Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. It's a tumultuous
Speaker 1: time to say to Lisa, and what we're gonna do, folks,
Speaker 1: is bring you the best minds we can on Global
Speaker 1: Wall Street and of course also in the nation's capitol
Speaker 1: right now. One of those minds is Cecilia Rouse. She
Speaker 1: is chair of the White House Council of Economic Advisors
Speaker 1: and survived at ten at Harvard University. A few years ago.
Speaker 1: Did you have the Feldstein version of the Manque version?
Speaker 1: I actually had a Cay I'm dating myself auto X sign. Oh,
Speaker 1: there you go. She's dating yourself and she is well
Speaker 1: preserved because she's on her pellet. And that's a side story.
Speaker 1: Dr Rouse. Otto Eckstein would say, don't look at the headline. Data.
Speaker 1: Parse the data. You and the president have to parse
Speaker 1: the character of the nation's inflation. What part of it
Speaker 1: is the focus of the President this morning. Well, look,
Speaker 1: the President is focused on the whole of it because
Speaker 1: he understands that the cost of food and gas and
Speaker 1: the price of everyday items for the American family, and
Speaker 1: so he comes from a family where that would be
Speaker 1: meaningful if you had to pay more for a tank
Speaker 1: of gas. Uh, And so he's focused on the all
Speaker 1: of it. He's today he's going to lay out his
Speaker 1: plan for addressing priding price increases. Of course, as his
Speaker 1: economic advisor, I am focused on the part that is
Speaker 1: about core inflation, which is not focused on gas and food,
Speaker 1: and that tells us more about what the Federal Reserve
Speaker 1: can control as it it tries to address inflation, and
Speaker 1: also the parts that more enduring and that by be
Speaker 1: more challenging to address. So you know, the President is
Speaker 1: focused on the whole of it because that is the
Speaker 1: reality for American families. The whole of it is. Politicians,
Speaker 1: away from your remit have to come up with a plan.
Speaker 1: We prove that whip inflation now, buttons don't work. What's
Speaker 1: the plan? So from day one, this president has been
Speaker 1: focused on generating and economy where there is sustainable growth
Speaker 1: that works for all Americans. So he's as he likes
Speaker 1: to say, he wants to build it from the bottom up,
Speaker 1: in the middle out. So that was what underlied the
Speaker 1: American Rescue Plan. It was important to get shots into
Speaker 1: arms and for households and businesses to have the resources
Speaker 1: to get through the pandemic. So now he's focused on inflation,
Speaker 1: so he understands that he needs that we need to
Speaker 1: address gas prices. Much of the gas price increases of
Speaker 1: late have become because of the war of Russia's war
Speaker 1: against Ukraine. The President, in trying to ease those prices,
Speaker 1: has released historic levels from our strategic petroleum reserve in
Speaker 1: concert without our countries, so that on net to date
Speaker 1: there have been about four hundred two hundred forty million
Speaker 1: barrels released worldwide. In addition, he's urging gas and oil
Speaker 1: companies to increase their production domestically by using existing leases
Speaker 1: and increase their drillings so that we can get more
Speaker 1: oil on the market. But he also was focused on
Speaker 1: reducing long term costs for families. That is through for example,
Speaker 1: reducing prescription costs by getting allowing Medicare to negotiate prices,
Speaker 1: by addressing childcare costs, by addressing the cost of housing.
Speaker 1: These are policies that we know will help increase our
Speaker 1: economic growth, ensure that it's more broadly shared, and in
Speaker 1: the process reduced the cost for families. But he wants
Speaker 1: to do so in a deficit reducing way his budget.
Speaker 1: You know, last year he reduced the deficit by three
Speaker 1: hundred billion dollars, on track to do reduce it by
Speaker 1: one point five trillion this year um and he does
Speaker 1: so by increasing taxes on our very wealthiest corporation cecilia.
Speaker 1: With retrospect, with hindsight being our guide, was it a
Speaker 1: mistake in March to issue four checks to every American
Speaker 1: who qualified? It is so hard to go back and
Speaker 1: do retrospective because it's hard to imagine the counter factual.
