Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferrill and Lisa Brownwitz jay Leie. We bring
Speaker 1: you insight from the best and economics, finance, investment and
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Speaker 1: worldwide and place to Say on Bloomberg Radio and TV.
Speaker 1: We can now head down to the White House and
Speaker 1: catch up with Jared Bernstein of the Council of Economic Advisors. Jared,
Speaker 1: it's always good to catch up, sir, Thank you for
Speaker 1: being with us. Let's just start here with a question
Speaker 1: that I think a lot of people will be wandering.
Speaker 1: Really solid payrolls report. The outlook is brighter, the vaccine
Speaker 1: time table. You guys have accelerated it. Why on earth
Speaker 1: do we need a one point nine trillion dollar bill.
Speaker 1: First of all, it's great to see you too, Always
Speaker 1: enjoy catching up. Look, I think we need to get
Speaker 1: under the hood of this job report in a second.
Speaker 1: We're always happy to see more people get more jobs,
Speaker 1: but let's take a breath here and look at the
Speaker 1: bigger picture. This job market is still down nine and
Speaker 1: a half million jobs from a year ago. That's actually
Speaker 1: eight hundred thousand jobs worse than the lowest point of
Speaker 1: the Great Recession. We learned today that the black unemployment
Speaker 1: rate is just below ten P nine point nine P
Speaker 1: sixty nine thousand educator jobs down. That's a million over
Speaker 1: the past year. Our state local help from the American
Speaker 1: Rescue Plan directly targets that problem. So there is a
Speaker 1: lot of economic pain out there and that hasn't changed
Speaker 1: because of this one print, especially by the way, a
Speaker 1: print that was driven. Uh of those gains come from
Speaker 1: the very volatile leisure and hospitality sector, a sector that
Speaker 1: a couple of months ago shed half a million jobs.
Speaker 1: So let's get under the hood, let's take a breath,
Speaker 1: and let's recognize that many, many Americans are still in
Speaker 1: the throes of this crisis and need to help delivered
Speaker 1: by the American Rescue Plans. So, charge, what do you
Speaker 1: think that that argument that you've just illustrates it quite
Speaker 1: perfectly is not resonating with prominent democratic economists. Uh, In fact,
Speaker 1: that not only is it resonating with economists on both
Speaker 1: sides of the aisle, it's massively resonating with the American people,
Speaker 1: which I would argue are the most important group here,
Speaker 1: even if I argue, even if I'm neglecting my own
Speaker 1: profession of it. Here we're talking about approval rates for
Speaker 1: this plan that are north of se I just saw
Speaker 1: a number that was seventy five or seventy six, and
Speaker 1: and and bipartisan. By the way, you know this word partisanship,
Speaker 1: it means something different in Washington than in the rest
Speaker 1: of the country. This is a plan that, whether you're
Speaker 1: a deed or an r you want to see the
Speaker 1: schools open. That simply doesn't happen in a timely fashion
Speaker 1: that's acceptable to this president without the American Rescue Plan,
Speaker 1: distribution of the vaccine, getting shots and arms as I mentioned,
Speaker 1: schools providing checks, relief, unemployment an insurance by the way,
Speaker 1: unemployment benefits that expire in something like eleven or twelve days.
Speaker 1: Without the American Rescue Plan. The urgency of this plan
Speaker 1: is just as as big as it was yesterday, and
Speaker 1: the American people know that. Jared, Let's pick up on that,
Speaker 1: because in many ways, yes, that is true, but also
Speaker 1: you are stating the obvious. If I was getting sent
Speaker 1: a four hundred dollar check by you, and I was surveyed,
Speaker 1: I'd be approving it as well. No wonder there is
Speaker 1: a high approval rate on the economist on the democratic
Speaker 1: economist Larry Summers, former Treasury secretary, raising questions about this,
Speaker 1: Olivier Blanchard raising questions about this. And I have an
Speaker 1: economist after economist on this program with me, raising the
Speaker 1: very same questions. Did the matter? And then let me
Speaker 1: just finish the question, Jared, let me just fit Quinnis
Speaker 1: finish the question quickly. You've said the electorate matters, and
Speaker 1: of course they approved this. If you've lost the argument
Speaker 1: in financial circles and in markets, does that matter at all? Well,
Speaker 1: first of all, the objection from Larry, for example, who
Speaker 1: is a good old friend of mine, to whom I
Speaker 1: try to catch up with as often as I can,
Speaker 1: and we'd us agree on this heating point. If you
Speaker 1: read what Larry is saying at all carefully, he is
Speaker 1: absolutely agreeing of the need for relief, the need to
Speaker 1: finally hit this virus with the knockout punch that is
Speaker 1: here tofore alluded it, and finally get us to the
Speaker 1: other side of this crisis so we can launch a
Speaker 1: robust reliable and racially inclusive recovery. So there is definitely
Speaker 1: arguments about this heating question, and that has a lot
Speaker 1: to do more with the size of the output gap
Speaker 1: and the speed of the spend out and whether people
Speaker 1: are gonna save or spend. And those are nuanced arguments
Speaker 1: that I'm happy to get into. But in fact, you know,
Speaker 1: there are very few economists who disagree with the need
Speaker 1: for this plan. There's argument around the edges. Now you
Speaker 1: set a second ago, you know the people like it. Well,
Speaker 1: sometimes if the public you know, north of approve of
Speaker 1: a plan, that actually means it's a good plan. You
Speaker 1: don't have to hope forthink it, especially in a period
Speaker 1: where we're nine point five million jobs own from where
Speaker 1: we were a year ago. If you were telling me
Speaker 1: we were at full employment, we'd be having a much
Speaker 1: different discussion. The black unemployment it is almost ten percent.
