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

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Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jay Lee, we bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg

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Speaker 1: dot Com, and of course on the Bloomberg terminal. It

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Speaker 1: is the annual FED get together and the host of

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Speaker 1: that get together is the Kansas City FED President Esther George.

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Speaker 1: She sat down with Bloomberg's Mike McKee and Kathleen Hayes.

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Speaker 1: If you think about how tight the labor market is,

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Speaker 1: we are operating with an unemployment rate that is below

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Speaker 1: I think what most people would consider to be a

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Speaker 1: normal or natural rate of unemployment. So that suggests to

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Speaker 1: me that to get loosening in that labor market, to

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Speaker 1: see some of this tightness come out of the economy,

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Speaker 1: that you may well see more unemployment meant in the

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Speaker 1: process of this tightening cycle. Well, you got two camps.

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Speaker 1: One that says you need to keep going no matter what,

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Speaker 1: and another that says you need to be careful because

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Speaker 1: these are real people who lose jobs. So how much

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Speaker 1: unemployment is too much well, I think anytime someone is

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Speaker 1: unemployed that doesn't want to be Uh, you care about that?

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Speaker 1: I think in the long run, which is where I'm focused,

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Speaker 1: you have to have a sustainable economy and the best

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Speaker 1: path to full employment is going to be conditions of

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Speaker 1: price stability. And so I think for the long run,

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Speaker 1: that's where we have to be focused to bring inflation

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Speaker 1: down so that we can have those conditions. So what

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Speaker 1: are you looking at when you see the housing market?

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Speaker 1: We saw penning home sales with the weakest again since

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Speaker 1: the beginning of before the pandemic. Even mortgage rates have

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Speaker 1: shot up. We know all kinds of people who backed

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Speaker 1: out of wanting to buy a home because they're expecting

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Speaker 1: prices to fall more So, is that a welcome tightening

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Speaker 1: and financial conditions? Is it a little bit more than

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Speaker 1: the thet is bargained for? Well, I think it's been

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Speaker 1: one of the first places we've seen it. So you

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Speaker 1: saw that initial tightening and mortgage rates very quickly early

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Speaker 1: in the tightening cycle, and that of course does affect

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Speaker 1: the economics of someone being able to afford a mortgage,

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Speaker 1: make that payment they need to pay. So in some

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Speaker 1: sense this isn't surprising to see these numbers come off,

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Speaker 1: to see sales come down, whether the actual prices the

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Speaker 1: housing valuation comes down consistent with that, I think we

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Speaker 1: will still have to see, and I suspect that could

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Speaker 1: be to come. You know, you just mentioned that the

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Speaker 1: funds rate could have to go above four percent to

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Speaker 1: get to the point where you're slowing down the economy

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Speaker 1: and and really slowing down demand. Uh. John Taylor, author

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Speaker 1: the Taylor Rule more. You know, well, just a couple

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Speaker 1: of days ago on Bloomberg Television told me that he

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Speaker 1: thinks the Fed should be aiming for five percent or

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Speaker 1: even more if inflation does not start coming down more rapidly. Well,

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Speaker 1: I think certainly if we don't see a response in

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Speaker 1: bringing this imbalance between demand and supply to bear on inflation, um,

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Speaker 1: we will again have to consider where that short term

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Speaker 1: interest rate is going to have to be. You wouldn't

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Speaker 1: roll out something that high. Well, I wouldn't rule it out.

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Speaker 1: I'm not suggesting that's where we're going. But the other thing, Kathleen,

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Speaker 1: that I think we don't talk enough about is the

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Speaker 1: sizeable balance sheet that the Federal Reserve has and that

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Speaker 1: we will be doing runoff of that balance sheet, and

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Speaker 1: again understanding how these two things work together. Um, I

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Speaker 1: think it's going to be important to see how that

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Speaker 1: runoff works as we go through the year. And that's

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Speaker 1: the other part of this rate increase environment that is

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Speaker 1: important to watch. I think, what's the danger of a

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Speaker 1: session that you see and what would you see it

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Speaker 1: in in terms of indications that we are slipping into contraction.

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Speaker 1: So you know, again, when I go around my region,

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Speaker 1: I don't hear many signs of that, uh from our contacts.

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Speaker 1: What I hear is tight labor market, price pressures, supply

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Speaker 1: constraints going on here. I will tell you when I

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Speaker 1: look at global growth though, so we've seen the i

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Speaker 1: m F cut its for cast for global growth. We

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Speaker 1: see the issues in China, we see Europe, and we

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Speaker 1: know that that reduction and demand will affect our own

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Speaker 1: growth here simultaneous with the tightening cycle that the bed

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Speaker 1: is underway. So how it how it comes out and

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Speaker 1: balance over time is hard to know. But I think

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Speaker 1: again the focus on watching these in violence has resolved themselves,

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Speaker 1: We're going to have multiple factors that will come to

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Speaker 1: bear on the President. Biden has now introduced a student

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Speaker 1: loan forgiveness program ten dollars or twenty depending on the

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Speaker 1: program you were in per person, which is going to

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Speaker 1: cost billions of dollars that a lot of economists are

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Speaker 1: worried this is going to be inflationary? Do you see

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Speaker 1: it working against your goals? So I haven't looked at

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Speaker 1: this particular decision that came out, but I think always

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Speaker 1: fiscal policy is something we will take in to understand.

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Speaker 1: Is it an impact in the short term? Does that

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Speaker 1: happen over a period of time that makes its particularly

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Speaker 1: impact of the economy there? So I don't have a

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Speaker 1: sense of the particular impact here. Again, given the size

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Speaker 1: relative to our economy and what we're looking at in consumption, UM,

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Speaker 1: I'd be hard pressed to say what I think it's

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Speaker 1: impact is right now speaking of your district, speaking of

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Speaker 1: the world economy and what's driving at right now. Drought

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Speaker 1: is big. It's across much of the Western United States

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Speaker 1: in Europe. Now, Um, where is it the point yet

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Speaker 1: where it enters into a factor in policy and is

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Speaker 1: something like drought and what it could do to production,

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Speaker 1: our cultural production, all kinds of things. Is it potentially

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Speaker 1: a drag on the economy which tilts you toward recession

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Speaker 1: potentially is it's something that boost inflation because a lot

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Speaker 1: of prices are going to get even higher, particularly for food.

