Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jay Lee, we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg
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Speaker 1: is the annual FED get together and the host of
Speaker 1: that get together is the Kansas City FED President Esther George.
Speaker 1: She sat down with Bloomberg's Mike McKee and Kathleen Hayes.
Speaker 1: If you think about how tight the labor market is,
Speaker 1: we are operating with an unemployment rate that is below
Speaker 1: I think what most people would consider to be a
Speaker 1: normal or natural rate of unemployment. So that suggests to
Speaker 1: me that to get loosening in that labor market, to
Speaker 1: see some of this tightness come out of the economy,
Speaker 1: that you may well see more unemployment meant in the
Speaker 1: process of this tightening cycle. Well, you got two camps.
Speaker 1: One that says you need to keep going no matter what,
Speaker 1: and another that says you need to be careful because
Speaker 1: these are real people who lose jobs. So how much
Speaker 1: unemployment is too much well, I think anytime someone is
Speaker 1: unemployed that doesn't want to be Uh, you care about that?
Speaker 1: I think in the long run, which is where I'm focused,
Speaker 1: you have to have a sustainable economy and the best
Speaker 1: path to full employment is going to be conditions of
Speaker 1: price stability. And so I think for the long run,
Speaker 1: that's where we have to be focused to bring inflation
Speaker 1: down so that we can have those conditions. So what
Speaker 1: are you looking at when you see the housing market?
Speaker 1: We saw penning home sales with the weakest again since
Speaker 1: the beginning of before the pandemic. Even mortgage rates have
Speaker 1: shot up. We know all kinds of people who backed
Speaker 1: out of wanting to buy a home because they're expecting
Speaker 1: prices to fall more So, is that a welcome tightening
Speaker 1: and financial conditions? Is it a little bit more than
Speaker 1: the thet is bargained for? Well, I think it's been
Speaker 1: one of the first places we've seen it. So you
Speaker 1: saw that initial tightening and mortgage rates very quickly early
Speaker 1: in the tightening cycle, and that of course does affect
Speaker 1: the economics of someone being able to afford a mortgage,
Speaker 1: make that payment they need to pay. So in some
Speaker 1: sense this isn't surprising to see these numbers come off,
Speaker 1: to see sales come down, whether the actual prices the
Speaker 1: housing valuation comes down consistent with that, I think we
Speaker 1: will still have to see, and I suspect that could
Speaker 1: be to come. You know, you just mentioned that the
Speaker 1: funds rate could have to go above four percent to
Speaker 1: get to the point where you're slowing down the economy
Speaker 1: and and really slowing down demand. Uh. John Taylor, author
Speaker 1: the Taylor Rule more. You know, well, just a couple
Speaker 1: of days ago on Bloomberg Television told me that he
Speaker 1: thinks the Fed should be aiming for five percent or
Speaker 1: even more if inflation does not start coming down more rapidly. Well,
Speaker 1: I think certainly if we don't see a response in
Speaker 1: bringing this imbalance between demand and supply to bear on inflation, um,
Speaker 1: we will again have to consider where that short term
Speaker 1: interest rate is going to have to be. You wouldn't
Speaker 1: roll out something that high. Well, I wouldn't rule it out.
Speaker 1: I'm not suggesting that's where we're going. But the other thing, Kathleen,
Speaker 1: that I think we don't talk enough about is the
Speaker 1: sizeable balance sheet that the Federal Reserve has and that
Speaker 1: we will be doing runoff of that balance sheet, and
Speaker 1: again understanding how these two things work together. Um, I
Speaker 1: think it's going to be important to see how that
Speaker 1: runoff works as we go through the year. And that's
Speaker 1: the other part of this rate increase environment that is
Speaker 1: important to watch. I think, what's the danger of a
Speaker 1: session that you see and what would you see it
Speaker 1: in in terms of indications that we are slipping into contraction.
Speaker 1: So you know, again, when I go around my region,
Speaker 1: I don't hear many signs of that, uh from our contacts.
Speaker 1: What I hear is tight labor market, price pressures, supply
Speaker 1: constraints going on here. I will tell you when I
Speaker 1: look at global growth though, so we've seen the i
Speaker 1: m F cut its for cast for global growth. We
Speaker 1: see the issues in China, we see Europe, and we
Speaker 1: know that that reduction and demand will affect our own
Speaker 1: growth here simultaneous with the tightening cycle that the bed
Speaker 1: is underway. So how it how it comes out and
Speaker 1: balance over time is hard to know. But I think
Speaker 1: again the focus on watching these in violence has resolved themselves,
Speaker 1: We're going to have multiple factors that will come to
Speaker 1: bear on the President. Biden has now introduced a student
Speaker 1: loan forgiveness program ten dollars or twenty depending on the
Speaker 1: program you were in per person, which is going to
Speaker 1: cost billions of dollars that a lot of economists are
Speaker 1: worried this is going to be inflationary? Do you see
Speaker 1: it working against your goals? So I haven't looked at
Speaker 1: this particular decision that came out, but I think always
Speaker 1: fiscal policy is something we will take in to understand.