Speaker 1: So the urgency of this plan is recognized by the
Speaker 1: American and people in a way that we should pay
Speaker 1: attention to jam. There's a need for a relief. Everyone
Speaker 1: agrees with that. I don't disagree with you not had
Speaker 1: hit to advocate a separate argument. It's about the composition
Speaker 1: of this plan, And more importantly, for a lot of people,
Speaker 1: it's about the size and you know that, and the
Speaker 1: size is absolutely massive. Secondary Summers, who comes on bloom Bug,
Speaker 1: has talked about this repeatedly as well. The worriors you
Speaker 1: know is this takes all the oxygen out of the
Speaker 1: room to secure an infrastructure plan down the road, to
Speaker 1: secure public investment. And you'll be overwhelmed if we do overheat.
Speaker 1: What gives you the confidence, what gives you the confidence
Speaker 1: that we won't overheat? That this isn't big enough? Great question,
Speaker 1: So I'm gonna get to that. Let me just first
Speaker 1: slow address this targeting point. There are elements of this
Speaker 1: plan that reduced child poverty by fifty that would be
Speaker 1: a massive success at a time when low income families,
Speaker 1: many of whom are essential workers, are under trum mendous pressure.
Speaker 1: This plan targets state and local government, said, as I
Speaker 1: just told you, have shed one point four million jobs,
Speaker 1: one million of those jobs in education. Now heating versus overheating.
Speaker 1: Let me be very clear, nobody is saying that the
Speaker 1: risks of economic heat are zero. In fact, we've already
Speaker 1: seen and you've reported on some of the heat that's
Speaker 1: generated by expectations. There's plan heat that I, by the way,
Speaker 1: would consider vitally important to an economy that's experienced much
Speaker 1: more deflation than than inflation in recent years. Why am
Speaker 1: I confidence against overheating? Well, for one, the output gap
Speaker 1: is much larger than many economists assume it is. And
Speaker 1: if you if you look at some of the works
Speaker 1: safe from Goldman Sacks, you'll find an output gap that's
Speaker 1: twice as large as some of the sort of inflation
Speaker 1: Eastas are saying. Secondly, the spend out is considerably slower
Speaker 1: than some folks believe. That is, according to the Corressional
Speaker 1: Budget Office, this does not spend out in one year.
Speaker 1: It spends out in two years. And that's important both
Speaker 1: in terms of making sure the fiscal impulse is lasting,
Speaker 1: and making and and and and putting down overheating risks. Now,
Speaker 1: to be very clear about this, people will start getting
Speaker 1: checks very quickly, people will get unemployment insurance benefits very quickly.
Speaker 1: But some of the longer term plan parts of the
Speaker 1: plan spend out more slowly. Finally, some folks are going
Speaker 1: to initially save some of these resources. That translates into
Speaker 1: a lower multiplier and less inflation. Is that a problem. No,
Speaker 1: I think it's actually a feature, not a bug, because
Speaker 1: in times of great pandemic induced uncertainty, families who usually
Speaker 1: have negative or lower or zero savings rates need that
Speaker 1: kind of a cushion to help deal with the air
Speaker 1: pockets that they face over the terms of this crisis.
Speaker 1: That final point there is the difference between relief and stimulus.
Speaker 1: What those checks get used for. And even I've spoken
Speaker 1: before and you've said it's relief and it's not stimulus.
Speaker 1: So help me understand this just a little bit better.
Speaker 1: How do you calibrate who those checks go to based
Speaker 1: on where the need is and what the money is
Speaker 1: used for? And why did you come up with a
Speaker 1: number at say seventy and yeah, so first of all,
Speaker 1: let's let I think listeners may sometimes reasonably be confused,
Speaker 1: what do you mean relief? What do you mean stimulus? Well,
Speaker 1: so oftentimes stimulus is designed to get people back into
Speaker 1: the labor force as quickly as possible, to spend out
Speaker 1: UH and have higher multipliers on the kinds of of
Speaker 1: resources that we're providing, and definitely a lot of that
Speaker 1: will happen are anti eviction resources in the in the
Speaker 1: rescue plan get to people right away and help them
Speaker 1: cut down some of that debt that they've been accumulating
Speaker 1: for from rent. But others we've found when we've when
Speaker 1: we've seen past examples of this, initially save these resources
Speaker 1: because they can't go out and spend them as quickly
Speaker 1: as they want, and then when they hit an air
Speaker 1: pocket in their personal economies, that's when they spend. So
Speaker 1: having this cushion, this relief cushion, is essential to them.