Speaker 1: Mark Xandy, who has tried to do so and looking
Speaker 1: at all of the pandemic policies, has has estimated that
Speaker 1: had we not acted, this goes back to cares as well,
Speaker 1: because that was important as well, But including the American
Speaker 1: Rescue Plan, we may well have faced a double depercession.
Speaker 1: We would be facing elevated unemployment today and we would
Speaker 1: not have had the economic growth that we had last year,
Speaker 1: which is going to put us on a path for
Speaker 1: more sustainable growth going forward. So the American Rescue Plan
Speaker 1: was an insurance policy. We did not know how long
Speaker 1: this pandemic was going to remain a challenge. We needed
Speaker 1: to get shots into arms so we could regain our lives.
Speaker 1: So worldwide, advanced economies are dealing with inflation because that
Speaker 1: is the consequence of helping families and businesses get through
Speaker 1: the pandemic when we were facing supply chains which couldn't
Speaker 1: quite handle that sustained demand. So, Cecilia, how much does
Speaker 1: inflation have to come down before the end of the
Speaker 1: year for this growth that we're seeing to be sustained
Speaker 1: for that not to really curtail some of the momentum
Speaker 1: that we're seeing in households. So what's important is that
Speaker 1: we maintain our economic activity UH, and we don't want
Speaker 1: the inflation to become spiraling out of control and for individuals,
Speaker 1: households have become underwater. So what we need the Federal
Speaker 1: Reserve mandate is price stability and full employment. You gave
Speaker 1: it your header. J Powell, the chair Powell UH emphasizing
Speaker 1: how the Federal Reserve is on it, and that is
Speaker 1: what they are focused on as well. The President would
Speaker 1: urge Congress to confirm his his nominees so that the
Speaker 1: Federal Reserve Board has all hands on deck to fulfill
Speaker 1: their dual mandate. So that is what's going to be
Speaker 1: most important to date. We see that inflation expectations are anchored,
Speaker 1: so we're optimistic that the Federal Reserve can do what job. Meanwhile,
Speaker 1: the President is also focused on doing what he can
Speaker 1: to ease the pain at the pump and to ensure
Speaker 1: that families that can pay a reasonable price for gas.
Speaker 1: He's focused on food prices, UH, and he's focused on
Speaker 1: addressing those costs that we know that families face every
Speaker 1: day and that are so important for them. It's the
Speaker 1: City Arrest. Thank you the champ of the White House
Speaker 1: Council of Economic Advices. Right now we do go global
Speaker 1: and it's wonderful to have with us again from City Group,
Speaker 1: Nathan Sheets. He's global chief Economist at City and former
Speaker 1: Undersecretary of the Treasury for International Affairs with public service
Speaker 1: at the Federal Reserve System as well. Nathan Sheets, wonderful
Speaker 1: to have you with us. I want to go to
Speaker 1: Stanley Fisher, who you are a nodding acquaintance with m
Speaker 1: I t a few years ago, which is suddenly the
Speaker 1: US central bankhead is central banker to the world. How
Speaker 1: close is Jerome po Well to being central banker to
Speaker 1: the world. You know, that's certainly true during times of stress,
Speaker 1: where when global markets are under duress and under pressure,
Speaker 1: they need dollars, and on several occasions over the last
Speaker 1: fifteen years, the FAT has stepped up and provided that liquidity.
Speaker 1: But similarly, I would say it in episode like the
Speaker 1: one we're in now, where central banks are struggling with
Speaker 1: this truly extraordinary set of shocks and an inflation environment
Speaker 1: unlike anything that we've seen in decades, that the FED
Speaker 1: is very much setting the tone. And as the FED
Speaker 1: shifted more hawkish, that opened the way for a lot
Speaker 1: of other central banks to be more hawkish as well.
Speaker 1: What are the stresses? For example, I take sing dollar
Speaker 1: back to two thousand six, and the answer is we
Speaker 1: have a week Singapore dollar, which is usually a crown
Speaker 1: jewel of tiger economies. Tell us what those those those
Speaker 1: economies do after the easy decision to defend by raising rates,
Speaker 1: the the FEDS moving, and as the FED moves and
Speaker 1: the US economy is under pressure but still looks better
Speaker 1: than a lot of h the rest of the world.