Speaker 1: Is it an impact in the short term? Does that
Speaker 1: happen over a period of time that makes its particularly
Speaker 1: impact of the economy there? So I don't have a
Speaker 1: sense of the particular impact here. Again, given the size
Speaker 1: relative to our economy and what we're looking at in consumption, UM,
Speaker 1: I'd be hard pressed to say what I think it's
Speaker 1: impact is right now speaking of your district, speaking of
Speaker 1: the world economy and what's driving at right now. Drought
Speaker 1: is big. It's across much of the Western United States
Speaker 1: in Europe. Now, Um, where is it the point yet
Speaker 1: where it enters into a factor in policy and is
Speaker 1: something like drought and what it could do to production,
Speaker 1: our cultural production, all kinds of things. Is it potentially
Speaker 1: a drag on the economy which tilts you toward recession
Speaker 1: potentially is it's something that boost inflation because a lot
Speaker 1: of prices are going to get even higher, particularly for food.
Speaker 1: So issues that affect our real economy or things that
Speaker 1: I think we have long taken into account. You think
Speaker 1: about a region like mind where agriculture UM is prominent,
Speaker 1: the idea that weather events, the idea that commodity prices
Speaker 1: all come to bear on how the economy does what
Speaker 1: it contributes to GDP where the constraints are UM in
Speaker 1: that sector. I think these events just our continuation of
Speaker 1: some of that and the magnitude of them may change.
Speaker 1: But I will tell you, for example, in the Kansas
Speaker 1: City Fed District, drought in the western part of our
Speaker 1: region does have an impact on the yields that are
Speaker 1: coming off these crops. Now, it will matter over time. Uh.
Speaker 1: Farmers are used to dealing with that in many respects.
Speaker 1: Banks that lend to them are used to dealing with that,
Speaker 1: and I think in that sense, UM, it will have
Speaker 1: the same impact on our policy that we see across
Speaker 1: many sectors in the economy. A very near term decision
Speaker 1: and every Fed Bank president, every FED official gets as
Speaker 1: this all the time, UM, and especially you, because you
Speaker 1: did dissent against the first seventy five basis point rate hike,
Speaker 1: and you just recently said you're going to continue debate
Speaker 1: the needed size fifth year seventy five with your FED colleagues.
Speaker 1: So again, when you see how well the economy is
Speaker 1: holding up and how little inflation has come down this far, um,
Speaker 1: what is your baseline? Is your baseline fifty and you're
Speaker 1: gonna be talked into seventy five? What's going to tilt
Speaker 1: the balance for you? I mean I supported seventy five
Speaker 1: at the July meeting, and I find it an interesting
Speaker 1: time when we debate fifty or seventy five because who
Speaker 1: would have thought fifty would have a more dubbish view,
Speaker 1: uh than seventy five. I think for me, coming into
Speaker 1: this September meeting, we're going to be looking again at
Speaker 1: an inflation report, We're going to be looking at a
Speaker 1: labor market report, and I think trying to draw some
Speaker 1: sense of whether we see continuation of things that we've
Speaker 1: seen over the summer, whether progress looks like it's meaningful
Speaker 1: in some way. I do look forward to getting back
Speaker 1: to a sustainable rate path. That was my issue at
Speaker 1: the June meeting. Again, No, no, disagreement about the direction
Speaker 1: we are headed, but I think just being mindful of
Speaker 1: the destination and how quickly we get there at a
Speaker 1: time when we're reducing the balance sheet. You've been doing
Speaker 1: that for a long time. The old adage was don't
Speaker 1: fight the fit. Why do you think the markets are
Speaker 1: fighting the Fed now and not listening to what you've
Speaker 1: been saying about how serious you are about taking on inflation.
Speaker 1: I don't know what drives in the markets, Mike. I
Speaker 1: probably would not be a well positioned to say that. Certainly,
Speaker 1: it is important for our communications to be clear because
Speaker 1: we want financial conditions to tighten along with the direction
Speaker 1: we are moving around policy. So I think it puts
Speaker 1: a premium on being clear in our communication of having
Speaker 1: resolved toward the end game here and again, the end
Speaker 1: game is to bring inflation back to our two percent target,
Speaker 1: and um that's challenging and the environment ran we're coming
Speaker 1: off an unprecedented period. The economy, I think, in some
Speaker 1: respects is still sorting itself out. We have global factors
Speaker 1: to take into that, so there's a lot to think about.
Speaker 1: I'm sure markets are thinking about that even as we
Speaker 1: proceed with this interest rate increase. You're retiring at the
Speaker 1: end of the year. This is your last economic symposium.