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Speaker 1: So issues that affect our real economy or things that

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Speaker 1: I think we have long taken into account. You think

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Speaker 1: about a region like mind where agriculture UM is prominent,

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Speaker 1: the idea that weather events, the idea that commodity prices

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Speaker 1: all come to bear on how the economy does what

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Speaker 1: it contributes to GDP where the constraints are UM in

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Speaker 1: that sector. I think these events just our continuation of

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Speaker 1: some of that and the magnitude of them may change.

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Speaker 1: But I will tell you, for example, in the Kansas

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Speaker 1: City Fed District, drought in the western part of our

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Speaker 1: region does have an impact on the yields that are

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Speaker 1: coming off these crops. Now, it will matter over time. Uh.

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Speaker 1: Farmers are used to dealing with that in many respects.

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Speaker 1: Banks that lend to them are used to dealing with that,

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Speaker 1: and I think in that sense, UM, it will have

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Speaker 1: the same impact on our policy that we see across

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Speaker 1: many sectors in the economy. A very near term decision

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Speaker 1: and every Fed Bank president, every FED official gets as

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Speaker 1: this all the time, UM, and especially you, because you

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Speaker 1: did dissent against the first seventy five basis point rate hike,

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Speaker 1: and you just recently said you're going to continue debate

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Speaker 1: the needed size fifth year seventy five with your FED colleagues.

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Speaker 1: So again, when you see how well the economy is

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Speaker 1: holding up and how little inflation has come down this far, um,

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Speaker 1: what is your baseline? Is your baseline fifty and you're

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Speaker 1: gonna be talked into seventy five? What's going to tilt

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Speaker 1: the balance for you? I mean I supported seventy five

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Speaker 1: at the July meeting, and I find it an interesting

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Speaker 1: time when we debate fifty or seventy five because who

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Speaker 1: would have thought fifty would have a more dubbish view,

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Speaker 1: uh than seventy five. I think for me, coming into

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Speaker 1: this September meeting, we're going to be looking again at

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Speaker 1: an inflation report, We're going to be looking at a

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Speaker 1: labor market report, and I think trying to draw some

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Speaker 1: sense of whether we see continuation of things that we've

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Speaker 1: seen over the summer, whether progress looks like it's meaningful

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Speaker 1: in some way. I do look forward to getting back

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Speaker 1: to a sustainable rate path. That was my issue at

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Speaker 1: the June meeting. Again, No, no, disagreement about the direction

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Speaker 1: we are headed, but I think just being mindful of

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Speaker 1: the destination and how quickly we get there at a

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Speaker 1: time when we're reducing the balance sheet. You've been doing

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Speaker 1: that for a long time. The old adage was don't

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Speaker 1: fight the fit. Why do you think the markets are

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Speaker 1: fighting the Fed now and not listening to what you've

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Speaker 1: been saying about how serious you are about taking on inflation.

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Speaker 1: I don't know what drives in the markets, Mike. I

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Speaker 1: probably would not be a well positioned to say that. Certainly,

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Speaker 1: it is important for our communications to be clear because

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Speaker 1: we want financial conditions to tighten along with the direction

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Speaker 1: we are moving around policy. So I think it puts

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Speaker 1: a premium on being clear in our communication of having

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Speaker 1: resolved toward the end game here and again, the end

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Speaker 1: game is to bring inflation back to our two percent target,

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Speaker 1: and um that's challenging and the environment ran we're coming

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Speaker 1: off an unprecedented period. The economy, I think, in some

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Speaker 1: respects is still sorting itself out. We have global factors

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Speaker 1: to take into that, so there's a lot to think about.

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Speaker 1: I'm sure markets are thinking about that even as we

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Speaker 1: proceed with this interest rate increase. You're retiring at the

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Speaker 1: end of the year. This is your last economic symposium.

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Speaker 1: How do you think economics and the economy and the

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Speaker 1: FED have changed during your tenure. Well, a lot has

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Speaker 1: been done. When you think about the Great Financial Crisis

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Speaker 1: where the introduction of quantitative easing came about zero interest

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Speaker 1: rate policy. Um, has been an extraordinary time for the economy,

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Speaker 1: for policy to think about how it responds to the economy.

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Speaker 1: Also coming into a time when we have demographic changes,

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Speaker 1: really broader changes around the world. So the world continues

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Speaker 1: to evolve in ways that sometimes look clear to us,

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Speaker 1: sometimes don't. But um, Well, in this vein of of here,

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Speaker 1: you are about to end your wonderful tenure at the

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Speaker 1: Kansas City FED. This last part, I would think is

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Speaker 1: one of them one of the very most difficult parts

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Speaker 1: seeing inflation get out of control the way it has.

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Speaker 1: What's the biggest lesson learned for you? Uh, for the

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Speaker 1: Federal Reserve after having gotten into this situation and now

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Speaker 1: needing to get out of it. So, Kathleen, really I'm

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Speaker 1: going to answer that question by saying, this is one

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Speaker 1: of the things I'm looking forward to with the conference

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Speaker 1: that we have this year. Is really reassessing how we

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Speaker 1: understood constraints over the last couple of decades, finding ourselves

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Speaker 1: again in a place of high inflation which we hadn't

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Speaker 1: seen for some forty years, and really being reminded what

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Speaker 1: are those factors that are important to price stability? We

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Speaker 1: know as our mandate that that hasn't changed for a

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Speaker 1: long time, even as the economy is evolved, even as

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Speaker 1: the tool kit may have evolved. But getting back to

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Speaker 1: really thinking about how price stability is achieved even as

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Speaker 1: the world changes, I think is going to be an

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Speaker 1: important part of this discussion here at Jackson Hall Symposium

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Speaker 1: that was the Kansas City Fed President as the George

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Speaker 1: sitting down with Michael McKay and Kathleen Hayes. Yea, let's

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Speaker 1: get to the theme at the moment at Jackson Hawaiian

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Speaker 1: in case the title reassessing constraints on the Economy and Policy.

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Speaker 1: Let's have that conversation now with Glenn Hoover, the Professor

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Speaker 1: of Finance and Economics of the Columbia Business gool going,

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Speaker 1: great to have you with us. Can you frame how

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Speaker 1: challenging this moment is for this fet chair. Well, I

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Speaker 1: think it's it's very challenging for two reasons. One, it's

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Speaker 1: momentuous time in the economy with both significant uncertainty about

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Speaker 1: inflation and recession too. It's important for him and in communication.

