WEBVTT - Surveillance: Fed Credibility With Dudley 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.080 and of course on the Bloomberg terminal. Right now, William Dudley, 0:00:31.120 --> 0:00:34.440 the Farmer President of the New York Fed Bloomberg Opinion columnists, 0:00:34.479 --> 0:00:37.080 with the timely essay at this morning. It gets us 0:00:37.080 --> 0:00:40.080 to Wednesday, but far more gets us to the new 0:00:40.159 --> 0:00:42.159 new and the new theory. Bill, I want to go 0:00:42.200 --> 0:00:44.880 back to Berkeley, and I've always had such a respect 0:00:44.920 --> 0:00:49.080 for the interesting faculty that shows a University of California, 0:00:49.120 --> 0:00:53.120 Berkeley over other institutions. And it all wraps around a 0:00:53.240 --> 0:00:57.040 theory of belief of behavior, and that wraps around this 0:00:57.200 --> 0:01:01.720 strange word credibility. What is the character of the FEDS 0:01:01.800 --> 0:01:05.600 credibility in a time where we're making it up as 0:01:05.640 --> 0:01:10.320 we go. Well, there's a risk to their credibility because one, 0:01:10.400 --> 0:01:14.800 inflation is higher for longer to inflation expectations are starting 0:01:14.800 --> 0:01:19.160 to rise, and three they sort of bound bound themselves 0:01:19.160 --> 0:01:21.400 in terms of you know, when they can actually raise race. 0:01:21.440 --> 0:01:22.800 They said they're not going to raise rates at all 0:01:22.840 --> 0:01:26.280 until theyve hit two percent inflation, hitful employment, and our 0:01:26.319 --> 0:01:28.320 confident inflation is going to stay above two percent in 0:01:28.319 --> 0:01:31.560 the future, inflation expectations get an anchored, that's going to 0:01:31.640 --> 0:01:35.160 push inflation up even before we get to maximum sustainable employment. 0:01:35.200 --> 0:01:37.399 So they could be in a tough spot. Be in 0:01:37.400 --> 0:01:39.920 a tough spot. But take it back to like the 0:01:40.080 --> 0:01:43.440 history of Ike and Grain, or maybe the social economics 0:01:43.480 --> 0:01:46.440 of Brad DeLong and the other young turks out at 0:01:46.480 --> 0:01:50.040 your Berkeley Here. Again, we're making it up as we go. 0:01:50.160 --> 0:01:53.080 With the debt dynamics that we have. Now, what is 0:01:53.120 --> 0:01:57.720 the theory that you would propose to maintain this valuable, 0:01:57.840 --> 0:02:02.560 this precious credibility. Well, I think the FET should be 0:02:02.560 --> 0:02:04.880 a little bit more flexible in terms of when they're 0:02:04.920 --> 0:02:08.240 willing to raise long term short term industries. Uh, if 0:02:08.280 --> 0:02:11.359 inflation expectations truly become an anchored, that's a problem for 0:02:11.520 --> 0:02:13.960 actual inflation, and I would think that they would have 0:02:14.000 --> 0:02:17.160 to react to that. The current regime where they don't 0:02:17.160 --> 0:02:20.400 do anything until they reach maximum sustainable employment in their mind, 0:02:20.800 --> 0:02:23.720 might turn out to be too late. How concerned are 0:02:23.720 --> 0:02:27.320 you bill to that point about recent consumers consumer confidence 0:02:27.360 --> 0:02:31.800 surveys that show that consumers expect inflation to be materially 0:02:31.880 --> 0:02:35.160 above the Fed's expectations over the next three to five 0:02:35.240 --> 0:02:40.760 years at a time when this is also dampening their optimism. Well, 0:02:40.880 --> 0:02:44.760 the New York Fed publishes a household survey of expectations 0:02:44.800 --> 0:02:47.760 about inflation, and the most recent reading is really quite 0:02:47.960 --> 0:02:52.120 uh disturbing. The three months inflation expectations are now up 0:02:52.120 --> 0:02:55.640 to four percent, which is essentially double what the Fed's 0:02:55.639 --> 0:02:58.880 actually targeted. Great, So, how concerning is this too? I mean, 0:02:59.000 --> 0:03:02.000 the idea is that can sumers don't always get it right. However, 0:03:02.200 --> 0:03:05.840 this does signal a credibility issue beyond markets for the 0:03:05.840 --> 0:03:09.200 Federal Reserve to address. Well, the key questions whether people 0:03:09.200 --> 0:03:11.799 trust the FED. If people trust the Fed and trust 0:03:11.800 --> 0:03:14.799 the Fed's forecasts and inflations, expectations will come back down 0:03:14.840 --> 0:03:18.400 as inflation moderates. If people don't trust the Fed, inflation 0:03:18.520 --> 0:03:21.200 expectations will stay high, they will push up inflation, and 0:03:21.200 --> 0:03:23.040 the Fed will have a have a problem on scenes. 