Speaker 1: You're seeing the dollar strengthening, and there's been a debate
Speaker 1: about how much traction the FEDS getting in financial conditions,
Speaker 1: but make no mistake, it's getting traction on the dollar,
Speaker 1: and Tom, as you suggest, that has echoes throughout the
Speaker 1: rest of the world, and uh the US stronger currency,
Speaker 1: it's helpful frosting fighting inflation, but the weaker currencies that
Speaker 1: are on the other side of that are inflationary in
Speaker 1: those countries and making the challenges for those central banks
Speaker 1: even more acute and in adgestion for many emerging market economies,
Speaker 1: it creates tensions in their national balance sheets giving their
Speaker 1: exposures to dollars. So it does create, as you suggest,
Speaker 1: some exquisite dilemmas for these central banks and may force
Speaker 1: them into further rate hikes at times when they don't
Speaker 1: want to hike rates. Here in the United States, in
Speaker 1: about twenty four hours, as John was mentioning, we are
Speaker 1: going to get that CPI print expected to come in
Speaker 1: at eight point one percent by economist surveyed by Bloomberg,
Speaker 1: down from eight point five percent in the prior read.
Speaker 1: How important is it to look at the components of
Speaker 1: what's driving this inflation. What's your projection for how we
Speaker 1: can understand the granularity of this report. I think that
Speaker 1: looking under the hood is going to be critical. We're
Speaker 1: expecting a zero point four percent month to month read
Speaker 1: for core, somewhat lower for headline, but when I look
Speaker 1: at underlying components, I just have a hard time being
Speaker 1: too optimistic about the inflation outlook. I think in this
Speaker 1: environ with high commodity prices, supply chaining pressures, potential further
Speaker 1: disruptions as a result of what's happened in China to
Speaker 1: supply chains, that it's not a positive environment for for
Speaker 1: goods prices, there's a lot of inertia in shelter and
Speaker 1: ownery equivalent rents. That's not looking like a very positive picture.
Speaker 1: And then finally, for services, we've got a red hot
Speaker 1: labor market and wages may not have risen quite as
Speaker 1: much as headline CPI, but it looks to me like
Speaker 1: pressures on services prices will likely be pretty durable as well.
Speaker 1: So I think those components right now are just not
Speaker 1: very encouraging and tell a tale of longer lived inflation.
Speaker 1: So do you think, Nathan, that we've seen the peak.
Speaker 1: You know, maybe in some arithmetic sense, yes, uh, you know,
Speaker 1: is this the peak for twelvemonth headline inflation or even
Speaker 1: twelvemonth core inflation? Possibly? Is it? Is? It likely to
Speaker 1: be on a bit of a downward trajectory, but a
Speaker 1: very gradual downward trajectory, and one that even at the
Speaker 1: end of this year, our expectation is the measures of
Speaker 1: core prices, be they PC or cp I, are still
Speaker 1: likely to have four handles well above federal reserve targets.
Speaker 1: So maybe it is peak, but it's really more, as
Speaker 1: my colleagues have said, really more of a plateau. Nathan,
Speaker 1: how much control does the FED really have over this
Speaker 1: inflationary impulse? If so much of it is coming in
Speaker 1: addition to the housing in addition to the labor market,
Speaker 1: to what we're seeing in China, to what we're seeing
Speaker 1: with the oil markets, how much control can the federally have?
Speaker 1: This is this is the critical question now, Paul Paul
Speaker 1: Volker that taught us in the nineteen eighties that if
Speaker 1: the BED is aggressive enough, it can move that demand
Speaker 1: curve sufficiently to UH to tame inflation. But that is
Speaker 1: a very painful process, and I think Ultimately to get
Speaker 1: out of this without a recession, the fat is going
Speaker 1: to need some help from the outside world. We're gonna
Speaker 1: need to see these supply chains improving, commodity prices come down,
Speaker 1: and they's in the common feature of city group economics,
Speaker 1: from Villin Powders through Catherine Van to you is respect
Speaker 1: for the data. Do you take comfort in I m
Speaker 1: F or w t O global g d P guesses
Speaker 1: now or is it an impossible task? The reality here
Speaker 1: is that we as economists have this uh tendency to
Speaker 1: UH to forecast immaculate landings. But why do we do this?
Speaker 1: Why do we forecast the soft landing where inflation kind
Speaker 1: of eases down, grows slow some, and we avoid recession.
Speaker 1: The reality is that the other outcome are just so
Speaker 1: messy it's hard to figure out what they look like
Speaker 1: on paper. So we write down these these these soft
Speaker 1: landing scenarios, and there is a plausible path to a
Speaker 1: soft landing with some lock. But they're right now. The
Speaker 1: inflation risk, section risk, even the stagflation risk, is quite appreciable.
Speaker 1: And and those kinds of forecasts don't don't help me
Speaker 1: sleep a whole lot better at Nathan are we at
Speaker 1: any point where we turn to a nominal analysis from
Speaker 1: a real analysis, are things so out of whack we'd
Speaker 1: literally go back pre Arthur Burns As as inflation surges,
Speaker 1: you have to start thinking about the nominals as well
Speaker 1: as the reels. Now, to be clear, I think at
Speaker 1: the end of the day, how does the FED attraction?
Speaker 1: And the FED has to get traction ironically by thinking
Speaker 1: about the reels. And I think ultimately the question that
Speaker 1: the FED it's got a struggle with is how much
Speaker 1: are they gonna have to push interest rates positive in
Speaker 1: real terms to get traction on this thing? And in
Speaker 1: their SCP from a couple of months ago, they said,
Speaker 1: well just a little bit positive. That's not clear to me.
Speaker 1: That's not clear to me at all that we may
Speaker 1: need a substantially positive real rate. So it's the world's
Speaker 1: thinking more nominal. It's gonna be critical for the FED
Speaker 1: to think more real. Nan also gonna get you hope
Speaker 1: for you a Boddy as other wise Nathan shakes. That
Speaker 1: sits eight. Lisa shllet is with Morgan Stanley Wealth Management.
Speaker 1: She hinges everything and having a plan and then heaven
Speaker 1: forbid staying with the plan in times of stress? What's
Speaker 1: the plan, Lisa? And how do you have the courage
Speaker 1: to stay with it? Right now? So? Look, I actually
Speaker 1: think as radical as the last you know, week has
Speaker 1: been in volatile as the last week has been, there
Speaker 1: is an element of it that is somewhat predictable. And
Speaker 1: what I mean by that is that the market has
Speaker 1: finally gotten to the point where it's digested, Uh, the
Speaker 1: level and degree to which the FED is going to
Speaker 1: be hawkish, But they didn't hadn't yet really really, um,
Speaker 1: you know, fast forwarded that to what are the probabilities
Speaker 1: that the FED can really execute a soft landing? And
Speaker 1: so we know from history. You know that in the
Speaker 1: post World War two period, the FED has tightened roughly
Speaker 1: fourteen times. Eleven of those episodes have resulted in a recession,
Speaker 1: and only three times have we pulled off a soft landing. Uh.
Speaker 1: And we are operating this is a FED at JEROMEE.
Speaker 1: Powell admitted this that is operating with an against a
Speaker 1: backdrop where there's an extraordinary degree of difficulty. Not only
Speaker 1: is the macro environment complex, but the geopolitical environment is complex.