Speaker 1: In terms of the targeting of the checks. Congress recently
Speaker 1: ratcheted down the high end of the phase out of
Speaker 1: those checks, so they phase out sooner. But there's no
Speaker 1: question if you actually look at the kinds of burdens
Speaker 1: that people face, if you look at some of the
Speaker 1: low aiming rights that they went into, that a single
Speaker 1: family with seventy k is facing hardship in this economy
Speaker 1: and they need those direct income income payments just as
Speaker 1: much as some of the well targeted That's just as
Speaker 1: much as some of the more directly targeted to the
Speaker 1: poor payments that I mentioned a minute ago, helping to
Speaker 1: cut child poverty by fifty percent. Jared, I hear you're
Speaker 1: fighting for this, and I know you're passionate about it.
Speaker 1: What it don't here is the same passionate fight around
Speaker 1: a high minimum white. And many people might sit here
Speaker 1: and ask the question, why don't you're fighting hard enough
Speaker 1: for it? Why don't you fight hard and want you
Speaker 1: to go shedding? Wann't you willing to give something up
Speaker 1: to secure it? What's happening? Uh? You know now that
Speaker 1: you've raised the minimum wage. Let me tell you that
Speaker 1: I have been fighting for that policy, uh, for my
Speaker 1: whole career, which last too many, too many decades for
Speaker 1: me to get into. And the President of the United States,
Speaker 1: far more importantly than me, has been fighting for this
Speaker 1: ever since the campaign. And I want to tell you
Speaker 1: right here on Bloomberg TV that he is not going
Speaker 1: to stop fighting for that. He is committed to fifteen
Speaker 1: dollar in our minimum wage, phasing in over a few years.
Speaker 1: He's going to continue to fight for that. And the
Speaker 1: people who say that that's somehow unrelated to, uh, to
Speaker 1: what's going on in the country, I think are just
Speaker 1: missing the boat. You've got millions of low paid essential
Speaker 1: workers working away, toiling away at a minimum wage that
Speaker 1: said it's seven dollars and twenty five cents an hour.
Speaker 1: Now if anybody who can hear my voice thinks that's
Speaker 1: that that's an adequate wage for you've got an argument
Speaker 1: with myself and the President of the United States. Because
Speaker 1: we believe that minimum wage should be raised. We need
Speaker 1: to figure out how to get from here to there.
Speaker 1: And trust me, that is going to be an ongoing
Speaker 1: focus of this. Why let's finish there on that road.
Speaker 1: Last time around there was a willingness to draw taxes
Speaker 1: own companies to face this in Can we do that again?
Speaker 1: You know this is neither the time nor place for
Speaker 1: that negotiation. But you are right that historically those kinds
Speaker 1: of things have been paired. I think there are many
Speaker 1: variations that we're gonna have to work with Congress to
Speaker 1: get from here. To understand you, what with me? Are
Speaker 1: you willing to negotiate with them on that point? And
Speaker 1: are you I'm really here for the economic analysis. The
Speaker 1: negotiators are a different group of people. What I'm here
Speaker 1: to tell you is that this nation can get to
Speaker 1: fifteen dollars an hour UH in UH in a phase
Speaker 1: out range and provide much needed relief to people. It's
Speaker 1: a simple plan that that has the intended consequences of
Speaker 1: raising the pay of low wage workers without having distortionary
Speaker 1: effects on the other side. So full speed ahead on
Speaker 1: the minimum wage. Let's catch up saying it's gonna see
Speaker 1: John Best the Council of Economic Advisors, thank you right
Speaker 1: now joining us. And this is the perfect guest to
Speaker 1: start on radio and TV. Sevida Supermannian is a Bank
Speaker 1: of America. She has bulletproof skill sets out of Berkeley
Speaker 1: and mathematics and philosophy as well. Forget about the mathematics, Sevina,
Speaker 1: this is a nuts job's day. Give us the equity
Speaker 1: philosophy of Supermania in this morning philosophy. You know, I
Speaker 1: think it's simple. I think that we saw a very
Speaker 1: strong run up in the market last year anticipating and
Speaker 1: economic recovery and earnings recovery. And this year we're not
Speaker 1: going to get much more on the multiple expansion side,
Speaker 1: but we are going to get the earnings. And that's
Speaker 1: where I think, well, that's what we need to watch
Speaker 1: this year is how strong earnings actually come in. I mean,
Speaker 1: we're penciling in something close to earnings growth, but if
Speaker 1: we see anything short of that, yeah, I mean it's
Speaker 1: a it's a blockbuster number for earnings, but I think
Speaker 1: what's fascinating is that the market multiple expanded even more
Speaker 1: than that last year. And you know, Tom, this is
Speaker 1: kind of typical. I mean, the market generally anticipates the
Speaker 1: good news before it happens. And now what I worry
Speaker 1: about is that the bulk of news we're gonna get
Speaker 1: is going to be less good and it's more about
Speaker 1: you know, kind of uh inklings of inflationary pressure on margins.