0:03:23.200 --> 0:03:25.640 So do you think that the market could potentially have 0:03:25.840 --> 0:03:28.560 a problem or a disruption if the FED does not 0:03:28.760 --> 0:03:32.240 signal tapering soon enough, Well, I think the FED is 0:03:32.240 --> 0:03:34.640 going to say single tapering pretty soon. I mean, I 0:03:34.639 --> 0:03:38.160 think that this meeting they'll probably reinforce the idea that 0:03:38.160 --> 0:03:41.400 they're making progress towards their goals, setting up the notion 0:03:41.440 --> 0:03:44.360 that taper infected to be announced at the November f MOC. 0:03:44.520 --> 0:03:48.040 Meaning so, what is the effect of the senior age 0:03:48.080 --> 0:03:53.640 of the US dollar on all of this philosophy and calculus? 0:03:54.040 --> 0:03:57.760 We are different with the US dollar. How does that 0:03:57.840 --> 0:04:04.200 make Chairman Paul's press conference different on Wednesday? Well, having 0:04:04.240 --> 0:04:07.760 the dollar as a reserve currency allows us to attract 0:04:07.760 --> 0:04:11.520 the foreign capital on very attractive terms as long as 0:04:11.520 --> 0:04:15.360 we have credibility. If people start to doubt the FEDS 0:04:15.400 --> 0:04:18.640 commitment to a stable inflation over time, you know, then 0:04:18.680 --> 0:04:20.960 the dollar would start to weaken, and people that if 0:04:20.960 --> 0:04:23.720 that went on for a good period of time, then 0:04:23.760 --> 0:04:26.640 people might start looking around for substitutes to the US dollar. 0:04:27.560 --> 0:04:30.200 But you have been a great optimist on this, you 0:04:30.200 --> 0:04:33.520 you know, within the body of the William Dudley work. Frankly, Bill, 0:04:33.560 --> 0:04:36.040 I'll take it back to Goldman Sex. You've been a 0:04:36.080 --> 0:04:41.479 great optimist on the institutional strength of the American system. 0:04:41.520 --> 0:04:45.479 Do you maintain that that institutional strength is there with 0:04:45.600 --> 0:04:49.880 the fractious Washington that we have. Well, the thing we 0:04:49.920 --> 0:04:51.800 have going for is number one, we have a very 0:04:51.839 --> 0:04:54.200 deep and liquid capital market, and to the FED has 0:04:54.200 --> 0:04:56.279 done a good job keeping inflation and checks, so we 0:04:56.320 --> 0:04:58.400 have credibility with the rest of the world. As long 0:04:58.480 --> 0:05:00.919 as we don't mess up our economy. People are going 0:05:01.000 --> 0:05:03.200 to be willing to continue to use the dollar as 0:05:03.240 --> 0:05:06.600 the reserve currency because there aren't really great alternatives, you know. 0:05:06.680 --> 0:05:08.200 I look, Bill, we've got to get back to the 0:05:08.240 --> 0:05:11.760 markets here as they are. Challenge futures a negative eighty one. 0:05:12.240 --> 0:05:14.680 But Bill, to me, it is just a FED on 0:05:14.800 --> 0:05:18.559 a massive ex post basis will wait and wait and wait. 0:05:18.640 --> 0:05:22.320 We're mentioning Alan Meltzer of Carnegie Mellon earlier. I think 0:05:22.320 --> 0:05:25.320 of timber Lake and the Georgia School, and the answer is, 0:05:25.400 --> 0:05:29.080 when in doubt, wait right. Well, I think it depends 0:05:29.080 --> 0:05:30.840 on what the risks are. I think one thing that 0:05:31.000 --> 0:05:33.600 we will see this this week is the dot plot. 0:05:33.720 --> 0:05:37.520 The forecast of interest rates in two will probably show 0:05:37.520 --> 0:05:40.840 more people being in favor of rate hike in two 0:05:40.880 --> 0:05:43.760 and then may reduce the concerns about the FED being late, 0:05:44.640 --> 0:05:47.080 but you face down the risks out of China many 0:05:47.120 --> 0:05:49.560 times on the f wem C. I'm thinking of the 0:05:49.680 --> 0:05:54.320 summer at