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Speaker 1: I actually have a hold whip inflation now button here

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Speaker 1: from a Ford administration, and I think Chair Powell needs

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Speaker 1: to do a bit better in expressing warsome candor about

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Speaker 1: the past, not necessarily be a culpole, but for what

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Speaker 1: happened and about the future what it's going to take,

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Speaker 1: as well as talking about the difficult path of get

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Speaker 1: inflation all the way back down to two percent, getting

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Speaker 1: it down to four maybe straightforward, getting into too much

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Speaker 1: heart Glenn Hubert. The arc of Republican economics, represented by

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Speaker 1: so many here at Jackson Hole is that the system

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Speaker 1: will solve itself. Is a general statement. Is the religion

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Speaker 1: of supply side economics or the religion that the American

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Speaker 1: economy can heal itself? Has that failed? I don't think so.

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Speaker 1: I mean the economy is a lot of self equilebrating mechanisms.

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Speaker 1: A question is over what time period in the presence

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Speaker 1: of such a large shocks. I think policy still has

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Speaker 1: a role to play and had a role to play

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Speaker 1: in the COVID pandemic, and the FED just can't wait

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Speaker 1: to let inflation work itself out. So Dean Hubbard, Glenn,

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Speaker 1: what's your view on our debate that we were just

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Speaker 1: having about whether this FED chair will speak to markets,

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Speaker 1: what he will say about their enthusiasm about some sort

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Speaker 1: of pivot or some sort of pause in federate hikes. Well,

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Speaker 1: I think the message he could give, going back to

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Speaker 1: the point I said about candor about where we have

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Speaker 1: to go, is what it would take to reduce inflation.

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Speaker 1: I don't think he's literally going to lecture the markets

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Speaker 1: and say the stock markets too high or something like that.

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Speaker 1: But I think he can outline a path that says

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Speaker 1: we have work to do, getting that work done requires

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Speaker 1: tighter financial conditions, and speaking in general terms, I think

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Speaker 1: that would be wise to make that kind of communication

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Speaker 1: to the public and to the markets. There was an

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Speaker 1: article in the Wall Street Journal. I keep mentioning this

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Speaker 1: because it really caught my attention about whether we have

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Speaker 1: seen the end of the low rate policies, is what

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Speaker 1: PIMCO is put out there, and the possibility of inflation

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Speaker 1: remaining high for a longer period of time due to

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Speaker 1: a de globalization due to structurally higher commodity prices due

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Speaker 1: to a lack of investment over the past few years.

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Speaker 1: Do you buy into this theory and if the FED does,

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Speaker 1: what does that mean in terms of how high rates

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Speaker 1: have to stay and for how long? I think there's

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Speaker 1: certainly something to the fact that we have demographic changes,

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Speaker 1: structural changes, globalization changes. Be hesitant to draw straight lines

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Speaker 1: and say that's just going to be permanent, but I

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Speaker 1: think it's definitely something to watch. To my mind, the

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Speaker 1: concern for the third eye, there's probably two worlds, one

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Speaker 1: in which we keep inflation expectations anchored around two, the

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Speaker 1: other in which they go off kilter. I think that's

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Speaker 1: the challenge the chair faces, and you'll have to quote

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Speaker 1: do what it takes to make that happen. Like Glenn,

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Speaker 1: thank you, sir, it's going to hear from you as always.

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Speaker 1: From Columbia Business School. We're really happy to say that

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Speaker 1: John to gets Mohammed area in a flimp bug opinion

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Speaker 1: and Colleen's College, Cambridge. A man who unlike this FED chairman,

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Speaker 1: called this, called this inflation spiral. Mohammed, let's go straight there.

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Speaker 1: The challenge for this FED chair and this annual FED

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Speaker 1: gets together. How big is it? It's huge, John, and

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Speaker 1: good morning. It's huge because he's speaking to multiple audiences,

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Speaker 1: as you pointed out. But it's also huge because he's

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Speaker 1: got to deal with issues with respect to the past,

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Speaker 1: the present, and a few He's got to figure out

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Speaker 1: how he's going to address his speech last year that

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Speaker 1: proves so off the mark. He's got to figure out

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Speaker 1: what to signal about current monetary policy. And let's not

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Speaker 1: forget that we have a framework that is not fit

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Speaker 1: for purpose. We have a policy framework fit for world

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Speaker 1: of deficient aggregate demand, and we are in the world

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Speaker 1: for deficient aggregate supply. So put all this together, the

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Speaker 1: challenge is very big, John Mohammed, you're focused on a

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Speaker 1: new word, stickiness, and you've been focused on that for

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Speaker 1: a number of months now. From the incoming information, How

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Speaker 1: sticky do you think that inflation dynamic is? And how

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Speaker 1: much does that tell me about how much work this

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Speaker 1: chairman still has to do. So I worried that core

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Speaker 1: inflation is going to prove more sticky than the FED anticipates.

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Speaker 1: Right now, we have wages are starting to be a

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Speaker 1: driver of higher cost and eventually higher prices. So while

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Speaker 1: headline inflation is going to continue to go down for

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Speaker 1: the next two months, core may prove quite sticky. And

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Speaker 1: that's what a problem, Folter. For those of you have

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Speaker 1: Bloomberg Radio and Bloomberg Television, you just saw a little

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Speaker 1: bit of light going out. That was one of the

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Speaker 1: grizzly bears standing up and getting in the way of

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Speaker 1: the light. Here they're watching here this morning as well.

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Speaker 1: Dr Larry, and people forget why you are, doctor Hilarion,

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Speaker 1: and it has to do with the acuity and concision

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Speaker 1: of your game theory. You codified in a modern day

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Speaker 1: the phrase T decision. Let's distill that down to the

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Speaker 1: T decision that Chairman Powell has to make between now

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Speaker 1: and a data busy September. And it's an important one,

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Speaker 1: Tom because right now the FETE is so late that

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Speaker 1: it's looking at two challenges. It's looking at putting the

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Speaker 1: inflation genie back into the bottle, and it's looking at

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Speaker 1: not creating too much damaged to the economic growth and inequality,

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Speaker 1: something that you have been speaking to all morning. Look,

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Speaker 1: I don't think he has any choice. He's got to

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Speaker 1: put the inflation genie back into the bottle. You know,

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Speaker 1: that and all saying that Maco stability isn't everything, but

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Speaker 1: without it you have nothing. So they've got to put

