Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This morning, the focus is on inflation CPI coming in
Speaker 2: below expectations, tradus adding to bets for two more rate
Speaker 2: cuts this year, including one next Wednesday. David Kevey of
Speaker 2: JP Morgan Acid Management joins us. Now for more, David,
Speaker 2: let's start with the inflation data. Is three the new two?
Speaker 2: And is it going to stop this Federal Reserve from
Speaker 2: cunning interest rights?
Speaker 3: Well, I think that that's going to keep on cutting rates.
Speaker 4: It's generally a better than expected report, but I think
Speaker 4: what it really shows is we have a K shaped economy,
Speaker 4: and it's called sort of a K shaped CPI report.
Speaker 4: The thing that really jumped out of me is, first
Speaker 4: of all, rental costs coming down. There's you know, we've
Speaker 4: got a big change in demographics here and rents are
Speaker 4: Rental inflation is just going away. You also saw use
Speaker 4: vehicle prices full, although it's pretty interesting. And then the
Speaker 4: big thing here is core goods prices outside of food
Speaker 4: and energy. That's the stuff that should be hit by tariffs,
Speaker 4: but that's only up two tens of percent of one
Speaker 4: and a half percent year over year. It is clear
Speaker 4: that mainstream retailers don't believe they can pass on the
Speaker 4: tariff increases right now, and that's what's making this inflation
Speaker 4: rate a little bit tamer than people feared.
Speaker 1: David doesn't just justify what the market's already sussed out,
Speaker 1: which is that inflation fears were overblown earlier this year.
Speaker 1: The Fed can keep cutting potentially below three percent by
Speaker 1: the end of next year, and that it's not going
Speaker 1: to cause a huge inflation problem.
Speaker 4: Well, I never thought we had a long term inflation problem,
Speaker 4: but I think it is still early days on the
Speaker 4: tariff effects. So what's going to happen is right now
Speaker 4: retailers feel like they can't pass on the price increases.
Speaker 4: But early next year you're going to have this refund bonanza.
Speaker 4: The average incompact refund per household, we believe it's going
Speaker 4: to be able four thousand dollars. Last year is thirty
Speaker 4: two hundred dollars, and that is the exact time when
Speaker 4: retailers are going to feel like they can pass on
Speaker 4: these tariff increases. So I do think we've got a
Speaker 4: little bit of a spurred in tarifflation still to come.
Speaker 4: But then you know, if nothing else happens, there isn't
Speaker 4: a lot of momentum in this economy, and it'll slow
Speaker 4: down again, and it'll cool down again. So I don't
Speaker 4: think we've got a long term inflation problem. My real
Speaker 4: question is, given how bubbly financial markets are, do you
Speaker 4: really need the Federal Reserve adding more liquidity to the
Speaker 4: party right now? Or should they just hang on in
Speaker 4: there and say this is enough liquidity?
Speaker 1: What are you saying? What are you seeing that really
Speaker 1: is bubbly given the fact that earnings have exceeded expectations,
Speaker 1: the forecasts have exceeded expectations, and we're likely to see
Speaker 1: more of the same next week with the tech earnings.
Speaker 4: Well, well, valuations are extremely high for the over now.
Speaker 4: Obviously it's a lot of it's concentrated in the meya
Speaker 4: cap stocks, but also profits is a share of GDP
Speaker 4: are extraordinarily high. So overall, the total valuable US market
Speaker 4: cap is about three hundred and sixty five percent of
Speaker 4: GDP right now. It was about two hundred and twelve
Speaker 4: percent before the tech bubble bursts back in two thousand.
Speaker 4: It was eighty seven percent before the eighty seven stock
Speaker 4: market crash. So there's you know, it's leverage upon leverage,
Speaker 4: high pe ratios on a very high level of earnings
Speaker 4: relative to GDP. Now, I still think this is a
Speaker 4: very good economy for equities, but I wouldn't say that
Speaker 4: you could call the market depressed at this stage. I
Speaker 4: think that, you know, one of the dangers here is
Speaker 4: that everybody gets out over their skis and then you
Speaker 4: have a significant market correction or a bear market.
Speaker 1: So are you talking about potentially if the Fed is
Speaker 1: cutting into strength, they'll be making an error this month.
Speaker 4: Yeah, because it's a different economy. And we keep on
Speaker 4: talking about the Fed's going to tighten to lower inflation.
Speaker 4: Forget about it. The Federal reserves, short term magistrates, are
Speaker 4: not impacting growth, they're not impacting inflation, but they are
Speaker 4: impacting financial markets. And the big problem that we've had
Speaker 4: in this century of the two thousands hasn't been CPI
Speaker 4: inflation getting getting out of hand. It's asset bubbles, you know,
Speaker 4: whether it's housing bubbles or tech bubbles. And the Federal
Speaker 4: Reserve should not be in the business of blowing up bubbles.
Speaker 4: So I think they should, you know, just take it.
Speaker 4: I don't mind if they cut rates a little bitier,
Speaker 4: but I certainly would have a problem if they cut
Speaker 4: rates below what they think neutral is if the economy
Speaker 4: is you know, it is not threatened by a recession,
Speaker 4: because we are we are seeing money go into financial markets,
Speaker 4: go into financial assets, and just not come out. And
Speaker 4: it's sort of it's kind of like a stuck valve,
Speaker 4: and the more more money goes in, the more this
Speaker 4: this market just seems to accelerate upon itself.
Speaker 2: And David, if we ask Governor Wall of this question
Speaker 2: when he was on the program last week, we asked
Speaker 2: whether he was getting lved into kind of interest rates
Speaker 2: and potentially reducing financial markets. David, do you think there's
Speaker 2: a problem with their interpretation of the dual mandate or
Speaker 2: just the dual mandate?
Speaker 3: I think the dual mandate itself.
Speaker 4: I think that I think that if you if you
Speaker 4: they need Congress needs to recognize, they need to recognize
Speaker 4: that monetary policy has significant impacts on financial conditions and
Speaker 4: therefore maintaining stable financial conditions should be part of the goal.
Speaker 4: It's it's kind of like with the ECB for years
Speaker 4: decided they didn't they weren't supposed to interview if one
Speaker 4: particular country got into significant dec coomic distress.
Speaker 3: And destabilize the eurosystem.
Speaker 4: And then finally Mario drag He said, look, if Greece
Speaker 4: is a problem, we're going to do something about Greece. Well,
Speaker 4: this is a similar situation where the mandate needs to
Speaker 4: be expanded a little to recognize the impact of FED
Speaker 4: policy on financial and other asset price bubbles, to try
Speaker 4: to prevent bubbles or busts, because of.
Speaker 3: Course that's why bubble creates.
Speaker 4: A bus and you want to have financial market stability,
Speaker 4: not just economic stability, and I think the Federal Reserve
Speaker 4: kind of have an impact on that.
Speaker 2: David, this was thoughtful. We appreciate your time. David Kelly
Speaker 2: there of JP Morgan Asset Management,