I'm thinking of early as well. If we 0:05:54.320 --> 0:05:55.920 were the FED looking at the risks that are playing 0:05:55.920 --> 0:05:58.279 out at the moment building in China, how are you 0:05:58.320 --> 0:06:01.280 processing that, digesting the moment. But I'd love your insight 0:06:01.360 --> 0:06:03.560 on that. I think your experience is really valuable on 0:06:03.600 --> 0:06:07.160 this particular top peg Well. I think you know that 0:06:07.200 --> 0:06:10.159 the Fitter Reserves certainly understands that China's an important player 0:06:10.160 --> 0:06:12.320 in the global economy of the China had had a 0:06:12.360 --> 0:06:15.719 hard landing that would have very serious consequences for the 0:06:15.760 --> 0:06:18.680 rest of the and and for the United States. I 0:06:18.720 --> 0:06:21.600 think at this point it's really premature to reach that conclusion, though, 0:06:21.640 --> 0:06:24.760 that Chinese have tried to tighten things up before, and 0:06:24.800 --> 0:06:27.560 when it starts to actually affect the rate of growth 0:06:27.560 --> 0:06:30.479 and employment, they tend to ease off on the brakes, 0:06:30.520 --> 0:06:32.080 and I think that's what's going to happen this time 0:06:32.080 --> 0:06:34.200 as well. How do you think the Chairman will approach 0:06:34.240 --> 0:06:37.919 that issue in the news conference this Wednesday, Bill, I 0:06:37.920 --> 0:06:39.680 think he'll just say that we take the world as 0:06:39.720 --> 0:06:42.120 it is, and obviously we're updating our views about what's 0:06:42.120 --> 0:06:43.920 happening in the rest of the world as things unfold. 0:06:43.960 --> 0:06:45.640 So I don't think he's going to make a strong 0:06:45.680 --> 0:06:48.760 statement about his views about how China's gonna unfold. Well, 0:06:48.760 --> 0:06:50.720 but do you think Bill, for example, if there is 0:06:50.760 --> 0:06:53.919 a draw down like sum are expecting Mike Wilson in 0:06:53.920 --> 0:06:57.000 particular Morgan Stanley, what does the FED do? Do they 0:06:57.000 --> 0:07:01.080 not taper at all? Well? I deviously, if things happen 0:07:01.160 --> 0:07:03.520 in a way that change the economic outlook in a 0:07:03.520 --> 0:07:07.000 meaningful way, then obviously the Fed world just course. But 0:07:07.040 --> 0:07:09.640 at this point they're not going to react to, you know, 0:07:09.680 --> 0:07:13.200 small market moves and then defer the tap tapering on 0:07:13.200 --> 0:07:15.760 that basis, they have to change their economic focus. That's 0:07:15.760 --> 0:07:18.280 why the summary of economic projections this week is also 0:07:18.280 --> 0:07:20.640 important because it's basically tell you what the FED thinks 0:07:20.680 --> 0:07:23.280 about how the economy is like to evolve, not just 0:07:23.360 --> 0:07:26.200 in one and twenty two, but also twenty three and 0:07:26.240 --> 0:07:28.760 twenty four. Bill, this Fed is a different Fed than 0:07:28.760 --> 0:07:30.280 the one that you are a member of in the 0:07:30.320 --> 0:07:32.600 sense that it's balance sheet is bigger and the stakes 0:07:32.640 --> 0:07:35.320 are higher should there be a disruption, because their ammunition 0:07:35.760 --> 0:07:39.239 is just limited. How much does a nearly nine trillion 0:07:39.240 --> 0:07:42.400 dollar balance sheet tie their hands going forward in terms 0:07:42.440 --> 0:07:46.200 of how much ammunition they can really deploy. There's no 0:07:46.280 --> 0:07:49.040 limit on the size of the FED reserves balance. They 0:07:49.040 --> 0:07:51.200 can make it much bigger than it is right now. 0:07:51.240 --> 0:07:53.160 I mean, it's obviously we're not used to having a 0:07:53.160 --> 0:07:56.080 balance sheet of this magnitude. There's no actual limit on 0:07:56.120 --> 0:08:00.920 how big balanction can get. Bill You've been very vocal, 0:08:01.000 --> 0:08:04.119 you know, with the public responsibilities you've had over the years. 