Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jay Lee. We
Speaker 1: bring you insight from the best and economics, finance, investment
Speaker 1: and international relations Fine Bloomberg Surveillance on Apple Podcast, Suncloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Terminal.
Speaker 1: I'm looking at jud In Emmanuel and he's just itching
Speaker 1: to jump in on this. Judy and Dipping Rip, I
Speaker 1: think Mike Wilson and Morgan Stanley asked yesterday, I wouldn't
Speaker 1: do this for anyone else. Mike Wilson turned round and said,
Speaker 1: how is the consensus wrong? He thinks it's not the direction,
Speaker 1: it's the magnitude. Max Kentner coming out this morning, same
Speaker 1: first half. First half might be better than people expect.
Speaker 1: What do you say, Well, look, you know that we're
Speaker 1: in in the dipping rip camp, and frankly, being in
Speaker 1: the consensus has always in a point of of bother
Speaker 1: for us. But when you when you look at it,
Speaker 1: you know you're fighting this whole notion that the FED
Speaker 1: is going to hike at least fifty, maybe seventy five
Speaker 1: basis points more and the I S M S both
Speaker 1: manufacturing and now services are in recession. Let's not hey
Speaker 1: with cham and pal three has away. Some mentioned it
Speaker 1: financial conditions of a somewhat. Do you think he pushes
Speaker 1: back against that? He does? Do you think it works? Uh? Here,
Speaker 1: here's the issue. The issue is there's a lot of
Speaker 1: position in going on in front of Thursday's cp I.
Speaker 1: Uh so, So from the aspect of a cap being
Speaker 1: on risk assets like we saw basically two hours into
Speaker 1: yesterday's session, it probably does work, but it's could be
Speaker 1: an entirely new narrative after that report comes out. Your
Speaker 1: shop invented the synthesis of equity analysis and economic analysis.
Speaker 1: A guy from Texas to this a few years years ago.
Speaker 1: Synthesize right now the enduring Ed Hyman belief that America
Speaker 1: clears itself like nobody else. We will get through higher rates,
Speaker 1: we will get through all the tech layoffs and all
Speaker 1: the other drama. It's out there. Synthesize the optimism on
Speaker 1: your floor right now, well point blank. Ed has been
Speaker 1: of the view a good nine months now that inflation
Speaker 1: is going to fall faster than the market believes, and
Speaker 1: thus far it's starting to materialize. His full year inflation
Speaker 1: forecast is two and a half percent the golden to handle. Okay,
Speaker 1: that is an entire new set of circumstances for the
Speaker 1: FED to deal with if in fact that's right, And
Speaker 1: and you know that is probably in and of itself
Speaker 1: the argument for risk assets that we think materializes at
Speaker 1: the end of the year, at the end of the year,
Speaker 1: but not at the beginning of the year. And this
Speaker 1: is what I wanted to raise because I actually understand
Speaker 1: what Max Kettner is getting at people who are saying,
Speaker 1: wait a second, the data isn't that bad. There has
Speaker 1: been eight change in facts with better than expected weather,
Speaker 1: warmer than expected weather, and a China that's reopening. Why
Speaker 1: isn't that enough to sustain things for a bit longer?
Speaker 1: Before people hear what Raphael Boss is saying. I am
Speaker 1: not a pivot guy, look, no question about it. The
Speaker 1: surprise to me when I got to the green room
Speaker 1: was to look at natural guests and realize it has
Speaker 1: a three handle on it after what we've seen the
Speaker 1: last several months. That's a big deal. But but at
Speaker 1: the end of the day, we have this set of
Speaker 1: circumstances where the FED is intent on raining in the
Speaker 1: labor situation, and the only way you do that at
Speaker 1: this point is to cause I wouldn't call it a
Speaker 1: material slow down, but look ed is looking for a
Speaker 1: couple of negative GDP quarters what we used to call
Speaker 1: until the first half of last year a recession. Okay,
Speaker 1: and I understand they dig There is a lot of
Speaker 1: people are saying it didn't actually happen. So what causes
Speaker 1: the rip? What causes the upside? If the FETE is
Speaker 1: determined to bring inflation down, if they're really going gangbusters
Speaker 1: the air, and you don't necessarily get some sort of
Speaker 1: fiscal impulse or anything to really drive things near the direction.
Speaker 1: It's essentially this idea that there is a terminal, you know,
Speaker 1: endpoint to the hiking. You don't necessarily need to see
Speaker 1: the easing, and the market is probably and I think
Speaker 1: we're going to hear this in a few hours incorrect
Speaker 1: and believing that there's going to be any sort of
Speaker 1: material easing in three But what it really is is
Speaker 1: what you have every time at market bottoms. There has
Speaker 1: never been a bear market bottom without a capitulation, without
Speaker 1: an emotional volatility spike, and that in it of itself
Speaker 1: clears the playing field for the next bowl market. And
Speaker 1: we think that's going to happen if I'm not in cash,
Speaker 1: where am I? What sectors have value and have protection?