Speaker 1: And look, the FED itself is trying to do something
Speaker 1: that they've never done before, which is simultaneously raised rates
Speaker 1: and reduce the size of the balance sheet. So to me,
Speaker 1: yesterday was very much something to be expected that eventually
Speaker 1: we were going to get a growth scare where everyone
Speaker 1: starts worrying about the fact that we might in fact
Speaker 1: have a hard landing. And while we continue to be
Speaker 1: in the camp that says we don't see an imminent recession,
Speaker 1: the reality is is that growth may slow much faster,
Speaker 1: uh than than folks believe. And so it's notable to
Speaker 1: to your and Jonathan's point that finally the bond market
Speaker 1: is getting on the bandwagon, meaning starting to to worry
Speaker 1: less about upward moves and inflation and potentially beginning to
Speaker 1: think about downward moves and inflation, which are you know,
Speaker 1: a reflection of weaker growth, So at least a two
Speaker 1: pound question, just to be clear, it sounds like you
Speaker 1: expect one more down side and equity prices. But to
Speaker 1: the second part, if we have that dance side, that
Speaker 1: set off just the character the nature of the sound
Speaker 1: of change, Uh yeah, I do. I do think that
Speaker 1: it does because I think, um, you know, we start
Speaker 1: to get a lot more defensive. It's why why bonds
Speaker 1: are finally getting a bid here UH. And so I
Speaker 1: think that that defensive trade that unwound, the long duration,
Speaker 1: stable growth stock trade that was really unwinding fiercely last
Speaker 1: week UM starts to get a bid uh And And
Speaker 1: again it's what do I want to own if the
Speaker 1: economy is really genuinely slowing. So you're basically basically saying, Lisa,
Speaker 1: big tech is a bright spot for the next couple
Speaker 1: of months. So I want to be really careful because
Speaker 1: I don't know that I think big tech in in
Speaker 1: all caps is but I think long duration assets actively
Speaker 1: selected are the place to be. So we have begun
Speaker 1: to add duration. We started that about three or four
Speaker 1: weeks ago, albeit it was early and and you know,
Speaker 1: many of our clients who began to add back UH
Speaker 1: into bonds have not had a great three or four weeks.
Speaker 1: But but we do think that that that trade may
Speaker 1: begin to work, and some of the higher quality UH
Speaker 1: growth oriented names are certainly worth looking at today and
Speaker 1: and buying, And that's what we're advising our clients to do, Lisa.
Speaker 1: There have been some people who have talked about the
Speaker 1: unwind of certain nonprofitable tech companies and others as the
Speaker 1: bursting of a bubble. And I take a look at
Speaker 1: Peloton this morning, the shares were down from the peak
Speaker 1: even before going into today the shares getting massacred right
Speaker 1: now in pre market trading after they reported their earnings.
Speaker 1: Is Peloton a one off? Or is this uh something
Speaker 1: that is endemic that has not fully been beaten out
Speaker 1: of the system. Uh? And oh, I think we're starting
Speaker 1: to get there. Uh. And and on the stock side
Speaker 1: of things, I think we we certainly have. What's interesting
Speaker 1: is among the unprofitable tech companies, uh, the stocks may
Speaker 1: actually have led uh. And the credit market probably needs
Speaker 1: to catch up and and really blow some of these
Speaker 1: um you know triples see and junk spreads out even further. Um.
Speaker 1: But but from a stock perspective, you probably are starting
Speaker 1: to get to the point where there's enough blood and
Speaker 1: enough pain in the streets uh that these valuations start
Speaker 1: to look a little bit better. The key issue, however,
Speaker 1: is to recognize that companies are now and investors are
Speaker 1: now looking at you know, cost of capital, and that means,
Speaker 1: you know, to what extent has cost of debt gone
Speaker 1: up and to what extent has cost of equity gone up?
Speaker 1: And both have gone up. Uh in this rising uh
Speaker 1: you know rate environment and the policy pivot. Lisa Shanna
Speaker 1: awesome as a wife from Morgan Stanley Wealth Management. Lisa,
Speaker 1: thank you right now. Cathy joins Jones, chief fixed Income
Speaker 1: Strategists at the Schwab Center for Financial Research. Kathy, A
Speaker 1: given bondy TF is down in price nine annualized big loss.
Speaker 1: I would just the bond market handles price decline and
Speaker 1: a bond bear market differently than the equity market. What
Speaker 1: are you observing from SWAB clients? Is they enjoy price decline? Well,
Speaker 1: I'm not sure they're enjoying price decline and bond funds.