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Speaker 1: that inflation genie back into the bottle and do it

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Speaker 1: in a determined and sustainable fashion. Okay, but this is

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Speaker 1: the politics of it, Dr Larry. And if you have

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Speaker 1: a partial differentiation from eight percent US inflation, the halves

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Speaker 1: are benefited. When you get to six percent or five,

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Speaker 1: the have nots, the great middle class are still flat

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Speaker 1: on their back. What is your timeline where all of

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Speaker 1: America finally gets inflation back into the bottle. So it's

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Speaker 1: gonna take some time because the FED has been asleep

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Speaker 1: at the wheel and that's unfortunate. Tom. What you raise

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Speaker 1: is much bigger. It is speaks to the FED being

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Speaker 1: necessary but not sufficient to address our policy issues. Um,

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Speaker 1: you've got to deal with the inequality aspect. You've got

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Speaker 1: to protect the most vulnerable segments of the population with

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Speaker 1: focus um fiscal policy, and you've got a lot to

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Speaker 1: do a lot more on productivity and equal opportunity. So

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Speaker 1: it's a long list, but the FED has to focus

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Speaker 1: on inflation and has to do it in a more

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Speaker 1: committed fashion. That has done it so far, So it's

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Speaker 1: been trying to sound Mohammed committed, right. I mean, if

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Speaker 1: it's basically been saying inflation is or number one issue

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Speaker 1: that they're facing, why is the market not hearing it?

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Speaker 1: Two reasonsly, so, One is the FED itself. Let's not

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Speaker 1: forget that. Chappal hinted not hinted, stated that we were

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Speaker 1: at the neutral rate. The minute the market heard that,

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Speaker 1: it moved, and it moved in a significant fashion and

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Speaker 1: all the talk about pivot started being amplified. So that's

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Speaker 1: one reason that the communication hasn't been consistent and that's

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Speaker 1: been a problem for the last year. And the second

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Speaker 1: issue is that the market is looking at the impact

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Speaker 1: on growth, is looking at this at the potential impact

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Speaker 1: on markets. And as John said earlier today, we remembers

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Speaker 1: fourth quarter of remembers the FED blinking, so it believes

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Speaker 1: on push comes to shove, the feed is going to

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Speaker 1: blink again, that we're gonna have a flip flopping fed. Ammmed.

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Speaker 1: What I hear from you is that you don't think

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Speaker 1: this FED blinks anytime soon. I don't know, John. I

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Speaker 1: know what they should do, which is they should not

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Speaker 1: blink um. But it's been very difficult to call this fed.

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Speaker 1: This fed has unfortunately failed at analysis, failed that forecast,

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Speaker 1: failed that communication. So it's very difficult to say what

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Speaker 1: this feed is going to do. It's easier to say

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Speaker 1: what it should do, but it's much it's much harder

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Speaker 1: to say what it should what it's going to do.

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Speaker 1: And that's why you get this disconnect that you've been

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Speaker 1: talking about between the markets and the fat. Easy to

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Speaker 1: find out what you think. So let's go there and

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Speaker 1: wrap up this segment with you on what you think.

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Speaker 1: Larry sum has called that neutral comment analytically indefensible. You

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Speaker 1: said on neutral, and I think you're a little bit

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Speaker 1: more diplomatic at it. When we last spoke, you said

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Speaker 1: the zip code for neutral was hard. And where we

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Speaker 1: are right now, Mohammed, what is the zip code for neutral?

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Speaker 1: And how on earth do we know with inflation where

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Speaker 1: it is and where race where they are right now?

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Speaker 1: So I don't know specifically where it is, and I've

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Speaker 1: been warning against spurious precision. There are so many structural

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Speaker 1: changes going on. We are changing liquidity regimes. I said earlier,

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Speaker 1: We're going from a world of deficient aggregate amount to

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Speaker 1: world of deficient aggregate supply. That's the world we live

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Speaker 1: in now. No one knows for show where neutral is,

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Speaker 1: so you've got to try to figure out as you

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Speaker 1: go along the way. And you mustn't attempt this purisk

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Speaker 1: precision because if you do, the market is gonna jump

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Speaker 1: immediately to conclusions and then you're gonna have to undo it.

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Speaker 1: You know, the Fed itself federal officials have walked back

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Speaker 1: that comment. It didn't take many days for other federal

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Speaker 1: officials to come out and say we're not at neutral

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Speaker 1: darker Laura and I want to go to the international

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Speaker 1: tone here central banker of the world. And the singular

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Speaker 1: feature I have is the focus is on Plaza chord

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Speaker 1: like partners. When there is e M forget about idiosyncratic

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Speaker 1: turkey out over eighteen Lira. What will be the shock

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Speaker 1: of Powell action to a more fragile emerging market of

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Speaker 1: and third world economies. It's a high risk situation, Tom.

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Speaker 1: You have higher rates, so more uncertain market conditions, you

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Speaker 1: have global economic growth slowing much faster than most people expected,

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Speaker 1: and you have a stronger dollar. Historically that has not

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Speaker 1: been a favorable mix for for imaging economies. So right now,

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Speaker 1: how much does this bleed back to the U S economy.

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Speaker 1: How do you bleed through the pain that you're seeing

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Speaker 1: in Europe, in China into slowing US growth and entering

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Speaker 1: a recession? You know? He said, The quick and easy

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Speaker 1: is to say that everybody has an inflation problem, everybody

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Speaker 1: has a growth problem, and that's true, but go further,

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Speaker 1: have massive dispersion um growth. The US is in a

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Speaker 1: much better place than most other countries central bank policy.

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Speaker 1: If we think that the FED faces tough challenges, look

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Speaker 1: at the ECB. Not only do I have high inflation,

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Speaker 1: they have a much more fragile economy and they have

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Speaker 1: the risk of fragmentation. So I think the theme going

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Speaker 1: forward is going to have a strong element of dispersion

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Speaker 1: come into it, and that makes markets have to spend

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Speaker 1: a lot more time thinking about relative values and not

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Speaker 1: just the overall beta if you like. When you take

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Speaker 1: a look at the framework, policymakers are starting to think

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Speaker 1: more about a structural inflation that will last a much

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Speaker 1: longer time due to deglobalization and due to the sort

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Speaker 1: of structurally higher commodity costs. The market is not buying it.

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Speaker 1: They are still betting on some sort of return to

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Speaker 1: what we've experienced of the past few decades. We know that, Mohammad,

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Speaker 1: you air on the structural side, say, that's probably where

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Speaker 1: we're going. What will it take for the markets to

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Speaker 1: wake up to that reality and how violent is that pivot?

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Speaker 1: It's gonna take time. Um, you know, I'm a buyer

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Speaker 1: of the notion that we are changing macro regimes, as

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Speaker 1: I said earlier, from deficient aggregate demand the deficient aggregate supply.

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Speaker 1: You pointed out to the Wall Street Journal article earlier

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Speaker 1: that listed three reasons why supply is going to be

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Speaker 1: a challenge in the next few years. Globalization, deglobalizations, et cetera.

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Speaker 1: So we are in a different regime. I think the

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Speaker 1: economists recognize this. I think the federal official semi recognize this.

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Speaker 1: Markets are still in a cyclical mindset and it's the

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Speaker 1: mindset that has served them well. So it's going to

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Speaker 1: take some time, and it's going to take persistence on

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Speaker 1: the part of central banks to try and convince markets

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Speaker 1: that they have to think structurally and not just clicarly. So, Mohammed,

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Speaker 1: with that in mind, what are the characteristics of this

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Speaker 1: new market right? What do you think the defining characteristics

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Speaker 1: and will be I think resilience are gonna be the

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Speaker 1: key issue, John, I think you've got to have resilient

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Speaker 1: names in your portfolios, whether it's in credit, whether it's inequities,

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Speaker 1: UM and resilience means balantreat means management teams. Resilience is

432
00:24:14,280 --> 00:24:18,399
Speaker 1: going to be the most important element to help you

433
00:24:18,520 --> 00:24:23,119
Speaker 1: navigate this world. Can we talk about the resilience of

434
00:24:23,119 --> 00:24:25,119
Speaker 1: Europe and finish there. We touched on that at the

435
00:24:25,119 --> 00:24:26,919
Speaker 1: start of this segment when you talked about the difficult

436
00:24:26,960 --> 00:24:29,760
Speaker 1: to the a c B. European gas prices are up

437
00:24:29,760 --> 00:24:32,159
Speaker 1: by six and a half percent against a Mohammed, I

438
00:24:32,200 --> 00:24:36,000
Speaker 1: still don't think we fully realize how tough things could

439
00:24:36,000 --> 00:24:38,760
Speaker 1: be in Europe later this year. Do you sense the

440
00:24:38,760 --> 00:24:40,439
Speaker 1: same thing from the people you speak to? And can

441
00:24:40,480 --> 00:24:42,320
Speaker 1: you frame how bad do you think this is going

442
00:24:42,359 --> 00:24:46,240
Speaker 1: to be later this year? It's gonna be hard. Um,

443
00:24:46,280 --> 00:24:49,480
Speaker 1: It's gonna be a cost of living crisis. You see

444
00:24:49,520 --> 00:24:51,720
Speaker 1: it already in the UK, and you see the reaction

445
00:24:51,760 --> 00:24:54,439
Speaker 1: in the UK much earlier than you're seeing it in

446
00:24:54,480 --> 00:24:57,720
Speaker 1: continental Europe. And on top of that, there's going to

447
00:24:57,760 --> 00:25:01,199
Speaker 1: be a massive demand destruction going on. So Europe is

448
00:25:01,240 --> 00:25:03,840
Speaker 1: looking at a tough six or nine months. I, like

449
00:25:04,440 --> 00:25:06,560
Speaker 1: some others that have been on your show, don't see

450
00:25:06,560 --> 00:25:10,439
Speaker 1: how Europe escaped recession. I hate saying that, but the

451
00:25:10,520 --> 00:25:14,920
Speaker 1: outlook is one of a recessionary economy, and let's hope

452
00:25:14,960 --> 00:25:22,920
Speaker 1: it's shallow and short. Uh Mohammed Augustin Carstens of Mexico,

453
00:25:23,040 --> 00:25:26,120
Speaker 1: now General Manager the Bank of International Settlements is published

454
00:25:26,160 --> 00:25:28,440
Speaker 1: today in the F two with Chris Kyle's It's an

455
00:25:28,440 --> 00:25:34,240
Speaker 1: extremely important piece about our behavior, our individual gain theory

456
00:25:34,760 --> 00:25:39,560
Speaker 1: with higher inflation. What is the when where we begin

457
00:25:39,680 --> 00:25:44,119
Speaker 1: to embed high inflation behavior? Are we there now or

458
00:25:44,160 --> 00:25:47,080
Speaker 1: does it wait for next year? So it depends who

459
00:25:47,160 --> 00:25:51,560
Speaker 1: we are. UM. If you are the striking UM ports

460
00:25:52,280 --> 00:25:56,120
Speaker 1: workers in the UK or underground workers, you're there. You're

461
00:25:56,160 --> 00:25:59,840
Speaker 1: ready there. Your inflationary expectations have changed. You want to

462
00:26:00,000 --> 00:26:03,399
Speaker 1: attect your standard of living. It's only a matter of

463
00:26:03,440 --> 00:26:07,960
Speaker 1: time until they seek not only to protect against past

464
00:26:08,000 --> 00:26:11,880
Speaker 1: erosion and purchasing power, but also future erosion in purchasing power.

465
00:26:12,320 --> 00:26:15,240
Speaker 1: So you're there in the US. You're not there yet,

466
00:26:15,920 --> 00:26:19,320
Speaker 1: but slowly you're gonna get there. And what we're gonna find,

467
00:26:19,560 --> 00:26:21,639
Speaker 1: Tom and I know you know that in terms of

468
00:26:21,680 --> 00:26:25,640
Speaker 1: game theory is that initial conditions very tremendously. Some workers

469
00:26:25,680 --> 00:26:28,400
Speaker 1: and some companies are going to be able to protect

470
00:26:28,840 --> 00:26:33,040
Speaker 1: their margins, to protect their purchasing powers. Others will not. Mohammed,

471
00:26:33,160 --> 00:26:35,359
Speaker 1: wonderful to catch up with you. You're getting comfortable in

472
00:26:35,480 --> 00:26:38,040
Speaker 1: some seat over there, I am. I love the microphone.