0:08:04.160 --> 0:08:08.360 I really value the Bloomberg opinion essays as well. What 0:08:08.600 --> 0:08:12.440 is the great research mystery now? If you're lined up 0:08:12.480 --> 0:08:16.119 with the people like say Vincent Reinhardt of the time 0:08:16.160 --> 0:08:18.160 of green Span, if you're lined up with the young 0:08:18.280 --> 0:08:22.080 PhDs at the FED, what's the research idea now to 0:08:22.280 --> 0:08:27.720 you that bears immediate and further study. Well, the biggest 0:08:27.720 --> 0:08:29.560 connunter we have right now is how tight is the 0:08:29.640 --> 0:08:33.600 US labor market? On one hand, we still have part 0:08:33.600 --> 0:08:35.559 fall from where we were in February twin twin. On 0:08:35.600 --> 0:08:37.960 the other hand, the number of job openings at a 0:08:38.000 --> 0:08:40.360 record level. So is is layer market loser? Is a 0:08:40.400 --> 0:08:42.440 living Okay? Well, you went right to my third round. 0:08:42.440 --> 0:08:45.760 I'm gonna go there because of your heritage here with Goldman, Saxon, Berkeley, 0:08:45.920 --> 0:08:48.760 Bill Dudley. Do we have a clue what the overlay 0:08:48.800 --> 0:08:54.720 of technology is on our labor share and our labor dynamics. Well, 0:08:54.760 --> 0:08:57.000 the labor market is obviously changing in a pretty rapid 0:08:57.080 --> 0:09:00.880 rate way, and obviously the COVID pandemic accelerated that transformation. 0:09:00.920 --> 0:09:03.600 So I think it does raise questions about, you know, 0:09:03.640 --> 0:09:05.600 the level of uncertain we have about the layer market. 0:09:05.640 --> 0:09:07.480 I think the level of uncertaining about how the labor 0:09:07.520 --> 0:09:10.520 market right now is unusually. But we've got to leave 0:09:10.559 --> 0:09:13.480 it there. An important topic, important conversation got into Wednesday, 0:09:13.920 --> 0:09:16.400 looking forward to that decision, a news conference this coming Wednesday. 0:09:16.400 --> 0:09:19.880 Build don't think that Bloomberg opinion columnist and senior advisors 0:09:19.880 --> 0:09:29.200 to Bloomberg Economics and former New York Fed President. It 0:09:29.280 --> 0:09:31.880 is the volatility that Lori Kvassin has been wasting for 0:09:32.240 --> 0:09:34.920 the OBC Capital Markets head of U Security Strategy joins 0:09:35.000 --> 0:09:37.440 us right now, Laurie, is this it is this the 0:09:37.440 --> 0:09:39.360 set up, the beginning of it, at least that you've 0:09:39.360 --> 0:09:42.600 been waiting for. I think it very well could be John. 0:09:42.600 --> 0:09:44.560 I mean, you know, looking at the futures this morning, 0:09:44.600 --> 0:09:46.560 this is the first time in quite some time that 0:09:46.600 --> 0:09:48.960 we've had a real meaningful break and I think if 0:09:48.960 --> 0:09:51.960 you talk to investors, UM, the fear is starting to 0:09:52.000 --> 0:09:54.840 become palpable, and ultimately, we really do need to see 0:09:54.840 --> 0:09:58.800 a break in institutional investor sentiment and positioning to get 0:09:58.840 --> 0:10:02.360 this pause that ultimately refreshes UM. Look, you know, we've 0:10:02.360 --> 0:10:04.280 been talking a long time about this. You know, we've 0:10:04.280 --> 0:10:06.360 talked a lot about the deceleration and the rate of 0:10:06.440 --> 0:10:09.000 change in SMP earnings growth time and time again. Coming 0:10:09.040 --> 0:10:11.400 out of a recession, it typically leads to a pretty 0:10:11.400 --> 0:10:14.400 meaningful pullback in the stock market. Um, it is natural 0:10:14.440 --> 0:10:16.400 for this kind of pullback to happen, and we've got 0:10:16.400 --> 0:10:18.400 a lot of a lot of other catalysts besides slowing 0:10:18.400 --> 0:10:20.760 earnings growth that are starting to perk up to help 0:10:20.840 --> 0:10:24.800 catalyze that downward move. So look, I am actually somewhat 0:10:24.880 --> 0:10:26.560 hopeful that we can just go ahead and get this 0:10:26.600 --> 0:10:28.160 done and get this out of the way and then 0:10:28.200 --> 0:10:30.800 move on. UM. I never want to see a down market, 0:10:30.840 --> 0:10:32.720 but I do think that this is just a natural 0:10:33.320 --> 0:10:35.480 part of the process. When you come out of a recession, 0:10:35.520 --> 0:10:38.120 that you have to have this digestion period. What is 0:10:38.160 --> 0:10:41.319 the overbought nature of the market right now? Of institutions, 0:10:41.400 --> 0:10:46.120 what's the character of their confidence. I think that it 0:10:46.240 --> 0:10:49.080 is a hope that some of the pressures we have 0:10:49.320 --> 0:10:51.520 on the market and earnings growth, in particular on the 0:10:51.520 --> 0:10:54.120 inflation side, the supply chain side, that those will be 0:10:54.600 --> 0:10:57.880 uh resolved sooner rather than later. I think there's also 0:10:57.920 --> 0:11:01.079 the idea that we are heading into a strong economy 0:11:01.120 --> 0:11:03.560 again next year. I think at the end of the day, 0:11:03.679 --> 0:11:07.080 investors have to ask themselves what's the risk of a recession? 0:11:07.160 --> 0:11:09.160 It really is that simple. Is it yes? Is it no? 0:11:09.600 --> 0:11:11.959 If the answer is no, you are but typically better 0:11:12.000 --> 0:11:15.520 off sitting around waiting and buying the dip. It's really 0:11:15.559 --> 0:11:18.920 only when a true recession fear builds in that institutions 0:11:18.920 --> 0:11:21.679 will take that positioning down and move to a more 0:11:21.720 --> 0:11:24.240 defensive posture. LORI, when do we know that it's the 0:11:24.280 --> 0:11:27.920 dip to buy? I think that we've got to watch 0:11:27.920 --> 0:11:30.800 the sentiment indicators very closely, Lisa, and you know, we 0:11:30.840 --> 0:11:33.080 actually had one take a very good step in the 0:11:33.160 --> 0:11:35.120 right direction last week, which is if you look at 0:11:35.160 --> 0:11:38.959 the a AII Retail Investor survey that comes out every week. 0:11:39.240 --> 0:11:42.560 The net bullishness dipped to about minus seventeen percent, So 0:11:42.600 --> 0:11:45.319 we saw bears pick up pretty quickly, and we also 0:11:45.360 --> 0:11:48.320 saw the bulls just absolutely collapsed. Now that's one week 0:11:48.360 --> 0:11:50.640 of data. We really need to see that hold for 0:11:50.640 --> 0:11:53.520 four weeks on the four week average. But typically when 0:11:53.559 --> 0:11:56.040 you get below ten percent minus ten percent on the 0:11:56.040 --> 0:11:58.679 four week average, that's a very good bye signal for 0:11:58.720 --> 0:12:01.320 the market on a three and twelve month forward basis. 0:12:01.600 --> 0:12:04.640 Now that's just one side of the sentiment puzzle. You 0:12:04.720 --> 0:12:07.000 also have to look at what institutions are doing. And 0:12:07.000 --> 0:12:10.200 the CFTC data, which we get weekly, is showing us 0:12:10.200 --> 0:12:12.240 that we're still sitting around all time highs. If you 0:12:12.240 --> 0:12:14.560 look at SMP five hundred contracts, if you look at 0:12:14.600 --> 0:12:19.120 aggregated smpach are broader US equity market futures positioning. So 0:12:19.160 --> 0:12:22.080 we need to see that institutional positioning come down, and 0:12:22.120 --> 0:12:23.840 we probably need to see a little bit more damage 0:12:23.840 --> 0:12:25.760 on the retail side for a few more weeks. Laura, 0:12:25.800 --> 0:12:28.600 you'll call forty year and forty nine hundred year end 0:12:29.000 --> 0:12:31.400 next year. What it's fed policy fit into this least 0:12:31.440 --> 0:12:33.440 it's home bringing it up this morning once they could 0:12:33.440 --> 0:12:35.480 be interesting given what we're seeing on the screen this morning, 0:12:35.600 --> 0:12:38.280 what's the FED call that goes into that forty next year. 0:12:39.200 --> 0:12:42.280 So the FED call really impacts two things. Is one 0:12:42.320 --> 0:12:45.360 our assumptions on multiples, and second are are how we 0:12:45.400 --> 0:12:47.839 want to be positioned for the broader US equity market. 0:12:48.320 --> 0:12:49.960 Like I think, a lot of the damage to the 0:12:50.000 --> 0:12:52.880 market itself, John was done back in the spring when 0:12:52.880 --> 0:12:55.120 you saw all the economists around the street clamor for 0:12:55.120 --> 0:12:57.920 the FED to start sending those tapering signals, and back 0:12:57.960 --> 0:13:01.240 then we saw small caps really start to underperformed large caps. 0:13:01.240 --> 0:13:03.319 We've also seen the value trade take a pretty big 0:13:03.360 --> 0:13:05.840 hit if you look at two que performance. That is 0:13:05.880 --> 0:13:08.720 important because if you look back at the last tapering episode, 0:13:08.960 --> 0:13:11.719 we saw markets actually ultimately continue to climb, but the 0:13:11.800 --> 0:13:14.480 risk trade took a hit. So value underperformed and small 0:13:14.480 --> 0:13:17.400 cap underperformed. That's that's I think one issue. But the 0:13:17.400 --> 0:13:19.520 other issue, frankly, is that if you look at the 0:13:19.520 --> 0:13:23.320 FED balance sheet, it's really enabled multiple expansions and the 0:13:23.320 --> 0:13:25.880 post financial crisis era. So if you take the balance 0:13:25.920 --> 0:13:29.960 sheet expansion away, you don't get any more multiple expansion. 0:13:30.000 --> 0:13:32.880 That's really gonna be earning strongth griven market going forward. Laura, 0:13:32.920 --> 0:13:35.160 I'm I'm in a complete sweat here this morning with 0:13:35.280 --> 0:13:37.559 futures where they are now. We're in the SPX of 0:13:37.679 --> 0:13:41.080 four point one draw down. I mean a crisis is 0:13:41.120 --> 0:13:43.600 it in the VIX? Isn't even at the thirty We're 0:13:43.600 --> 0:13:46.920 at twenty five point one four. When I decide to 0:13:47.000 --> 0:13:51.640 load the boat, which sector has the most combination of 0:13:51.720 --> 0:13:57.360 persistency and velocity into two thousand twenty two. So I'll 0:13:57.400 --> 0:13:59.400 say the two sectors that I'm gonna be telling people 0:13:59.440 --> 0:14:02.120 to buy this week are going to be financials and technology. 0:14:02.160 --> 0:14:04.080 You've got a big pillar of the value trade, big 0:14:04.080 --> 0:14:06.319 pillar of the growth trade. I think as we as 0:14:06.360 --> 0:14:08.800 we come out of these you know, sort of shorter 0:14:08.920 --> 0:14:11.040 term concerns on the market, I think the value trade 0:14:11.040 --> 0:14:13.240 will do well again. And I think the financials trade, 0:14:13.320 --> 0:14:16.360 it's cheap um, it doesn't have supply chain issues that 0:14:16.440 --> 0:14:19.360 things like industrials have. That's gonna be your cleanest, purest 0:14:19.400 --> 0:14:22.280 way to play that value pop. But longer term, what 0:14:22.360 --> 0:14:23.920 we do know about the FED, and so let's move 0:14:23.920 --> 0:14:26.960 away from tapering and start talking about hikes. But typically 0:14:27.000 --> 0:14:30.880 the FED hiking cycle does end up killing the value 0:14:30.880 --> 0:14:33.760 trade as well. We see that time and time again. 0:14:34.120 --> 0:14:36.480 UM and I think longer term, when we start to 0:14:36.520 --> 0:14:40.040 see economic growth decelerate back towards kind of trend like levels, 0:14:40.040 --> 0:14:41.520 you want to be in the growth trade, and tech 0:14:41.640 --> 0:14:44.040 is probably your best way to play that. LOI thank you. 0:14:44.160 --> 0:14:47.120 Going to catch up as always Lori Kavassin or obviously 0:14:47.160 --> 0:14:56.760 Capital Markets head of US equity Strategy Andrew Holland Horse 0:14:56.880 --> 0:15:00.600 drives for the conversation with City Group, their chief US economists. 0:15:00.640 --> 0:15:03.880 And maybe it's a slowdown Q three, a pickup Q four, 0:15:04.440 --> 0:15:07.000 and then it's a complete mystery. What is the most 0:15:07.040 --> 0:15:11.000 mysterious part of the mystery known as economic two thousand 0:15:11.040 --> 0:15:14.360 and twenty two. I think if there's one big mystery 0:15:14.400 --> 0:15:17.000 out there, and maybe the most important mystery also, it's 0:15:17.120 --> 0:15:19.600 what's going on in the labor market right now? How 0:15:19.680 --> 0:15:23.440 serious are these worker shortages? How long will they continue? Forth? 0:15:23.440 --> 0:15:26.080 So we know that we're in an economy that's constrained 0:15:26.080 --> 0:15:29.120 by the supply side, and the big question is how 0:15:29.160 --> 0:15:31.200 significant is that constraint and how long will it be? 0:15:31.280 --> 0:15:34.320 With us? Well, the constraints there, and it wraps around 0:15:34.320 --> 0:15:36.960 a consumer as well the consumers linked in and supply 0:15:37.120 --> 0:15:41.920 constraints and particularly linked into the challenges and prosperities of China. 0:15:42.240 --> 0:15:46.600 How do you link American consumption of the economy into 0:15:46.600 --> 0:15:50.880 the dynamics we observe out of Hong Kong and Beijing. Yeah, 0:15:51.000 --> 0:15:52.920 it's interesting, Tom, because if you do the kind of 0:15:53.040 --> 0:15:58.520 direct effects that go to three decimal points, yeah you get, yeah, 0:15:58.520 --> 0:16:01.960 you get, you get relatively relatively smaller numbers. The the 0:16:01.960 --> 0:16:03.960 the issue, of course is that if you get a 0:16:04.040 --> 0:16:07.120 general risk off in financial markets, a general concern and 0:16:07.160 --> 0:16:10.400 financial markets, then we find that global economy has become 0:16:10.480 --> 0:16:13.000 much more correlated. We saw that post two thousand eight, 0:16:13.000 --> 0:16:16.080 for instance. So you always have to watch these global risks, 0:16:16.160 --> 0:16:17.720 even if when you kind of run the numbers on 0:16:17.800 --> 0:16:20.920 these things that the direct effects look relatively small. Well 0:16:21.000 --> 0:16:23.280 me through the China issues right now, then as far 0:16:23.360 --> 0:16:25.520 as you see them, Andrews the anot of dice. If 0:16:25.520 --> 0:16:27.520 you're at the Federal Reserve and they faced this a 0:16:27.560 --> 0:16:30.760 few times over the last ten years, risks coming out 0:16:30.760 --> 0:16:32.600 of China, how don't they face this one dawn this 0:16:32.640 --> 0:16:36.200 time around. That's what's so difficult for the Federal Reserve 0:16:36.240 --> 0:16:39.880 of course, as the Federal Reserve, you aren't controlling primarily 0:16:39.880 --> 0:16:44.080 what's happening domestically, and your monetary policy should focus on 0:16:44.200 --> 0:16:46.960 domestic issues, but you have to take into account any 0:16:47.000 --> 0:16:50.200 exogenous shock, right, whether that be concerns about the dead ceiling, 0:16:50.200 --> 0:16:52.600 which you were just talking about, concerns about what's going 0:16:52.640 --> 0:16:55.480 on externally. So I think that's what FED officials are 0:16:55.480 --> 0:16:57.520 trying to navigate here now. I think they deal are 0:16:57.560 --> 0:17:00.760 in a pretty good place because we have very accommodated 0:17:00.880 --> 0:17:04.840 financial conditions right now, So they'll probably still be confident 0:17:04.880 --> 0:17:08.240 in proceeding towards tapering, but you know, as always with 0:17:08.240 --> 0:17:11.640 the FED, probably leaving lots of optionality, lots of contingencies 0:17:11.680 --> 0:17:14.199 there in case something happens down the road. They're not 0:17:14.200 --> 0:17:16.600 going to set themselves on a preset course. Andrew, A 0:17:16.600 --> 0:17:19.560 lot of equity analysts are very focused on whether supply 0:17:19.640 --> 0:17:22.480 chain disruptions are transitory. That's one of the key aspects 0:17:22.480 --> 0:17:25.640 with margin pressures. Does the FED really care how long 0:17:25.680 --> 0:17:28.320 they last? Or is that not the inflationary input that 0:17:28.359 --> 0:17:30.359 they're really focused on. Is it more just the labor 0:17:30.400 --> 0:17:33.639 mismatch that we're seeing. So I think it does matter 0:17:33.760 --> 0:17:35.919 the tightness that you're seeing in product markets. If it 0:17:35.960 --> 0:17:38.280 continues for a longer period of time, and we're talking 0:17:38.320 --> 0:17:42.320 about things like semiconductors where this could be continuing into 0:17:42.320 --> 0:17:46.080 mid two towards the end of two, that's gonna put 0:17:46.119 --> 0:17:48.679 continued opward pressure on prices and that can push up 0:17:48.720 --> 0:17:52.680 inflation expectations, and then the FED becomes concerned. But really, again, 0:17:52.840 --> 0:17:55.480 I would go back to the labor market because ultimately, 0:17:55.480 --> 0:17:59.160 in product markets, you can expand capacity, you can expand supply. 0:17:59.760 --> 0:18:03.240 What it's harder to expand supply of his workers because 0:18:03.280 --> 0:18:06.480 there fundamentally and fixed supply. So so I think that 0:18:06.520 --> 0:18:08.840 would be my concern if I were a FED official. Andrew, 0:18:09.119 --> 0:18:12.000 I'm still trying to understand why it is that the 0:18:12.040 --> 0:18:15.320 FED is continuing with a hundred billion dollars of purchases, 0:18:15.359 --> 0:18:18.399 how it directly feeds into the labor market. Basically, is 0:18:18.440 --> 0:18:21.240 this a statement saying that the FED has not successfully 0:18:21.240 --> 0:18:24.160 divorced the idea of taper from raising rates from tightening, 0:18:24.359 --> 0:18:25.840 and that they will not be able to do that 0:18:25.880 --> 0:18:29.720 no matter what their communication is. So I think you're 0:18:29.760 --> 0:18:31.680 not alonely, so I think there are even some FED 0:18:31.720 --> 0:18:33.760 officials who are with you. That are looking at what's 0:18:33.800 --> 0:18:36.600 going on with very low levels of interest rates, house 0:18:36.640 --> 0:18:40.399 prices that have increased very dramatically, and saying, do we 0:18:40.440 --> 0:18:42.280 really need a hundred and twenty billion a month of 0:18:42.320 --> 0:18:45.200 asset purchases? That is it really doing something for labor 0:18:45.240 --> 0:18:48.160 markets right now, which is the mandate where the FED 0:18:48.200 --> 0:18:50.840 is still trying to make progress. So I think there 0:18:50.880 --> 0:18:54.840 real there are real questions about the kind of marginal 0:18:54.960 --> 0:18:58.000 benefit of doing continued asset purchases at this point, which 0:18:58.000 --> 0:19:00.679 is why they're being papered down now. In terms of 0:19:00.920 --> 0:19:04.240 separating paper from tightening interest rates, yes, I think we're 0:19:04.240 --> 0:19:06.480 gonna hear from Chair Powell these are separate issues. But 0:19:06.760 --> 0:19:09.480 remember FED officials don't want to raise interest rates until 0:19:09.520 --> 0:19:12.040 they've fully tapered purchases. So I think there is a 0:19:12.080 --> 0:19:14.800 sense in which these can never be completely disconnected. It 0:19:14.920 --> 0:19:18.000 it's still a hawkish movement or a less dubbish movement. 0:19:18.040 --> 0:19:20.920 Maybe we should say to wind down the purchase plan 0:19:21.280 --> 0:19:22.920 and it does set you up for rate heights down 0:19:22.960 --> 0:19:26.480 the line. Andrew the linkage here of the great Alan 0:19:26.560 --> 0:19:29.520 Meltzer of Carnegie Mellen back to your U c l A. 0:19:29.720 --> 0:19:32.920 I mean, come on, it's a huge deal. You were 0:19:33.000 --> 0:19:36.480 throwing the two volumes Alan Meltzer History of the FED 0:19:36.840 --> 0:19:39.480 and said, yeah, I'll read the introduction, give me the 0:19:39.600 --> 0:19:42.159 History of the FED right now. And the answer is 0:19:42.240 --> 0:19:45.800 they wait and wait and wait. There's data dependent now 0:19:45.960 --> 0:19:49.800 they've ever been right it. So those those volumes are 0:19:49.800 --> 0:19:51.720 on my book shelf. Tom. I can't say whether or 0:19:51.760 --> 0:19:53.800 not I've read Oh good. I can say I have 0:19:53.880 --> 0:19:56.159 not read them. And I told that the professor Meltzer 0:19:56.280 --> 0:19:59.440 wants go. But but I think that is what the 0:19:59.600 --> 0:20:02.520 fedest trying to do with this flexible average inflation targeting. 0:20:02.520 --> 0:20:05.280 The whole idea is we're gonna wait until we actually 0:20:05.320 --> 0:20:08.160 see the inflation emerging, which we're seeing now. Now maybe 0:20:08.160 --> 0:20:10.800 it's transitory, but we're certainly seeing those numbers now, and 0:20:10.840 --> 0:20:13.800 then we're gonna wait until inflation expectations are moving higher. 0:20:13.800 --> 0:20:16.760 And we have seen those expectations move higher. University of 0:20:16.800 --> 0:20:20.159 Michigan five to ten. Your expectation sitting around three percent. 0:20:20.280 --> 0:20:23.159 Some of the other survey based expectation measures also higher. 0:20:23.400 --> 0:20:25.400 So that that is a sense in which FIT officials, 0:20:26.160 --> 0:20:29.520 relative to their prior policy, that they're essentially trying to 0:20:29.640 --> 0:20:32.639 be behind the curve. Relative to where they would have 0:20:32.680 --> 0:20:35.560