back. They've kept cost down. A labor I think 0:17:51.440 --> 0:17:54.560 will be a flying ointment on that one. But corporations 0:17:54.560 --> 0:17:58.359 have morphed in lots of ways that caused them to 0:17:59.040 --> 0:18:02.680 print these slin earnings reports. I'll talk about another flying 0:18:02.680 --> 0:18:04.680 the ointment, just to keep repeating the image on this 0:18:04.720 --> 0:18:08.920 Monday morning for everybody eating breakfast. I do wonder going forward, Bob, 0:18:09.359 --> 0:18:12.760 about the potential for higher taxes, and I look to Washington, 0:18:12.840 --> 0:18:15.760 d C. Pulling together some sort of infrastructure plan. What 0:18:15.920 --> 0:18:19.160 have you accounted for in your projections and what isn't 0:18:19.200 --> 0:18:23.000 accounted for? Right now? Yeah, I still think the path 0:18:23.080 --> 0:18:26.520 the least resistance for that legislation is that we do 0:18:26.640 --> 0:18:33.080 have a Democrat reconciliation package following the bipartisan um infrastructure plan, 0:18:33.480 --> 0:18:37.320 but a much watered down one. Uh. Let's call it 0:18:37.400 --> 0:18:40.720 two trillion with up to a trillion dollar of tax increases, 0:18:41.200 --> 0:18:45.520 kind of the plane Vanilla ones, higher for higher wage earners, 0:18:45.560 --> 0:18:48.680 for corporations, and higher capital gains. But you know, the 0:18:48.720 --> 0:18:53.640 Afghanistan thing, uh, does not raise President Biden's political capital 0:18:53.680 --> 0:18:56.520 get that through. So whatever you thought the probability there, 0:18:56.600 --> 0:18:59.280 it is lower. Now, Bob Don, what's your target on 0:18:59.440 --> 0:19:05.439 SMPF hundred. I'm embarrassed to say fifty. Uh, as the 0:19:05.440 --> 0:19:08.280 thing just keeps going up, I've not revised my target. 0:19:08.400 --> 0:19:10.520 Let's revise it. Right now. It's a slow Monday. We 0:19:10.560 --> 0:19:13.280 had to get Riggs on the show for Taylor. Riggs, 0:19:13.280 --> 0:19:17.800 do your revision right now. Al there we go. We're 0:19:17.840 --> 0:19:21.080 making news. Bob Doll, thank you so much. Dollar, I 0:19:21.160 --> 0:19:30.040 love it, Taylor Dollar, cross Mark pretty cool joining us now. 0:19:30.560 --> 0:19:33.480 Peter Truowittz from the London School of Economics with all 0:19:33.520 --> 0:19:36.880 of his good work over the years at the University 0:19:36.920 --> 0:19:40.320 of Texas at Austin, and Professor Trubowitz. We talked to 0:19:40.400 --> 0:19:44.000 Afghan experts. I want to talk to you about United 0:19:44.040 --> 0:19:48.200 States experts, and I go back to your landmark politics 0:19:48.200 --> 0:19:53.240 and strategy. Do we have a strategy in foreign policy 0:19:53.680 --> 0:19:56.359 that gets us out to say, two thousand twenty three 0:19:56.720 --> 0:20:01.480 a year before our next election. Well, Tom, it's good 0:20:01.480 --> 0:20:03.720 to be with you. I would say we have the 0:20:03.800 --> 0:20:07.760 beginnings of a of a strategy. I mean, really, what's 0:20:07.760 --> 0:20:10.600 been going on for well over ten years at the 0:20:10.680 --> 0:20:16.240 United States is in the process of reassessing and adjusting 0:20:16.280 --> 0:20:22.040 strategically and internationally. What that means is moving more of 0:20:22.119 --> 0:20:25.480 its energy, it's time, it's energy, and its assets to 0:20:25.640 --> 0:20:30.199 East Asia and domestically. I think the principal challenge that 0:20:30.280 --> 0:20:36.679 has dogged three administrations. Is UM rebuilding or renewing the 0:20:36.800 --> 0:20:41.199 social contract, which has really been badly damaged by the 0:20:41.280 --> 0:20:45.800 country's failure to keep international openness and social protection and balance. 