Speaker 1: How do you think economics and the economy and the
Speaker 1: FED have changed during your tenure. Well, a lot has
Speaker 1: been done. When you think about the Great Financial Crisis
Speaker 1: where the introduction of quantitative easing came about zero interest
Speaker 1: rate policy. Um, has been an extraordinary time for the economy,
Speaker 1: for policy to think about how it responds to the economy.
Speaker 1: Also coming into a time when we have demographic changes,
Speaker 1: really broader changes around the world. So the world continues
Speaker 1: to evolve in ways that sometimes look clear to us,
Speaker 1: sometimes don't. But um, Well, in this vein of of here,
Speaker 1: you are about to end your wonderful tenure at the
Speaker 1: Kansas City FED. This last part, I would think is
Speaker 1: one of them one of the very most difficult parts
Speaker 1: seeing inflation get out of control the way it has.
Speaker 1: What's the biggest lesson learned for you? Uh, for the
Speaker 1: Federal Reserve after having gotten into this situation and now
Speaker 1: needing to get out of it. So, Kathleen, really I'm
Speaker 1: going to answer that question by saying, this is one
Speaker 1: of the things I'm looking forward to with the conference
Speaker 1: that we have this year. Is really reassessing how we
Speaker 1: understood constraints over the last couple of decades, finding ourselves
Speaker 1: again in a place of high inflation which we hadn't
Speaker 1: seen for some forty years, and really being reminded what
Speaker 1: are those factors that are important to price stability? We
Speaker 1: know as our mandate that that hasn't changed for a
Speaker 1: long time, even as the economy is evolved, even as
Speaker 1: the tool kit may have evolved. But getting back to
Speaker 1: really thinking about how price stability is achieved even as
Speaker 1: the world changes, I think is going to be an
Speaker 1: important part of this discussion here at Jackson Hall Symposium
Speaker 1: that was the Kansas City Fed President as the George
Speaker 1: sitting down with Michael McKay and Kathleen Hayes. Yea, let's
Speaker 1: get to the theme at the moment at Jackson Hawaiian
Speaker 1: in case the title reassessing constraints on the Economy and Policy.
Speaker 1: Let's have that conversation now with Glenn Hoover, the Professor
Speaker 1: of Finance and Economics of the Columbia Business gool going,
Speaker 1: great to have you with us. Can you frame how
Speaker 1: challenging this moment is for this fet chair. Well, I
Speaker 1: think it's it's very challenging for two reasons. One, it's
Speaker 1: momentuous time in the economy with both significant uncertainty about
Speaker 1: inflation and recession too. It's important for him and in communication.
Speaker 1: I actually have a hold whip inflation now button here
Speaker 1: from a Ford administration, and I think Chair Powell needs
Speaker 1: to do a bit better in expressing warsome candor about
Speaker 1: the past, not necessarily be a culpole, but for what
Speaker 1: happened and about the future what it's going to take,
Speaker 1: as well as talking about the difficult path of get
Speaker 1: inflation all the way back down to two percent, getting
Speaker 1: it down to four maybe straightforward, getting into too much
Speaker 1: heart Glenn Hubert. The arc of Republican economics, represented by
Speaker 1: so many here at Jackson Hole is that the system
Speaker 1: will solve itself. Is a general statement. Is the religion
Speaker 1: of supply side economics or the religion that the American
Speaker 1: economy can heal itself? Has that failed? I don't think so.
Speaker 1: I mean the economy is a lot of self equilebrating mechanisms.
Speaker 1: A question is over what time period in the presence
Speaker 1: of such a large shocks. I think policy still has
Speaker 1: a role to play and had a role to play
Speaker 1: in the COVID pandemic, and the FED just can't wait
Speaker 1: to let inflation work itself out. So Dean Hubbard, Glenn,
Speaker 1: what's your view on our debate that we were just
Speaker 1: having about whether this FED chair will speak to markets,
Speaker 1: what he will say about their enthusiasm about some sort
Speaker 1: of pivot or some sort of pause in federate hikes. Well,
Speaker 1: I think the message he could give, going back to
Speaker 1: the point I said about candor about where we have
Speaker 1: to go, is what it would take to reduce inflation.
Speaker 1: I don't think he's literally going to lecture the markets
Speaker 1: and say the stock markets too high or something like that.
Speaker 1: But I think he can outline a path that says
Speaker 1: we have work to do, getting that work done requires
Speaker 1: tighter financial conditions, and speaking in general terms, I think
Speaker 1: that would be wise to make that kind of communication
Speaker 1: to the public and to the markets. There was an
Speaker 1: article in the Wall Street Journal. I keep mentioning this
Speaker 1: because it really caught my attention about whether we have
Speaker 1: seen the end of the low rate policies, is what
Speaker 1: PIMCO is put out there, and the possibility of inflation
Speaker 1: remaining high for a longer period of time due to
Speaker 1: a de globalization due to structurally higher commodity prices due
Speaker 1: to a lack of investment over the past few years.