Speaker 1: Do companies have the pricing power to pass this on
Speaker 1: to consumers? That I think is to be determined. So
Speaker 1: so I think this is going to be really kind
Speaker 1: of a show me year in terms of earnings growth, um,
Speaker 1: you know, in terms of the fundamentals actually supporting a
Speaker 1: fairly lofty multiple on the SMP five hundred right now.
Speaker 1: So I just build on that. Why we're so challenged
Speaker 1: on the SMP five hundred at the index level. You
Speaker 1: have the year end price target I think thirty eight
Speaker 1: hundred thirty seven right now in future is why are
Speaker 1: we sub challenged at the headline? Yeah, I think it's
Speaker 1: because of the constitution of the market, and we've talked
Speaker 1: about this a lot on your show. I think the
Speaker 1: SMP five hundred is not a proxy for the US economy.
Speaker 1: It's a proxy for low interest rates, disinflationary pressure, secular growth.
Speaker 1: It's much more defensively tilted than any other index you
Speaker 1: can look at. So I think the real risks this
Speaker 1: year are going to be in the SMP and even
Speaker 1: more so than NASDACK. But small caps, you know, value
Speaker 1: stocks should still do okay as long as the economic
Speaker 1: recovery remains intact. I do worry as we approached the
Speaker 1: end of the year that the news is going to
Speaker 1: go from you know, kind of pretty good to to
Speaker 1: more negative. And I think what we start to hear
Speaker 1: about is how to fund this this big fiscal stimulus program.
Speaker 1: Maybe we start to hear more rumblings around tats hikes, um,
Speaker 1: you know, I don't you know, in terms of the taper,
Speaker 1: I don't think if the Fed starts talking about tapering
Speaker 1: their their assets purchase program, I think that will be
Speaker 1: negative for risk assets. So those are the factors to
Speaker 1: watch as we as we progress forward in the year.
Speaker 1: But I think what we're watching now is just earnings.
Speaker 1: If inflationary pressure is enough to actually take a dent
Speaker 1: out of earnings, that would be negative. But if companies
Speaker 1: actually get pricing power that I think is the big
Speaker 1: positive here. As you speak, I think about sort of
Speaker 1: a double way at me of risks. We've had a
Speaker 1: lot of investors come on this show and say that
Speaker 1: yields have not responded to the positive sentiment that we've
Speaker 1: seen in equities. Right, they haven't baked in that earnings
Speaker 1: growth of that you're talking about. Now, those yields are
Speaker 1: those are starting to They're creeping up at the same
Speaker 1: gimatically that stocks have already priced those in. And our
Speaker 1: price to perfection and our subject to disappointment. How do
Speaker 1: you walk through those double whammys, the idea that yields
Speaker 1: could rise hitting the relative valuation of stocks at the
Speaker 1: same time that we're still getting disappointments with respect to earnings. Yeah. Absolutely,
Speaker 1: I think that's the way to think about investing this
Speaker 1: year is inflation protected yield and I think they're What
Speaker 1: you want to do is look for dividend growth stocks.
Speaker 1: This is one of the reasons I like financials. Financials
Speaker 1: offers relatively inflation protected dividend yield and cash return. Financials
Speaker 1: participates in economic recoveries, has a low payout ratio, has
Speaker 1: room to raise dividends, UM other stocks like that in
Speaker 1: the consumer sectors and industrials. I think that's the way
Speaker 1: to play the year. Don't get too fancy, um, you know,
Speaker 1: look for cheap inflation protected dividend field because we've already
Speaker 1: seen a run up in a lot of the low
Speaker 1: quality recovery place. Now, I think it gets a little
Speaker 1: bit more difficult in terms of how to how to
Speaker 1: position your portfolio. I do think go ahead, it's likely
Speaker 1: I'm gonna interrupt, Sevina. Tell me about revenue growth stocks.
Speaker 1: I mean, I get the yearnings growth stocks, I get
Speaker 1: the cash flow the dividend outed out of everybody's talking,
Speaker 1: including Ethan Harris and Michelle about you know, a bigger, bigger,
Speaker 1: bigger economy. Am I right that I learned in my
Speaker 1: philosophy a Supermannian that means revenue growth matters well, revenue
Speaker 1: growth and free cash flow growth. Yeah. I think that's
Speaker 1: absolutely right. So we're moving from just a price to
Speaker 1: book driven you know, by the cheapest stocks on on anything,
Speaker 1: to an environment where, like you said, you want to
Speaker 1: see the revenue growers. And I think what's really interesting
Speaker 1: this year is that we are seeing a market change
Speaker 1: in the sales acceleration stories. And it's it's an obvious point,
Speaker 1: but you know, last year was a very different market.