Speaker 1: But what we are saying is UM investors trying to
Speaker 1: take on a little more income by going into longer
Speaker 1: duration bonds. And this has been our call recently to
Speaker 1: start gradually, not at once, but gradually adding some duration
Speaker 1: as as yields go up, because you know, you have
Speaker 1: the opportunity now to get some relatively attractive coupons at
Speaker 1: prices that are often below par. So that means not
Speaker 1: only the opportunity to earn more incommon a portfolio, but
Speaker 1: also potential capital games. Where is the biggest opportunity right now, Kathy,
Speaker 1: when you talk about those coupons, is it in credit
Speaker 1: and the riskier the better, or is it in full
Speaker 1: faith and credit US treasuries. Well, I would cite it
Speaker 1: a little bit more carefully than that. There are two
Speaker 1: areas that we really like. One as municipal bonds. Um
Speaker 1: you can get on a tax equivalent basis for a
Speaker 1: very high income earner uh A north to five percent
Speaker 1: in municipal bomb, high quality municipal bonds. We're okay with
Speaker 1: investment grade, but we want to stay a little more
Speaker 1: careful because we do think we're going into or we
Speaker 1: are in credits part of the credit cycle where we'll
Speaker 1: see some further spread. I think we're not crazy about
Speaker 1: the high yield simply because this is this is the
Speaker 1: part of the cycle where high yield usually does most poorly.
Speaker 1: People forget that it's not the beginning of the rate
Speaker 1: hike cycle. It's usually the end of the rate high cycle,
Speaker 1: when the economy starting to weekend that you start to
Speaker 1: see those high yield spreads really move that, Kathy, I
Speaker 1: want to focus on that for a minute, because we
Speaker 1: saw a pretty pretty big move in spreads yesterday in
Speaker 1: the high yield sector, which is something new. We really
Speaker 1: hadn't been seeing credit respond in the same kind of
Speaker 1: way that stocks have been responding, and yet suddenly we
Speaker 1: do see some sort of indication here. Is this just
Speaker 1: the beginning of a widening of a protracted selloff and
Speaker 1: credit or is this basically some sort of mini capitulation
Speaker 1: that will be viable for a lot of investors. I
Speaker 1: think it's the former and not the ladder. So I
Speaker 1: think that we have seen, say, triple C is really
Speaker 1: underperformed for quite some well quite a while relative to say,
Speaker 1: you know, the higher end of the high yield market.
Speaker 1: But as we get into higher rates, you're starting to
Speaker 1: see the impact on cash flow for those weaker companies
Speaker 1: with weaker balance sheets, maybe not as great as a
Speaker 1: cash flow. It's one reason we don't like loans as
Speaker 1: well now, simply because we're starting to see the effect
Speaker 1: of the interest rate increases and that's probably going toor
Speaker 1: road the ability to to meet those obligations at the
Speaker 1: lower the weaker credits. So definitely would not be chasing
Speaker 1: how yield at this stage of the game. Kathy, there's
Speaker 1: a religion in the equity market that if you go down, correction,
Speaker 1: bear market, or worse. At some point you grow your
Speaker 1: way back to where you were the market high, and
Speaker 1: there's long spans where this has been a challenge. How
Speaker 1: do you do that in the bond market? If I'm
Speaker 1: x percent down from the summer of two thousand twenty,
Speaker 1: how do I grow myself back with yield if I
Speaker 1: don't have attendant growth underneath it like I have in stocks. Well,
Speaker 1: it depends. If you're holding individual bonds and you hold
Speaker 1: them to par, you're still gonna get. You're still going
Speaker 1: to get your principle and your interest payments barring a
Speaker 1: default all the way along. So you've earned whatever that
Speaker 1: current yield was when you bought the bond. If you're
Speaker 1: in a bond fund, it usually takes longer, but usually
Speaker 1: what will happen in a bond fund is the manager
Speaker 1: is reinvesting for higher income and on a total return
Speaker 1: basis over time, assuming that rates don't go sky high
Speaker 1: from here, which we don't think is likely. Um, you
Speaker 1: know you you're earned your way back with the income component. Kathy,
Speaker 1: thank you for bemist this morning. Kathy Jones that of
Speaker 1: the swap Sense financial research, this is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television
Speaker 1: each day from six to nine am for insight from
Speaker 1: the best in economics, finance, investment, and in in national relations.
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course, on the terminal. I'm
Speaker 1: Tom keene In. This is Bloomberg