Speaker 1: We continue to think that value has value. Okay, it
Speaker 1: is going to be challenged for the next couple of
Speaker 1: weeks at mids Uh, That's that's part of it. Look,
Speaker 1: we're very defensive minded right now. Consumer staples, healthcare, and
Speaker 1: energy continues to be you know, it's sort of the
Speaker 1: pinata back and forth, you know, with ways of emotion
Speaker 1: and you know, ticks in the oil price. But at
Speaker 1: the end of the day, even if we dip into
Speaker 1: a recession, energy is five percent of the index weight
Speaker 1: and it's going to account for nine percent of the
Speaker 1: earnings issues. So you don't think TANK can regain leadership here,
Speaker 1: it's basically the message. In the short term, it absolutely can.
Speaker 1: But in the long term, look, the fact is is
Speaker 1: that the investing public still owns too much. Fang, you're
Speaker 1: a student of market history. I think what we're all
Speaker 1: leaning on here is this idea that's incredibly rare to
Speaker 1: get a market low before the recession. Is that basically
Speaker 1: the argument here? Yeah, in a nutshell, absolutely it would
Speaker 1: it would look again, we have to take it from
Speaker 1: the jump off point that everything that we've seen in
Speaker 1: the last three years is about, you know, has very little,
Speaker 1: if any historical precedent, but this is one of these things.
Speaker 1: Entire the entirety of two We were asked, when's the capitulation,
Speaker 1: when's the chicarsis, when's the emotion? It's coming? And the
Speaker 1: saint Yeah, Junemanny, what have a acre alongside us in
Speaker 1: the studio today, Judy, what do you make of all
Speaker 1: this euro optimism we're waking up to this morning and
Speaker 1: this dollar weakness was seeing as well off the back
Speaker 1: of this chin of reopening story. Uh. In the immediate term,
Speaker 1: it may be a little bit in terms of the
Speaker 1: reaction of of euro dollar at one oh seven, that's understandable.
Speaker 1: But the bigger picture is is that what the last
Speaker 1: nine months have been about is ridding the Eurozone of
Speaker 1: the psychology of negative interest rates. It's very difficult to
Speaker 1: overstate how important that is for risk assets, for investors,
Speaker 1: you know, assessing capital allocation decisions. Uh, you know, in
Speaker 1: that part of the world. And when you think at
Speaker 1: the about the discount for over a decade during which
Speaker 1: time the dollar rallied almost consistently. It makes sense the
Speaker 1: case for Europe. What's revenue growth do if we get
Speaker 1: an ed him an inflation scenario, which is a forty
Speaker 1: eight or fifty two I can't remember even into alright,
Speaker 1: deflation in the early fifties, What does corporate revenue growth
Speaker 1: do given a rapid disinflation. It's certainly going to decline,
Speaker 1: and it's going to decline faster than the market expects.
Speaker 1: Is it going to go negative? Very unlikely, because frankly,
Speaker 1: again you have the other side of the fact that
Speaker 1: you've got so much stock of consumer savings, and in
Speaker 1: that environment, one might be able to argue that you're
Speaker 1: going to have I wouldn't say a soft landing, but
Speaker 1: not a crash to call it over five in the
Speaker 1: unemployment rate, and so you're still going to have that
Speaker 1: backstop that gets you through the shallow session to the
Speaker 1: recovery in twenty four. If this is true, does that
Speaker 1: mean that the FED the e CP can remove accommodation completely,
Speaker 1: go from negative or zero to two three four percent
Speaker 1: without causing a financial crisis, without causing a crash, a
Speaker 1: normalization that just leaves a couple of potholes, but not
Speaker 1: that much more along the way. It's very difficult. It's
Speaker 1: literally only happened. Uh And interestingly enough, when you look
Speaker 1: at ninety four, that was the only other year in
Speaker 1: the bond stock quadrant where you had negative returns to
Speaker 1: both bonds and socks. Granted there were nowhere near the
Speaker 1: scope of what we saw in two, but the upside
Speaker 1: is it is possible. But we reverted back to low
Speaker 1: yields after that, and it really entered this decade, these
Speaker 1: two decades, three decades of the incredible bond rally. If
Speaker 1: we don't get that, if this is the new normal,
Speaker 1: maybe not this high, but a three percent fed funds rate,
Speaker 1: an e c B rate of two percent, does that
Speaker 1: mean that we can just live with that? Then it
Speaker 1: just is basically, money isn't free, but it's not gonna
Speaker 1: necessarily cause some complete rereading of stock and bond returns
Speaker 1: for a longer period of time. It is possible. It's
Speaker 1: going to compress multiples, it's going to compress leverage, it's
Speaker 1: going to compress valuations across assets. But it isn't a
Speaker 1: deal killer, and at the end of the day, it
Speaker 1: doesn't depress materially the concept of earnings and earning growth,
Speaker 1: which is what drives stock process in Europe. This goes
Speaker 1: beyond the weather. This seems to all go back to China.
Speaker 1: I think so many of the calls that we're seeing
Speaker 1: this morning are underpinned by this more optimistic constructive for
Speaker 1: you on China reopening, Morgan Stanley, We're pretty blunt about it.
Speaker 1: We believe the market is under appreciating the farm reaching
Speaker 1: ramifications of reopening and the possibility that a robust cyclical
Speaker 1: recovery can occur despite lingering structural headwinds. So make it
Speaker 1: really simple. I think for a lot of people waking
Speaker 1: up this morning in the market, they want to work
Speaker 1: out whether they should be investing in a story where
Speaker 1: growth slows or investing in a story where growth rebounds.
Speaker 1: Which one is it. We think there's a very good
Speaker 1: case to be made for China assets right now. In fact,
Speaker 1: our China strategist Neo Wang thinks we get to six
Speaker 1: point two percent GDP growth this year. Yep. It's just stunning.
Speaker 1: Yep exactly, And I s I ever Core Asian Economists
Speaker 1: feels they get a six plus handle. Ye wow, absolutely, John,
Speaker 1: what we're talking about here in my head is spinning
Speaker 1: over where we were three weeks So I believe three
Speaker 1: weeks ago the world was ending as we know it,
Speaker 1: and now we've got all this optimism mere and only
Speaker 1: one thing has changed. Disinflation in Spain, disinflation in France,
Speaker 1: some other place. I can't remember this stunning six percent call,
Speaker 1: stunning six percent call on China, and what are we
Speaker 1: going to see Thursday in the United So I'll answer
Speaker 1: my own question. I guess it depends where you look.
Speaker 1: If you look to China, things look better. If you
Speaker 1: look to the United States, maybe things look worse. And
Speaker 1: Judian just as a final question that teas up the
Speaker 1: question we ask almost every single January, every single year
Speaker 1: is whether we can get our performance x US, whether
Speaker 1: that's where the performance is international markets beyond US shows
Speaker 1: isn't that where it is? So so it's it's been
Speaker 1: it fits and starts type of argument. And again, if
Speaker 1: you look at the broad sweep, it's because of the
Speaker 1: prevalence of negative rates in much of the rest of
Speaker 1: the world and because the dollar has rallied. We think
Speaker 1: that we're not saying you're in the dollar bearer market,
Speaker 1: but the dollar has topped in our view, and that
Speaker 1: is absolutely tail when for the rest of the world
Speaker 1: out performance this was great. Should Manuel I've a kill
Speaker 1: in a studio. Let's go on dow in an important
Speaker 1: conversation for Global Wall Street, Mr Kentner, where the chief
Speaker 1: multiss strategist that hus be seeing, Max John's got a
Speaker 1: lot of important questions. I'm gonna do this simple. How
Speaker 1: do you dovetail your shift into Steve Major's call for
Speaker 1: low interest rates? Yeah? Good morning. So I think it's
Speaker 1: probably the key question is already around the sequencing, right,
Speaker 1: not so much where the end results is going to be.
Speaker 1: I think it's really a sequencing question. And with this
Speaker 1: really really pessimistic, you know, these pessimistic outlooks that we
Speaker 1: got both from the cell side and the buy side
Speaker 1: in the last couple of months, I think there is
Speaker 1: a very very strong contenders, and it is my feeling
Speaker 1: that it's probably the most concentrated consensus that we had
Speaker 1: ever since the end of twenties seventeen. You may remember
Speaker 1: back then we had this idea of globally synchronized growth
Speaker 1: that really then went horribly wrong in twenty eighteen, and
Speaker 1: I think that's probably as much you know as much
Speaker 1: of a concentrated consensus as we've got right now. So therefore,
Speaker 1: what simply what we're saying is that actually against the
Speaker 1: backgroup of such a concentrated consentus, there's simply a lack
Speaker 1: of downside catalysts, a lack of downsides of prises, and
Speaker 1: therefore the only way is up. So Max, let's talk
Speaker 1: about that. So your words super depressed growth expectations are key.