Speaker 1: We had tech as the real revenue growth the stable,
Speaker 1: stable revenue growth stories. This year we're seeing revenue growth
Speaker 1: expectations in very different pockets of the market, and consumer
Speaker 1: services sectors and industrials and cape s been a fish yaries.
Speaker 1: So I think that's going to be the pivot is
Speaker 1: moving from a growth and a tech dominated market under
Speaker 1: this stay at home environment that we've been in to
Speaker 1: a reopening play where you know, some of these smaller,
Speaker 1: more beaten down cyclical companies really have that revenue acceleration
Speaker 1: that's going to drive drive their their stock prices further
Speaker 1: from here. And interestingly, Energy this way up thirty three
Speaker 1: year today, how stretched do you think that story is? Look,
Speaker 1: I think energy is still a buy and the reason
Speaker 1: is that if you look at positioning and valuations, they
Speaker 1: still suggest that your long only institutional fund managers are
Speaker 1: not necessarily moving to even an equal weight position. The
Speaker 1: world is still very very underweight energy. And if the
Speaker 1: FED is willing to accommodate inflation for a longer period
Speaker 1: of time, and we're going to be in this late
Speaker 1: cycle type of market for a longer period of time
Speaker 1: than is normal. Energy is one of the best ways
Speaker 1: to hedge against inflation. So I think the sector is
Speaker 1: still a buy until we get to a point where
Speaker 1: it looks a lot more expensive and the world has
Speaker 1: gotten there Sevida, we were just talking to pre amr
Speaker 1: Over at TV Securities. She predicts a two percent treasury
Speaker 1: yields if we get there. How much more downside is
Speaker 1: there on big tech stocks? Yeah, No, I know, pre
Speaker 1: and I think two percent is achievable. Um, So you know,
Speaker 1: I think the downside to big tech is as potentially, um,
Speaker 1: you know, akin to what we've seen already. I think
Speaker 1: about it. We've seen a pretty dramatic move in rates.
Speaker 1: We've seen tech sel up. Expect kind of another leg
Speaker 1: down similar to what we've seen already. Um, you know,
Speaker 1: I think tech is ultimately longer term, uh, you know,
Speaker 1: a long term growth story. It's a bye. But I
Speaker 1: do think that in the near term, as we see
Speaker 1: that cost of capital increase and some of these long
Speaker 1: duration stocks could get hit by just pricing in that
Speaker 1: new discount rate on a on a DCF basis. Sorry,
Speaker 1: I got to my math side of very good to
Speaker 1: appreciate has always the catchups of eight to supermanti bankf
Speaker 1: America Security's head of you I secuity, anti rit strategy.
Speaker 1: It is time I get less distracted and look at
Speaker 1: jobs today, and I hope you agree. Ellen Setner is
Speaker 1: wonderful to do this with Morgan Stanley. Ellen, you have
Speaker 1: reaffirmed a stronger g dB statistic. Talk about the backdrop
Speaker 1: of jobs is it links into year six and even
Speaker 1: seven economic growth. So the backdrop of jobs is really important.
Speaker 1: I mean, we're passing more fiscal stimulus UH this month,
Speaker 1: and that's going to continue to build the bridge hopefully
Speaker 1: to win jobs are really coming back hand over this
Speaker 1: because you need that bridge in order to have those
Speaker 1: government transfers help households, help workers that are still without
Speaker 1: jobs until we get those jobs back and we can
Speaker 1: replace that with labor income. So the income growth has
Speaker 1: to be there in order to drive consumption in GDP
Speaker 1: as high as we've got it. We don't think today's
Speaker 1: report is going to be more than a trickle of
Speaker 1: jobs back, but I think in a couple of months
Speaker 1: we're going to see that that really barely Okay, well,
Speaker 1: this is really important as we go from a DP
Speaker 1: to claim. So the jobs report many people ellen above
Speaker 1: you at a hundred thousand, How would you perceive and
Speaker 1: how does Morgan Stanley perceive markets will react to a
Speaker 1: Zentner a hundred thousand. So I think the I'm glad
Speaker 1: you asked how markets reacts. Of course, from economist standpoint,
Speaker 1: will borrow you to death. The different statistically between sixty
Speaker 1: thousand and a hundred eight thousand is pretty much nothing
Speaker 1: when you think of the wide standard deviations that are
Speaker 1: in this data. But the market right is looking for
Speaker 1: any positive data uh in order to continue to justify
Speaker 1: this march higher UH in the ten uere And so
Speaker 1: if the if the if we get something above consensus,
Speaker 1: meaning so it goes beyond market expectations. So we get
Speaker 1: sort of the higher especially like the five hundred thousand,
Speaker 1: which is one of the top end estimates from from
Speaker 1: Bloomberg contributors. UH. You know, certainly that's something that is
Speaker 1: bound to send the tenure higher. Right, the market is
Speaker 1: looking for things to justify this move. Now, is a
Speaker 1: higher tenure justified? Absolutely, We're going to be in a
Speaker 1: completely different spot with the outlook looking much better as
Speaker 1: as Governor Brayner has said earlier this week, the direction
Speaker 1: of travels perfectly fine. The markets should be pricing in
Speaker 1: a better outlook. It's just the volatility UH and speed
Speaker 1: at which we get there that tends to be uncomfortable
Speaker 1: for the Fed. Outside of the volatility of Thursday. Allen,
Speaker 1: what should the FET chat be uncomfortable with right now
Speaker 1: that you think he's ignoring? Do you think he's being
Speaker 1: slightly tone deaf anywhere? That's all well, I don't think
Speaker 1: that he's being tone deaf, but I don't think he's
Speaker 1: sending the message forceful enough for markets. I think you
Speaker 1: did a good job of framing this earlier on the show,
Speaker 1: talking about basically they don't speak the same language. The
Speaker 1: FED can feel like send a strong message. I mean
Speaker 1: Pal's message when I read it as an economist yesterday
Speaker 1: was things are good, things are getting better. There's there's
Speaker 1: even less downside risk to inflation. There's probably upside risk
Speaker 1: to inflation, and yes it's transported, but guess what, We're
Speaker 1: still not going to do anything that is risk on.
