Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Let us turn
Speaker 1: out to the President's trip and we're thrilled to speak
Speaker 1: today to Ian Bremer of Eurasia Group. It is G
Speaker 1: zero media, but far more is the effect of his
Speaker 1: many books upon our thinking of international relations, and that
Speaker 1: includes the phrase a G zero world. Dr Bremer. President
Speaker 1: Biden will travel to that the G eight x Russia,
Speaker 1: the G seven meetings. How G zero is this G
Speaker 1: seven meeting? Well, it's less G zero than last year,
Speaker 1: since the G seven didn't even meet UH in the
Speaker 1: year of the pandemic UH. It clearly is a little
Speaker 1: more aligned. We've got a few pieces of news that matter,
Speaker 1: the Europeans and the Americans coordinating pretty effectively in the
Speaker 1: response to the downing of the Ryan airplane to mince
Speaker 1: the diversion a couple of weeks ago. So everyone pretty
Speaker 1: irritated at Blarus, right Now secondly, you've got the Biden
Speaker 1: administration announcing coordination of this global minimum tax. It will
Speaker 1: take years if it ever gets done, to get the
Speaker 1: US Senate and individual European parliaments to ratify it. But
Speaker 1: still it's a meaningful move towards coordination among the G
Speaker 1: seven that sets up the O E C D in
Speaker 1: that direction. So it's not like nothing is getting done.
Speaker 1: But on really big issues out there, like on coronavirus response,
Speaker 1: like on climate change, we are very very far from
Speaker 1: meaningful global coordination. And even on China, where the US
Speaker 1: of course sees Beijing as its principal adversary through a
Speaker 1: national security lens, the Europeans largely do not. And and
Speaker 1: this is perhaps the most principal issue that really divides
Speaker 1: the G seven in a in a Cold War era,
Speaker 1: seven is all rowing in the same direction because everyone
Speaker 1: sees the Soviets as their principal adversary. Today that is
Speaker 1: no longer the case at all, and it makes life
Speaker 1: a lot more difficult. You see, and you see the
Speaker 1: polarity of Europe. Mr Orban of Hungary coming on saying
Speaker 1: the Global minimum corporate tax plan his quote absurd. Okay,
Speaker 1: that's one view from Eastern Europe. What captured my attention
Speaker 1: was the miracle victory and domestic ellections in Germany over
Speaker 1: the weekend. And to borrow from Mr Trump and the Queen,
Speaker 1: does the President Chancellor Malcha walk in front of him?
Speaker 1: I mean the body language that we're gonna see at
Speaker 1: this summit has to tilt to the Chancellor of Germany
Speaker 1: in her stem career, in her recent political victory. Well,
Speaker 1: since it's her last G seven, sure I'd let her
Speaker 1: do that. And and since the relationship between Biden and
Speaker 1: Merkel has always been friendly. I've seen Biden now attend
Speaker 1: in person Munich security conferences for fifteen years. There's always
Speaker 1: been a good relationship with Merkel and the top of
Speaker 1: the German government, the Biden administration is staffed, its cabinet
Speaker 1: are largely Atlanticists who like these people. The European Allies
Speaker 1: or bond Is the singular major exception, are much happier
Speaker 1: with Biden than they were with Trump. But that doesn't
Speaker 1: mean they trust the Americans. That doesn't mean there as
Speaker 1: a line with the Americans. And they also are very
Speaker 1: aware of just how unstable and politically divided Biden's own
Speaker 1: leadership for the future is and so the willingness of
Speaker 1: the Europeans to suddenly count funny United States that they
Speaker 1: are somewhat less aligned with, and they also don't necessarily
Speaker 1: trust the long term nature of its commitment. That the
Speaker 1: US EU relationship is nowhere close to where Biden would
Speaker 1: like it to be. And this idea ever back, Tom,
Speaker 1: I mean when when Biden said America is back in
Speaker 1: terms of power, America never went anywhere. Not our dollar,
Speaker 1: not our tech companies, not our energy production. In terms
Speaker 1: of the influence we have with allies around the world,
Speaker 1: America has been deteriorating for a long time and it's
Speaker 1: not changing very much right now. Can it ever get
Speaker 1: back in? You know, I split my adult life between
Speaker 1: Germany and the US, And when I first came here
Speaker 1: in the nineties, in the in the early Auts, I
Speaker 1: was welcomed with open arms. They were so excited to
Speaker 1: have an American in their midst who actually spoke the language.
Speaker 1: There was a real brotherhood between the two countries. After
Speaker 1: the healing from World War Two, and and then with
Speaker 1: the first UM or the second move into Iraq under
Speaker 1: Bush too um the relationship disintegrated a little and was
Speaker 1: absolutely destroyed by President Trump? Can we ever get back together?
Speaker 1: It wasn't destroyed by Trump. It was deteriorating under Bush,
Speaker 1: under Obama, and under Trump, and that deterioration accelerated over time.
Speaker 1: But I think it has less to do with the
Speaker 1: individual presidents. It has more to do with the fact
Speaker 1: that the United States no longer leads by example. In
Speaker 1: the eyes of Europeans, our democracy is by far the
Speaker 1: most divided and dysfunctional. January six was an absolute shock
Speaker 1: to the Europeans, more so than it was in the
Speaker 1: United States. We kind of got through. It was soft,
Speaker 1: you know, I mean, we don't we don't have these
Speaker 1: structural problems. Anyone that said it was a coup, No,
Speaker 1: it's not a coup. You know. We we came back
Speaker 1: and we get to business as usual, such as it is.
Speaker 1: The Europeans are pretty startled by all of this. And
Speaker 1: let's also keep in mind, you remember when when the
Speaker 1: Snowden revelation showed that the I'm gonna Merkel's cell phone
Speaker 1: was being hacked by the Americans. It's just a very
Speaker 1: different environment where the US is seen as much more unilateralist.
Speaker 1: Biden says, we're pulling out of Afghanistan. Europeans have as
Speaker 1: many troops there as in the US. He didn't coordinate that.
Speaker 1: The Europeans we announced we're going to not pay attention
Speaker 1: to patents anymore, um for for coronavirus. The Germans and
Speaker 1: the EU strongly opposed. That wasn't coordinated advanced by the
Speaker 1: United States. So even though they liked this guy, and
Speaker 1: even though they trust us more than the Chinese, were
Speaker 1: actually farther apart than we have been. And and that's
Speaker 1: exactly where I wanted to go. And I don't mean
Speaker 1: to cut you off. If there's this question about how, yes,
Speaker 1: the US perhaps is it as far apart from Germany
Speaker 1: as they are with not However, what kind of consensus,
Speaker 1: what kind of alliance can they forge if there isn't
Speaker 1: that trust. And frankly, if Germany looks at the US
Speaker 1: and says you're not leading by example, we can forge
Speaker 1: a lot of coordinated policies when it's intentional and when
Speaker 1: it's specific. So if we sit down and say that
Speaker 1: we want to work together on dealing with digital services,
Speaker 1: tax dealing with an alternamentum attacks, we don't have to
Speaker 1: hit each other with, you know, an escalating tariff environment,
Speaker 1: we can create predictability for the markets on Blarus, an
Speaker 1: issue that is, you know, not front of line for
Speaker 1: the average American in Washington. But nonetheless, Biden made it
Speaker 1: clear that he wanted to coordinate with the Europeans, and
Speaker 1: we did that. We did that effectively. But that's very
Speaker 1: different from saying that on the issues that are the
Speaker 1: top priority of the United States that the Europeans will
Speaker 1: see them in the same way. And one thing we
Speaker 1: haven't mentioned so far, which matters a lot more than
Speaker 1: what we've seen in the US is Brexit. The UK
Speaker 1: is by far the most aligned and closest former European
Speaker 1: country with the United States. They're no longer in the EU.
Speaker 1: The UK relationship with the EU is very strange. This
Speaker 1: makes it a lot harder for the Americans to actually
Speaker 1: get the Europeans on the same page because the UK
Speaker 1: used to help us with that inside the EU don't anymore. So, Ian,
Speaker 1: can you give us a sense of what kind of
Speaker 1: guide posts you're looking forward to determine whether this global
Speaker 1: tour that President Biden is embarking on today is successful.
Speaker 1: I want to see how much Emmanuel mccron talks about
Speaker 1: strategic autonomy in front of the Americans. The French have
Speaker 1: a very different view of the future of Europe in
Speaker 1: terms of national security, in terms of migrants, um, in
Speaker 1: terms of the Middle East, North Africa, you name it.
Speaker 1: I want to see to what in the Mediterranean. I
Speaker 1: want to see to what extent he is trying to
Speaker 1: make a name for himself. Let's keep in mind Merkel
Speaker 1: did very well in these elections in East Germany. Mccron
Speaker 1: is gonna be there after Merkel was gone, and he
Speaker 1: sees himself as the future leader of Europe. So I
Speaker 1: want to watch that. I want to see the mood
Speaker 1: music between the Germans and the Americans at the high levels,
Speaker 1: see how much it looks coordinated in advance. And I
Speaker 1: want to see if there's any substance to the reference
Speaker 1: to the cogs that come out. Nobody cares. When's your
Speaker 1: next book out? Early next year? Early next year? Give
Speaker 1: us the thief, give us a tease here. It's called
Speaker 1: the crisis we need and and given that coronavirus, I mean,
Speaker 1: the lessons we've learned from coronavirus globally do not exist.
Speaker 1: So to what extent can we take from that? Uh?
Speaker 1: Any solace that with climate, with the technology revolution, with
Speaker 1: cyber are are we going to be able to use
Speaker 1: those to change our governance? Winston Churchill, looking at the
Speaker 1: world after coronavirus, would be very disappointed we did not
Speaker 1: take advantage of this. Cristis about the drought very quickly here,
Speaker 1: Dr Bremer. The drought in the United States, I think
Speaker 1: is underplayed right now, do you agree? I think that
Speaker 1: Americans are paying a lot more attention to climate young people,
Speaker 1: whether they're from the left or the right or five
Speaker 1: years ago, the factors it's hitting a lot of Americans
Speaker 1: at home really matters. Dr Bremer, Thank you so much.
Speaker 1: Really look forward to getting out six months now where
Speaker 1: we can planning his top risks of two thousand right now.
Speaker 1: Luigi san Gallas with us from Italy and from the
Speaker 1: Boost School of Chicago, and I really can't say enough
Speaker 1: about his podcast Capitalism and also of course A Capitalism
Speaker 1: for the People is wonderful book, a really different view
Speaker 1: on the American economic and political experiment. Professor's in Gallis,
Speaker 1: thank you so much for joining us this morning. How
Speaker 1: will President Biden be greeted in Europe? I think that
Speaker 1: uh Matt was right, He's greeted very nicely just because
Speaker 1: it's not Trump. I think that Trump did create a
Speaker 1: long term friction, and some of that can be fixed
Speaker 1: by just not being Trump. But I think that there
Speaker 1: is a longer term concern of whether the US policy
Speaker 1: and the European policy are aligned in the future. And
Speaker 1: I think that the the giant in the room is
Speaker 1: of courch China, and the policy that Germany as in
Speaker 1: mind and indirect to you as in mind for China
Speaker 1: is very different you from the policy that the Buying
Speaker 1: administration as in mind. So I think that there's a
Speaker 1: whisk for conflict there. Luigi, what do you expect to
Speaker 1: actually come from these meetings with European allies with respect
Speaker 1: to China policy? What are you hoping could get accomplished
Speaker 1: or will actually tell you something concrete? Um, Honestly, I
Speaker 1: don't hope, I don't I don't expect anything to to
Speaker 1: take place. I think that Germany wants to maintain very
Speaker 1: stronger eight relationships with China and there is not going
Speaker 1: to do anything to jeopardize those and so uh And
Speaker 1: I think the United States like a stronger voice on
Speaker 1: human rights and also on trade policy in general. So
Speaker 1: I don't see much of a space for agreement there
Speaker 1: has Germany becomes somewhat of a problem here, Luigi. I
Speaker 1: mean um Berlin wants stronger ties with Beijing, and Berlin
Speaker 1: also wants to send money to Moscow via the Nord
Speaker 1: dream To pipeline. It seems like the Germans are not
Speaker 1: willing to let go of a lot of US adversaries
Speaker 1: in parties that the Trump presidency represented a structure that
Speaker 1: is difficult to undo. Germany realized that cannot rely longer
Speaker 1: term on on the relation the same way that used to,
Speaker 1: and so I think it started to craft a European policy.
Speaker 1: The problem is that there's not really European state, let
Speaker 1: alone the European Army. So I think it's gonna be
Speaker 1: a bit of a of a challenge there, because if
Speaker 1: you hope, were to spoke with a common uh language
Speaker 1: and a common message, I think would be one thing. Unfortunately,
Speaker 1: in foreign policy we steal a pretty fracture, Luigi, on
Speaker 1: your take on American capitalism, where is our capitalism now?
Speaker 1: With the dominance of these technology companies. President Biden's dealing
Speaker 1: with it, our radio or TV listeners and viewers, each
Speaker 1: of us is dealing with this technological revolution, whether it's Amazon, Google,
Speaker 1: or things we don't even understand, how will our capitalism
Speaker 1: survive that? So I think it's a mixed view. On
Speaker 1: the one end, that technologist boat us an enormous amount
Speaker 1: of benefits. I think would be hard to imagine the
Speaker 1: life under the pandemic without the technology that was provided
Speaker 1: from the zoom we're using to the Amazon, the river,
Speaker 1: our food to our door steps and sounds of food.
Speaker 1: So there is no doubt that there being enormous improvement,
Speaker 1: enormous benefits. UH. The concern I have is that the
Speaker 1: market is becoming more concentrated and less uh contestable UM
Speaker 1: and more importantly, that these companies can pretty quickly have
Speaker 1: also some power and determine what we see, what we read,
Speaker 1: what we do and UH. And when we start to
Speaker 1: such a large market power, the concern is that you
Speaker 1: might use it not only for economic reason but also
Speaker 1: for political reasons. So I think that the easier concern
Speaker 1: that is not just about uh the economic effects of concentration,
Speaker 1: but also the political effects. There's a quick question, Luigi
Speaker 1: about the dynamite of the economy with concentration at the
Speaker 1: top and then highly intended companies that have more legacy
Speaker 1: businesses making up the remaining economy. Do you think the
Speaker 1: economy that you're describing here with the concentration of big
Speaker 1: tech is less dynamic and poised for slower growth. I
Speaker 1: think the wis the wish that is less dynamic, and
Speaker 1: I think that that's where, in my view, one of
Speaker 1: the direction of the anti trust should be um. In
Speaker 1: my view, I know this is a disputed view, but
Speaker 1: in my view, the trial against Microsoft in the late
Speaker 1: nineties was very useful to provide a space for the
Speaker 1: common technology revolution. I think that if Google exists today
Speaker 1: in part is because the d o J sue Microsoft.
Speaker 1: So it's only fair that the J was sue Google
Speaker 1: to let the next Google come about. Luis, you gotta
Speaker 1: leave it there, Luigi's and Gale, thank you so much.
Speaker 1: Really look forward to you coaching Tottenham here in the
Speaker 1: coming weeks. He is from the University of Chicago Booths School.
Speaker 1: Of course, I can't say enough his book of the
Speaker 1: Summer a number of years ago on capitalism, Stewart Chiser
Speaker 1: Joy doesn't get it right to it. Would you be
Speaker 1: as head of equity derivative strategy stored in your world
Speaker 1: of equities. Is your world linked to the ten year
Speaker 1: yield and the shock we see with low yields? Thod
Speaker 1: Martin Tom, It definitely is. And I think really what
Speaker 1: you've seen recently is probably pretty positive for equities in
Speaker 1: the sense that inflation break evens and inflation expectations that
Speaker 1: started to get to the level at which we thought
Speaker 1: it was going to become disruptive for equity markets. But
Speaker 1: now with like you know, with the tender break even
Speaker 1: back bold to forty, with ten year yields pulling back
Speaker 1: a little bit, I think that sort of has relieved
Speaker 1: the pressure a bit. You know, we had a very
Speaker 1: fast and high volatility rise in rates and inflation expectations.
Speaker 1: The fact that those have come off a bit, I
Speaker 1: think is kind of reduced a little pressure on markets.
Speaker 1: But but there's definitely a link between the two, no doubt.
Speaker 1: So what where is the source of potential volatility here
Speaker 1: for markets? I mean, I think I think FED policy
Speaker 1: is gonna be probably the number one source of potential
Speaker 1: volatility over the next couple of weeks. Obviously we get
Speaker 1: a big inflation print on Thursday. You know, ubs is
Speaker 1: is well above consensus for both core and headline, So
Speaker 1: I think that will test the recent moves and markets.
Speaker 1: You know, you you got tenure break evens up to
Speaker 1: sixty ish um the last time we had a strong
Speaker 1: inflation print, So I think it'll be interesting to see
Speaker 1: how that plays out. And then secondly, you know, the
Speaker 1: following week, how does that impact FED thinking? You know,
Speaker 1: do the dots move um? Does the FED start to
Speaker 1: speak a little more positively about the growth outlook, which
Speaker 1: the market might read as hawker? So I think over
Speaker 1: the course of the next month, those are gonna be
Speaker 1: the two big ones and then two key learnings upon
Speaker 1: us at that point. But story, why am I not
Speaker 1: to believe that what the markets pricing in right now
Speaker 1: is effectively what the market forces here. If we do
Speaker 1: get a higher than projected read on that inflation, what
Speaker 1: would change the dynamics here that would take us anywhere
Speaker 1: away from one five where we are right now on
Speaker 1: the tenure yield. Well, it's a great question. I think
Speaker 1: what most people are saying on the market side is
Speaker 1: number one, a lot of the inflation is coming from
Speaker 1: things like use car prices, which they expect to kind
Speaker 1: of be quote unquote transitory. If it hurts me to
Speaker 1: say that term, but but that's the one that's out there.
Speaker 1: So I think, look, I think you know what would
Speaker 1: get it to move would be do you see things
Speaker 1: like wage inflation, like rents um like goods prices inflation
Speaker 1: that might be a little more sustainable. So I think
Speaker 1: it's going to be below the surface and the inflation print.
Speaker 1: What are the drivers and does that start to dislodge things?
Speaker 1: If you were to say, you know what could be
Speaker 1: most disruptive from markets, I think it's gonna be longer
Speaker 1: term inflation expectations, you know, the fit excuse me. The
Speaker 1: FED looks at survey based inflation. So if things like
Speaker 1: University of Michigan long term inflation start to move, if
Speaker 1: the inflation term structure, you know, you know, stops being
Speaker 1: inverted from you know, five year to thirty year, that
Speaker 1: could be an issue as well. So look, it's it's
Speaker 1: a high inflation print, and then it's the components of
Speaker 1: that print um that look less transitory than that maybe
Speaker 1: the FED and the markets are currently expecting. So are
Speaker 1: we overplaying the inflation story which we're not gonna have
Speaker 1: an answer to until the end of the year, and
Speaker 1: perhaps are playing some of these other factors like, for example,
Speaker 1: earnings disappointments, especially given how high expectations are. It's a
Speaker 1: great question. I mean it's it's it's hard for portfolio
Speaker 1: manager or risk manager to ignore the cadence of the
Speaker 1: inflation data, right, So it could be that six months
Speaker 1: from now we look back and we think that that
Speaker 1: was a tempest in a teapot. But you know, an
Speaker 1: investor can't ignore that stuff as it's happening. So I
Speaker 1: think people are responding rationally to the data that that
Speaker 1: they're seeing. Um In terms of earnings, expectations I think
Speaker 1: are high at the single stock level, but if you
Speaker 1: look collectively, you know, SMPPS for next quarter I think
Speaker 1: still shows a sequential decline versus last quarter. So we
Speaker 1: do think there's you know, the potential as we get
Speaker 1: into actually post f O m C. I think as
Speaker 1: people start to look at it, look at earnings and
Speaker 1: sharpen their pencils. I think earnings could you know, turn
Speaker 1: out to be a positive catalyst over over the course
Speaker 1: of the rest of the month. We've heard that now
Speaker 1: this is the second time. That's an important insight. Sharpen
Speaker 1: the pencils as we go to earnings and of course,
Speaker 1: we'll do that here on Surveillan Stewart cards, and we
Speaker 1: look forward to you sharpening at your pencil in a
Speaker 1: couple of weeks with us as well. UBS had an
Speaker 1: equity derivative research. Joining us now is someone who has
Speaker 1: a courage to take a longer perspective. Claudia Sam is
Speaker 1: one of the most interesting practicing economists in the nation
Speaker 1: with Jane Family Institute formally with the Federal Reserve and
Speaker 1: always controversial. We're thrilled and Missam could join us. This warning, Claudia,
Speaker 1: I love your Morning Report where you say, look, would
Speaker 1: everybody grow up and stop looking at weekly claims, stop
Speaker 1: looking monthly, monthly thinking monthly. You want us to have
Speaker 1: the courage to look out a decade. What do you
Speaker 1: mean by that? Well, I follow every shred of data,
Speaker 1: just like anyone else who's doing macroeconomics right now. But
Speaker 1: I am so frustrated with the fact that we can't
Speaker 1: even set the latest numbers in the context of the pandemic,
Speaker 1: let alone the decades of trend that we have seen.
Speaker 1: Inflation is just one example, has trended down decade after decade.
Speaker 1: Trends do not reverse in a month. Or two like
Speaker 1: this is absurd. And we also, and this is very disconcerting,
Speaker 1: have seen for decades fewer people working. I mean the
Speaker 1: employment to population ratio. If you smooth across the recessions,
Speaker 1: it's been going down. Claudia Samas again as Air Force
Speaker 1: one begins a flight three p m. This afternoon, President,
Speaker 1: the first Lady will be at Royal Air Force Milden
Speaker 1: Hall in the United Kingdom and then onto Cornwall in
Speaker 1: the G seven meetings. Very impressive. They're going to go
Speaker 1: to Tregana Castle. I think that was in poll dark
Speaker 1: as as well. Claudia. G seven meetings speaks to the
Speaker 1: international economy. Where does the US fit in right now?
Speaker 1: After the Trump years? The President clearly wants to reassert
Speaker 1: abiden tone internationally. How would you suggest his best practice
Speaker 1: would be, it's time to lead and and it's time
Speaker 1: to work with these other countries. It's just like this
Speaker 1: moment in the pandemic. We are not going to be
Speaker 1: on track until the least privileged among us in the
Speaker 1: world community are on track. And the United States has
Speaker 1: a responsibility, a moral responsibility to help people get out
Speaker 1: of the pandemic and the vaccines. But there's a leadership
Speaker 1: in the global economy that frankly starts at home and
Speaker 1: investing in the United States and its people. Like that's
Speaker 1: an example we need to set for the rest of
Speaker 1: the world. Let's tie the idea of the global stage
Speaker 1: with the domestic one. The idea here of inflation being
Speaker 1: an international story. And one reason why people say for
Speaker 1: decades inflation has been coming down is because of the
Speaker 1: disinflation that was imported from China, the idea that there
Speaker 1: could be some cheap labor uh and and and cheap
Speaker 1: goods that the US was importing. We are seeing a
Speaker 1: shift in How much does that change the underlying premise
Speaker 1: that inflation will not pick up if China is a
Speaker 1: wealthier nation that's seeing inflation itself pick up, right, well,
Speaker 1: I think it's important, especially as we watch the month
Speaker 1: to month numbers, to know that we have different cross currents, right,
Speaker 1: deflationary pressures, particularly now that we are still in a
Speaker 1: pandemic around the world there with US Now, obviously there
Speaker 1: are supply chain issues that have come from the pandemic
Speaker 1: that are pushing against it. So it's kind of a
Speaker 1: race between the two. But I'm betting on the longer
Speaker 1: run trends, and it may change like China, it may
Speaker 1: shift around the world, but it's going to do so slowly.
Speaker 1: We're not turning on a dime here. Yeah, well, there
Speaker 1: is a question, especially as we emerge from the pandemic
Speaker 1: and President Biden among his comments saying that the world
Speaker 1: vaccination strategy that he has he's going to detail in
Speaker 1: his trip to Europe. He is making comments as he
Speaker 1: heads overseas for the G seven meeting, Claudia, going forward,
Speaker 1: what is giving you convict shition that you are right in?
Speaker 1: All of these former FETE officials and others who are
Speaker 1: coming out and warning against being too sanguine about inflation
Speaker 1: are wrong. So I'm a good forecaster and I've trained
Speaker 1: with the best in the world. I mean the Federal Reserve.
Speaker 1: They take inflation very seriously. They think about the data. Frankly,
Speaker 1: the staff did better forecasting than the Federal Open Market
Speaker 1: Committee for years telling them you're not getting to unless
Speaker 1: you do something. So I think there's a thoughtfulness, a
Speaker 1: grounding in data, and an understanding that supply chain issues
Speaker 1: do tend to be temporary. We live in a very
Speaker 1: different world, a very different economy than in the nineteen seventies.
Speaker 1: And while I think inflation is going to run, you're
Speaker 1: over year around three percent the rest of this year.
Speaker 1: That's a good sign. That is a economy getting back
Speaker 1: on track, getting people back to work, And I just
Speaker 1: I want people to write down their numbers so we
Speaker 1: can have a conversation. Do you think that there would
Speaker 1: be if we got to say three or any around there, Claudia,
Speaker 1: do you think that there would be any conflict with
Speaker 1: an inflation rate at that level? Uh? And I guess
Speaker 1: the other side of the mandate here, which is of
Speaker 1: course getting that full employment level, whatever that may be
Speaker 1: at this point. Right, Well, they're both pointing in the
Speaker 1: same direction. Again, if we look back last year, inflation
Speaker 1: was running around one percent. The FED says it once
Speaker 1: on average too. I mean the last time I checked
Speaker 1: one in three average to two. Right, So the Fed
Speaker 1: is on track, and we have millions of people who
Speaker 1: are not on the job. So there are mandates pushing
Speaker 1: in the same direction. And I really struggled to see
Speaker 1: the conflict here. As part of that mandate, though, do
Speaker 1: you think that there's going to be more focused on
Speaker 1: the quality of jobs rather than just that aggregate number. Well,
Speaker 1: there should be that's what full employment is. Maybe you
Speaker 1: go back decades and decades, it wasn't just about having
Speaker 1: a job, it was having a job at a livable wage.
Speaker 1: And frankly, I'm surprised at some of the movement we've seen,
Speaker 1: not just in wages but getting people, you know, more
Speaker 1: regular hours. I mean, there are so many things we
Speaker 1: can do in the labor market to make jobs better
Speaker 1: that are frankly no brainers. And we should have been
Speaker 1: there before the pandemic and we weren't. Clodius, I thank
Speaker 1: you so much. You've got to keep it shorter today
Speaker 1: because of the President's trip, but greatly greatly appreciate it.
Speaker 1: Clodius and I can't say enough folks about following her
Speaker 1: on Twitter just to get her thoughts on the present
Speaker 1: economic data and the longer view as well with the
Speaker 1: Jane Family Institute. This is the equity conversation of the
Speaker 1: moment for me. Jonathan Gollub with credit Sweez, you were
Speaker 1: way out front months ago with respect for the big tech.
Speaker 1: They've been some no lent here over the last X
Speaker 1: number of months. What do you do with big tech
Speaker 1: right now? I think that the real story here is
Speaker 1: not a tech versus the rest of the market. But
Speaker 1: really about the power of the reopening and operating leverage,
Speaker 1: and you want to be in companies that benefit the
Speaker 1: most from the stimulus and the reopening, and those tend
Speaker 1: to be higher fixed cost businesses and old economy businesses.
Speaker 1: I think the tech ends up being a market performer.
Speaker 1: These these tech names are superior long term best five years,
Speaker 1: ten years, they wouldn't want to hold. But over the
Speaker 1: next three to six months between now and the end
Speaker 1: of the year, I think that they're they're they're kind
Speaker 1: of in the game, but they're not leading the pack. Okay,
Speaker 1: they're in the game, they're not leading them pack. But
Speaker 1: to me, what's so important here is they've got revenue growth.
Speaker 1: When you get operating leverage, increase fixed cost advantage. Does
Speaker 1: revenue growth matter? It does, but but it really depends
Speaker 1: on the kind of business. What you really want is
Speaker 1: if you think about a factory where a huge amount
Speaker 1: of the overhead is in that building and the machine,
Speaker 1: when you increase revenues, it drops right to the bottom line.
Speaker 1: You just don't have the same dynamic for a software
Speaker 1: company you do for hardware, you do for technology equipment companies.
Speaker 1: You do for semis, but you don't for internet companies
Speaker 1: or social media companies. So the pure play on this
Speaker 1: is to buy banks and commodities and industrial names and
Speaker 1: transportation companies, stuff that doesn't seem all that innovative, but
Speaker 1: tends to get a bigger unit of EPs growth from
Speaker 1: a single unit of revenue growth. Jonathan, how concerned should
Speaker 1: I be about margins here? You know, in supporting earnings
Speaker 1: going forward? I mean, and I really think about it
Speaker 1: from the wage inflation perspective here, I think, you know,
Speaker 1: as this economy reopens, is that a big risk that
Speaker 1: we have wage inflation to the point that it impacts profitability?
Speaker 1: You know, we we we've a bunch of research on this,
Speaker 1: and we're finding is two things. First of all, right now,
Speaker 1: companies have an extraordinary amount of pricing power. Um. The
Speaker 1: ability to pass on higher costs is just shocking up.
Speaker 1: I guess give you one specific example, UM, people who
Speaker 1: make you know, um sugary beverages. Yeah, you know, soft drinks.
Speaker 1: They're the cost of corn sweeteners up, the cost of
Speaker 1: the cans up, The cost of the oil is up.
Speaker 1: To transport those cance full of sugary water to the
Speaker 1: store is up, and yet their profit margins are rising
Speaker 1: because they're able to pass on that cost and some
Speaker 1: and you're seeing that very very broadly. There's a problem, though,
Speaker 1: is if you look further out into the future, once
Speaker 1: you increase those wages, you can't bring it back down.
Speaker 1: You know, the price of every one of the things
Speaker 1: I mentioned, maybe oil prices going back down, maybe all,
Speaker 1: but wages stick. And so your point, I think is
Speaker 1: the good one. Commodity inflation, not concerning age inflation more concerned.
Speaker 1: Do you think that John Gollub does this research with
Speaker 1: a Canna mountain do in his hand. Absolutely, He's got
Speaker 1: a red bull on the other one. Detail he's got
Speaker 1: a seltzer and his killed potato vodka seltzer, and he's
Speaker 1: just he's all set up for beverage research. Jonathan, Let's
Speaker 1: talk valuation here. I mean three times forward earnings. I
Speaker 1: know earnings have come through really strong over the past
Speaker 1: several quarters, but should investors be asking some valuation questions? Um?
Speaker 1: For first of all, you know we are at you know,
Speaker 1: we're we're absolutely stretched valuations. I think, Um, if you
Speaker 1: if you assume and I do, that the earnings are underestimated.
Speaker 1: I mean take a look at last quarter UM where
Speaker 1: you had something like a twenty plus percent beat. If
Speaker 1: we see something even directionally like that, what it means
Speaker 1: is the actual PE multiple is much much lower than
Speaker 1: the stated number because the earnings are underestimated UM. So
Speaker 1: that's the most important thing. The second issue is if
Speaker 1: you compare now to history, there are two big differences.
Speaker 1: Interest rates or discount rate is much lower, and number two,
Speaker 1: the cash full generation of the SMP is much higher.
Speaker 1: Some of that is text, some of that is just
Speaker 1: changing business practices. So I think that we're gonna be
Speaker 1: carrying a higher multiple for the next decade. I think
Speaker 1: that multiple is just gonna be higher. But in the
Speaker 1: near term, I think that the multiples are probably overstated
Speaker 1: because we're understating the E and the P formula. What's
Speaker 1: your study on use of cash right now? What is
Speaker 1: your study on dividend growth? Share buy back? Which is
Speaker 1: obvious but critically, is there truly an appetite for capex
Speaker 1: um if? That's a brilliant question and I'm not just
Speaker 1: saying that the bi back. Here's what's happened, tom is
Speaker 1: the buy backs have gotten totally slashed, but the corporate
Speaker 1: free cash flow generation has gotten better. So here's what
Speaker 1: normally happens during a session companies free cash flows just
Speaker 1: collapse and they need to pull in. They need to
Speaker 1: cut their nobody wants to cut a dividend, so they
Speaker 1: kill their buy backs and then they reinstate them later.
Speaker 1: Now you've had this weird thing, is that they've killed
Speaker 1: the buybacks in anticipation of of this thing being really ugly,
Speaker 1: and in fact the cash flows have held up so quickly.
Speaker 1: What happens then, So what happens? Five backs are going
Speaker 1: to increase way, way, way more than we think over
Speaker 1: the next two or three years, and it's going to
Speaker 1: support the market. They'll give a real pine. I think
Speaker 1: Mr Golub's onto something there, and that's maybe the great
Speaker 1: surprise September as well. Jonathan Golubs always aren't always in
Speaker 1: the market. Credit Suites Chief US Equity Strategists. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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