Speaker 1: Do you buy into this theory and if the FED does,
Speaker 1: what does that mean in terms of how high rates
Speaker 1: have to stay and for how long? I think there's
Speaker 1: certainly something to the fact that we have demographic changes,
Speaker 1: structural changes, globalization changes. Be hesitant to draw straight lines
Speaker 1: and say that's just going to be permanent, but I
Speaker 1: think it's definitely something to watch. To my mind, the
Speaker 1: concern for the third eye, there's probably two worlds, one
Speaker 1: in which we keep inflation expectations anchored around two, the
Speaker 1: other in which they go off kilter. I think that's
Speaker 1: the challenge the chair faces, and you'll have to quote
Speaker 1: do what it takes to make that happen. Like Glenn,
Speaker 1: thank you, sir, it's going to hear from you as always.
Speaker 1: From Columbia Business School. We're really happy to say that
Speaker 1: John to gets Mohammed area in a flimp bug opinion
Speaker 1: and Colleen's College, Cambridge. A man who unlike this FED chairman,
Speaker 1: called this, called this inflation spiral. Mohammed, let's go straight there.
Speaker 1: The challenge for this FED chair and this annual FED
Speaker 1: gets together. How big is it? It's huge, John, and
Speaker 1: good morning. It's huge because he's speaking to multiple audiences,
Speaker 1: as you pointed out. But it's also huge because he's
Speaker 1: got to deal with issues with respect to the past,
Speaker 1: the present, and a few He's got to figure out
Speaker 1: how he's going to address his speech last year that
Speaker 1: proves so off the mark. He's got to figure out
Speaker 1: what to signal about current monetary policy. And let's not
Speaker 1: forget that we have a framework that is not fit
Speaker 1: for purpose. We have a policy framework fit for world
Speaker 1: of deficient aggregate demand, and we are in the world
Speaker 1: for deficient aggregate supply. So put all this together, the
Speaker 1: challenge is very big, John Mohammed, you're focused on a
Speaker 1: new word, stickiness, and you've been focused on that for
Speaker 1: a number of months now. From the incoming information, How
Speaker 1: sticky do you think that inflation dynamic is? And how
Speaker 1: much does that tell me about how much work this
Speaker 1: chairman still has to do. So I worried that core
Speaker 1: inflation is going to prove more sticky than the FED anticipates.
Speaker 1: Right now, we have wages are starting to be a
Speaker 1: driver of higher cost and eventually higher prices. So while
Speaker 1: headline inflation is going to continue to go down for
Speaker 1: the next two months, core may prove quite sticky. And
Speaker 1: that's what a problem, Folter. For those of you have
Speaker 1: Bloomberg Radio and Bloomberg Television, you just saw a little
Speaker 1: bit of light going out. That was one of the
Speaker 1: grizzly bears standing up and getting in the way of
Speaker 1: the light. Here they're watching here this morning as well.
Speaker 1: Dr Larry, and people forget why you are, doctor Hilarion,
Speaker 1: and it has to do with the acuity and concision
Speaker 1: of your game theory. You codified in a modern day
Speaker 1: the phrase T decision. Let's distill that down to the
Speaker 1: T decision that Chairman Powell has to make between now
Speaker 1: and a data busy September. And it's an important one,
Speaker 1: Tom because right now the FETE is so late that
Speaker 1: it's looking at two challenges. It's looking at putting the
Speaker 1: inflation genie back into the bottle, and it's looking at
Speaker 1: not creating too much damaged to the economic growth and inequality,
Speaker 1: something that you have been speaking to all morning. Look,
Speaker 1: I don't think he has any choice. He's got to
Speaker 1: put the inflation genie back into the bottle. You know,
Speaker 1: that and all saying that Maco stability isn't everything, but
Speaker 1: without it you have nothing. So they've got to put
Speaker 1: that inflation genie back into the bottle and do it
Speaker 1: in a determined and sustainable fashion. Okay, but this is
Speaker 1: the politics of it, Dr Larry. And if you have
Speaker 1: a partial differentiation from eight percent US inflation, the halves
Speaker 1: are benefited. When you get to six percent or five,
Speaker 1: the have nots, the great middle class are still flat
Speaker 1: on their back. What is your timeline where all of
Speaker 1: America finally gets inflation back into the bottle. So it's
Speaker 1: gonna take some time because the FED has been asleep
Speaker 1: at the wheel and that's unfortunate. Tom. What you raise
Speaker 1: is much bigger. It is speaks to the FED being
Speaker 1: necessary but not sufficient to address our policy issues. Um,
Speaker 1: you've got to deal with the inequality aspect. You've got
Speaker 1: to protect the most vulnerable segments of the population with
Speaker 1: focus um fiscal policy, and you've got a lot to
Speaker 1: do a lot more on productivity and equal opportunity. So
Speaker 1: it's a long list, but the FED has to focus
Speaker 1: on inflation and has to do it in a more
Speaker 1: committed fashion. That has done it so far, So it's
Speaker 1: been trying to sound Mohammed committed, right. I mean, if
Speaker 1: it's basically been saying inflation is or number one issue
Speaker 1: that they're facing, why is the market not hearing it?