Speaker 1: If that's not a risk on message, I don't know
Speaker 1: what is. But it wasn't said forceful enough, so I
Speaker 1: don't think. I think it just sort of went over
Speaker 1: people's heads that were that we're watching. So the FED
Speaker 1: needs to be much more forceibule in this communication and
Speaker 1: most likely he'll take advantage of that at the March
Speaker 1: seventeen meeting when he does a Q and A. But
Speaker 1: they're gonna be challenged on this all years. The data
Speaker 1: continues to roll in. It's just confirming a good outlook,
Speaker 1: but the market tends to take that and want to
Speaker 1: take it even further. And I think you've nowada and
Speaker 1: some I touched on this earlier. This is going to
Speaker 1: be the debate, not for the next couple of weeks.
Speaker 1: This is the debate for the next several months when
Speaker 1: those base effects start to kick in and we start
Speaker 1: to get that tuggable and what I think would be really,
Speaker 1: really fascinating and we haven't seen it yet. The real
Speaker 1: test of the fed's credibility would come if we've got
Speaker 1: to break out at the front end of the yield curve,
Speaker 1: because people started to believe the FED would blink and
Speaker 1: I don't see that yet. Pick your company's Amazon. We
Speaker 1: spoke to Exxon yesterday. I know, John, you love the
Speaker 1: Delta Airlines interview. How do those companies perform given a
Speaker 1: Zentner seven GDP if growth gets better? Good times Even
Speaker 1: if you would go higher, Ellen, And isn't that the story?
Speaker 1: If yours go higher because growth gets better, that's a
Speaker 1: good story. I just wonder if we start to get
Speaker 1: that challenge at the front end as the months progress sellen,
Speaker 1: if we do start to get a real tug of wars,
Speaker 1: some real tension, and so believe the Fed could blink
Speaker 1: even though they've told us what they expect and they've
Speaker 1: told us what they'll do when it happens, which is
Speaker 1: nothing right. So that's why I think it is going
Speaker 1: to be quite the communication challenge for them. In One
Speaker 1: way that they can keep the front end end is
Speaker 1: altering the timing or pushing out the timing of when
Speaker 1: the bed draws down its balance sheet. You know, even
Speaker 1: if the FED starts tapering in January two as we
Speaker 1: expect UH, and you taper at every meeting, which would
Speaker 1: be in line with the pace that they tapered at UH,
Speaker 1: you would be looking at the bulk of two that
Speaker 1: it takes to finish paper in the balance sheet. They
Speaker 1: will not raise rates before they finished papering the balance sheet,
Speaker 1: so there's only you know, so far forward that rate
Speaker 1: hikes can come, and so the front end can be
Speaker 1: addressed that way in through communication. We think at the
Speaker 1: March MC meeting, even though they revise up where their
Speaker 1: forecast for growth maybe show a little bit more inflation
Speaker 1: in the near term, uh, we still think that they're
Speaker 1: gonna fail to show a median UH placement on the
Speaker 1: dot plot of an expectation that they'll hype before the
Speaker 1: end of three. So that's going to continue to send
Speaker 1: a strong message to markets. Ellen. Just to tie this
Speaker 1: all together, there's a bigger idea behind everything that we're
Speaker 1: talking about, which is, at what point does market turmoil
Speaker 1: or frankly a sell off and risk your assets affect
Speaker 1: the underlying economy. And this is really a key question
Speaker 1: as we take a look at froth that's getting blown
Speaker 1: off the top, which might be healthy. So at what
Speaker 1: point should the Fed start to care about a sell
Speaker 1: off and say stocks, or a sell off in credit
Speaker 1: if we don't necessarily see companies having to borrow money
Speaker 1: because they've already excepted their maturities and there isn't that
Speaker 1: clear cut financing transmission mechanism. Yeah, so it's a great question, Lisa.