0:20:46.359 --> 0:20:51.520 This is the challenge. Afghanistan doesn't really change that, but 0:20:51.640 --> 0:20:54.000 I think it kind of draws our attention to it 0:20:54.040 --> 0:20:57.119 in a kind of more focused way. UM. As we 0:20:57.160 --> 0:21:01.159 wind down this chapter and UH and hopefully the United 0:21:01.160 --> 0:21:04.960 States begins a new one, I look Peter at a 0:21:05.040 --> 0:21:08.840 new strategy, and it just seems to be all of 0:21:09.000 --> 0:21:13.200 the ghosts that the looking back. We look back one year, 0:21:13.520 --> 0:21:17.000 we looked back, two decades, we look back three wars. 0:21:17.320 --> 0:21:23.800 Which are you looking back to to find perspective? I'm 0:21:23.800 --> 0:21:27.359 not actually looking back at wars. What I think about 0:21:27.480 --> 0:21:31.439 is I think about I really do think we're in 0:21:31.480 --> 0:21:35.800 a period where the national interest is being redefined, and 0:21:35.840 --> 0:21:39.200 it's not being done in the news cycle. It's being 0:21:39.240 --> 0:21:41.640 done over an extended period of time. So I look 0:21:41.720 --> 0:21:46.359 back at periods for the historians out there, UH, like 0:21:46.400 --> 0:21:49.680 the eighteen nineties and the nineteen twenties and the nineteen 0:21:49.760 --> 0:21:56.320 forties and the nineteen seventies where the United States readjusted, recalibrated, 0:21:56.960 --> 0:22:01.960 change the balance between international and domestic stick interest and 0:22:02.440 --> 0:22:04.240 and that's what I think we're in the middle of. 0:22:04.280 --> 0:22:06.840 And I think it's very hard to see. You have 0:22:06.920 --> 0:22:09.359 to be able to kind of bracket it, step outside 0:22:09.359 --> 0:22:12.520 of it, and get some distance looking at it from 0:22:12.560 --> 0:22:16.399 ten thousand feet rather than from from a hundred feet, 0:22:16.480 --> 0:22:19.000 And right when you're in the middle of something like 0:22:19.040 --> 0:22:22.480 what's going on in Afghanistan right now, it's very hard 0:22:22.520 --> 0:22:26.920 to see that. But I do think that's what Biden wants, 0:22:27.080 --> 0:22:30.440 perhaps trying to get out he is having trouble. That's 0:22:30.440 --> 0:22:32.720 where I wanted to go because right now we're looking 0:22:32.840 --> 0:22:35.439 at an agenda in Washington, d C. That is almost 0:22:35.480 --> 0:22:37.880 solidly Afghanistan. I mean, I was watching the Sunday talk 0:22:37.920 --> 0:22:41.000 shows and the political shows are all Afghanistan at a time, 0:22:41.000 --> 0:22:43.200 and we're heading up into the debt ceiling debate. We're 0:22:43.240 --> 0:22:46.440 heading up until uh this question about infrastructure and getting 0:22:46.440 --> 0:22:51.160 it past. I mean, did this just accomplish the opposite? Yes, 0:22:51.240 --> 0:22:53.639 I think that's you know, they said, that's the great 0:22:53.680 --> 0:22:56.320 irony and all of this. One of the reasons that 0:22:56.440 --> 0:22:59.879 Biden was so keen to get out of Afghanistan was 0:23:00.000 --> 0:23:03.879 to focus more attention on domestic problems and the messy, 0:23:04.280 --> 0:23:09.000 costly withdrawal from Afghanistan has basically only increased the political 0:23:09.119 --> 0:23:12.600 risks of failing to deliver on that front and the 0:23:12.680 --> 0:23:16.439 difficulties of getting it done because he's now open and 0:23:16.560 --> 0:23:20.440 vulnerable to attacks over Afghanistan. You heard it yesterday, people 0:23:20.480 --> 0:23:25.080 calling for impeachment, Lindsey Graham calling for impeachment of Joe Biden, 0:23:25.680 --> 0:23:27.879 you know, and and we'll hear more of that in 0:23:27.920 --> 0:23:33.080 the coming days. I think, Professor, are our allies rethinking 0:23:33.320 --> 0:23:37.159 our commitment to them, and I have Taiwan specifically in mind, 0:23:39.160 --> 0:23:42.760 so you know, I think that is going on, although Frankly, Teller, 0:23:42.840 --> 0:23:45.880 it's mostly on my side of the Atlantic over here, 0:23:45.920 --> 0:23:50.120 and I don't mean the UK, but also in Europe 0:23:50.560 --> 0:23:52.600 there's a lot of people who are very piste off 0:23:52.680 --> 0:23:57.280 about not being sufficiently consulted about the operations with respect 0:23:57.280 --> 0:24:01.200 to the withdrawal. I hear much less of actually from 0:24:01.200 --> 0:24:04.359 our allies in East Asia. So why is that the case. 0:24:04.800 --> 0:24:08.320 I think it's because they know that the goal behind this, 0:24:08.600 --> 0:24:12.320 at least the international goal, is to shift the focus 0:24:12.440 --> 0:24:16.200 to East Asia, to China and more broadly, and that's 0:24:16.200 --> 0:24:19.040 a concern on this side of the Atlantic on on, 0:24:19.280 --> 0:24:22.280