Speaker 1: Is there any evidence Max, here that those growth expectations
Speaker 1: are captured in the ice of markets right now and
Speaker 1: where you're seeing that? Yeah? I think so. I think
Speaker 1: when we look at market pricing, so we look at
Speaker 1: things like equities versus rates, we look at equities versus
Speaker 1: rates against p M e s, equities versus fixed income,
Speaker 1: comparing that against break evens, across acid relationships or cross
Speaker 1: acid against macro relationships. All of that looks a bit more,
Speaker 1: a bit more realistic now. And I think one thing
Speaker 1: that I would say is it's it's not like we're
Speaker 1: super bullish, right, It's not like I'm saying, you know,
Speaker 1: growth is going to go through the roof and it's
Speaker 1: gonna be rock and roll. The only thing I'm gonna
Speaker 1: say as well. It's not gonna be a rocky horror show,
Speaker 1: right so that that's the only thing that I'm saying
Speaker 1: that basically we're not going to see such extreme pessimism
Speaker 1: and such against the factup of such extreme pessimism. You know,
Speaker 1: you don't need an awful lot of positive surprises, right
Speaker 1: to really make risk asses get going a little bit
Speaker 1: at the upside. And in the first half of the year,
Speaker 1: it could change in the second half of the year,
Speaker 1: right when the ultimate the ultimate level of inflation. Perhaps
Speaker 1: then it's a bit sticky then thought, But you know
Speaker 1: that's something for in six nine months time, not something
Speaker 1: to fret about right now. Why don't get the feeling
Speaker 1: you practiced that line a little bit earlier this morning, Suitely, Max,
Speaker 1: Let's finish on this underweight in cash that you did have.
Speaker 1: Where you allocating that capital? Where does it go? We've
Speaker 1: had some big calls this morning on China reopening, Morkan
Speaker 1: Stanley one of them on the Eurozone Goldener dropping its
Speaker 1: recession call. Where does that cash call go now? So
Speaker 1: it's not going into full on overweight equities yet, right,
Speaker 1: So we haven't been as crazy as going from maximum
Speaker 1: weeight equity is to max overweight equities, So we're sort
Speaker 1: of dipping out of toes. We're going into i G credit,
Speaker 1: into high yeld credit, into emerging market debt, right, so
Speaker 1: really sort of dipping out toes into risk acids. It's
Speaker 1: still a preference of value over growth rate and equities.
Speaker 1: So we still actually like European equities, um, you know,
Speaker 1: we like European equities more than US equities. Really like
Speaker 1: also in EM and Chinese equities now, so I do
Speaker 1: in against the backdrup of Chinese reopening. Still a bit
Speaker 1: of underlying pessimism around Chinese growth, right, So we've just
Speaker 1: heard a bit of a pretty old call around China
Speaker 1: growth early on in your program. It's at starting to
Speaker 1: happen now people are starting to drop recession calls for
Speaker 1: Europe and for the Eurozone. All that really should be
Speaker 1: continuing in the next couple of weeks, and as that
Speaker 1: rear repraisal really continues, that should be beneficial for EM
Speaker 1: equities and for European equity. So what's on the other side, Max,
Speaker 1: with the rocky horror show potential that you were talking
Speaker 1: about for the first half that seems to be pushed out.
Speaker 1: What are you looking for to determine whether you should
Speaker 1: go back into your defensive hunch. Yeah, I think the
Speaker 1: defensive haunch is probably towards the second half of the year.
Speaker 1: Once we've seen the negative rate of change in inflation
Speaker 1: play out, which is really probably going to be happening
Speaker 1: over the next sort of four or five months, right
Speaker 1: then was something you to start saying, Okay, now the
Speaker 1: negative rate of inflation is in the real right, that's
Speaker 1: the rear view. Now we've played that. Now let's talk
Speaker 1: about the ultimate level of inflation work in a state?
Speaker 1: Does the FED have to you know, and does the
Speaker 1: FED in other center branks have to keep raids a
Speaker 1: little bit higher for longer? Does do the put first
Speaker 1: have to be praised at? And that then could be
Speaker 1: leading to perhaps an accident on financial markets or a
Speaker 1: retightening of financial conditions via higher higher credit spreads, lower equities.
Speaker 1: That's then something for the second half of the year
Speaker 1: once that, you know, once that focus shift from initially
Speaker 1: now the negative rate of change in inflation, so the
Speaker 1: delta and inflation, to the ultimate level of inflation where
Speaker 1: we're going to encompat. Do you think that the ultimate
Speaker 1: path for European equities is actually more positive than you
Speaker 1: previously thought because of this d emphasis a U s
Speaker 1: tech basically that yes, there might be a downturn, but
Speaker 1: the optimism around Europe is sustainable. Yeah, I think so,
Speaker 1: especially against the expectations. Right. Let's let's remember there's two
Speaker 1: things that we do in markets. We trade the rate
Speaker 1: of change and we trade data versus consensus. Right, we
Speaker 1: don't really care whether data is, say, we care about
Speaker 1: how it pans out against consensus expectations. And I would
Speaker 1: argue one and a half two months ago it was
Speaker 1: there was barely any ball to be found on Europe. Right,
Speaker 1: So that's not long ago. That's just starting now, right,
Speaker 1: that shift is just starting. So I would really expect
Speaker 1: there is a bit more, a bit more more positive,
Speaker 1: a bit more a positive run to go for for Europe,
Speaker 1: both on the credit side, on EFX and on equities. Wow. Max,
Speaker 1: great to catch out, buddy, Thanks for jumping on with us.
Speaker 1: Max counting there of HSPC Lindsay pegs are with US
Speaker 1: chief economists Stephile lindsay, I'm gonna cut to the chase.
Speaker 1: Our audiences, our viewers are listeners, their heads are spinning
Speaker 1: Atlanta GDP now is a stunning three and a half
Speaker 1: percent plus guestimate of where we are. The fourth quarter
Speaker 1: looks pretty good after all the gloom. Where is the
Speaker 1: assured nous of economic slowdown in this ninety days or
Speaker 1: dare I say even Q two? Well, I think the
Speaker 1: assuredness comes from the weakness that we're seeing on part
Speaker 1: of the consumer. As a consumer based economy, if the
Speaker 1: consumer is not out in the marketplace, happy and healthy,
Speaker 1: we would expect a meaningful decline from that more robust
Speaker 1: pace as we saw in the second half of the year,
Speaker 1: and against the backdrop of negative real income growth, higher
Speaker 1: borrowing cards, and of course many consumers facing the risk
Speaker 1: of variable rate debt resetting in the first quarter at
Speaker 1: higher levels. This will compound the pressure on consumers. Linsy,
Speaker 1: you're reading my mind. The chart yesterday, I believe zero
Speaker 1: hedg chat at thank you zero hedge and it was
Speaker 1: a big, a bloomberg chart. I can't remember of the
Speaker 1: credit card interest rate is a variable rate. I mean,
Speaker 1: we're all looking at housing in that, but fold into
Speaker 1: your analysis credit card rates that were to how does
Speaker 1: that play in to the caution Well, it plays in significantly,
Speaker 1: particularly as savings are now drawn down to near zero levels.
Speaker 1: Whmembere the consumer was very much supported by this accumulation
Speaker 1: of wealth during the pandemic and the immediate aftermath. We
Speaker 1: estimate there was an additional about six trillion in terms
Speaker 1: of a wealth cushion supporting consumers, and that removed any
Speaker 1: sense of immediacy to revert back to the normal labor
Speaker 1: force participation formation that we've seen in previous cycles. But
Speaker 1: now as we go forward and consumers draw down that savings,
Speaker 1: we're seeing this return to a reliance on credit card debt. Now,
Speaker 1: arguably the household balance sheet is beginning from relatively healthier
Speaker 1: position than in previous cycles, but still we don't have
Speaker 1: this unlimited amount of wiggle room for consumers to take
Speaker 1: on that new amount of debt, and particularly as that
Speaker 1: debt is now repricing at higher levels, this will compound
Speaker 1: that pressure as I said, on consumers limited their ability
Speaker 1: to go out into the marketplace. That doesn't mean that
Speaker 1: consumers are going to fall off a cliff, but that
Speaker 1: does mean a meaningful loss of momentum, and again is
Speaker 1: the key part of the economy is going to be
Speaker 1: nearly impossible to maintain then that level of three percent
Speaker 1: growth as we turned the corner now into the new year. So, lindsay,
Speaker 1: would you push back against some of the optimism that
Speaker 1: we've been hearing from people who have been pessimistic through
Speaker 1: all of the second half of last year. Well, I
Speaker 1: think the timeline for the pessimism to set in was extended.
Speaker 1: Consumers did prove to be surprisingly resilient through much of
Speaker 1: this turmoil INWO But again, it doesn't negate the fact
Speaker 1: that these outlying variables will weigh on the consumer and
Speaker 1: limit their ability to spend. There's only so much savings
Speaker 1: that we can draw down, there's only so much credit
Speaker 1: card debt that consumers can ramp up. And so just
Speaker 1: looking at this from a quantitative perspective, regardless of our
Speaker 1: qualitative optimism, the numbers suggests that consumers simply will not
Speaker 1: be there in the first half of the year. Just
Speaker 1: changing the timeline change the depths of whatever downturn you're
Speaker 1: expecting to happen. In other words, does it make it
Speaker 1: less or does it make it more? As new excesses
Speaker 1: build up Now, well, I think the depth and duration
Speaker 1: in terms of the downturn is very much going to
Speaker 1: be hinged on monetary policy and the sticky nature of inflation.