473
00:26:38,119 --> 00:26:39,919
Speaker 1: It's a bit cold, though, I must say it's colder

474
00:26:40,000 --> 00:26:41,760
Speaker 1: here than it is where you are. There. You go,

475
00:26:41,920 --> 00:26:46,280
Speaker 1: Mohammad at New York today. Mohammed, thank you just absolutely

476
00:26:46,280 --> 00:27:01,080
Speaker 1: brilliant as you always are. Thanks for Artica Servesa Supermanium

477
00:27:01,119 --> 00:27:03,399
Speaker 1: joins us now Servesa, fantastic to have you with us.

478
00:27:03,400 --> 00:27:04,720
Speaker 1: I wanted to start with a note that you actually

479
00:27:04,760 --> 00:27:06,920
Speaker 1: put out a number of weeks ago, and the title

480
00:27:07,000 --> 00:27:09,200
Speaker 1: was something like, why are we so happy with eight

481
00:27:09,200 --> 00:27:13,239
Speaker 1: point five cp I? So why was this market so

482
00:27:13,280 --> 00:27:18,000
Speaker 1: happy without point five cp I? Look, I think that

483
00:27:18,160 --> 00:27:20,480
Speaker 1: part of it was the idea that we're off peak.

484
00:27:20,840 --> 00:27:25,040
Speaker 1: But our point was sometimes the second derivative doesn't matter.

485
00:27:25,200 --> 00:27:28,080
Speaker 1: Sometimes it's the first derivative you want to pay attention to.

486
00:27:28,560 --> 00:27:30,800
Speaker 1: An eight and a half percent c p I is

487
00:27:30,920 --> 00:27:34,159
Speaker 1: really far away from two or three percent, which is

488
00:27:34,200 --> 00:27:37,239
Speaker 1: what we believe the market is pricing in um, I

489
00:27:37,280 --> 00:27:39,720
Speaker 1: think that you know, when I hear the bullish arguments

490
00:27:39,760 --> 00:27:41,920
Speaker 1: for you know, kind of justification for the rally that

491
00:27:41,960 --> 00:27:46,280
Speaker 1: we've seen from July or you know from June, I guess, um,

492
00:27:46,280 --> 00:27:49,719
Speaker 1: it's it's two things. It's one, we've moved past peak inflation,

493
00:27:50,440 --> 00:27:53,280
Speaker 1: but wages are still strong, so the consumer is still

494
00:27:53,320 --> 00:27:56,720
Speaker 1: going to be okay, therefore soft landing. That's one bullish

495
00:27:56,760 --> 00:27:59,639
Speaker 1: argument that I disagree with. And the second bullish argument

496
00:27:59,640 --> 00:28:03,120
Speaker 1: that I do agree with is that we've seen earnings

497
00:28:03,160 --> 00:28:06,119
Speaker 1: better than feared, we've seen results better than feared, and

498
00:28:06,160 --> 00:28:10,439
Speaker 1: everybody points to really strong top line and um, you know,

499
00:28:11,280 --> 00:28:14,639
Speaker 1: sales growth for the SMP. The problem with that is

500
00:28:14,920 --> 00:28:18,360
Speaker 1: that most of the work for sales was coming from

501
00:28:18,440 --> 00:28:21,639
Speaker 1: energy Energy group sales by eight percent. Everything else was

502
00:28:21,680 --> 00:28:25,520
Speaker 1: fairly lackluster. And then when you adjust for inflation, when

503
00:28:25,520 --> 00:28:28,679
Speaker 1: you take that nine percent print of inflation out of

504
00:28:28,720 --> 00:28:32,480
Speaker 1: two Q sales, the sales for the SMP five hundred

505
00:28:32,720 --> 00:28:36,679
Speaker 1: x energy were essentially flat. More companies in the SMP

506
00:28:36,760 --> 00:28:42,360
Speaker 1: five undershot inflation in sales couldn't grow sales faster than pricing,

507
00:28:42,440 --> 00:28:45,160
Speaker 1: which is really, you know, kind of a weird set

508
00:28:45,240 --> 00:28:49,600
Speaker 1: up versus the other half that managed to beat beat CPI.

509
00:28:49,920 --> 00:28:51,680
Speaker 1: So I think that what we're point what we're all

510
00:28:51,720 --> 00:28:54,360
Speaker 1: looking for our reasons to get more bullish, But the

511
00:28:54,440 --> 00:28:58,160
Speaker 1: reasons are pretty thin. If you ask me um on

512
00:28:58,360 --> 00:29:02,280
Speaker 1: peak cp I and strong still strong job costs, I

513
00:29:02,280 --> 00:29:05,440
Speaker 1: mean I see that as a still strong labor I

514
00:29:05,560 --> 00:29:09,600
Speaker 1: see that as overwhelmingly negative because what that means is

515
00:29:09,840 --> 00:29:13,479
Speaker 1: pricing power for the average corporation is starting to wane.

516
00:29:13,960 --> 00:29:17,680
Speaker 1: Demand is starting to wane, but wages, which are the

517
00:29:18,160 --> 00:29:21,760
Speaker 1: biggest depressant on corporate margins for the SMP five hundreds,

518
00:29:21,880 --> 00:29:25,400
Speaker 1: are sticky and high. I mean, why are we celebrating

519
00:29:25,400 --> 00:29:28,920
Speaker 1: about this? I just don't get it. And that was

520
00:29:28,960 --> 00:29:30,640
Speaker 1: the essence of your notes surveated. We caught up with

521
00:29:30,640 --> 00:29:33,000
Speaker 1: Mike Wilson and Morgan Standy yesterday, who's very much on

522
00:29:33,040 --> 00:29:34,880
Speaker 1: the same page as you at the moment on some

523
00:29:34,960 --> 00:29:36,680
Speaker 1: of these issues. Take you listen to what you have

524
00:29:36,800 --> 00:29:39,640
Speaker 1: to say. The old fire and ice narrative is coming

525
00:29:39,640 --> 00:29:42,800
Speaker 1: back into plates. We're in a downtrend, and until the

526
00:29:42,840 --> 00:29:46,240
Speaker 1: market can get back above that downtrend, I think to

527
00:29:46,360 --> 00:29:49,040
Speaker 1: be making some you know, grandiose call about new highs

528
00:29:49,200 --> 00:29:52,920
Speaker 1: is is quite frankly, it's irresponsible. Given what's going on

529
00:29:53,040 --> 00:29:55,640
Speaker 1: with the FED and QT coming is bob laid out,

530
00:29:55,720 --> 00:29:57,880
Speaker 1: It's going to be a lot worse than people have

531
00:29:58,040 --> 00:30:00,880
Speaker 1: experienced so far. Price is wrong and Darnings are wrong again,

532
00:30:00,920 --> 00:30:05,080
Speaker 1: which means the attractiveness of risk reward today could be

533
00:30:05,280 --> 00:30:09,240
Speaker 1: almost as bad as it was back in January. Sevenda,

534
00:30:09,320 --> 00:30:12,120
Speaker 1: you're back at thirty six hundred on the SMP five hundred,

535
00:30:12,160 --> 00:30:15,160
Speaker 1: that's your forecast. What's the fetes role in that move? Love,

536
00:30:15,160 --> 00:30:18,800
Speaker 1: whether you're looking for Look, I don't think the short

537
00:30:18,920 --> 00:30:20,520
Speaker 1: end of the curve and what the FED is doing

538
00:30:20,560 --> 00:30:22,880
Speaker 1: at the short end matter as much as the long end.

539
00:30:22,920 --> 00:30:25,680
Speaker 1: And I think that what's bizarre to me is that,

540
00:30:25,760 --> 00:30:28,920
Speaker 1: you know, I think this laser focus on you know,

541
00:30:29,000 --> 00:30:32,600
Speaker 1: sort of inflation prints and on a monthly basis and

542
00:30:32,680 --> 00:30:35,400
Speaker 1: real time reads on inflation, and what is the FED

543
00:30:35,440 --> 00:30:37,200
Speaker 1: going to do? Are they going to hide fifty basis

544
00:30:37,240 --> 00:30:39,160
Speaker 1: points or twenty five? You know, are they going to

545
00:30:39,200 --> 00:30:41,760
Speaker 1: start cutting? I think all of that is second to

546
00:30:42,440 --> 00:30:44,680
Speaker 1: what happens at the long end of the curb. And

547
00:30:44,880 --> 00:30:48,480
Speaker 1: you know, I like that that that that phrase complexity

548
00:30:48,480 --> 00:30:50,320
Speaker 1: of the moment because I think this is a very

549
00:30:50,400 --> 00:30:53,720
Speaker 1: complex moment for equities. And the reason I say that

550
00:30:53,880 --> 00:30:57,320
Speaker 1: is the duration of the SMP five hundred is still

551
00:30:57,360 --> 00:31:01,120
Speaker 1: above thirty years. We're looking at as earty year zero

552
00:31:01,160 --> 00:31:04,320
Speaker 1: coupon bond. So what that means is that a mere

553
00:31:04,480 --> 00:31:08,000
Speaker 1: fifty basis point change in the cost of equity capital,

554
00:31:08,080 --> 00:31:11,760
Speaker 1: which is more influenced by the long end, could drive

555
00:31:11,840 --> 00:31:15,480
Speaker 1: the market either really high or really low from here.

556
00:31:15,560 --> 00:31:18,000
Speaker 1: And I think that's what makes up the complexity of

557
00:31:18,080 --> 00:31:24,200
Speaker 1: the moment for equities. Sevina Brian moynahan takes immense pride

558
00:31:24,480 --> 00:31:27,760
Speaker 1: in studying the granularity of American business. It is the

559
00:31:27,800 --> 00:31:30,960
Speaker 1: franchise of your Bank of America. What are you in

560
00:31:31,000 --> 00:31:33,920
Speaker 1: the cell side at Bank of America, the research analysts,

561
00:31:34,160 --> 00:31:37,720
Speaker 1: what are they saying about how corporations are adapting and

562
00:31:37,800 --> 00:31:42,160
Speaker 1: adjusting to these complexities? Well, you know, you're right, So

563
00:31:42,240 --> 00:31:45,959
Speaker 1: corporations are adapting and adjusting, and it's really marvelous to watch.

564
00:31:46,720 --> 00:31:48,760
Speaker 1: But I think that what that requires is a fair

565
00:31:48,800 --> 00:31:52,320
Speaker 1: amount of capital spending from the big multinationals that are

566
00:31:52,320 --> 00:31:56,360
Speaker 1: in the process of, you know, rejiggering supply change with

567
00:31:56,840 --> 00:32:00,960
Speaker 1: supply change, which is a complicated and long long process

568
00:32:01,040 --> 00:32:03,680
Speaker 1: that costs a lot of money. Um. They're also in

569
00:32:03,680 --> 00:32:06,320
Speaker 1: the process of automating labor, which has gotten that much

570
00:32:06,360 --> 00:32:09,240
Speaker 1: more expensive. So this is all really good for long

571
00:32:09,360 --> 00:32:13,600
Speaker 1: term productivity of corporations. We haven't seen a real capex

572
00:32:13,640 --> 00:32:17,320
Speaker 1: cycle in a long time because earnings have been void

573
00:32:17,320 --> 00:32:21,320
Speaker 1: by low rates, buy backs, all sorts of imaginations that

574
00:32:21,360 --> 00:32:24,200
Speaker 1: aren't real economic growth. But I think what we're seeing

575
00:32:24,240 --> 00:32:26,840
Speaker 1: now is the beginnings of a real, you know, a

576
00:32:26,960 --> 00:32:31,360
Speaker 1: real growth cycle driven by companies getting more productive, and

577
00:32:31,400 --> 00:32:35,160
Speaker 1: that is very bullish for the SMP five hundred. Unfortunately,

578
00:32:35,160 --> 00:32:37,120
Speaker 1: I think it takes a little while to get there,

579
00:32:37,400 --> 00:32:40,280
Speaker 1: and it also costs a lot in terms of capital spending.

580
00:32:40,640 --> 00:32:43,000
Speaker 1: So what we like within the market are the more

581
00:32:43,080 --> 00:32:46,560
Speaker 1: domestic plays that could benefit from that capex cycle. And

582
00:32:46,640 --> 00:32:50,560
Speaker 1: still hall our Smith strategist has been talking about this, um,

583
00:32:50,600 --> 00:32:53,640
Speaker 1: you know, on your show quite a bit, so I

584
00:32:53,680 --> 00:32:56,840
Speaker 1: think that's a great area to start to deploy capital.

585
00:32:57,160 --> 00:33:01,200
Speaker 1: But multinasmist for the time being up, Yeah, I mean

586
00:33:01,280 --> 00:33:06,360
Speaker 1: I think multi from Savida, well, hold on a second, Savina,

587
00:33:06,400 --> 00:33:08,360
Speaker 1: this is actually exactly where I wanted to go because

588
00:33:08,400 --> 00:33:10,800
Speaker 1: basically everyone's calling me a baron dressing me up this

589
00:33:10,880 --> 00:33:14,520
Speaker 1: one on internet. But I am wondering from your perspective, Well,

590
00:33:14,560 --> 00:33:19,920
Speaker 1: there is which is Okay, I I accepted, I embrace it.

591
00:33:20,800 --> 00:33:24,320
Speaker 1: I'm not scared of that. Um. Yeah, we'll just say

592
00:33:24,320 --> 00:33:26,960
Speaker 1: that there is the sort of bullish tilt. There is

593
00:33:27,080 --> 00:33:31,240
Speaker 1: no I ambrase it. But if you know what is

594
00:33:31,320 --> 00:33:35,440
Speaker 1: the after hundred right, this is at the distinction between

595
00:33:35,800 --> 00:33:38,680
Speaker 1: the long term bowls and the long term bears right

596
00:33:38,760 --> 00:33:41,320
Speaker 1: thirty six hundred, is that the new low that is

597
00:33:41,360 --> 00:33:44,960
Speaker 1: Catharsis that then leads to adjusting and adapting of Tom

598
00:33:45,080 --> 00:33:48,440
Speaker 1: Keane or is this a more protracted loss in the

599
00:33:48,480 --> 00:33:52,400
Speaker 1: momentum and frankly the valuation of US equities. Look, I

600
00:33:52,400 --> 00:33:54,560
Speaker 1: think this is all happening at a warp speed. So

601
00:33:54,600 --> 00:33:56,960
Speaker 1: at the beginning of the year, our long term model

602
00:33:57,040 --> 00:34:01,200
Speaker 1: was pointing to negative returns for the next ten years. Today,

603
00:34:01,280 --> 00:34:03,720
Speaker 1: the good news is that after this massive drop in

604
00:34:03,760 --> 00:34:07,160
Speaker 1: the market and lower not low, but lower multiples, that

605
00:34:07,400 --> 00:34:11,040
Speaker 1: model is spitting out, you know, mid single digit returns

606
00:34:11,080 --> 00:34:13,600
Speaker 1: for the SMP five hundred for the next ten years.

607
00:34:13,640 --> 00:34:16,640
Speaker 1: That's a much better set up, a much better entry point.

608
00:34:17,000 --> 00:34:20,080
Speaker 1: I do think that point in point in time targets

609
00:34:20,400 --> 00:34:24,359
Speaker 1: are fraught with all sorts of problems. But I will

610
00:34:24,400 --> 00:34:26,520
Speaker 1: tell you this. I think that the fact that just

611
00:34:26,640 --> 00:34:30,319
Speaker 1: a mere fifty basis point change and the cost of

612
00:34:30,360 --> 00:34:33,799
Speaker 1: equity capital either long rates or the risk premium could

613
00:34:33,880 --> 00:34:38,000
Speaker 1: drive us to our target of makes me worried about

614
00:34:38,040 --> 00:34:41,440
Speaker 1: the downside risk to me. And I've got a key

615
00:34:41,520 --> 00:34:43,719
Speaker 1: question is for all of global Wall Street. They know

616
00:34:43,880 --> 00:34:46,400
Speaker 1: you on the high ground on E S G investing.

617
00:34:46,760 --> 00:34:51,480
Speaker 1: Essentially you invented it is E S G investing dead?

618
00:34:51,600 --> 00:34:54,200
Speaker 1: Where is it in a year? I'm serious? Where is

619
00:34:54,200 --> 00:34:56,920
Speaker 1: it in a year? You know? I think what the

620
00:34:57,000 --> 00:35:00,000
Speaker 1: problem right now is that investors are throwing the baby

621
00:35:00,120 --> 00:35:02,080
Speaker 1: out with the bath butter. And we've done a lot

622
00:35:02,080 --> 00:35:04,239
Speaker 1: of great work on you know, and we've talked about

623
00:35:04,239 --> 00:35:07,280
Speaker 1: our work on your show. E S G Investing is nuanced.

624
00:35:07,280 --> 00:35:10,480
Speaker 1: It's not one size fits all. Different sectors have different

625
00:35:10,520 --> 00:35:13,759
Speaker 1: factors that are more important for driving, uh you know,

626
00:35:13,840 --> 00:35:19,279
Speaker 1: social factors are more important for labor intensive innovators. Environmental

627
00:35:19,320 --> 00:35:23,160
Speaker 1: factors are more important for energy and materials. So it's

628
00:35:23,239 --> 00:35:26,200
Speaker 1: not just some kind of you know, one size fits all.

629
00:35:26,320 --> 00:35:29,720
Speaker 1: Apply this rating to your entire portfolio and you're done.

630
00:35:30,160 --> 00:35:32,560
Speaker 1: But we do think that there are a lot of

631
00:35:33,000 --> 00:35:37,400
Speaker 1: E s G considerations that are being ignored in this

632
00:35:37,640 --> 00:35:41,160
Speaker 1: uh you know, kind of refusal to even think about

633
00:35:41,239 --> 00:35:43,480
Speaker 1: E s G in an environment where it's drawing a

634
00:35:43,520 --> 00:35:46,040
Speaker 1: lot of fire. Um. So I think it's a it's

635
00:35:46,040 --> 00:35:48,839
Speaker 1: a complex, nuanced topic, but I still think that there

636
00:35:48,840 --> 00:35:52,239
Speaker 1: are lots of ways to make money and this is

637
00:35:52,239 --> 00:35:58,600
Speaker 1: a huge deal And was in Davos some years ago.

638
00:35:58,680 --> 00:36:03,120
Speaker 1: Was that three or four years ago something she and

639
00:36:03,160 --> 00:36:05,800
Speaker 1: Brian moynann said, we're going to actually do the math

640
00:36:05,960 --> 00:36:07,800
Speaker 1: of the E s G And that's where they provided

641
00:36:08,040 --> 00:36:11,719
Speaker 1: leaders would have thought we'd be talking about cold exactly.

642
00:36:12,080 --> 00:36:15,839
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

643
00:36:15,960 --> 00:36:19,000
Speaker 1: us live weekdays from seven to ten a m. Eastern

644
00:36:19,239 --> 00:36:23,279
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from

645
00:36:23,320 --> 00:36:28,600
Speaker 1: six to nine am for insight from the best in economics, finance, investment,

646
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg