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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferroll and Lisa A. Brownwitz. Daily we bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. To find Bloomberg Surveillance on Apple Podcast, Suncloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg terminal.

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Speaker 1: Right now, the honor of the laureate from Columbia University,

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Speaker 1: Joseph Stiglets joins us. And on any number of the

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Speaker 1: topics we could talk about, we go to something dear

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Speaker 1: to his heart is a gentleman from Gary, Indiana long

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Speaker 1: ago new different bouts of inflation, fear and inflation scare

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Speaker 1: Joe Stiglets. Your basic message is what everyone calmed down.

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Speaker 1: Why is this inflation not like the inflation of Heller seventies. Well,

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Speaker 1: first of all, it's mostly a supply side inflation. And

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Speaker 1: think about some of the things that are really driving it.

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Speaker 1: Take the price of energy. In the price of oil,

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Speaker 1: it's way up. We have a war in Ukraine. We

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Speaker 1: understand that, but we know over the long run, and

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Speaker 1: I when I'm talking about the long run, and it's

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Speaker 1: not that long. Uh. The price of oil energy is

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Speaker 1: going to come down because the backstop, as we call it. Uh,

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Speaker 1: we know we can produce an unlimited amount of renewable

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Speaker 1: energy at the equivalent of about fifty a barrel. And

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Speaker 1: if that number keeps coming down, so that is the

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Speaker 1: number that energy is going to be. So you're gonna

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Speaker 1: be disinflation. We're gonna go through disinflation in the future. Well,

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Speaker 1: I can't tell you when it's gonna happen. Unfair, Okay,

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Speaker 1: you know what's so important here, Joe. And if people

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Speaker 1: even reducts back then forty seven out to the eyes

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Speaker 1: and our disinflation and the two bouts of disinflation we

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Speaker 1: had into the early nineteen fifties. Once inflation begins to disinflate,

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Speaker 1: do you believe it keeps going or do we come

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Speaker 1: down and stay at a certain point which causes an

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Speaker 1: uproar once? Is there a momentum to a disinflation? Well, uh,

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Speaker 1: the people used to think that there was a momentum

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Speaker 1: on inflation and then a momentum on disinflation. But uh,

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Speaker 1: the forces for that momentum are much much weaker today

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Speaker 1: than they were, say, fifty years ago. Uh, fifty years ago. Uh,

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Speaker 1: Unions were strong. When prices went up, they demanded higher wages.

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Speaker 1: Higher wages led to higher prices. UH. Unions are weak,

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Speaker 1: and so we're back to you might call normal competitive forces.

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Speaker 1: And what we saw in the year before the pandemic

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Speaker 1: that overall UH supply was extraordinary robust and prices were

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Speaker 1: kept down. UH and I think we're going to be

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Speaker 1: returning to that kind of a world. Well, what's the

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Speaker 1: Fed's role in this then, because there is this belief

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Speaker 1: out there that this is a different moment, and people

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Speaker 1: point to not just oil prices and commodity prices, but

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Speaker 1: also this fissure between the US and China and a

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Speaker 1: restoring of some of the supplies, which is naturally inflationary.

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Speaker 1: Also some of the conflicts inflationary by nature with Russia

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Speaker 1: and Ukraine. How much are you looking at a FED that,

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Speaker 1: even if they don't want to, has to raise rates

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Speaker 1: substantially to get ahead of inflation that may disinflate down

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Speaker 1: the line, but not quickly enough to create some real

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Speaker 1: threats to this economy. Well, first of all, you know

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Speaker 1: almost all those forces you site are either long term

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Speaker 1: or real. Do we small, Yeah, we're going to be

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Speaker 1: restoring we have low cost suppliers that are alternative to China,

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Speaker 1: Vietnam and Asia. Latin America has a lot of capacity.

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Speaker 1: So yes, costs are going to go up and there's

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Speaker 1: going to be a readjustment. But I don't and it's

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Speaker 1: but it's gonna take over a number of years, and

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Speaker 1: it's not going to be that big. We ought to

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Speaker 1: get prepared for it. Um. What I worry is on

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Speaker 1: the other side, that the fed UH works too fast

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Speaker 1: and too much. Remember it takes about eighteen months for

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Speaker 1: the full effects of monetary policy to be felt. And

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Speaker 1: in the span of eighteen months, if the war in

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Speaker 1: Russia comes to an end, the energy prices will come down.