Speaker 1: The higher that prices remain, the longer that prices remain
Speaker 1: in this uncomfortable level relative to what the Fed can
Speaker 1: would stand, that's going to force the Fed to raise
Speaker 1: rates higher and potentially keep rates higher for a longer
Speaker 1: period of time. And that's going to be the scenario
Speaker 1: that's going to compound that that downturn in the duration
Speaker 1: of that downturn. You know, Lindsay, I know you hang
Speaker 1: on every word we do. And Julian Emmanuel is just
Speaker 1: done with Mr Edward S. Highman and their team in
Speaker 1: Asia modeling six percent plus China g d P. Not
Speaker 1: that I don't need you to tell me that's what
Speaker 1: we're gonna see. But if we get five point eight,
Speaker 1: six point to whatever, what does that do to exports
Speaker 1: and imports in your US g d P mass, Well,
Speaker 1: certainly it's it's going to be difficult to get to
Speaker 1: six per cent. That that's extremely optimistic. That being said,
Speaker 1: it does seem as if there's nowhere to go but up.
Speaker 1: When you're talking about an economy emerging from a nationwide
Speaker 1: shutdown or or more restrictive zero COVID policies. But that
Speaker 1: being said, what we've seen thus far has been far
Speaker 1: from an ideal reopening. It isn't a flip the switch scenario,
Speaker 1: so it's more going to be a slow bleed, particularly
Speaker 1: against the backdrop of a number of black swans that
Speaker 1: continue to float around. Those with overheightened optimism, new variants,
Speaker 1: a lack of natural immunity to the virus. Any of
Speaker 1: these resurgences, as deemed by the government is inappropriate or intolerable,
Speaker 1: could lead back to many of these zero COVID policies.
Speaker 1: So I do think it's overly optimistic to think that
Speaker 1: once the door cracks open, it's going to swing wide
Speaker 1: open and get us back to that structural fluidity that
Speaker 1: we saw prior of the COVID pandemic. John Piggsy there
Speaker 1: was on the edge of Bramo. I mean, that's that's
Speaker 1: what I noted there. I mean, you know, she's on
Speaker 1: the edge of Brammo. This I think a lot of
Speaker 1: people waking up this morning feeling like they've been told
Speaker 1: conflicting things. Three weeks for manufacturing and services. Then we've
Speaker 1: got this big boom the people are talking about over
Speaker 1: in China, and they're wondering whether they should be pricing
Speaker 1: in slower growth or a growth rate band, And lindsay,
Speaker 1: what's so important here, to go back to your earlier insight,
Speaker 1: is variable rate. John Farrell lives this in England there
Speaker 1: the land of the variable rate, the floating rate mortgage
Speaker 1: and all that. How big a deal is the variable
Speaker 1: variable rate in America, I'll get it out. I think
Speaker 1: it's a very big deal, particularly when we go back
Speaker 1: to the conversation we had about consumers, when we're talking
Speaker 1: about credit cards as a key support to consumer spending
Speaker 1: going forward. As that interest charge continues to rise, that's
Speaker 1: going to limit the ability for consumers to access alternative
Speaker 1: sources of income aside from returning to a more traditional
Speaker 1: position in the labor market. Now, this could actually be
Speaker 1: somewhat of a double edged sword, but but a positive
Speaker 1: in the way that if consumers feel they can't rely
Speaker 1: on these alternative sources, that may create more of an
Speaker 1: incentive for these sideline workers to move back into the
Speaker 1: labor market and help increase that labor force participation, which,
Speaker 1: of course, as labor demand outpaces labor supply, we've seen
Speaker 1: this upward pressure on wages. If we see the reverse
Speaker 1: occur that could put some welcomed downward pressure on wages,
Speaker 1: something the FED is certainly looking for. Just real quick here,
Speaker 1: if you choose a data point, you can tell your
Speaker 1: own story. You can pick whatever data point you want
Speaker 1: to edify your view. That has been basically the belief
Speaker 1: for the first couple of weeks of this year. Which
Speaker 1: data would you be watching most closely? Free true read
Speaker 1: on the pace of how the economy is developing? Well,
Speaker 1: I think when we turn the page looking at the consumer,
Speaker 1: I think negative real income growth for the better part
Speaker 1: of the past year tells a longer term story about
Speaker 1: the unsustainability of positive spending act and that is really
Speaker 1: going to be the driver of whether or not the
Speaker 1: consumer can continue to shoulder these elevated prices against the
Speaker 1: backdrop of negative real income growth. Lindsay, thanks for this
Speaker 1: accident of steel on the US economy. Last year, in
Speaker 1: the shock of Ukraine and Putin in Russia, I name
Speaker 1: my book of the year in February or maybe the
Speaker 1: first week of March. It was the absolute must read
Speaker 1: Putin's World by Angelus Stanton. I'd never had a book
Speaker 1: of the year that early, and I'm not going to
Speaker 1: top it this year with Olivier Blanchard's Magisterial Fiscal Policy
Speaker 1: under low interest rates. All you need to know is
Speaker 1: this is the definitive short read with the rigor of
Speaker 1: the Massachusetts Institute of Technology and blenchcharded, is the mediate
Speaker 1: must read for every economic geek that is out there, uh,
Speaker 1: trying to get smarter, trying to get curious. Blanchard of
Speaker 1: m I T and the Peterson Institute, the former chief
Speaker 1: economist for the International Monetary Fund, joins us this morning, Olivia,
Speaker 1: at least is gonna vault into your wonderful new book,
Speaker 1: a short but but dense read. I need to go
Speaker 1: to my essay of the year for last year, which
Speaker 1: is you late in the year in the financial times,
Speaker 1: where you said everybody calmed down. The American public doesn't
Speaker 1: doesn't worry about inflation at two percent, and the new
Speaker 1: two percent worry is maybe a three percent. What happens
Speaker 1: to our financial and economic system if we get the
Speaker 1: the the level of three percent with inflation, is that
Speaker 1: the new two percent? Well that's not that's not my
Speaker 1: decision to take. It's a decision of the central vacs Um.
Speaker 1: Out of the book is based on the fact that
Speaker 1: when we had the target of two percent, which we
Speaker 1: still have, this implies fairly low nominal rates on average,
Speaker 1: and that really limits the ability of a fact to
Speaker 1: help the economy. If it's closed down. You can only
Speaker 1: decrease the rates by you say, phenomenal rates are two
Speaker 1: percent of represent by three percent. And what we have
Speaker 1: seen over the last twenty years is that that is
Speaker 1: not enough for the fact to actually do the job
Speaker 1: of e CP or whoever any central back and so
Speaker 1: I have valued that might be better to actually when
Speaker 1: the economy on average at three percent, which would imply
Speaker 1: higher rates, which would give more room for my tree
Speaker 1: policy and would make some of the issues in my
Speaker 1: book less whatever, because if my foo policy can do
Speaker 1: most of the job, it should do most of the job.
Speaker 1: If it cannot, then physical policy has to come in,
Speaker 1: which is the title of and and thisss Lisa is
Speaker 1: so profound. Professor Bonchard at I m F with stig
Speaker 1: Let's talked about four and that was hugely controversial in
Speaker 1: oh eight and oh nine. And this is a bit
Speaker 1: of a different discussion, as you and I have heard
Speaker 1: from his colleague at Peterson, Adam Posen Right, this question
Speaker 1: of do you let it run hot? But on the
Speaker 1: flip side, and Olivia Blanchard the title of your book
Speaker 1: fiscal policy under low interest rates, fiscal policy of trying
Speaker 1: to fuel growth when monetary policy didn't have room to
Speaker 1: do so does it get flipped on its head, especially
Speaker 1: after fiscal policy created the problem that monetary policy is
Speaker 1: now trying to address. So as as you may know,
Speaker 1: fiscal policy can do too much, and I think that
Speaker 1: we're paying in large part major fiscal policy mistake. There
Speaker 1: was no need for very large programs that we saw
Speaker 1: in twenty but more especially at the beginning of twenty
Speaker 1: twenty one, which led to very large of the heating
Speaker 1: of the US economy UH and supply change options which
Speaker 1: would have been there, but we're did by it and
Speaker 1: in general of the hitting in the world. So yes,
Speaker 1: in this such a thing as using physical policy too much,
Speaker 1: I had a sense that although I was arguing for
Speaker 1: using physical policy, the Biden administration in particular was probably
Speaker 1: doing to two times or three times what I would
Speaker 1: have liked. And the result has been Indeed, there are
Speaker 1: some other reasons, and it clearly Ukraine has been very
Speaker 1: high inflation and the fact has had to react the
Speaker 1: other way with with with very high interest rates are
Speaker 1: relatively high interest rates. I think that's the phase. I
Speaker 1: think that the book is rewritten looking beyond the current
Speaker 1: inflation episode, the cult higher rate episode, and one of
Speaker 1: the thesis of the book is that we're probably going
Speaker 1: to return to an environment in which the rate that
Speaker 1: the central banks need to choose in order to get
Speaker 1: the econmicate potential is going to be very low again.
Speaker 1: So we are again going to be in this situation
Speaker 1: in which might be constraints on the mintric policy, and
Speaker 1: school post has to do more. But the point is
Speaker 1: clearly adverstage. The discussion is very much about the high rates.
Speaker 1: So there's a bit of a publication in coming with
Speaker 1: coming out with a book with the title of it
Speaker 1: is low res. But I would argue that firstly or not,
Speaker 1: they'bly like are surprisingly low at the height of a
Speaker 1: battle against inflation, uh, and there's no reason to think
Speaker 1: that they will now go back to something like we
Speaker 1: had before COVID. So then where does that leave the
Speaker 1: federals are of the ECB in terms of the balance
Speaker 1: of risks? Is it to go too far with a
Speaker 1: benchmark rates and hold them there too for too long now?
Speaker 1: Or is it not do enough given that we are
Speaker 1: going back to perhaps something that is slightly different than
Speaker 1: what we experience of the past several decades. So I
Speaker 1: think that with respect to the inflasion process. Uh, you know,
Speaker 1: I'm slightly older than you are, and so I've seen
Speaker 1: it before and it seems to me and maybe tell
Speaker 1: me is in between us? It's my guess, Uh, it's
Speaker 1: it's it seems to me that I have seen it
Speaker 1: before and the shoes are always the same, which is
Speaker 1: as well. Infortion is too high. Part of it is
Speaker 1: going to go away because part of it is due
Speaker 1: to energy prices. For prices, and these are going to decline.
Speaker 1: They have started declining. But you know, we still don't
Speaker 1: have to basically slow down the economy a bit, and
Speaker 1: we don't know how resilient the ecomy is. Right in
Speaker 1: the textbook or in the simplified stories you hear on
Speaker 1: the radio, you know, you're basically increasing interest rate and
Speaker 1: the ecomy just slows down, but you don't know how
Speaker 1: easily you get to that. So I think that's what
Speaker 1: the FED, the ECB in all central banks are facing,
Speaker 1: which is should we do the more should we do less?
Speaker 1: And then there are two issues if if if you
Speaker 1: give me too much more. The first one is that
Speaker 1: they are what we call lacks right, which is that
Speaker 1: even if it works, it doesn't work quight away, and
Speaker 1: so you have to kind of stop tightening or going
Speaker 1: easy before you actually have seen the results, because the
Speaker 1: results take six months or yeah by. And then the
Speaker 1: other aspect, which I think is one of them in
Speaker 1: this case, is that some of the factors which increased
Speaker 1: inflation turned around on their own, independent of the independent
Speaker 1: of these So energy prices go down, and that's what
Speaker 1: I've called falls down, which is inflation falls. And it
Speaker 1: is following. Now you know, month to month, the numbers
Speaker 1: are very good, and some people say we're done, Olivia.
Speaker 1: I got I got one minute left, Olivia. I'm gonna
Speaker 1: rip up the script here. I got Alan Blinder writing
Speaker 1: in the Wall Street Journal that disinflation is intact Krugman's
Speaker 1: and pounding the table on this for months. You know,
Speaker 1: the history of forty seven, forty nine into the Eisenhower
Speaker 1: deflation that we saw in fifty two. Come you just
Speaker 1: thank you, But Robert Solo is who you dedicated your
Speaker 1: book to at ninety eight years old. Do we have
Speaker 1: any clue? What do we have any clue what we're doing?
Speaker 1: Olivier given disinflation in place a mid technology so low
Speaker 1: the laureate Paul Romer, there should be Laurier, Olivia Blanchard,
Speaker 1: Do we have a clue where we are given the
Speaker 1: technological progress that's solo invented? Yeah, I think I think
Speaker 1: we do. But there's uncertainty. I think there's the usual
Speaker 1: amount of uncertainty, which is your vecom is always changing,
Speaker 1: so you have to take this into account the response
Speaker 1: to interest which changes as technology changes, and so that
Speaker 1: I think for the moment we're roughly where we should be.
Speaker 1: It looks like we have a probably more or less
Speaker 1: under control. The really difficult tissue, uh Tom, is what
Speaker 1: is the unemployment rate that we can sustain? Can we
Speaker 1: basically get inflation down all the way to free point
Speaker 1: five as it is now and keep it there or
Speaker 1: do we have to accept slightly how unemployment in order
Speaker 1: to stabilize inflation. And I think that's the big issue.
Speaker 1: That's where all kinds of the dog school issues come up,
Speaker 1: matching re allocation, all kinds of things like that. We
Speaker 1: are out of time, Olivia Blanchard at Tersons too. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg