Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Right now, we
Speaker 1: are thrilled to bring to you a Rockin rog And
Speaker 1: he is of course at the University of Chicago Boost School.
Speaker 1: He is of course a former Reserve Bank of India governor,
Speaker 1: but also one of the most prescient students of American
Speaker 1: culture and our future. Were thrilled that Dr Roger could
Speaker 1: join Bloomberg this morning. Rockerman, want to go back to
Speaker 1: I think it was two thousand twelve and your postmortem
Speaker 1: in the Corporate and the Corporation and Finance where you
Speaker 1: talked about the near death experience of two thousand eight.
Speaker 1: How close are we to that now? When you look
Speaker 1: at the unique challenges every central bank happens, including the
Speaker 1: work at Bank of India UH ten days ago, I
Speaker 1: will say, how close are we to a two thousand
Speaker 1: twenty two near death experience? Well, every UH sort of
Speaker 1: episode is different. Of course, I think we are not
Speaker 1: as fearful of the banking sector this time because of
Speaker 1: substantially more capital in that sector. What is less known
Speaker 1: as what happens in the shadow banking system, uh, the cryptos,
Speaker 1: the finance companies, the various funds, and UH. What has
Speaker 1: happened over the last ten years is we've had very
Speaker 1: easy money. Very easy money means leverage. Very easy money
Speaker 1: means a dependence on liquity, UH, and dependence on being
Speaker 1: able to roll over stuff. And the big unknown is
Speaker 1: how many, how much of the financial sector is is
Speaker 1: actually going to have problems as rates go up, as
Speaker 1: rollovers become more difficult. Yesterday, day before, we saw that
Speaker 1: happening to stable coins. What else is waiting out there
Speaker 1: by now? Pay later? Yeah? What what's so important here,
Speaker 1: Dr Roger? And is the University of Chicago's intellectual foundation
Speaker 1: and leadership on the breaking of inflation by Paul Woker
Speaker 1: a few decades ago. I know history doesn't repeat, but
Speaker 1: what are the methods we need to do to break
Speaker 1: this inflation? Well, Paul Volker used a sledgehammer, right. He
Speaker 1: essentially created a double dep procession in order to squeeze
Speaker 1: out inflation. We hope it doesn't come to that this time. Nevertheless,
Speaker 1: I think the message from Volker is as inflation gets legs,
Speaker 1: as it picks up, as it spreads, and it spreads
Speaker 1: not just within the country across goods and services, but
Speaker 1: across the world, you have to take strong medicine, and
Speaker 1: that means raising rates, typically a percentage point or two
Speaker 1: above the prevailing inflation rate, and right now we are
Speaker 1: so far from it. Now. The good news, I think
Speaker 1: is when you look at an inflation expectations over the
Speaker 1: last few days, they seem to have come down. That's
Speaker 1: an interesting development. People think the Fed is serious. The
Speaker 1: markets may not be perfectly right, but they certainly think
Speaker 1: the FED has a chance. Now you look at five
Speaker 1: year five year forward expectations, they had gone up to
Speaker 1: two and a half percent. They're back down to two
Speaker 1: point three now. So there's something here suggesting the market
Speaker 1: believes the Fed is serious. Program. You're talking about the
Speaker 1: concern about financial stability as well as this belief in
Speaker 1: faith that the FED can actually bring down inflation, that
Speaker 1: they're actually to go ahead and do that. In some ways,
Speaker 1: does the FED get more conviction to go faster and
Speaker 1: more from the fact that the disruptions, whether it's in
Speaker 1: the stable coin that you talk about, whether it's the
Speaker 1: fact that we've seen massive amounts of pain in the
Speaker 1: big tech sector, that we have not seen a wholesale
Speaker 1: financial market collapse in some of the shadow banking sector.
Speaker 1: Does that give the FED more confidence that they can
Speaker 1: raise rates to the pace that they're planning to. I
Speaker 1: think it does. I also do think that, uh, you know,
Speaker 1: the fact that the market was not reacting earlier in
Speaker 1: the year to anticipation that the FED would do something,
Speaker 1: certainly into late last year and earlier this year, Um,
Speaker 1: that was a source of concern. Everybody knew the FED
Speaker 1: had to start raising rates and uh, you know, you
Speaker 1: wanted some of the uh sort of wombs behind the
Speaker 1: market to die down. Now that has happened, but as
Speaker 1: you said, it hasn't resulted in the wholesale collapse. It
Speaker 1: has been you know, steady declines. Uh that's not a
Speaker 1: bad thing. Of course, the FED is weary. It doesn't
Speaker 1: want to cause the market collapse and uh that you know,
Speaker 1: if that does happen, it may have to rethink a
Speaker 1: little bit of strategy. But certainly steady decline is not
Speaker 1: a bad thing for the FED. Meanwhile, the great Fed
Speaker 1: conundrum of two is just how much growth has to
Speaker 1: come down in order to meet their goal of bringing
Speaker 1: down inflation in light of some of the supply chain disruptions,
Speaker 1: the supply side issues that have really caused this. Where
Speaker 1: do you weigh in on this as a former central banker,
Speaker 1: as a former head of a central bank that had
Speaker 1: to make some of these hard decisions. Do you think
Speaker 1: it's worth it to curtail employment to potentially send the
Speaker 1: economy into a recession if that's what it takes to
Speaker 1: bring down inflation. Well, there are two sources of concern right.
Speaker 1: One is that inflationary expectations get more entrenched as you
Speaker 1: see higher inflation over a sustained period. And the second
Speaker 1: is that translates into workers demanding higher wages, and you
Speaker 1: get the wage price spiral. Workers demanding higher wages causing
Speaker 1: higher inflation causing them to demand more. Now, there are
Speaker 1: two ways to break this. One, of course, is to
Speaker 1: bring down inflation so expectations come down. The other is
Speaker 1: to take some of the heat of the labor market
Speaker 1: uh to create some slack so that workers now say, well,
Speaker 1: maybe inflation has gone up, but I'd rather prefer having
Speaker 1: my job than going out, uh, you know, demanding a
Speaker 1: wage hike and uh, I think you can work on
Speaker 1: both now. The the I think the possibility of having
Speaker 1: a softer landing is certainly one that has been talked
Speaker 1: about a lot. And increase in labor supply as COVID
Speaker 1: sort of fears come down, but importantly as immigration picks
Speaker 1: up and and floods the lower end with a few
Speaker 1: more people taking the heat of the labor market in
Speaker 1: that at that end, and that can trans make upwards.
Speaker 1: But I think these are things that take time. I
Speaker 1: think the FED has to act to show that it's
Speaker 1: serious and hope that these forces uh sort of kicking
Speaker 1: down the line and prevent that that recession from necessarily happening.
Speaker 1: Very importantly here, your book, The Third Pillar, was one
Speaker 1: of my books of the summer. You talked there about
Speaker 1: the elites of America leaving the community behind. Give us
Speaker 1: an update. I don't think it's that pretty, is it.
Speaker 1: It isn't. And my big worry is that we've spent
Speaker 1: six trillion, but a lot of it was income support
Speaker 1: and not so much on structural reforms that would strengthen
Speaker 1: the capacity of those communities that are disadvantages, that are
Speaker 1: falling behind their capacity to earn a you know, stronger
Speaker 1: living to have stronger institutions. Now I think we have
Speaker 1: a chance. I think with the increase in technology, the
Speaker 1: ability to work from home that we've learned in the pandemic,
Speaker 1: maybe economic opportunity can spread more widely, that people in
Speaker 1: skilled services don't have to go into the big city
Speaker 1: every day. They can stay in more remote places. They
Speaker 1: can fertilize those places with their capabilities, with the incomes,
Speaker 1: and you get a spreading of economic activity. But we
Speaker 1: have to work on this. We have to do far more,
Speaker 1: and I think if we do more, it will reduce
Speaker 1: some of the divide that plagues not just the United
Speaker 1: States but almost every industrial country. We do have to
Speaker 1: build up elsewhere, level up, so to speak. I always
Speaker 1: enjoy listening to say thanks to famous for so long
Speaker 1: a ranch and there at the University of Chicago. Let's
Speaker 1: go right now and moving forward into the summer. Is
Speaker 1: a joy to speak to Angelo's stand. She is non
Speaker 1: resident Senior Fellow Brookings and author of my book of
Speaker 1: the Year, made far too early in this Tumultua was
Speaker 1: two thousand, twenty two Putin's world. All I can say
Speaker 1: is it's definitive. Professor Stan, thank you so much for
Speaker 1: joining today. Here's what Wikipedia says about Mr Putin's health.
Speaker 1: These claims are speculative and made by those who are
Speaker 1: not medical professionals. So Dr stant I remember you on
Speaker 1: Dr Kildare a few years ago, how is Mr Putin's health?
Speaker 1: I am not a medical doctor. Good morning, So it
Speaker 1: is all speculation. I mean, if you looked at him
Speaker 1: on Monday in the May ninth rally commemorating the anniversary
Speaker 1: of the defeated the Nazis, he didn't look quite you know,
Speaker 1: as robust, let's say, as he's done on previous occasions.
Speaker 1: His speech was very short. We all expected something longer
Speaker 1: and more bombastic in a way. I mean, it was
Speaker 1: still pretty aggressive, but it was kind of toned down
Speaker 1: and he didn't make really any news, which people thought
Speaker 1: he would. But we do have to reiterate it's all regulation. Um.
Speaker 1: You know, I've seen on Twitter many people claiming to
Speaker 1: be medical professionals who have diagnosed him with a large
Speaker 1: number of ailments. But we just don't know the truth.
Speaker 1: I don't understand. You have studied Napoleon to Moscow, Hitler
Speaker 1: to Moscow, and now Putent to Kiev. Is his military overextended?
Speaker 1: I think it is. I think they're doing much less
Speaker 1: well than people thought. They're even having a very hard
Speaker 1: time taking the rest of the dune bus. They have
Speaker 1: taken some territory in the past few weeks, and they're
Speaker 1: grinding on. They're still just as brutal, but we one
Speaker 1: would have thought that they would have been able to
Speaker 1: take more territory. You have this kind of dynamic stalemate
Speaker 1: now in the Ukraine War, the Russians take some territory,
Speaker 1: the Ukrainians pushed them back. The Ukrainians are now pushing
Speaker 1: them back from Harkey, the second largest city. So they
Speaker 1: are not performing as well as people thought they would.
Speaker 1: But they still do have the firepower and the manpower,
Speaker 1: so they're going to continue this grinding war. I go
Speaker 1: as long as they can until they achieve some of
Speaker 1: their objectives. Angela, how much raw equipment do they have
Speaker 1: left that doesn't need any repairs? And I asked this
Speaker 1: because a lot of people were talking about the sanctions
Speaker 1: and how it would prevent imports to Russia of some
Speaker 1: of the key aspects to fix for example, tanks, to
Speaker 1: fix other issues their planes. How much is that starting
Speaker 1: to bite? Oh, I think it's definitely starting to buy
Speaker 1: exactly with the sanctions and the spare parts. I mean,
Speaker 1: they still do have equipment, but as far as we
Speaker 1: can see, it isn't top shape, it isn't in great shape.
Speaker 1: So it's going to get more challenging for them going
Speaker 1: forward with respect to gas and oil. And I want
Speaker 1: to pivot to that point because we are hearing so
Speaker 1: much about ongoing negotiations in Europe, how would you characterize
Speaker 1: them Because there's so much uncertainty of what they've agreed on,
Speaker 1: what they're planning to do, what groundwork is actually getting laid.
Speaker 1: How realistic is it to see a real shift away
Speaker 1: from Russian gas in the near future. So at the
Speaker 1: moment on the oil, they're still arguing within the EU
Speaker 1: about a total off, particularly Hungry as a holdout and
Speaker 1: says that it's not going to stop importing Russian oil
Speaker 1: because that would be devastating for its own economy. One
Speaker 1: assumes that they're going to continue these difficult negotiations and
Speaker 1: try and come to some compromise with the Hungarians, and
Speaker 1: then with gas it is more challenging. I mean, the
Speaker 1: Germans have now said that they do want to get
Speaker 1: off imports of Russian gas, but they can't do it
Speaker 1: tomorrow more even in six months, it's going to take
Speaker 1: them a longer time. The Russians, of course threatening and
Speaker 1: actually coming off some of the gas supplies already, so
Speaker 1: that's a rather messy set of negotiations. But they are
Speaker 1: continuing to try and figure out how best that is.
Speaker 1: Europe can wean itself totally off Freshian energy, but it'll
Speaker 1: still take time. Angela Stent years ago, I remember asking
Speaker 1: the giant Marshall Goulden this question. Let me ask the
Speaker 1: same one to you. We were wrong, wrong, wrong, wrong
Speaker 1: about the strengths in our intelligence of the Soviet Union.
Speaker 1: Do you believe we have a good understanding of the
Speaker 1: strength of the Russian army, the Russian military complex, including navy.
Speaker 1: So I think we overestimated the strength of the Russian military,
Speaker 1: just apparently as Putin did. I think even our intelligence
Speaker 1: services have been surprised by how badly they've done, because
Speaker 1: maybe we just didn't have insight into the impact of
Speaker 1: this pervasive corruption where a lot of the money that
Speaker 1: was supposed to have gone to new equipment, to training,
Speaker 1: to building up the army is lining people's pockets and
Speaker 1: maybe we just didn't understand that well enough. And I
Speaker 1: think we're now coming trying to reassess our previous assessments
Speaker 1: of the Russian military and maybe downgrade them. But I
Speaker 1: think it's sort of natural that any intelligence agency will
Speaker 1: look at the worst case scenario because that's what they
Speaker 1: have to do. And therefore they probably did overestimate how
Speaker 1: quickly the Russians would they will be able to accomplish
Speaker 1: what they're trying to do in Ukraine and to the
Speaker 1: stand of Brookins, and they're just wonderful to have you
Speaker 1: with this on the program as always, and you to
Speaker 1: thank you. This is a joy in a great pleasure.
Speaker 1: Barton Crockett is a gentleman of certain courage. He's at
Speaker 1: Rose and Blood Securities and joins us right now. And
Speaker 1: as all of you look at your draw down, let's
Speaker 1: pick amazon down from the peaks. Crockett lonely was out front.
Speaker 1: He has been a consistent neutral as a general statement
Speaker 1: on the fangs for quarters and quarters and quarters, Barton,
Speaker 1: I want to drill down to one emotion right now,
Speaker 1: which is does Jeff Bezos come back to Amazon? Is
Speaker 1: Amazon online retail so screwed up that like Igor at Disney,
Speaker 1: Bezos must return? Oh Bezos isn't coming back. He's uh,
Speaker 1: he's enjoying life. UM. You know, I think that UM.
Speaker 1: The focus at Amazon for growth is going to be
Speaker 1: on Amazon Web services, Amazon retail, there direct to retail
Speaker 1: or third party retail. UM is a business that I
Speaker 1: think is doing what every business should do, which has
Speaker 1: gotten so large that I think it is hitting a
Speaker 1: maturity plateau. And if you look at the numbers for
Speaker 1: Amazon retail UM for UM a few quarters now, they're
Speaker 1: not growing faster than retail overall. And that's sales for
Speaker 1: Amazon and UM. You could argue that that's not the
Speaker 1: driver of value. The web services is, which is I
Speaker 1: think the saving grace for the stock, but a big
Speaker 1: revenue line I think is resetting UM. I think the
Speaker 1: growth story of Amazon is different now because of the pandemic.
Speaker 1: We've had a pull forward, We've had the competitive set improve,
Speaker 1: You've weeded out the weakest players UM, and Amazon doesn't
Speaker 1: have a strong play in click and brick, and that's
Speaker 1: a meaningful part of what consumers are looking for right now.
Speaker 1: Parton with the pullback that we were, the pullback that
Speaker 1: we're enjoying, or would you suggest that the anointed profitable
Speaker 1: of technology are going to have a come to Jesus
Speaker 1: moment and they're gonna change their business models more towards
Speaker 1: profitability and use of free cash flow. We're already seeing changes,
Speaker 1: you know. We're we're seeing Amazon work through excess supply.
Speaker 1: Remember a bull argument for Amazon was that in the pandemic,
Speaker 1: they build up the supply that would power the business
Speaker 1: because it would give them the capacity to meet the demand,
Speaker 1: and instead they overbuilt, so they're having a right size
Speaker 1: to reality. Um, you know, we're seeing that in other businesses,
Speaker 1: um a tighter focus from these growth stories on what
Speaker 1: life is when you start to face more maturity, which
Speaker 1: is what a lot of these big companies are coming
Speaker 1: into right now. So talking about right sizing, we've seen
Speaker 1: a huge right sizing and Twitter share prices today. We've
Speaker 1: seen Ellen must come out and say that he was
Speaker 1: going to put it on hold, but then he just
Speaker 1: came out recently in the past few moments saying that
Speaker 1: he was still committed to the acquisition. You're seeing a
Speaker 1: bit of a pop near forty dollars on the shares,
Speaker 1: but still a deep skepticism that this will get done
Speaker 1: at the deal, at the price deal that that he
Speaker 1: was talking about. How much of a rerating do you
Speaker 1: think needs to happen further, based not just on Twitter's
Speaker 1: up model, but also on the broader reevaluation of how
Speaker 1: much some of these big tech companies are worth well.
Speaker 1: I think I think in the case of Twitter UM,
Speaker 1: I think that this is Elon musk being Elon musk Um.
Speaker 1: I think at the end of the day, he's he's
Speaker 1: put his uh put himself so deep into the water
Speaker 1: on this one that I don't see it, see it.
Speaker 1: I don't see him turning back Um. You know, if
Speaker 1: he did turn back Twitter, there'd be some sentiment reset.
Speaker 1: But I think on a fundamental basis, I don't think
Speaker 1: he actually paid much of a premium. I think that
Speaker 1: Twitter um was not as miss priced as as you know,
Speaker 1: perhaps some other equities have been. UM. Look, I think
Speaker 1: that that what we're confronting right now is UH separation
Speaker 1: from some companies. So some companies are confronting the reality
Speaker 1: of an addressable market that is not what we thought.
Speaker 1: We're seeing that with Netflix. I think we're seeing that
Speaker 1: with Amazon Retail. UM. Other companies I think are going
Speaker 1: through UH situations that are going to be long lived.
Speaker 1: And I put Apple in China UM. The never ending
Speaker 1: COVID lockdown is what that does for an important end market,
Speaker 1: what that does for never ending supply disruptions. I put
Speaker 1: them in that camp. UM, you know, for businesses where
Speaker 1: the blue sky story is not what it was or
Speaker 1: is being challenged. UM. You know, I think right now
Speaker 1: is a time of reset and a time of rethink
Speaker 1: for companies that are going to be able to power
Speaker 1: through this. And I put alphabet UM in that camp.
Speaker 1: The search business is something that will be here generationally.
Speaker 1: YouTube I think can handle its short form transition. UH
Speaker 1: cloud services, I think, you know, that's a company that
Speaker 1: I think can separate. So in the Fang group, that's
Speaker 1: the one company that I'm recommending UM near the other
Speaker 1: companies I think have issues that need to be worked through.
Speaker 1: Abouttom one issue with Twitter, and let's finish there. Just
Speaker 1: on a substance of the tweet from Elon Musk this morning,
Speaker 1: he's basically probing this idea that there might be more
Speaker 1: than five percent of the ubas a base that make
Speaker 1: up spam, fake account spots and all the rest. You've
Speaker 1: got any calculation on that whatsoever? No, I mean there's
Speaker 1: no one on the outside that can can you go
Speaker 1: beyond Twitter's disclosures, nor can Musk. I don't think Musk knows,
Speaker 1: you know, I think this is talk. I think this
Speaker 1: is him doing what he does, which is stirring up
Speaker 1: the pot um and so uh, you know the caveat
Speaker 1: is that you know, I'm not Musk. I don't know
Speaker 1: precisely what he's going to do, but like that would
Speaker 1: be time. I think there's gonna be the bottom line.
Speaker 1: No one knows what Elon Musk is thinking. Let's not
Speaker 1: try and work that out. Bona Crockett Rose and Blast Securities,
Speaker 1: Megan Green, Global Chief Economists Institute where Thissen, Senior Fellow,
Speaker 1: Harvard Kennedy School. Megan, you know the framework here two
Speaker 1: percent and unders where we're comfortable on inflation. Adam Posing
Speaker 1: and Peterson Institute is controversially suggested maybe the new two
Speaker 1: percent is three percent, hoping a prayer or trying to
Speaker 1: get back to four percent. How important is this discussion
Speaker 1: of two or three and four percent is a new
Speaker 1: level of inflation. I actually don't think it's that important.
Speaker 1: Lots of people have been saying that the FED should
Speaker 1: be targeting three percent inflation all along. Anyhow, the point
Speaker 1: isn't whether it's two, three, or four. It's it's whether
Speaker 1: it's stable or not. And so I think the glide
Speaker 1: path to that is what's most important, whether it's to
Speaker 1: three or four percent. I think the FED, by the way,
Speaker 1: would be fine with three or four percent inflation by
Speaker 1: the end of the year. Unfortunately, I don't think we'll
Speaker 1: quite get there yet. That might we might have to
Speaker 1: wait until next year for that, but it's it's the
Speaker 1: path there as long as inflation expectations remain anchored. I
Speaker 1: think the FED is okay with overshooting your target, but
Speaker 1: that much they're just not okay with what we have now.
Speaker 1: How much of that glide path is linked to the
Speaker 1: glide path of a slowdown and economic growth. They're clearly linked,
Speaker 1: um and they get at the debate on whether inflation
Speaker 1: is so much higher because of demand side factors or
Speaker 1: supply side factors, and we economists just fundamentally cannot agree
Speaker 1: on that, in part because we've never put the economy
Speaker 1: on a deep freeze in defrosted it before, so we've
Speaker 1: never done this before. But also in part because it's
Speaker 1: demand relative to supply and supply relative to demand. So
Speaker 1: if we have a weaker economy, that undermines demand and
Speaker 1: so that can take some of the heat off inflation.
Speaker 1: And that's pretty much all the FED has got to
Speaker 1: work with. The FED can't do much about supply side actions,
Speaker 1: and I tend to actually think that it's the supply
Speaker 1: side factors that are overwhelming demand side factors on inflation.
Speaker 1: Right now, all the FAI can really do is engage
Speaker 1: in what we economists call, you know, aggregate demand management,
Speaker 1: which means killing off demand. And that's why everyone's so
Speaker 1: worried about FED actions resulting in a recession. Megan, if
Speaker 1: you're talking about the majority of inflation coming from the
Speaker 1: supply side, then essentially, given how strong those pressures are,
Speaker 1: does the FED essentially have to spur a recession in
Speaker 1: order to fight inflation? And I ask this because frankly,
Speaker 1: it's a sort of delicate issue that a lot of
Speaker 1: FETE officials are trying to dance around. Yeah, it may
Speaker 1: well have to. As I said before, the FED can
Speaker 1: do anything about supply side factor is all I can
Speaker 1: do is tinker with demand. And so we obviously are
Speaker 1: out of whack between the two uh, and so the
Speaker 1: FED is going to have to cool off demand UM.
Speaker 1: And of course central banking tools aren't precise. They kick
Speaker 1: in with long and variable lags, and so you know,
Speaker 1: the FIG can't find tweak this perfectly. It may end
Speaker 1: up hiking too much and pushing us into recession. In fact,
Speaker 1: that's what usually happens. The hope is that the FIG
Speaker 1: can generate some kind of soft landing. I would say
Speaker 1: this is going to be really hard. I mean, the
Speaker 1: FEED is effectively trying to thread needle wearing of admitst blindfolded.
Speaker 1: It's it's going to be really tough. So we haven't
Speaker 1: really seen the repricing to the same degree and credit
Speaker 1: as we have in equities. And this is interesting because frankly,
Speaker 1: a lot of people look at credit as the canary
Speaker 1: in the coal mine. It has not been that. How
Speaker 1: concerned are you about some sort of crisis to be
Speaker 1: in terms of the next couple of months or even
Speaker 1: a year, because you're getting both the growth slow down
Speaker 1: and rates that are higher. You know, I'm not that
Speaker 1: worried about it. Before the pandemic hits, I was very
Speaker 1: worried about corporate leverage in the US, and of course
Speaker 1: the FEDS actions in response to the pandemic supercharged corporate leverage.
Speaker 1: That being said, companies have built up huge cash positions,
Speaker 1: and so I think that they've got a while to
Speaker 1: burn through that before we really need to worry about
Speaker 1: um credit and about kind of defaults that end up
Speaker 1: being sort of cascading defaults prompting a recession. I think
Speaker 1: we're a long way off from that, so I'm not
Speaker 1: particularly concerned for what it's worth, though. I think if
Speaker 1: if that were to happen, if there were signs was coming,
Speaker 1: I think the FED would actually about face and and
Speaker 1: there the FED put still exists. I think the FED
Speaker 1: is fine watching equity markets fall for now, that's not
Speaker 1: really systemic. If we saw dislocations in the credit markets,
Speaker 1: that would get the FEDS attention of the Crown Institute. Megan,
Speaker 1: thank you. When you have the courage to write the
Speaker 1: notes that Mr Schumacher writes votes, you not only put
Speaker 1: a rate on it, you put a date on it.
Speaker 1: Mike Schumacher is one of the very few saying here's
Speaker 1: the terminal rate Mike Schumacher three point zero five percent
Speaker 1: in the middle of next year, and then you go
Speaker 1: on to a higher statistic, is well, what is the
Speaker 1: likelihood of that happening? Given the worries about a growth slowdown?
Speaker 1: That's time we think the market has to price a
Speaker 1: lot more tightening by the FED. And the reason is
Speaker 1: the policymakers are talking tough, and I know the markets
Speaker 1: faded the FED countless times over the last fifteen year.
Speaker 1: This one does feel different. Powell's basically penciled in fifty
Speaker 1: for the next couple of meetings, so we think there's
Speaker 1: a pretty good chance of that terminal riak gets up
Speaker 1: to three seventy five over the next few months. That'll
Speaker 1: feel really bad for risk assets, but that's really the
Speaker 1: idea actually is to tighten conditions quite a bit. How
Speaker 1: bad will it feel for equities given how much I've
Speaker 1: already priced in versus credit that perhaps and arguably has
Speaker 1: not priced this all in yet. I think I've talked
Speaker 1: to my friend Chris Harvey off the ledge, Lisa, but
Speaker 1: I suspect that's probably under down turn up ten plus percent. Wait,
Speaker 1: you think that there's another ten plus percent downside within credit.
Speaker 1: Oh no, inequity. Okay, did you tell us, Mike, how
Speaker 1: Chris responded to that, given that he's got to think
Speaker 1: of forty seven fifteen price target on the SMP. You
Speaker 1: know it's not today to quantify these things, John, it's
Speaker 1: right to the thirteenth. A lot of strange events happen.
Speaker 1: So I'll leave that to Chris. But but down a bit.
Speaker 1: But John, the problem is Harvey's standing on the ledge
Speaker 1: of the bar had been one fifty six straight and
Speaker 1: it's a little like a t I guarantee there's an
Speaker 1: AMU white and give in a few minutes time. Mike,
Speaker 1: let's work through this. You had a big coal on
Speaker 1: the front end at the start of this year. It
Speaker 1: was kind of at a consensus. I remember looking at it.
Speaker 1: I think it was about one fifty or something on
Speaker 1: a two year and I thought, Okay, that's punchy. We've
Speaker 1: blasted through that, Mike. Have we done everything we need
Speaker 1: to do with the front end of the curve? Is
Speaker 1: that done? Dusty finished? I don't think so, John. And
Speaker 1: it's interesting, right because you think about how much tightening
Speaker 1: is priced in over the next couple of meetings, fine
Speaker 1: fifty each, sort of boring. But for the end of
Speaker 1: this year, it's it's been bouncing around between two hundred.
Speaker 1: That seems to be sort of where it's gonna land.
Speaker 1: But our big issue is how little tightening is priced
Speaker 1: for next year thirty forty basis points. That's a joke
Speaker 1: you think about it. The biggest inflation worry and actual
Speaker 1: reality in the last forty years. And how can the
Speaker 1: FED or other central banks that matter, really think they
Speaker 1: get in under control in twelve months time. I think
Speaker 1: that's incredibly implausible. So we bat a lot more tightening
Speaker 1: to be priced in. That pushes up a two year,
Speaker 1: pushes up three years, So a lot more work to
Speaker 1: be done there. Michael, speaking of work to be done,
Speaker 1: you are way out front of the weekend notes we're
Speaker 1: gonna see and frankly the notes into June, which is
Speaker 1: the party is over at a goods supply chain analysis
Speaker 1: and that inflation is greater embedded into our system. Does
Speaker 1: Wells Fargo model model a path to four or an
Speaker 1: atom pose in three percent? Or can you actually model
Speaker 1: back to a two percent level? Yeah? Two percent seems
Speaker 1: aspirational at this point. Tom I need to put it
Speaker 1: kindly in you've got to say, well, where are the
Speaker 1: central bankers likely to the cleare victory? If they got
Speaker 1: inflation down to three percent, let's say in eighteen months,
Speaker 1: that'd be good enough. Maybe it's still too high to
Speaker 1: fifty I think they're done. So two percent maybe in
Speaker 1: many many ears, but not in the next Warner Field
Speaker 1: forecast dependent FED. Still then ultimately they get down to
Speaker 1: say for and they forecast two, and then they're done.
Speaker 1: I think that the deal here, John, is that the
Speaker 1: FED is going to have what I would call a
Speaker 1: binary discussion, maybe in five or six months, and they'll say, look,
Speaker 1: inflation is down almost certainly, probably down a third bet
Speaker 1: and this is what a lot of people discussed. And
Speaker 1: then what does the third How does the FED read that?
Speaker 1: Is that the piece is good enough for the level
Speaker 1: still bad And we don't really know the answer to that.
Speaker 1: So I think the FED is it's looking at the
Speaker 1: actual data coming in, paying a lot less heed to
Speaker 1: its models, and it has in the past, but that
Speaker 1: really multiplies the chance of an overshooting too much. Typing
Speaker 1: my shoemaca of waging Mike Tons to think about that.
Speaker 1: Thank you, buddy, and good luck with Chris when you
Speaker 1: get back to the office. This is the Bloomberg Surveillance Podcast.
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Speaker 1: keene In. This is Bloomberg