Speaker 1: So essentially they care when they look at underlying financial
Speaker 1: conditions and they've they've tightened in a way that threatens
Speaker 1: the outlook. And this is why even though the tenure
Speaker 1: rising is fine, we should see a higher tenure. They
Speaker 1: don't like the speed or volatility UH in movements in
Speaker 1: the tenure because it creates uncertainty and the Fed likes
Speaker 1: to be certain about its outlook. So when you strip
Speaker 1: out the change in yields right now and you look
Speaker 1: at financial conditions elsewhere, they've just moved sideways. They've not
Speaker 1: tightened at all. And that's why chair of PAL can
Speaker 1: sound comfortable about the increases in the tenure because there's
Speaker 1: not any sort of spill over effects with affect the economy.
Speaker 1: You mentioned the stock market and credit. Stock market low
Speaker 1: on their list of concerns. It doesn't have a strong
Speaker 1: transfer mechanism to the rest of the economy. Credit does,
Speaker 1: so UH. You know, yes, high yield UH is still
Speaker 1: performing okay, right, but if spreads UH, even in high
Speaker 1: yield widened, funding levels are not as favorable, and that
Speaker 1: starts to affect other up the credit quality chain and
Speaker 1: starts to drag out I G spreads right that has
Speaker 1: an immediate upfront impact on the economy, especially the labor market.
Speaker 1: And with long tails, that's when the BED gets concerned,
Speaker 1: and that's what happened in late and that's when I
Speaker 1: think you get a very very different chairman, pal Ellen.
Speaker 1: Great to catch up as always, good to see Allen Xeta,
Speaker 1: the wonderful Elenxetna of Morecin Stanley, the chief US Economy
Speaker 1: is looking for six and a half percent GDP in
Speaker 1: twenty one and five and twenty two. Compare that to
Speaker 1: the FED at five and three point seven. Let's bring
Speaker 1: in Prayer Misrael Teny Securities Global head of Right Strategy. Prayer,
Speaker 1: Let's just start at the top, a new forecast two
Speaker 1: on a ten year year end. What was it before
Speaker 1: and why the change? So we were looking for one
Speaker 1: fifty or to be precise, before yesterday. Why we changed
Speaker 1: it was we heard from chap Owel that he wasn't
Speaker 1: worried about the moves that happened over the last couple
Speaker 1: of weeks, which I would argue only part of that
Speaker 1: moves was for healthy reasons. The other part was technical.
Speaker 1: Was supply fears, was fear that the FED might step away,
Speaker 1: and we have a ton of treasuries to take down.
Speaker 1: And we just heard from Chap Howel that it's not
Speaker 1: disorderly enough, that this is not tightening in financial conditions.
Speaker 1: So the market is going to dann from some more.
Speaker 1: And you know, I think the market is looking ahead.
Speaker 1: I think every market is looking to the end of COVID.
Speaker 1: But at the end of COVID, we've got a certain
Speaker 1: post COVID normal. But we also have a lot of
Speaker 1: treasury so I didn't really move the front end as much.
Speaker 1: I think the FAT is going to be has a
Speaker 1: really high bar to hike, but to taper, they have us,
Speaker 1: you know, a shorter b bar to hike, and we
Speaker 1: have a lot more supply. So it's really the long
Speaker 1: end that I think is going to sort of try
Speaker 1: and force the Fat's hand. But we're not there yet.
Speaker 1: So you know, I think rates are going to keep
Speaker 1: rising until we get that disorderly market functioning or we
Speaker 1: get that persistent tightening in financial conditions. Tell you we're
Speaker 1: not there yet. I think it's fair to say that
Speaker 1: that seven year auction last week was somewhat disorderly. We've
Speaker 1: got thirty year bonds coming out next week billion dollars
Speaker 1: worth thirty eight billion dollars worth of ten year notes
Speaker 1: as well. So to bring you concerned about that extra
Speaker 1: supply coming in the next week, given what's been happening
Speaker 1: in this market over the last couple of weeks, I
Speaker 1: am very nervous. I mean, I think we were all
Speaker 1: looking for the fed chair. We didn't get that support.
Speaker 1: The market is going to set up, so I can't
Speaker 1: say that the auction will be awful. I mean, we
Speaker 1: know that auction is coming up. I think you're going
Speaker 1: to get once perils is out of the way. We
Speaker 1: don't have a name of fat talk, they're on blackout.
Speaker 1: I think the market is going to set up for
Speaker 1: that auction, so expect to see higher rates into the auction.
Speaker 1: But you know what, there's another There's a twenty year
Speaker 1: right after, and then within a week we'll have two
Speaker 1: five sevens again. So it's just the pace of supply
Speaker 1: here is so high that I think every auction is
Speaker 1: going to be a stress point for the market. Does
Speaker 1: it spill over into every other market? I think that's
Speaker 1: the question. Do you correlate really yield into your two
Speaker 1: percent call? You go from a negative zero point six
Speaker 1: four out. Let's say zero percent. Can you say that?
Speaker 1: I think zero to me is really hard to see.
Speaker 1: I think the you know, at that point it's going
Speaker 1: to start to impact the real economy. But you know,
Speaker 1: we are expecting a little bit more on the inflation front.
Speaker 1: I think you get that reopening related. You know, catch
Speaker 1: up demand is going to help inflation expectations. But I
Speaker 1: do have higher real rates by the end of the year,
Speaker 1: still negative, but you know, negative twenty five, negative thirty.
Speaker 1: I think maybe financial conditions can just about handle that.
Speaker 1: I think much higher or positive is going to be
Speaker 1: very hard. Pre we're waiting for your comments on the plumbing.
Speaker 1: We're looking out at the tenure duration and the measurement
Speaker 1: of the tenure duration and the overnight and the repurchase
Speaker 1: market is extraordinary. All would suggest absolutely historic. Is this
Speaker 1: a big deal of concern or does this gets solved?
Speaker 1: Is more issuance comes out? I think it gets so.
Speaker 1: I think specifically for the tenure report that's trading negative
Speaker 1: three percent historic um, I think that gets solved as
Speaker 1: supply comes in. For the front end plumbing, there's a
Speaker 1: separate issue where we have a lot of reserves in
Speaker 1: the system hopefully the fatties is the SLR constrained. I
Speaker 1: think we need more for those very front end rates
Speaker 1: to rise. There's a big t G a balance, so
Speaker 1: I think very front end rates stay low. But the
Speaker 1: specific point you're raising, the specialness in the report contract
Speaker 1: for the TENNU, I think that will ease. Right. We
Speaker 1: have a ton of supply. Listen, this is absolutely critical,
Speaker 1: and I want to point out that our true expert
Speaker 1: on as Irah Jersey, agrees with mis misra. Yeah, the
Speaker 1: idea that it will remedy itself. But it's sort of
Speaker 1: interesting if you look at the technic goes underpinning this.
Speaker 1: And I'm not going to get into it, but Japanese
Speaker 1: investors were selling a lot of those off the run treasuries,
Speaker 1: which raises a question not about the repo market pria,
Speaker 1: but in general, who's going to buy all of this
Speaker 1: depth that's coming online. You said that every auction is
Speaker 1: going to be a stress point going forward. Real rates
Speaker 1: perhaps rising not because of inflation, expected expectations going up,
Speaker 1: not because of necessarily even growth, but just because sheer
Speaker 1: supply is outstripping demand. Where is the demand going to
Speaker 1: come to on the edges? If the FED is not
Speaker 1: coming in and picking up more. Right, So if we
Speaker 1: look at last year, US banks were very large bias
Speaker 1: their flush with reserves. They had the sl exemption, so
Speaker 1: they actually had a capital exemption for buying treasuries. I
Speaker 1: hope that's extended. That that's supposed to run out of
Speaker 1: the end of March, so I think banks will step
Speaker 1: in at some point. Asset managers will step in. But
Speaker 1: this is why real rates will need to rise, because
Speaker 1: you have to attract people from other asset classes. I
Speaker 1: think the saddest thing about the treasury market is it's
Speaker 1: losing some of the head property. When equities fall, rates
Speaker 1: don't fall. So if I'm looking for the best hedge,
Speaker 1: really it's hard for me to get too excited about
Speaker 1: the tenure at one fifty unless now you're at two
Speaker 1: percent and there's a lot more room for it to decline,
Speaker 1: which is one of the underpinnings for why we think
Speaker 1: rates will keep rising. The FED steps away. Really have
Speaker 1: to attract other buyers from other asset classes. Let's get
Speaker 1: everyone to turn the volume down. Libel just to found
Speaker 1: a word on Liinebear, what's happen in prayer? Well, absolutely
Speaker 1: not not raise the Libel down because we just heard
Speaker 1: from the IBA a couple of hours ago that they
Speaker 1: are ending. So I think those of us, you know,
Speaker 1: in the five stages of grief, if you were in
Speaker 1: the denial stage, you've got to move out of that
Speaker 1: stage because we now have an end date, right, It's
Speaker 1: like the death notice has been given. I mean, it's
Speaker 1: something some of us have been working on for years,
Speaker 1: but today was pretty monumental in the sense we know
Speaker 1: that Sterling Libel will end at the end of this year.
Speaker 1: En libelar ends at the end of this year. Dollar
Speaker 1: Libel will definitely end, but at the end of June.
Speaker 1: Emotional John, thank you mistress. It's a good library. Oh
Speaker 1: I s strategy Priam isra over cocktails can being a
Speaker 1: conversation to deadly silence with a conversation on live board.
Speaker 1: She's right, it's a huge deal. She's right. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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