Speaker 1: Two reasonsly, so, One is the FED itself. Let's not
Speaker 1: forget that. Chappal hinted not hinted, stated that we were
Speaker 1: at the neutral rate. The minute the market heard that,
Speaker 1: it moved, and it moved in a significant fashion and
Speaker 1: all the talk about pivot started being amplified. So that's
Speaker 1: one reason that the communication hasn't been consistent and that's
Speaker 1: been a problem for the last year. And the second
Speaker 1: issue is that the market is looking at the impact
Speaker 1: on growth, is looking at this at the potential impact
Speaker 1: on markets. And as John said earlier today, we remembers
Speaker 1: fourth quarter of remembers the FED blinking, so it believes
Speaker 1: on push comes to shove, the feed is going to
Speaker 1: blink again, that we're gonna have a flip flopping fed. Ammmed.
Speaker 1: What I hear from you is that you don't think
Speaker 1: this FED blinks anytime soon. I don't know, John. I
Speaker 1: know what they should do, which is they should not
Speaker 1: blink um. But it's been very difficult to call this fed.
Speaker 1: This fed has unfortunately failed at analysis, failed that forecast,
Speaker 1: failed that communication. So it's very difficult to say what
Speaker 1: this feed is going to do. It's easier to say
Speaker 1: what it should do, but it's much it's much harder
Speaker 1: to say what it should what it's going to do.
Speaker 1: And that's why you get this disconnect that you've been
Speaker 1: talking about between the markets and the fat. Easy to
Speaker 1: find out what you think. So let's go there and
Speaker 1: wrap up this segment with you on what you think.
Speaker 1: Larry sum has called that neutral comment analytically indefensible. You
Speaker 1: said on neutral, and I think you're a little bit
Speaker 1: more diplomatic at it. When we last spoke, you said
Speaker 1: the zip code for neutral was hard. And where we
Speaker 1: are right now, Mohammed, what is the zip code for neutral?
Speaker 1: And how on earth do we know with inflation where
Speaker 1: it is and where race where they are right now?
Speaker 1: So I don't know specifically where it is, and I've
Speaker 1: been warning against spurious precision. There are so many structural
Speaker 1: changes going on. We are changing liquidity regimes. I said earlier,
Speaker 1: We're going from a world of deficient aggregate amount to
Speaker 1: world of deficient aggregate supply. That's the world we live
Speaker 1: in now. No one knows for show where neutral is,
Speaker 1: so you've got to try to figure out as you
Speaker 1: go along the way. And you mustn't attempt this purisk
Speaker 1: precision because if you do, the market is gonna jump
Speaker 1: immediately to conclusions and then you're gonna have to undo it.
Speaker 1: You know, the Fed itself federal officials have walked back
Speaker 1: that comment. It didn't take many days for other federal
Speaker 1: officials to come out and say we're not at neutral
Speaker 1: darker Laura and I want to go to the international
Speaker 1: tone here central banker of the world. And the singular
Speaker 1: feature I have is the focus is on Plaza chord
Speaker 1: like partners. When there is e M forget about idiosyncratic
Speaker 1: turkey out over eighteen Lira. What will be the shock
Speaker 1: of Powell action to a more fragile emerging market of
Speaker 1: and third world economies. It's a high risk situation, Tom.
Speaker 1: You have higher rates, so more uncertain market conditions, you
Speaker 1: have global economic growth slowing much faster than most people expected,
Speaker 1: and you have a stronger dollar. Historically that has not
Speaker 1: been a favorable mix for for imaging economies. So right now,
Speaker 1: how much does this bleed back to the U S economy.
Speaker 1: How do you bleed through the pain that you're seeing
Speaker 1: in Europe, in China into slowing US growth and entering
Speaker 1: a recession? You know? He said, The quick and easy
Speaker 1: is to say that everybody has an inflation problem, everybody
Speaker 1: has a growth problem, and that's true, but go further,
Speaker 1: have massive dispersion um growth. The US is in a
Speaker 1: much better place than most other countries central bank policy.
Speaker 1: If we think that the FED faces tough challenges, look
Speaker 1: at the ECB. Not only do I have high inflation,
Speaker 1: they have a much more fragile economy and they have
Speaker 1: the risk of fragmentation. So I think the theme going
Speaker 1: forward is going to have a strong element of dispersion
Speaker 1: come into it, and that makes markets have to spend
Speaker 1: a lot more time thinking about relative values and not
Speaker 1: just the overall beta if you like. When you take
Speaker 1: a look at the framework, policymakers are starting to think
Speaker 1: more about a structural inflation that will last a much
Speaker 1: longer time due to deglobalization and due to the sort
Speaker 1: of structurally higher commodity costs. The market is not buying it.