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Speaker 1: That would be a strong disinflationary force. Food prices will

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Speaker 1: come down. They're already signs of that. That will be

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Speaker 1: a strong disinflationary force. Remember, over the last fifty years,

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Speaker 1: public policy has been telling farmers don't produce, don't make

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Speaker 1: so much food, And if we just reverse that policy,

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Speaker 1: prices of agricultural goods are going to come down. So again,

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Speaker 1: we have a backstop here that it's hard for me

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Speaker 1: to believe that will sit by and simply let prices

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Speaker 1: be so high while we continue to subsidize our farmers.

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Speaker 1: We're gonna tell our farmers. So it seems like you

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Speaker 1: think that the potential error is worse but the FED

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Speaker 1: going too fast rather than too slowly, which is the

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Speaker 1: opposite of what a lot of people are saying, including

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Speaker 1: some FED members. What would you have to see to

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Speaker 1: change your mind in terms of the data, in terms

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Speaker 1: of the incoming developments on the ground of the economy, Well,

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Speaker 1: I would be looking for a particular acceleration of inflation. Uh.

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Speaker 1: You know, right now wages are not keeping up with prices.

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Speaker 1: Uh really, Uh, the opposite of what you would expect

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Speaker 1: in a very tight labor market. So if I saw

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Speaker 1: real wages going up dramatically and I saw inflation start

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Speaker 1: to take off at a higher rate rather now the

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Speaker 1: rate of inflation is happening and still going up, but

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Speaker 1: it's at much lower rate, those are signs that I

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Speaker 1: would I would would leave me to take stronger action.

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Speaker 1: Joseph Stiglet's the Laureate of Columbia. Right now, we got

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Speaker 1: any ways to go here with Kathleen vis Johnson is

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Speaker 1: just so wonderful at Oxford Economics is their chief US coons. Cathy,

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Speaker 1: let me set the groundwork for what Lisa John want

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Speaker 1: to talk about, which is just simply, where are we

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Speaker 1: on the guestimate of Q three g d P now

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Speaker 1: that July has closed. Do you have any handle on

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Speaker 1: it or is it just too early? Hi? John and

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Speaker 1: Tom happy to be with you. So, you know, three

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Speaker 1: quarter GDP is going to be quite important because we

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Speaker 1: had the two negative prints for Q one and Q two,

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Speaker 1: so so called technical recession. UM. We don't look for

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Speaker 1: the large inventory drag that you had in Q two

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Speaker 1: and also to QUBA one to some extent, so that's

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Speaker 1: going to make things arithmetically look better. Right, So we're

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Speaker 1: looking for, you know, roughly around one and a half

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Speaker 1: percent annualized real growth for Q three, but we don't

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Speaker 1: have many hard data points right to really corroborate that

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Speaker 1: UM and particularly consumer spending is always at the heart

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Speaker 1: of UM, you know GDP. Well, then link that into oil.

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Speaker 1: I mean, we were one twenty on Brent whatever it was.

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Speaker 1: We come down many guests talking about we'll get some

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Speaker 1: real good news on oil. We've got the news this morning,

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Speaker 1: and I get it's just OPEC plus and that how

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Speaker 1: sensitive is consumer spending? The oil in the modern day

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Speaker 1: versus in the seventies when we were driving around VW

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Speaker 1: Rabbit diesels. Um. Well, the consumers still very sensitive to

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Speaker 1: energy prices, particularly gasoline. So so oil obviously is going

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Speaker 1: to be a big input to gasoline prices. But gasoline

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Speaker 1: prices have really um weighed heavily on consumer sentiment and

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Speaker 1: competence and also consumer's pocketbooks. So the fact that gasoline

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Speaker 1: prices are down seventeen percent or so, that's big news.

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Speaker 1: UM still high right, still, you know, well above four

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Speaker 1: dollars a gallon, but the fact that we're seeing the

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Speaker 1: decline that may lift spirits a little bit and help

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Speaker 1: ease things a little for the consumer. But you know,

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Speaker 1: just keep in mind what the Fatal Reserve wants. And

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Speaker 1: you mentioned the Fed officials still sounding very hawkish. They

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Speaker 1: want things to slow down. They want the economy slow down.

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Speaker 1: They don't want to crash, they don't want recession, but

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Speaker 1: they do need things to slow down enable for inflation

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Speaker 1: to continue to go lower. How much, Kathy is the

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Speaker 1: Federal Reserve inadvertently tracking oil prices? In other words, you

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Speaker 1: were just talking about how people will have lifted spirits

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Speaker 1: if gas prices come down. They might spend more, there

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Speaker 1: might be a dip in some of the headline CPI

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Speaker 1: figures how much will the Fed use that to back

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Speaker 1: away versus say, you cannot count on this and it

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Speaker 1: could change on a dime. Well, that's a good point,

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Speaker 1: and we see the volatility across many asset classes, including

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Speaker 1: particularly oil, and things could change um. But I think

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Speaker 1: what they're going to be looking at is the fact

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Speaker 1: that the headline number can influence um inflation expectations. So

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Speaker 1: whether it's market expectations, but more importantly consumer and businesses,

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Speaker 1: that's going to be important. And as long as gasoline

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Speaker 1: prices continue to trend lower, that is really good news

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Speaker 1: for all together. Right, for all expectations and the actual

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Speaker 1: prints core inflation is gonna matter though too. Right the

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Speaker 1: service prices, which we know have been rising, UM, that's

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Speaker 1: going to continue to still be an issue from the

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Speaker 1: Fed Reserve and they're not going to keep They're not

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Speaker 1: going to take the ball, their eye off the balls.

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Speaker 1: Put it that way. So today is either OPEC plus

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Speaker 1: Wednesday or I s M Services Wednesday, depending on what

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Speaker 1: you think. Tomorrow is jobless claims also the Bank of England,

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Speaker 1: and on a Friday is the Big Jobs Report. Which data?

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Speaker 1: What type of data are you watching? And I keep

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Speaker 1: asking different guests the same question, because that has been

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Speaker 1: the key question for the Federal Reserve. What data matters

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Speaker 1: to determine their policy? Well, every little bit matters, because

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Speaker 1: if it's a it's part of the jigsaw puzzle, the

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Speaker 1: broader portrait of the macroeconomy. But I would say, oh,

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Speaker 1: this week, I would be looking towards the payroll number.

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Speaker 1: Um just for the fact that many of us have

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Speaker 1: been saying, you know, when a technical recession but not

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Speaker 1: a true recession, because the labor market is so strong.

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Speaker 1: When the labor market is strong, it provides income, and

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Speaker 1: that's the wherewithal for consumers to keep spending even though

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Speaker 1: they're getting hit by by still high prices. If you

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Speaker 1: start to see cracks and labor market, that becomes a

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Speaker 1: very different story. Kathy, you and I have been through

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Speaker 1: thick and thin on this, and right now is like

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Speaker 1: just kidding John Farrell, I'm drowning in gloom. I mean

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Speaker 1: the level of gloom out there. Worried, the handwringing. It's

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Speaker 1: you know, is it oh seven? Is it oh nine?

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Speaker 1: You know, collapse of the Great Financial crisis. No, how

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Speaker 1: bad is it out there? Kathy help me, Well, it's

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Speaker 1: it's in our opinion, is not anything near the Great

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Speaker 1: Financial Crisis or the COVID recession that we just went through. Um.

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Speaker 1: At worst, it would be, you know, a moderate recession

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Speaker 1: in our opinion, But we think if we do fall

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Speaker 1: into recession, it could be quite shallow. Um. You know,

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Speaker 1: we were not in the camp that thinks that unemployment

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Speaker 1: rate needs to go sharply hired to bring inflation down.

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Speaker 1: We're already seeing goods inflation trending lower and um, and

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Speaker 1: we think eventually, right credental prices will come down. His home,

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Speaker 1: Sam Stove all a seafar. It was just on modeling

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Speaker 1: nine down to seven percent or something like that. Do

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Speaker 1: you detect a pause on the way down or is

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Speaker 1: there an inertial force to it? That really gets us

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Speaker 1: back towards the vaunted that that the Fed speakers talk of. Well,

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Speaker 1: we we have a similar forecast. Actually for this year

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Speaker 1: we think nine percent. We're kind of trending around nine

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Speaker 1: percent maybe eight for the next few months. By year

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Speaker 1: and somewhere around seven percent. But the year and year

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Speaker 1: comparisons get much easier next year and that's the key,

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Speaker 1: and you don't need outright price declines, right, the levels

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Speaker 1: don't have to apply. Just the month to month change

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Speaker 1: has to slow and we need to see service price

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Speaker 1: inflation start to cool. But again, you don't need outright

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Speaker 1: declines in price levels. And I think that's important to

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Speaker 1: keep in mind, Kathy. How much does the policy mix

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Speaker 1: in Washington, d C. Change the picture at all for you,

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Speaker 1: whether it's the policy internationally with China or some of

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Speaker 1: the domestic bills that you're seeing proposed. Yeah, you know

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Speaker 1: right now that the size of uh, you know, the

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Speaker 1: billback mansion bill is um rather small rate compared to

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Speaker 1: what we've just come through in terms of fiscal policy,

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Speaker 1: and it's over a ten year period, so it incrementally

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Speaker 1: could be positive for the economy. We believe overall socially

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Speaker 1: fits starts to boost innovation and um technology, but but

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Speaker 1: not a big game changer for us. And it's just

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Speaker 1: right now, there's not a reason for fiscal policy to

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Speaker 1: pick up a lot and boost the economy because we

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Speaker 1: wanted to see things cool down in terms of geopolitical

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Speaker 1: that that is always a bit of a wild card rate. Um,

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Speaker 1: we didn't really know what was going to happen with

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Speaker 1: Russia and Ukraine. We don't really know what's going to

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Speaker 1: play out with China and Taiwan. A lot of brinkmanship

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Speaker 1: and I think that makes you know, makes us nervous,

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Speaker 1: makes the markets servous um And we'll have to see

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Speaker 1: how that plays out, but that that's always a wild

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Speaker 1: card for us, Canthy, Can I get to the academic

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Speaker 1: debate at the moment in economics and it has implications

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Speaker 1: for financial markets. It's being led at the moment by

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Speaker 1: Olivia Blanchard over the Peterson Institute. And the question I'll

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Speaker 1: ask is the question they ask is through declines in

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Speaker 1: vake seas involved less increases and unemployment when the initial

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Speaker 1: vacancy rate is this high, Kathy, if you spend some

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Speaker 1: time looking at that, because that seems to be the

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Speaker 1: debate from blanchardtow going against say Governor Walla over the Fed. Yeah.

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Speaker 1: I mean traditionally, when when the vacancy rates decline, you

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Speaker 1: do see a large increase in the unemployment rate. But

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Speaker 1: we think this time is quite different. There is um.

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Speaker 1: Even though the economy is slowing down, we still have

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Speaker 1: a really tight labor market and there's still more jobs

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Speaker 1: out there than workers. So I think it is possible

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Speaker 1: to call the labor market equal the economy without seeing

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Speaker 1: a real large increase in unemploymentry. We may get some right,

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Speaker 1: but we're talking, you know, are we going to go

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Speaker 1: to you know, two percent, three percent, four percent higher?

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Speaker 1: We don't think that's necessary to bring inflation down. We

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Speaker 1: think there there is a way to kind of thread

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Speaker 1: that needle, even if we have a bit of a

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Speaker 1: mild reception. Kathy also going to catch up with you.

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Speaker 1: As always, Cathy bus chances that of ox An Economics,

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Speaker 1: Isaac Voltanski is a perfect person to speak to. It's

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Speaker 1: with bt I g and Yes, director of Policy Research,

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Speaker 1: but writes very informed notes on the synthesis of legislative

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Speaker 1: into presidential politics as well. Isaac, I want to go

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Speaker 1: to a photo op pass, the fist bump, and maybe

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Speaker 1: a photo op forward, which is the president meeting with

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Speaker 1: the leadership of China. I mean, what does Mr Biden

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Speaker 1: need on the photoop passed and the photo op forward

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Speaker 1: When we see this morning slap of OPEC plus. You know,

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Speaker 1: it's it's hard to overstate how disappointing this OPEC plus

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Speaker 1: decision is for the Biden administration. Frankly, it's the geopolitical

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Speaker 1: equivalent of a slap in the face. The Biden administration

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Speaker 1: made a huge miscalculation. Their bet was they could go

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Speaker 1: to Saudi Arabia, they could have that fist picture with

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Speaker 1: the crown prints, which carries a bit of political complexity

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Speaker 1: to it, but that that would help make an increase

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Speaker 1: in production easier for the pat This hundred thousand is

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Speaker 1: not worth it or any of the political baggage that

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Speaker 1: came along with it for the Biden of industry. You

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Speaker 1: are perfect about the machinery of our legislative branch. What

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Speaker 1: does the people of Capitol Hill think about a change

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Speaker 1: in the gallon of gas? They're not looking at every

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Speaker 1: nickel move, are they? But what do they looking at? Well, look,

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Speaker 1: and for a lot of these economic data points, there

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Speaker 1: is a it's it's almost a political warshop test, right where,

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Speaker 1: depending upon where you are on the ideological spectrum, you

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Speaker 1: can use any of these data points in your flyers,

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Speaker 1: in your press releases on the campaign trail. But the

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Speaker 1: reality is folks are feeling it at the pump, They're

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Speaker 1: feeling it in their rent, they're feeling it at the

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Speaker 1: grocery store, and I think that that is going to

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Speaker 1: pull through to the election. And even though we had

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Speaker 1: some sort of cross currents with the primaries and decisions

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Speaker 1: last night, UM, that tell us a little bit of

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Speaker 1: a jarbald story. To me. One of the reasons I

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Speaker 1: have so much confidence the House is gonna flip Tom

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Speaker 1: is because of the inflation story. That impact on the

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Speaker 1: pocketbook gives me confidence that Republicans are going to take

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Speaker 1: the House. Isaac, how much it can President Biden come

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Speaker 1: out and seem angry about this, say, this is a

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Speaker 1: repudiation of the good graces that he showed. How much

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Speaker 1: does he message that sort of disappointment in this versus

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Speaker 1: at least it's something In other words, how does he

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Speaker 1: pivot from what you just called a slap in the

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Speaker 1: face from the Saudi Arabian Kingdom. I mean, what we've

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Speaker 1: seen thus far from the Biden administration is that the

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Speaker 1: President will still speak optimistically, uh and positively about this.

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Speaker 1: He will focus on attempting to cajole OPEC plus on

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Speaker 1: the next decision. But we're going to hear something I

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Speaker 1: think pretty sharp commentary from the cabinet members around this. UM.

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Speaker 1: I don't know yet what The underlying justification is, as

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Speaker 1: you said earlier, is this a supplier demand decision? What

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Speaker 1: really drove O peck plus is thinking here, But for

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Speaker 1: the Biden administration, they were desperately hoping to get more

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Speaker 1: than a hundred thousand barrels a day to alleviate the

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Speaker 1: pressure of the pump in the coming weeks and months

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Speaker 1: before the midterms. The good news is that gas prices

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Speaker 1: have been down every single day since the middle of June.

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Speaker 1: If they weren't heading in that direction, Isaac, this would

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Speaker 1: be much more controversial, Isaac. We always appreciate your time, sir.

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Speaker 1: I got to catch over the weekend, I said bot

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Speaker 1: Tansky there with bt I G. Kristin Bidley joins us

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Speaker 1: now from City Global Wealth Management, Christ and I was

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Speaker 1: going through the notes from you, and this just jumps

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Speaker 1: out to all of us. We have shifted to our

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Speaker 1: most cautious yet still fully invested portfolio since the first

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Speaker 1: quarter of Kristen. What does that mean? So what we've said,

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Speaker 1: and we've said this for the past couple of months,

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Speaker 1: it's really looking at where we could go from here.

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Speaker 1: And so there's three different scenarios that we could see

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Speaker 1: for markets and for the economy robust, resilient or recessionary

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Speaker 1: scenario robust really strong growth. I don't think anyone is

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Speaker 1: really calling for that. We have right now about a

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Speaker 1: fifty fifty chance in terms of tipping over into a

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Speaker 1: true recession, not a technical recession, or seeing that resilient,

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Speaker 1: slowing growth environment. And what we want to do is

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Speaker 1: prepare portfolios for both. So the changes that we recently

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Speaker 1: made in terms of investing in high quality equities, we've

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Speaker 1: been there all along really year to date and starting

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Speaker 1: in Q three of last year, upping our quality and

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Speaker 1: our fixing come portfolios. And we also pulled back on

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Speaker 1: some of our commodity positions energy positions due to the

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Speaker 1: fact that we're seeing some of those inflationary pressures a bait.

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Speaker 1: And that was really more in our portfolios for a

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Speaker 1: hedging purpose than any type of long call. Kristen, you're

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Speaker 1: so good down the income statement. What did you learn

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Speaker 1: about margin dynamics? Is I believe we've got seventy x

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Speaker 1: percent of earnings in right now? What have you learn

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Speaker 1: about what we need to study down the income statement?

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Speaker 1: So what we need to look at really going into

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Speaker 1: Q two. The end of Q two earnings. In Q

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Speaker 1: three earnings, I think when we look at this rally

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Speaker 1: that we saw in July, I know a lot of

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Speaker 1: people pointed to that there's a potential fed pivot, some

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Speaker 1: dovish comments. I don't think that was it at all.

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Speaker 1: I think earning showed some resiliency that was not antithy.

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Speaker 1: Where was it on the income statement? I don't you know.

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Speaker 1: I get the earnings were there, and we chat up

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Speaker 1: revenues as well, it was just about gross margin. Was

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Speaker 1: it about dynamics, we're operating income? Where was it on

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Speaker 1: the income statement that you saw? It was actually a

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Speaker 1: top line revenue and so okay, when you look at

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Speaker 1: the top line revenue growth that we saw, I think

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Speaker 1: that was surprising because everyone was looking at after you're

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Speaker 1: looking at you are looking at consumer spending. Consumer spending

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Speaker 1: is six of GDP, and we were trying to look

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Speaker 1: for cracks in the consumer backdrop. In Q two, we

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Speaker 1: started with financials. We looked at the loan loss reserves

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Speaker 1: better than feared. Basically, everything came out better than feared

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Speaker 1: when it came to the consumer. The only real cracks

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Speaker 1: that we started to see we're in the mass market

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Speaker 1: retailers right, like Walmart, Best Buy. We saw some commentary

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Speaker 1: there in terms of the shifting consumer spending pattern and

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Speaker 1: this is why when you look at our portfolio and

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Speaker 1: how we're allocated, we want to prepare for those two

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Speaker 1: different situations, resilient or recession, because from here, if consumers

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Speaker 1: are shifting their consumers their spending patterns, if they're pulling

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Speaker 1: away from services, if we're seeing some of that dynamic

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Speaker 1: over the summer that really was just revenge spending and traveling,

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Speaker 1: getting a lot of that out of the system, and

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Speaker 1: now they're preparing for a recession along with companies preparing

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Speaker 1: for a recession. That's going to start to flow through

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Speaker 1: to earnings and we're going to see some some some

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Speaker 1: estimates revised down from here. We hear the phrase data

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Speaker 1: dependency all the time. What is your data dependency as

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Speaker 1: you try to gauge whether there is a broadening out

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Speaker 1: in that weakness of consumer spending that we saw anecdotally

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Speaker 1: in the Walmarts and the targets but not that much elsewhere. Yeah,

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Speaker 1: So I think what we're and have to look at

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Speaker 1: is really some of those the data around whether so

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Speaker 1: take inflation right, and I think what people can agree upon.

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Speaker 1: Right now, growth is slowing. Core inflation is actually proving persistent,

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Speaker 1: but headline inflation is slowing on energy prices. So I

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Speaker 1: think this tight rope, tight rope walk that we're going

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Speaker 1: to have is really on the sense that some people

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Speaker 1: that the more resilient bulls are pointing to commodity prices

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Speaker 1: coming over, gasoline prices coming down, but I think you

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Speaker 1: still have the shelter costs, right, You still have that

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Speaker 1: housing affordability has deteriorated substantially, and so that balance that

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Speaker 1: the average consumer is really walking through. So I think

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Speaker 1: you can see spending patterns in credit cards, you can

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Speaker 1: see overall consumer patterns there, and then looking through in

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Speaker 1: terms of the inflation dynamics that we're facing and whether

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Speaker 1: some of that core inflation is stickier than expected. Kristen

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Speaker 1: Supercocious to catch up Kristin Bidley the Citsy. This is

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Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live

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Speaker 1: weekdays from seven to ten am Eastern on Bloomberg Radio

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Speaker 1: and on Bloomberg Television each day from six to nine

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Speaker 1: am for insight from the best in economics, finance, investment,

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Speaker 1: and international relations. And subscribe to the Surveillance podcast on

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Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

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Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg.