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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. It's a tumultuous

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Speaker 1: time to say to Lisa, and what we're gonna do, folks,

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Speaker 1: is bring you the best minds we can on Global

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Speaker 1: Wall Street and of course also in the nation's capitol

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Speaker 1: right now. One of those minds is Cecilia Rouse. She

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Speaker 1: is chair of the White House Council of Economic Advisors

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Speaker 1: and survived at ten at Harvard University. A few years ago.

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Speaker 1: Did you have the Feldstein version of the Manque version?

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Speaker 1: I actually had a Cay I'm dating myself auto X sign. Oh,

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Speaker 1: there you go. She's dating yourself and she is well

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Speaker 1: preserved because she's on her pellet. And that's a side story.

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Speaker 1: Dr Rouse. Otto Eckstein would say, don't look at the headline. Data.

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Speaker 1: Parse the data. You and the president have to parse

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Speaker 1: the character of the nation's inflation. What part of it

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Speaker 1: is the focus of the President this morning. Well, look,

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Speaker 1: the President is focused on the whole of it because

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Speaker 1: he understands that the cost of food and gas and

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Speaker 1: the price of everyday items for the American family, and

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Speaker 1: so he comes from a family where that would be

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Speaker 1: meaningful if you had to pay more for a tank

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Speaker 1: of gas. Uh, And so he's focused on the all

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Speaker 1: of it. He's today he's going to lay out his

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Speaker 1: plan for addressing priding price increases. Of course, as his

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Speaker 1: economic advisor, I am focused on the part that is

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Speaker 1: about core inflation, which is not focused on gas and food,

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Speaker 1: and that tells us more about what the Federal Reserve

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Speaker 1: can control as it it tries to address inflation, and

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Speaker 1: also the parts that more enduring and that by be

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Speaker 1: more challenging to address. So you know, the President is

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Speaker 1: focused on the whole of it because that is the

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Speaker 1: reality for American families. The whole of it is. Politicians,

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Speaker 1: away from your remit have to come up with a plan.

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Speaker 1: We prove that whip inflation now, buttons don't work. What's

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Speaker 1: the plan? So from day one, this president has been

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Speaker 1: focused on generating and economy where there is sustainable growth

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Speaker 1: that works for all Americans. So he's as he likes

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Speaker 1: to say, he wants to build it from the bottom up,

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Speaker 1: in the middle out. So that was what underlied the

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Speaker 1: American Rescue Plan. It was important to get shots into

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Speaker 1: arms and for households and businesses to have the resources

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Speaker 1: to get through the pandemic. So now he's focused on inflation,

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Speaker 1: so he understands that he needs that we need to

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Speaker 1: address gas prices. Much of the gas price increases of

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Speaker 1: late have become because of the war of Russia's war

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Speaker 1: against Ukraine. The President, in trying to ease those prices,

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Speaker 1: has released historic levels from our strategic petroleum reserve in

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Speaker 1: concert without our countries, so that on net to date

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Speaker 1: there have been about four hundred two hundred forty million

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Speaker 1: barrels released worldwide. In addition, he's urging gas and oil

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Speaker 1: companies to increase their production domestically by using existing leases

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Speaker 1: and increase their drillings so that we can get more

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Speaker 1: oil on the market. But he also was focused on

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Speaker 1: reducing long term costs for families. That is through for example,

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Speaker 1: reducing prescription costs by getting allowing Medicare to negotiate prices,

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Speaker 1: by addressing childcare costs, by addressing the cost of housing.

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Speaker 1: These are policies that we know will help increase our

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Speaker 1: economic growth, ensure that it's more broadly shared, and in

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Speaker 1: the process reduced the cost for families. But he wants

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Speaker 1: to do so in a deficit reducing way his budget.

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Speaker 1: You know, last year he reduced the deficit by three

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Speaker 1: hundred billion dollars, on track to do reduce it by

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Speaker 1: one point five trillion this year um and he does

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Speaker 1: so by increasing taxes on our very wealthiest corporation cecilia.

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Speaker 1: With retrospect, with hindsight being our guide, was it a

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Speaker 1: mistake in March to issue four checks to every American

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Speaker 1: who qualified? It is so hard to go back and

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Speaker 1: do retrospective because it's hard to imagine the counter factual.

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Speaker 1: Mark Xandy, who has tried to do so and looking

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Speaker 1: at all of the pandemic policies, has has estimated that

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Speaker 1: had we not acted, this goes back to cares as well,

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Speaker 1: because that was important as well, But including the American

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Speaker 1: Rescue Plan, we may well have faced a double depercession.

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Speaker 1: We would be facing elevated unemployment today and we would

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Speaker 1: not have had the economic growth that we had last year,

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Speaker 1: which is going to put us on a path for

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Speaker 1: more sustainable growth going forward. So the American Rescue Plan

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Speaker 1: was an insurance policy. We did not know how long

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Speaker 1: this pandemic was going to remain a challenge. We needed

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Speaker 1: to get shots into arms so we could regain our lives.

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Speaker 1: So worldwide, advanced economies are dealing with inflation because that

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Speaker 1: is the consequence of helping families and businesses get through

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Speaker 1: the pandemic when we were facing supply chains which couldn't

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Speaker 1: quite handle that sustained demand. So, Cecilia, how much does

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Speaker 1: inflation have to come down before the end of the

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Speaker 1: year for this growth that we're seeing to be sustained

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Speaker 1: for that not to really curtail some of the momentum

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Speaker 1: that we're seeing in households. So what's important is that

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Speaker 1: we maintain our economic activity UH, and we don't want

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Speaker 1: the inflation to become spiraling out of control and for individuals,

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Speaker 1: households have become underwater. So what we need the Federal

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Speaker 1: Reserve mandate is price stability and full employment. You gave

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Speaker 1: it your header. J Powell, the chair Powell UH emphasizing

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Speaker 1: how the Federal Reserve is on it, and that is

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Speaker 1: what they are focused on as well. The President would

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Speaker 1: urge Congress to confirm his his nominees so that the

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Speaker 1: Federal Reserve Board has all hands on deck to fulfill

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Speaker 1: their dual mandate. So that is what's going to be

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Speaker 1: most important to date. We see that inflation expectations are anchored,

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Speaker 1: so we're optimistic that the Federal Reserve can do what job. Meanwhile,

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Speaker 1: the President is also focused on doing what he can

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Speaker 1: to ease the pain at the pump and to ensure

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Speaker 1: that families that can pay a reasonable price for gas.

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Speaker 1: He's focused on food prices, UH, and he's focused on

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Speaker 1: addressing those costs that we know that families face every

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Speaker 1: day and that are so important for them. It's the

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Speaker 1: City Arrest. Thank you the champ of the White House

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Speaker 1: Council of Economic Advices. Right now we do go global

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Speaker 1: and it's wonderful to have with us again from City Group,

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Speaker 1: Nathan Sheets. He's global chief Economist at City and former

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Speaker 1: Undersecretary of the Treasury for International Affairs with public service

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Speaker 1: at the Federal Reserve System as well. Nathan Sheets, wonderful

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Speaker 1: to have you with us. I want to go to

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Speaker 1: Stanley Fisher, who you are a nodding acquaintance with m

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Speaker 1: I t a few years ago, which is suddenly the

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Speaker 1: US central bankhead is central banker to the world. How

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Speaker 1: close is Jerome po Well to being central banker to

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Speaker 1: the world. You know, that's certainly true during times of stress,

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Speaker 1: where when global markets are under duress and under pressure,

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Speaker 1: they need dollars, and on several occasions over the last

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Speaker 1: fifteen years, the FAT has stepped up and provided that liquidity.

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Speaker 1: But similarly, I would say it in episode like the

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Speaker 1: one we're in now, where central banks are struggling with

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Speaker 1: this truly extraordinary set of shocks and an inflation environment

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Speaker 1: unlike anything that we've seen in decades, that the FED

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Speaker 1: is very much setting the tone. And as the FED

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Speaker 1: shifted more hawkish, that opened the way for a lot

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Speaker 1: of other central banks to be more hawkish as well.

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Speaker 1: What are the stresses? For example, I take sing dollar

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Speaker 1: back to two thousand six, and the answer is we

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Speaker 1: have a week Singapore dollar, which is usually a crown

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Speaker 1: jewel of tiger economies. Tell us what those those those

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Speaker 1: economies do after the easy decision to defend by raising rates,

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Speaker 1: the the FEDS moving, and as the FED moves and

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Speaker 1: the US economy is under pressure but still looks better

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Speaker 1: than a lot of h the rest of the world.

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Speaker 1: You're seeing the dollar strengthening, and there's been a debate

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Speaker 1: about how much traction the FEDS getting in financial conditions,

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Speaker 1: but make no mistake, it's getting traction on the dollar,

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Speaker 1: and Tom, as you suggest, that has echoes throughout the

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Speaker 1: rest of the world, and uh the US stronger currency,

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Speaker 1: it's helpful frosting fighting inflation, but the weaker currencies that

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Speaker 1: are on the other side of that are inflationary in

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Speaker 1: those countries and making the challenges for those central banks

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Speaker 1: even more acute and in adgestion for many emerging market economies,

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Speaker 1: it creates tensions in their national balance sheets giving their

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Speaker 1: exposures to dollars. So it does create, as you suggest,

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Speaker 1: some exquisite dilemmas for these central banks and may force

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Speaker 1: them into further rate hikes at times when they don't

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Speaker 1: want to hike rates. Here in the United States, in

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Speaker 1: about twenty four hours, as John was mentioning, we are

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Speaker 1: going to get that CPI print expected to come in

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Speaker 1: at eight point one percent by economist surveyed by Bloomberg,

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Speaker 1: down from eight point five percent in the prior read.

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Speaker 1: How important is it to look at the components of

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Speaker 1: what's driving this inflation. What's your projection for how we

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Speaker 1: can understand the granularity of this report. I think that

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Speaker 1: looking under the hood is going to be critical. We're

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Speaker 1: expecting a zero point four percent month to month read

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Speaker 1: for core, somewhat lower for headline, but when I look

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Speaker 1: at underlying components, I just have a hard time being

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Speaker 1: too optimistic about the inflation outlook. I think in this

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Speaker 1: environ with high commodity prices, supply chaining pressures, potential further

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Speaker 1: disruptions as a result of what's happened in China to

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Speaker 1: supply chains, that it's not a positive environment for for

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Speaker 1: goods prices, there's a lot of inertia in shelter and

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Speaker 1: ownery equivalent rents. That's not looking like a very positive picture.

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Speaker 1: And then finally, for services, we've got a red hot

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Speaker 1: labor market and wages may not have risen quite as

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Speaker 1: much as headline CPI, but it looks to me like

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Speaker 1: pressures on services prices will likely be pretty durable as well.

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Speaker 1: So I think those components right now are just not

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Speaker 1: very encouraging and tell a tale of longer lived inflation.

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Speaker 1: So do you think, Nathan, that we've seen the peak.

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Speaker 1: You know, maybe in some arithmetic sense, yes, uh, you know,

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Speaker 1: is this the peak for twelvemonth headline inflation or even

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Speaker 1: twelvemonth core inflation? Possibly? Is it? Is? It likely to

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Speaker 1: be on a bit of a downward trajectory, but a

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Speaker 1: very gradual downward trajectory, and one that even at the

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Speaker 1: end of this year, our expectation is the measures of

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Speaker 1: core prices, be they PC or cp I, are still

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Speaker 1: likely to have four handles well above federal reserve targets.

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Speaker 1: So maybe it is peak, but it's really more, as

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Speaker 1: my colleagues have said, really more of a plateau. Nathan,

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Speaker 1: how much control does the FED really have over this

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Speaker 1: inflationary impulse? If so much of it is coming in

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Speaker 1: addition to the housing in addition to the labor market,

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Speaker 1: to what we're seeing in China, to what we're seeing

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Speaker 1: with the oil markets, how much control can the federally have?

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Speaker 1: This is this is the critical question now, Paul Paul

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Speaker 1: Volker that taught us in the nineteen eighties that if

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Speaker 1: the BED is aggressive enough, it can move that demand

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Speaker 1: curve sufficiently to UH to tame inflation. But that is

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Speaker 1: a very painful process, and I think Ultimately to get

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Speaker 1: out of this without a recession, the fat is going

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Speaker 1: to need some help from the outside world. We're gonna

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Speaker 1: need to see these supply chains improving, commodity prices come down,

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Speaker 1: and they's in the common feature of city group economics,

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Speaker 1: from Villin Powders through Catherine Van to you is respect

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Speaker 1: for the data. Do you take comfort in I m

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Speaker 1: F or w t O global g d P guesses

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Speaker 1: now or is it an impossible task? The reality here

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Speaker 1: is that we as economists have this uh tendency to

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Speaker 1: UH to forecast immaculate landings. But why do we do this?

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Speaker 1: Why do we forecast the soft landing where inflation kind

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Speaker 1: of eases down, grows slow some, and we avoid recession.

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Speaker 1: The reality is that the other outcome are just so

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Speaker 1: messy it's hard to figure out what they look like

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Speaker 1: on paper. So we write down these these these soft

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Speaker 1: landing scenarios, and there is a plausible path to a

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Speaker 1: soft landing with some lock. But they're right now. The

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Speaker 1: inflation risk, section risk, even the stagflation risk, is quite appreciable.

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Speaker 1: And and those kinds of forecasts don't don't help me

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Speaker 1: sleep a whole lot better at Nathan are we at

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Speaker 1: any point where we turn to a nominal analysis from

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Speaker 1: a real analysis, are things so out of whack we'd

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Speaker 1: literally go back pre Arthur Burns As as inflation surges,

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Speaker 1: you have to start thinking about the nominals as well

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Speaker 1: as the reels. Now, to be clear, I think at

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Speaker 1: the end of the day, how does the FED attraction?

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Speaker 1: And the FED has to get traction ironically by thinking

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Speaker 1: about the reels. And I think ultimately the question that

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Speaker 1: the FED it's got a struggle with is how much

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Speaker 1: are they gonna have to push interest rates positive in

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Speaker 1: real terms to get traction on this thing? And in

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Speaker 1: their SCP from a couple of months ago, they said,

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Speaker 1: well just a little bit positive. That's not clear to me.

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Speaker 1: That's not clear to me at all that we may

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Speaker 1: need a substantially positive real rate. So it's the world's

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Speaker 1: thinking more nominal. It's gonna be critical for the FED

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Speaker 1: to think more real. Nan also gonna get you hope

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Speaker 1: for you a Boddy as other wise Nathan shakes. That

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Speaker 1: sits eight. Lisa shllet is with Morgan Stanley Wealth Management.

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Speaker 1: She hinges everything and having a plan and then heaven

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Speaker 1: forbid staying with the plan in times of stress? What's

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Speaker 1: the plan, Lisa? And how do you have the courage

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Speaker 1: to stay with it? Right now? So? Look, I actually

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Speaker 1: think as radical as the last you know, week has

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Speaker 1: been in volatile as the last week has been, there

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Speaker 1: is an element of it that is somewhat predictable. And

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Speaker 1: what I mean by that is that the market has

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Speaker 1: finally gotten to the point where it's digested, Uh, the

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Speaker 1: level and degree to which the FED is going to

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Speaker 1: be hawkish, But they didn't hadn't yet really really, um,

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Speaker 1: you know, fast forwarded that to what are the probabilities

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Speaker 1: that the FED can really execute a soft landing? And

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Speaker 1: so we know from history. You know that in the

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Speaker 1: post World War two period, the FED has tightened roughly

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Speaker 1: fourteen times. Eleven of those episodes have resulted in a recession,

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Speaker 1: and only three times have we pulled off a soft landing. Uh.

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Speaker 1: And we are operating this is a FED at JEROMEE.

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Speaker 1: Powell admitted this that is operating with an against a

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Speaker 1: backdrop where there's an extraordinary degree of difficulty. Not only

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Speaker 1: is the macro environment complex, but the geopolitical environment is complex.

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Speaker 1: And look, the FED itself is trying to do something

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Speaker 1: that they've never done before, which is simultaneously raised rates

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Speaker 1: and reduce the size of the balance sheet. So to me,

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Speaker 1: yesterday was very much something to be expected that eventually

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Speaker 1: we were going to get a growth scare where everyone

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Speaker 1: starts worrying about the fact that we might in fact

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Speaker 1: have a hard landing. And while we continue to be

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Speaker 1: in the camp that says we don't see an imminent recession,

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Speaker 1: the reality is is that growth may slow much faster,

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Speaker 1: uh than than folks believe. And so it's notable to

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Speaker 1: to your and Jonathan's point that finally the bond market

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Speaker 1: is getting on the bandwagon, meaning starting to to worry

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Speaker 1: less about upward moves and inflation and potentially beginning to

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Speaker 1: think about downward moves and inflation, which are you know,

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Speaker 1: a reflection of weaker growth, So at least a two

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Speaker 1: pound question, just to be clear, it sounds like you

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Speaker 1: expect one more down side and equity prices. But to

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Speaker 1: the second part, if we have that dance side, that

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Speaker 1: set off just the character the nature of the sound

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Speaker 1: of change, Uh yeah, I do. I do think that

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Speaker 1: it does because I think, um, you know, we start

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Speaker 1: to get a lot more defensive. It's why why bonds

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Speaker 1: are finally getting a bid here UH. And so I

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Speaker 1: think that that defensive trade that unwound, the long duration,

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Speaker 1: stable growth stock trade that was really unwinding fiercely last

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Speaker 1: week UM starts to get a bid uh And And

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Speaker 1: again it's what do I want to own if the

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Speaker 1: economy is really genuinely slowing. So you're basically basically saying, Lisa,

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Speaker 1: big tech is a bright spot for the next couple

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Speaker 1: of months. So I want to be really careful because

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Speaker 1: I don't know that I think big tech in in

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Speaker 1: all caps is but I think long duration assets actively

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Speaker 1: selected are the place to be. So we have begun

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Speaker 1: to add duration. We started that about three or four

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Speaker 1: weeks ago, albeit it was early and and you know,

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Speaker 1: many of our clients who began to add back UH

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Speaker 1: into bonds have not had a great three or four weeks.

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Speaker 1: But but we do think that that that trade may

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Speaker 1: begin to work, and some of the higher quality UH

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Speaker 1: growth oriented names are certainly worth looking at today and

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Speaker 1: and buying, And that's what we're advising our clients to do, Lisa.

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Speaker 1: There have been some people who have talked about the

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Speaker 1: unwind of certain nonprofitable tech companies and others as the

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Speaker 1: bursting of a bubble. And I take a look at

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Speaker 1: Peloton this morning, the shares were down from the peak

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Speaker 1: even before going into today the shares getting massacred right

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Speaker 1: now in pre market trading after they reported their earnings.

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Speaker 1: Is Peloton a one off? Or is this uh something

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Speaker 1: that is endemic that has not fully been beaten out

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Speaker 1: of the system. Uh? And oh, I think we're starting

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Speaker 1: to get there. Uh. And and on the stock side

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Speaker 1: of things, I think we we certainly have. What's interesting

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Speaker 1: is among the unprofitable tech companies, uh, the stocks may

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Speaker 1: actually have led uh. And the credit market probably needs

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Speaker 1: to catch up and and really blow some of these

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Speaker 1: um you know triples see and junk spreads out even further. Um.

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Speaker 1: But but from a stock perspective, you probably are starting

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Speaker 1: to get to the point where there's enough blood and

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Speaker 1: enough pain in the streets uh that these valuations start

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Speaker 1: to look a little bit better. The key issue, however,

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Speaker 1: is to recognize that companies are now and investors are

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Speaker 1: now looking at you know, cost of capital, and that means,

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Speaker 1: you know, to what extent has cost of debt gone

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Speaker 1: up and to what extent has cost of equity gone up?

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Speaker 1: And both have gone up. Uh in this rising uh

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Speaker 1: you know rate environment and the policy pivot. Lisa Shanna

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Speaker 1: awesome as a wife from Morgan Stanley Wealth Management. Lisa,

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Speaker 1: thank you right now. Cathy joins Jones, chief fixed Income

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Speaker 1: Strategists at the Schwab Center for Financial Research. Kathy, A

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Speaker 1: given bondy TF is down in price nine annualized big loss.

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Speaker 1: I would just the bond market handles price decline and

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Speaker 1: a bond bear market differently than the equity market. What

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Speaker 1: are you observing from SWAB clients? Is they enjoy price decline? Well,

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Speaker 1: I'm not sure they're enjoying price decline and bond funds.

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Speaker 1: But what we are saying is UM investors trying to

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Speaker 1: take on a little more income by going into longer

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Speaker 1: duration bonds. And this has been our call recently to

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Speaker 1: start gradually, not at once, but gradually adding some duration

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Speaker 1: as as yields go up, because you know, you have

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Speaker 1: the opportunity now to get some relatively attractive coupons at

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Speaker 1: prices that are often below par. So that means not

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Speaker 1: only the opportunity to earn more incommon a portfolio, but

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Speaker 1: also potential capital games. Where is the biggest opportunity right now, Kathy,

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Speaker 1: when you talk about those coupons, is it in credit

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Speaker 1: and the riskier the better, or is it in full

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Speaker 1: faith and credit US treasuries. Well, I would cite it

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Speaker 1: a little bit more carefully than that. There are two

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Speaker 1: areas that we really like. One as municipal bonds. Um

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Speaker 1: you can get on a tax equivalent basis for a

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Speaker 1: very high income earner uh A north to five percent

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Speaker 1: in municipal bomb, high quality municipal bonds. We're okay with

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Speaker 1: investment grade, but we want to stay a little more

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Speaker 1: careful because we do think we're going into or we

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Speaker 1: are in credits part of the credit cycle where we'll

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Speaker 1: see some further spread. I think we're not crazy about

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Speaker 1: the high yield simply because this is this is the

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Speaker 1: part of the cycle where high yield usually does most poorly.

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Speaker 1: People forget that it's not the beginning of the rate

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Speaker 1: hike cycle. It's usually the end of the rate high cycle,

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Speaker 1: when the economy starting to weekend that you start to

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Speaker 1: see those high yield spreads really move that, Kathy, I

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Speaker 1: want to focus on that for a minute, because we

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Speaker 1: saw a pretty pretty big move in spreads yesterday in

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Speaker 1: the high yield sector, which is something new. We really

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Speaker 1: hadn't been seeing credit respond in the same kind of

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Speaker 1: way that stocks have been responding, and yet suddenly we

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Speaker 1: do see some sort of indication here. Is this just

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Speaker 1: the beginning of a widening of a protracted selloff and

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Speaker 1: credit or is this basically some sort of mini capitulation

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Speaker 1: that will be viable for a lot of investors. I

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Speaker 1: think it's the former and not the ladder. So I

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Speaker 1: think that we have seen, say, triple C is really

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Speaker 1: underperformed for quite some well quite a while relative to say,

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Speaker 1: you know, the higher end of the high yield market.

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Speaker 1: But as we get into higher rates, you're starting to

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Speaker 1: see the impact on cash flow for those weaker companies

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Speaker 1: with weaker balance sheets, maybe not as great as a

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Speaker 1: cash flow. It's one reason we don't like loans as

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Speaker 1: well now, simply because we're starting to see the effect

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Speaker 1: of the interest rate increases and that's probably going toor

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Speaker 1: road the ability to to meet those obligations at the

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Speaker 1: lower the weaker credits. So definitely would not be chasing

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Speaker 1: how yield at this stage of the game. Kathy, there's

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Speaker 1: a religion in the equity market that if you go down, correction,

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Speaker 1: bear market, or worse. At some point you grow your

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Speaker 1: way back to where you were the market high, and

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Speaker 1: there's long spans where this has been a challenge. How

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Speaker 1: do you do that in the bond market? If I'm

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Speaker 1: x percent down from the summer of two thousand twenty,

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Speaker 1: how do I grow myself back with yield if I

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Speaker 1: don't have attendant growth underneath it like I have in stocks. Well,

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Speaker 1: it depends. If you're holding individual bonds and you hold

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Speaker 1: them to par, you're still gonna get. You're still going

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Speaker 1: to get your principle and your interest payments barring a

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Speaker 1: default all the way along. So you've earned whatever that

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Speaker 1: current yield was when you bought the bond. If you're

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Speaker 1: in a bond fund, it usually takes longer, but usually

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Speaker 1: what will happen in a bond fund is the manager

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Speaker 1: is reinvesting for higher income and on a total return

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Speaker 1: basis over time, assuming that rates don't go sky high

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Speaker 1: from here, which we don't think is likely. Um, you

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Speaker 1: know you you're earned your way back with the income component. Kathy,

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Speaker 1: thank you for bemist this morning. Kathy Jones that of

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Speaker 1: the swap Sense financial research, this is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live weekdays from seven to

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Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television

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Speaker 1: Bloomberg dot com, and of course, on the terminal. I'm

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Speaker 1: Tom keene In. This is Bloomberg