Speaker 1: They are still betting on some sort of return to
Speaker 1: what we've experienced of the past few decades. We know that, Mohammad,
Speaker 1: you air on the structural side, say, that's probably where
Speaker 1: we're going. What will it take for the markets to
Speaker 1: wake up to that reality and how violent is that pivot?
Speaker 1: It's gonna take time. Um, you know, I'm a buyer
Speaker 1: of the notion that we are changing macro regimes, as
Speaker 1: I said earlier, from deficient aggregate demand the deficient aggregate supply.
Speaker 1: You pointed out to the Wall Street Journal article earlier
Speaker 1: that listed three reasons why supply is going to be
Speaker 1: a challenge in the next few years. Globalization, deglobalizations, et cetera.
Speaker 1: So we are in a different regime. I think the
Speaker 1: economists recognize this. I think the federal official semi recognize this.
Speaker 1: Markets are still in a cyclical mindset and it's the
Speaker 1: mindset that has served them well. So it's going to
Speaker 1: take some time, and it's going to take persistence on
Speaker 1: the part of central banks to try and convince markets
Speaker 1: that they have to think structurally and not just clicarly. So, Mohammed,
Speaker 1: with that in mind, what are the characteristics of this
Speaker 1: new market right? What do you think the defining characteristics
Speaker 1: and will be I think resilience are gonna be the
Speaker 1: key issue, John, I think you've got to have resilient
Speaker 1: names in your portfolios, whether it's in credit, whether it's inequities,
Speaker 1: UM and resilience means balantreat means management teams. Resilience is
Speaker 1: going to be the most important element to help you
Speaker 1: navigate this world. Can we talk about the resilience of
Speaker 1: Europe and finish there. We touched on that at the
Speaker 1: start of this segment when you talked about the difficult
Speaker 1: to the a c B. European gas prices are up
Speaker 1: by six and a half percent against a Mohammed, I
Speaker 1: still don't think we fully realize how tough things could
Speaker 1: be in Europe later this year. Do you sense the
Speaker 1: same thing from the people you speak to? And can
Speaker 1: you frame how bad do you think this is going
Speaker 1: to be later this year? It's gonna be hard. Um,
Speaker 1: It's gonna be a cost of living crisis. You see
Speaker 1: it already in the UK, and you see the reaction
Speaker 1: in the UK much earlier than you're seeing it in
Speaker 1: continental Europe. And on top of that, there's going to
Speaker 1: be a massive demand destruction going on. So Europe is
Speaker 1: looking at a tough six or nine months. I, like
Speaker 1: some others that have been on your show, don't see
Speaker 1: how Europe escaped recession. I hate saying that, but the
Speaker 1: outlook is one of a recessionary economy, and let's hope
Speaker 1: it's shallow and short. Uh Mohammed Augustin Carstens of Mexico,
Speaker 1: now General Manager the Bank of International Settlements is published
Speaker 1: today in the F two with Chris Kyle's It's an
Speaker 1: extremely important piece about our behavior, our individual gain theory
Speaker 1: with higher inflation. What is the when where we begin
Speaker 1: to embed high inflation behavior? Are we there now or
Speaker 1: does it wait for next year? So it depends who
Speaker 1: we are. UM. If you are the striking UM ports
Speaker 1: workers in the UK or underground workers, you're there. You're
Speaker 1: ready there. Your inflationary expectations have changed. You want to
Speaker 1: attect your standard of living. It's only a matter of
Speaker 1: time until they seek not only to protect against past
Speaker 1: erosion and purchasing power, but also future erosion in purchasing power.
Speaker 1: So you're there in the US. You're not there yet,
Speaker 1: but slowly you're gonna get there. And what we're gonna find,
Speaker 1: Tom and I know you know that in terms of
Speaker 1: game theory is that initial conditions very tremendously. Some workers
Speaker 1: and some companies are going to be able to protect
Speaker 1: their margins, to protect their purchasing powers. Others will not. Mohammed,
Speaker 1: wonderful to catch up with you. You're getting comfortable in
Speaker 1: some seat over there, I am. I love the microphone.
Speaker 1: It's a bit cold, though, I must say it's colder
Speaker 1: here than it is where you are. There. You go,
Speaker 1: Mohammad at New York today. Mohammed, thank you just absolutely
Speaker 1: brilliant as you always are. Thanks for Artica Servesa Supermanium
Speaker 1: joins us now Servesa, fantastic to have you with us.
Speaker 1: I wanted to start with a note that you actually
Speaker 1: put out a number of weeks ago, and the title
Speaker 1: was something like, why are we so happy with eight
Speaker 1: point five cp I? So why was this market so
Speaker 1: happy without point five cp I? Look, I think that
Speaker 1: part of it was the idea that we're off peak.
Speaker 1: But our point was sometimes the second derivative doesn't matter.
Speaker 1: Sometimes it's the first derivative you want to pay attention to.
Speaker 1: An eight and a half percent c p I is
Speaker 1: really far away from two or three percent, which is
Speaker 1: what we believe the market is pricing in um, I
Speaker 1: think that you know, when I hear the bullish arguments
Speaker 1: for you know, kind of justification for the rally that
Speaker 1: we've seen from July or you know from June, I guess, um,
Speaker 1: it's it's two things. It's one, we've moved past peak inflation,
Speaker 1: but wages are still strong, so the consumer is still
Speaker 1: going to be okay, therefore soft landing. That's one bullish
Speaker 1: argument that I disagree with. And the second bullish argument
Speaker 1: that I do agree with is that we've seen earnings
Speaker 1: better than feared, we've seen results better than feared, and
Speaker 1: everybody points to really strong top line and um, you know,
Speaker 1: sales growth for the SMP. The problem with that is
Speaker 1: that most of the work for sales was coming from
Speaker 1: energy Energy group sales by eight percent. Everything else was
Speaker 1: fairly lackluster. And then when you adjust for inflation, when
Speaker 1: you take that nine percent print of inflation out of
Speaker 1: two Q sales, the sales for the SMP five hundred
Speaker 1: x energy were essentially flat. More companies in the SMP
Speaker 1: five undershot inflation in sales couldn't grow sales faster than pricing,
Speaker 1: which is really, you know, kind of a weird set
Speaker 1: up versus the other half that managed to beat beat CPI.
Speaker 1: So I think that what we're point what we're all
Speaker 1: looking for our reasons to get more bullish, But the
Speaker 1: reasons are pretty thin. If you ask me um on
Speaker 1: peak cp I and strong still strong job costs, I
Speaker 1: mean I see that as a still strong labor I
Speaker 1: see that as overwhelmingly negative because what that means is
Speaker 1: pricing power for the average corporation is starting to wane.
Speaker 1: Demand is starting to wane, but wages, which are the
Speaker 1: biggest depressant on corporate margins for the SMP five hundreds,
Speaker 1: are sticky and high. I mean, why are we celebrating
Speaker 1: about this? I just don't get it. And that was
Speaker 1: the essence of your notes surveated. We caught up with
Speaker 1: Mike Wilson and Morgan Standy yesterday, who's very much on
Speaker 1: the same page as you at the moment on some
Speaker 1: of these issues. Take you listen to what you have
Speaker 1: to say. The old fire and ice narrative is coming
Speaker 1: back into plates. We're in a downtrend, and until the
Speaker 1: market can get back above that downtrend, I think to
Speaker 1: be making some you know, grandiose call about new highs
Speaker 1: is is quite frankly, it's irresponsible. Given what's going on
Speaker 1: with the FED and QT coming is bob laid out,
Speaker 1: It's going to be a lot worse than people have
Speaker 1: experienced so far. Price is wrong and Darnings are wrong again,
Speaker 1: which means the attractiveness of risk reward today could be
Speaker 1: almost as bad as it was back in January. Sevenda,
Speaker 1: you're back at thirty six hundred on the SMP five hundred,
Speaker 1: that's your forecast. What's the fetes role in that move? Love,
Speaker 1: whether you're looking for Look, I don't think the short
Speaker 1: end of the curve and what the FED is doing
Speaker 1: at the short end matter as much as the long end.
Speaker 1: And I think that what's bizarre to me is that,
Speaker 1: you know, I think this laser focus on you know,
Speaker 1: sort of inflation prints and on a monthly basis and
Speaker 1: real time reads on inflation, and what is the FED
Speaker 1: going to do? Are they going to hide fifty basis
Speaker 1: points or twenty five? You know, are they going to
Speaker 1: start cutting? I think all of that is second to
Speaker 1: what happens at the long end of the curb. And
Speaker 1: you know, I like that that that that phrase complexity
Speaker 1: of the moment because I think this is a very
Speaker 1: complex moment for equities. And the reason I say that
Speaker 1: is the duration of the SMP five hundred is still
Speaker 1: above thirty years. We're looking at as earty year zero
Speaker 1: coupon bond. So what that means is that a mere
Speaker 1: fifty basis point change in the cost of equity capital,
Speaker 1: which is more influenced by the long end, could drive
Speaker 1: the market either really high or really low from here.
Speaker 1: And I think that's what makes up the complexity of
Speaker 1: the moment for equities. Sevina Brian moynahan takes immense pride
Speaker 1: in studying the granularity of American business. It is the
Speaker 1: franchise of your Bank of America. What are you in
Speaker 1: the cell side at Bank of America, the research analysts,
Speaker 1: what are they saying about how corporations are adapting and
Speaker 1: adjusting to these complexities? Well, you know, you're right, So
Speaker 1: corporations are adapting and adjusting, and it's really marvelous to watch.
Speaker 1: But I think that what that requires is a fair
Speaker 1: amount of capital spending from the big multinationals that are
Speaker 1: in the process of, you know, rejiggering supply change with
Speaker 1: supply change, which is a complicated and long long process
Speaker 1: that costs a lot of money. Um. They're also in
Speaker 1: the process of automating labor, which has gotten that much
Speaker 1: more expensive. So this is all really good for long
Speaker 1: term productivity of corporations. We haven't seen a real capex
Speaker 1: cycle in a long time because earnings have been void
Speaker 1: by low rates, buy backs, all sorts of imaginations that
Speaker 1: aren't real economic growth. But I think what we're seeing
Speaker 1: now is the beginnings of a real, you know, a
Speaker 1: real growth cycle driven by companies getting more productive, and
Speaker 1: that is very bullish for the SMP five hundred. Unfortunately,
Speaker 1: I think it takes a little while to get there,
Speaker 1: and it also costs a lot in terms of capital spending.
Speaker 1: So what we like within the market are the more
Speaker 1: domestic plays that could benefit from that capex cycle. And
Speaker 1: still hall our Smith strategist has been talking about this, um,
Speaker 1: you know, on your show quite a bit, so I
Speaker 1: think that's a great area to start to deploy capital.
Speaker 1: But multinasmist for the time being up, Yeah, I mean
Speaker 1: I think multi from Savida, well, hold on a second, Savina,
Speaker 1: this is actually exactly where I wanted to go because
Speaker 1: basically everyone's calling me a baron dressing me up this
Speaker 1: one on internet. But I am wondering from your perspective, Well,
Speaker 1: there is which is Okay, I I accepted, I embrace it.
Speaker 1: I'm not scared of that. Um. Yeah, we'll just say
Speaker 1: that there is the sort of bullish tilt. There is
Speaker 1: no I ambrase it. But if you know what is
Speaker 1: the after hundred right, this is at the distinction between
Speaker 1: the long term bowls and the long term bears right
Speaker 1: thirty six hundred, is that the new low that is
Speaker 1: Catharsis that then leads to adjusting and adapting of Tom
Speaker 1: Keane or is this a more protracted loss in the
Speaker 1: momentum and frankly the valuation of US equities. Look, I
Speaker 1: think this is all happening at a warp speed. So
Speaker 1: at the beginning of the year, our long term model
Speaker 1: was pointing to negative returns for the next ten years. Today,
Speaker 1: the good news is that after this massive drop in
Speaker 1: the market and lower not low, but lower multiples, that
Speaker 1: model is spitting out, you know, mid single digit returns
Speaker 1: for the SMP five hundred for the next ten years.
Speaker 1: That's a much better set up, a much better entry point.
Speaker 1: I do think that point in point in time targets
Speaker 1: are fraught with all sorts of problems. But I will
Speaker 1: tell you this. I think that the fact that just
Speaker 1: a mere fifty basis point change and the cost of
Speaker 1: equity capital either long rates or the risk premium could
Speaker 1: drive us to our target of makes me worried about
Speaker 1: the downside risk to me. And I've got a key
Speaker 1: question is for all of global Wall Street. They know
Speaker 1: you on the high ground on E S G investing.
Speaker 1: Essentially you invented it is E S G investing dead?
Speaker 1: Where is it in a year? I'm serious? Where is
Speaker 1: it in a year? You know? I think what the
Speaker 1: problem right now is that investors are throwing the baby
Speaker 1: out with the bath butter. And we've done a lot
Speaker 1: of great work on you know, and we've talked about
Speaker 1: our work on your show. E S G Investing is nuanced.
Speaker 1: It's not one size fits all. Different sectors have different
Speaker 1: factors that are more important for driving, uh you know,
Speaker 1: social factors are more important for labor intensive innovators. Environmental
Speaker 1: factors are more important for energy and materials. So it's
Speaker 1: not just some kind of you know, one size fits all.
Speaker 1: Apply this rating to your entire portfolio and you're done.
Speaker 1: But we do think that there are a lot of
Speaker 1: E s G considerations that are being ignored in this
Speaker 1: uh you know, kind of refusal to even think about
Speaker 1: E s G in an environment where it's drawing a
Speaker 1: lot of fire. Um. So I think it's a it's
Speaker 1: a complex, nuanced topic, but I still think that there
Speaker 1: are lots of ways to make money and this is
Speaker 1: a huge deal And was in Davos some years ago.
Speaker 1: Was that three or four years ago something she and
Speaker 1: Brian moynann said, we're going to actually do the math
Speaker 1: of the E s G And that's where they provided
Speaker 1: leaders would have thought we'd be talking about cold exactly.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg