Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa A. Brownwitz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. To find Bloomberg Surveillance on Apple Podcast, Suncloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg terminal.
Speaker 1: Right now, the honor of the laureate from Columbia University,
Speaker 1: Joseph Stiglets joins us. And on any number of the
Speaker 1: topics we could talk about, we go to something dear
Speaker 1: to his heart is a gentleman from Gary, Indiana long
Speaker 1: ago new different bouts of inflation, fear and inflation scare
Speaker 1: Joe Stiglets. Your basic message is what everyone calmed down.
Speaker 1: Why is this inflation not like the inflation of Heller seventies. Well,
Speaker 1: first of all, it's mostly a supply side inflation. And
Speaker 1: think about some of the things that are really driving it.
Speaker 1: Take the price of energy. In the price of oil,
Speaker 1: it's way up. We have a war in Ukraine. We
Speaker 1: understand that, but we know over the long run, and
Speaker 1: I when I'm talking about the long run, and it's
Speaker 1: not that long. Uh. The price of oil energy is
Speaker 1: going to come down because the backstop, as we call it. Uh,
Speaker 1: we know we can produce an unlimited amount of renewable
Speaker 1: energy at the equivalent of about fifty a barrel. And
Speaker 1: if that number keeps coming down, so that is the
Speaker 1: number that energy is going to be. So you're gonna
Speaker 1: be disinflation. We're gonna go through disinflation in the future. Well,
Speaker 1: I can't tell you when it's gonna happen. Unfair, Okay,
Speaker 1: you know what's so important here, Joe. And if people
Speaker 1: even reducts back then forty seven out to the eyes
Speaker 1: and our disinflation and the two bouts of disinflation we
Speaker 1: had into the early nineteen fifties. Once inflation begins to disinflate,
Speaker 1: do you believe it keeps going or do we come
Speaker 1: down and stay at a certain point which causes an
Speaker 1: uproar once? Is there a momentum to a disinflation? Well, uh,
Speaker 1: the people used to think that there was a momentum
Speaker 1: on inflation and then a momentum on disinflation. But uh,
Speaker 1: the forces for that momentum are much much weaker today
Speaker 1: than they were, say, fifty years ago. Uh, fifty years ago. Uh,
Speaker 1: Unions were strong. When prices went up, they demanded higher wages.
Speaker 1: Higher wages led to higher prices. UH. Unions are weak,
Speaker 1: and so we're back to you might call normal competitive forces.
Speaker 1: And what we saw in the year before the pandemic
Speaker 1: that overall UH supply was extraordinary robust and prices were
Speaker 1: kept down. UH and I think we're going to be
Speaker 1: returning to that kind of a world. Well, what's the
Speaker 1: Fed's role in this then, because there is this belief
Speaker 1: out there that this is a different moment, and people
Speaker 1: point to not just oil prices and commodity prices, but
Speaker 1: also this fissure between the US and China and a
Speaker 1: restoring of some of the supplies, which is naturally inflationary.
Speaker 1: Also some of the conflicts inflationary by nature with Russia
Speaker 1: and Ukraine. How much are you looking at a FED that,
Speaker 1: even if they don't want to, has to raise rates
Speaker 1: substantially to get ahead of inflation that may disinflate down
Speaker 1: the line, but not quickly enough to create some real
Speaker 1: threats to this economy. Well, first of all, you know
Speaker 1: almost all those forces you site are either long term
Speaker 1: or real. Do we small, Yeah, we're going to be
Speaker 1: restoring we have low cost suppliers that are alternative to China,
Speaker 1: Vietnam and Asia. Latin America has a lot of capacity.
Speaker 1: So yes, costs are going to go up and there's
Speaker 1: going to be a readjustment. But I don't and it's
Speaker 1: but it's gonna take over a number of years, and
Speaker 1: it's not going to be that big. We ought to
Speaker 1: get prepared for it. Um. What I worry is on
Speaker 1: the other side, that the fed UH works too fast
Speaker 1: and too much. Remember it takes about eighteen months for
Speaker 1: the full effects of monetary policy to be felt. And
Speaker 1: in the span of eighteen months, if the war in
Speaker 1: Russia comes to an end, the energy prices will come down.
Speaker 1: That would be a strong disinflationary force. Food prices will
Speaker 1: come down. They're already signs of that. That will be
Speaker 1: a strong disinflationary force. Remember, over the last fifty years,
Speaker 1: public policy has been telling farmers don't produce, don't make
Speaker 1: so much food, And if we just reverse that policy,
Speaker 1: prices of agricultural goods are going to come down. So again,
Speaker 1: we have a backstop here that it's hard for me
Speaker 1: to believe that will sit by and simply let prices
Speaker 1: be so high while we continue to subsidize our farmers.
Speaker 1: We're gonna tell our farmers. So it seems like you
Speaker 1: think that the potential error is worse but the FED
Speaker 1: going too fast rather than too slowly, which is the
Speaker 1: opposite of what a lot of people are saying, including
Speaker 1: some FED members. What would you have to see to
Speaker 1: change your mind in terms of the data, in terms
Speaker 1: of the incoming developments on the ground of the economy, Well,
Speaker 1: I would be looking for a particular acceleration of inflation. Uh.
Speaker 1: You know, right now wages are not keeping up with prices.
Speaker 1: Uh really, Uh, the opposite of what you would expect
Speaker 1: in a very tight labor market. So if I saw
Speaker 1: real wages going up dramatically and I saw inflation start
Speaker 1: to take off at a higher rate rather now the
Speaker 1: rate of inflation is happening and still going up, but
Speaker 1: it's at much lower rate, those are signs that I
Speaker 1: would I would would leave me to take stronger action.
Speaker 1: Joseph Stiglet's the Laureate of Columbia. Right now, we got
Speaker 1: any ways to go here with Kathleen vis Johnson is
Speaker 1: just so wonderful at Oxford Economics is their chief US coons. Cathy,
Speaker 1: let me set the groundwork for what Lisa John want
Speaker 1: to talk about, which is just simply, where are we
Speaker 1: on the guestimate of Q three g d P now
Speaker 1: that July has closed. Do you have any handle on
Speaker 1: it or is it just too early? Hi? John and
Speaker 1: Tom happy to be with you. So, you know, three
Speaker 1: quarter GDP is going to be quite important because we
Speaker 1: had the two negative prints for Q one and Q two,
Speaker 1: so so called technical recession. UM. We don't look for
Speaker 1: the large inventory drag that you had in Q two
Speaker 1: and also to QUBA one to some extent, so that's
Speaker 1: going to make things arithmetically look better. Right, So we're
Speaker 1: looking for, you know, roughly around one and a half
Speaker 1: percent annualized real growth for Q three, but we don't
Speaker 1: have many hard data points right to really corroborate that
Speaker 1: UM and particularly consumer spending is always at the heart
Speaker 1: of UM, you know GDP. Well, then link that into oil.
Speaker 1: I mean, we were one twenty on Brent whatever it was.
Speaker 1: We come down many guests talking about we'll get some
Speaker 1: real good news on oil. We've got the news this morning,
Speaker 1: and I get it's just OPEC plus and that how
Speaker 1: sensitive is consumer spending? The oil in the modern day
Speaker 1: versus in the seventies when we were driving around VW
Speaker 1: Rabbit diesels. Um. Well, the consumers still very sensitive to
Speaker 1: energy prices, particularly gasoline. So so oil obviously is going
Speaker 1: to be a big input to gasoline prices. But gasoline
Speaker 1: prices have really um weighed heavily on consumer sentiment and
Speaker 1: competence and also consumer's pocketbooks. So the fact that gasoline
Speaker 1: prices are down seventeen percent or so, that's big news.
Speaker 1: UM still high right, still, you know, well above four
Speaker 1: dollars a gallon, but the fact that we're seeing the
Speaker 1: decline that may lift spirits a little bit and help
Speaker 1: ease things a little for the consumer. But you know,
Speaker 1: just keep in mind what the Fatal Reserve wants. And
Speaker 1: you mentioned the Fed officials still sounding very hawkish. They
Speaker 1: want things to slow down. They want the economy slow down.
Speaker 1: They don't want to crash, they don't want recession, but
Speaker 1: they do need things to slow down enable for inflation
Speaker 1: to continue to go lower. How much, Kathy is the
Speaker 1: Federal Reserve inadvertently tracking oil prices? In other words, you
Speaker 1: were just talking about how people will have lifted spirits
Speaker 1: if gas prices come down. They might spend more, there
Speaker 1: might be a dip in some of the headline CPI
Speaker 1: figures how much will the Fed use that to back
Speaker 1: away versus say, you cannot count on this and it
Speaker 1: could change on a dime. Well, that's a good point,
Speaker 1: and we see the volatility across many asset classes, including
Speaker 1: particularly oil, and things could change um. But I think
Speaker 1: what they're going to be looking at is the fact
Speaker 1: that the headline number can influence um inflation expectations. So
Speaker 1: whether it's market expectations, but more importantly consumer and businesses,
Speaker 1: that's going to be important. And as long as gasoline
Speaker 1: prices continue to trend lower, that is really good news
Speaker 1: for all together. Right, for all expectations and the actual
Speaker 1: prints core inflation is gonna matter though too. Right the
Speaker 1: service prices, which we know have been rising, UM, that's
Speaker 1: going to continue to still be an issue from the
Speaker 1: Fed Reserve and they're not going to keep They're not
Speaker 1: going to take the ball, their eye off the balls.
Speaker 1: Put it that way. So today is either OPEC plus
Speaker 1: Wednesday or I s M Services Wednesday, depending on what
Speaker 1: you think. Tomorrow is jobless claims also the Bank of England,
Speaker 1: and on a Friday is the Big Jobs Report. Which data?
Speaker 1: What type of data are you watching? And I keep
Speaker 1: asking different guests the same question, because that has been
Speaker 1: the key question for the Federal Reserve. What data matters
Speaker 1: to determine their policy? Well, every little bit matters, because
Speaker 1: if it's a it's part of the jigsaw puzzle, the
Speaker 1: broader portrait of the macroeconomy. But I would say, oh,
Speaker 1: this week, I would be looking towards the payroll number.
Speaker 1: Um just for the fact that many of us have
Speaker 1: been saying, you know, when a technical recession but not
Speaker 1: a true recession, because the labor market is so strong.
Speaker 1: When the labor market is strong, it provides income, and
Speaker 1: that's the wherewithal for consumers to keep spending even though
Speaker 1: they're getting hit by by still high prices. If you
Speaker 1: start to see cracks and labor market, that becomes a
Speaker 1: very different story. Kathy, you and I have been through
Speaker 1: thick and thin on this, and right now is like
Speaker 1: just kidding John Farrell, I'm drowning in gloom. I mean
Speaker 1: the level of gloom out there. Worried, the handwringing. It's
Speaker 1: you know, is it oh seven? Is it oh nine?
Speaker 1: You know, collapse of the Great Financial crisis. No, how
Speaker 1: bad is it out there? Kathy help me, Well, it's
Speaker 1: it's in our opinion, is not anything near the Great
Speaker 1: Financial Crisis or the COVID recession that we just went through. Um.
Speaker 1: At worst, it would be, you know, a moderate recession
Speaker 1: in our opinion, But we think if we do fall
Speaker 1: into recession, it could be quite shallow. Um. You know,
Speaker 1: we were not in the camp that thinks that unemployment
Speaker 1: rate needs to go sharply hired to bring inflation down.
Speaker 1: We're already seeing goods inflation trending lower and um, and
Speaker 1: we think eventually, right credental prices will come down. His home,
Speaker 1: Sam Stove all a seafar. It was just on modeling
Speaker 1: nine down to seven percent or something like that. Do
Speaker 1: you detect a pause on the way down or is
Speaker 1: there an inertial force to it? That really gets us
Speaker 1: back towards the vaunted that that the Fed speakers talk of. Well,
Speaker 1: we we have a similar forecast. Actually for this year
Speaker 1: we think nine percent. We're kind of trending around nine
Speaker 1: percent maybe eight for the next few months. By year
Speaker 1: and somewhere around seven percent. But the year and year
Speaker 1: comparisons get much easier next year and that's the key,
Speaker 1: and you don't need outright price declines, right, the levels
Speaker 1: don't have to apply. Just the month to month change
Speaker 1: has to slow and we need to see service price
Speaker 1: inflation start to cool. But again, you don't need outright
Speaker 1: declines in price levels. And I think that's important to
Speaker 1: keep in mind, Kathy. How much does the policy mix
Speaker 1: in Washington, d C. Change the picture at all for you,
Speaker 1: whether it's the policy internationally with China or some of
Speaker 1: the domestic bills that you're seeing proposed. Yeah, you know
Speaker 1: right now that the size of uh, you know, the
Speaker 1: billback mansion bill is um rather small rate compared to
Speaker 1: what we've just come through in terms of fiscal policy,
Speaker 1: and it's over a ten year period, so it incrementally
Speaker 1: could be positive for the economy. We believe overall socially
Speaker 1: fits starts to boost innovation and um technology, but but
Speaker 1: not a big game changer for us. And it's just
Speaker 1: right now, there's not a reason for fiscal policy to
Speaker 1: pick up a lot and boost the economy because we
Speaker 1: wanted to see things cool down in terms of geopolitical
Speaker 1: that that is always a bit of a wild card rate. Um,
Speaker 1: we didn't really know what was going to happen with
Speaker 1: Russia and Ukraine. We don't really know what's going to
Speaker 1: play out with China and Taiwan. A lot of brinkmanship
Speaker 1: and I think that makes you know, makes us nervous,
Speaker 1: makes the markets servous um And we'll have to see
Speaker 1: how that plays out, but that that's always a wild
Speaker 1: card for us, Canthy, Can I get to the academic
Speaker 1: debate at the moment in economics and it has implications
Speaker 1: for financial markets. It's being led at the moment by
Speaker 1: Olivia Blanchard over the Peterson Institute. And the question I'll
Speaker 1: ask is the question they ask is through declines in
Speaker 1: vake seas involved less increases and unemployment when the initial
Speaker 1: vacancy rate is this high, Kathy, if you spend some
Speaker 1: time looking at that, because that seems to be the
Speaker 1: debate from blanchardtow going against say Governor Walla over the Fed. Yeah.
Speaker 1: I mean traditionally, when when the vacancy rates decline, you
Speaker 1: do see a large increase in the unemployment rate. But
Speaker 1: we think this time is quite different. There is um.
Speaker 1: Even though the economy is slowing down, we still have
Speaker 1: a really tight labor market and there's still more jobs
Speaker 1: out there than workers. So I think it is possible
Speaker 1: to call the labor market equal the economy without seeing
Speaker 1: a real large increase in unemploymentry. We may get some right,
Speaker 1: but we're talking, you know, are we going to go
Speaker 1: to you know, two percent, three percent, four percent higher?
Speaker 1: We don't think that's necessary to bring inflation down. We
Speaker 1: think there there is a way to kind of thread
Speaker 1: that needle, even if we have a bit of a
Speaker 1: mild reception. Kathy also going to catch up with you.
Speaker 1: As always, Cathy bus chances that of ox An Economics,
Speaker 1: Isaac Voltanski is a perfect person to speak to. It's
Speaker 1: with bt I g and Yes, director of Policy Research,
Speaker 1: but writes very informed notes on the synthesis of legislative
Speaker 1: into presidential politics as well. Isaac, I want to go
Speaker 1: to a photo op pass, the fist bump, and maybe
Speaker 1: a photo op forward, which is the president meeting with
Speaker 1: the leadership of China. I mean, what does Mr Biden
Speaker 1: need on the photoop passed and the photo op forward
Speaker 1: When we see this morning slap of OPEC plus. You know,
Speaker 1: it's it's hard to overstate how disappointing this OPEC plus
Speaker 1: decision is for the Biden administration. Frankly, it's the geopolitical
Speaker 1: equivalent of a slap in the face. The Biden administration
Speaker 1: made a huge miscalculation. Their bet was they could go
Speaker 1: to Saudi Arabia, they could have that fist picture with
Speaker 1: the crown prints, which carries a bit of political complexity
Speaker 1: to it, but that that would help make an increase
Speaker 1: in production easier for the pat This hundred thousand is
Speaker 1: not worth it or any of the political baggage that
Speaker 1: came along with it for the Biden of industry. You
Speaker 1: are perfect about the machinery of our legislative branch. What
Speaker 1: does the people of Capitol Hill think about a change
Speaker 1: in the gallon of gas? They're not looking at every
Speaker 1: nickel move, are they? But what do they looking at? Well, look,
Speaker 1: and for a lot of these economic data points, there
Speaker 1: is a it's it's almost a political warshop test, right where,
Speaker 1: depending upon where you are on the ideological spectrum, you
Speaker 1: can use any of these data points in your flyers,
Speaker 1: in your press releases on the campaign trail. But the
Speaker 1: reality is folks are feeling it at the pump, They're
Speaker 1: feeling it in their rent, they're feeling it at the
Speaker 1: grocery store, and I think that that is going to
Speaker 1: pull through to the election. And even though we had
Speaker 1: some sort of cross currents with the primaries and decisions
Speaker 1: last night, UM, that tell us a little bit of
Speaker 1: a jarbald story. To me. One of the reasons I
Speaker 1: have so much confidence the House is gonna flip Tom
Speaker 1: is because of the inflation story. That impact on the
Speaker 1: pocketbook gives me confidence that Republicans are going to take
Speaker 1: the House. Isaac, how much it can President Biden come
Speaker 1: out and seem angry about this, say, this is a
Speaker 1: repudiation of the good graces that he showed. How much
Speaker 1: does he message that sort of disappointment in this versus
Speaker 1: at least it's something In other words, how does he
Speaker 1: pivot from what you just called a slap in the
Speaker 1: face from the Saudi Arabian Kingdom. I mean, what we've
Speaker 1: seen thus far from the Biden administration is that the
Speaker 1: President will still speak optimistically, uh and positively about this.
Speaker 1: He will focus on attempting to cajole OPEC plus on
Speaker 1: the next decision. But we're going to hear something I
Speaker 1: think pretty sharp commentary from the cabinet members around this. UM.
Speaker 1: I don't know yet what The underlying justification is, as
Speaker 1: you said earlier, is this a supplier demand decision? What
Speaker 1: really drove O peck plus is thinking here, But for
Speaker 1: the Biden administration, they were desperately hoping to get more
Speaker 1: than a hundred thousand barrels a day to alleviate the
Speaker 1: pressure of the pump in the coming weeks and months
Speaker 1: before the midterms. The good news is that gas prices
Speaker 1: have been down every single day since the middle of June.
Speaker 1: If they weren't heading in that direction, Isaac, this would
Speaker 1: be much more controversial, Isaac. We always appreciate your time, sir.
Speaker 1: I got to catch over the weekend, I said bot
Speaker 1: Tansky there with bt I G. Kristin Bidley joins us
Speaker 1: now from City Global Wealth Management, Christ and I was
Speaker 1: going through the notes from you, and this just jumps
Speaker 1: out to all of us. We have shifted to our
Speaker 1: most cautious yet still fully invested portfolio since the first
Speaker 1: quarter of Kristen. What does that mean? So what we've said,
Speaker 1: and we've said this for the past couple of months,
Speaker 1: it's really looking at where we could go from here.
Speaker 1: And so there's three different scenarios that we could see
Speaker 1: for markets and for the economy robust, resilient or recessionary
Speaker 1: scenario robust really strong growth. I don't think anyone is
Speaker 1: really calling for that. We have right now about a
Speaker 1: fifty fifty chance in terms of tipping over into a
Speaker 1: true recession, not a technical recession, or seeing that resilient,
Speaker 1: slowing growth environment. And what we want to do is
Speaker 1: prepare portfolios for both. So the changes that we recently
Speaker 1: made in terms of investing in high quality equities, we've
Speaker 1: been there all along really year to date and starting
Speaker 1: in Q three of last year, upping our quality and
Speaker 1: our fixing come portfolios. And we also pulled back on
Speaker 1: some of our commodity positions energy positions due to the
Speaker 1: fact that we're seeing some of those inflationary pressures a bait.
Speaker 1: And that was really more in our portfolios for a
Speaker 1: hedging purpose than any type of long call. Kristen, you're
Speaker 1: so good down the income statement. What did you learn
Speaker 1: about margin dynamics? Is I believe we've got seventy x
Speaker 1: percent of earnings in right now? What have you learn
Speaker 1: about what we need to study down the income statement?
Speaker 1: So what we need to look at really going into
Speaker 1: Q two. The end of Q two earnings. In Q
Speaker 1: three earnings, I think when we look at this rally
Speaker 1: that we saw in July, I know a lot of
Speaker 1: people pointed to that there's a potential fed pivot, some
Speaker 1: dovish comments. I don't think that was it at all.
Speaker 1: I think earning showed some resiliency that was not antithy.
Speaker 1: Where was it on the income statement? I don't you know.
Speaker 1: I get the earnings were there, and we chat up
Speaker 1: revenues as well, it was just about gross margin. Was
Speaker 1: it about dynamics, we're operating income? Where was it on
Speaker 1: the income statement that you saw? It was actually a
Speaker 1: top line revenue and so okay, when you look at
Speaker 1: the top line revenue growth that we saw, I think
Speaker 1: that was surprising because everyone was looking at after you're
Speaker 1: looking at you are looking at consumer spending. Consumer spending
Speaker 1: is six of GDP, and we were trying to look
Speaker 1: for cracks in the consumer backdrop. In Q two, we
Speaker 1: started with financials. We looked at the loan loss reserves
Speaker 1: better than feared. Basically, everything came out better than feared
Speaker 1: when it came to the consumer. The only real cracks
Speaker 1: that we started to see we're in the mass market
Speaker 1: retailers right, like Walmart, Best Buy. We saw some commentary
Speaker 1: there in terms of the shifting consumer spending pattern and
Speaker 1: this is why when you look at our portfolio and
Speaker 1: how we're allocated, we want to prepare for those two
Speaker 1: different situations, resilient or recession, because from here, if consumers
Speaker 1: are shifting their consumers their spending patterns, if they're pulling
Speaker 1: away from services, if we're seeing some of that dynamic
Speaker 1: over the summer that really was just revenge spending and traveling,
Speaker 1: getting a lot of that out of the system, and
Speaker 1: now they're preparing for a recession along with companies preparing
Speaker 1: for a recession. That's going to start to flow through
Speaker 1: to earnings and we're going to see some some some
Speaker 1: estimates revised down from here. We hear the phrase data
Speaker 1: dependency all the time. What is your data dependency as
Speaker 1: you try to gauge whether there is a broadening out
Speaker 1: in that weakness of consumer spending that we saw anecdotally
Speaker 1: in the Walmarts and the targets but not that much elsewhere. Yeah,
Speaker 1: So I think what we're and have to look at
Speaker 1: is really some of those the data around whether so
Speaker 1: take inflation right, and I think what people can agree upon.
Speaker 1: Right now, growth is slowing. Core inflation is actually proving persistent,
Speaker 1: but headline inflation is slowing on energy prices. So I
Speaker 1: think this tight rope, tight rope walk that we're going
Speaker 1: to have is really on the sense that some people
Speaker 1: that the more resilient bulls are pointing to commodity prices
Speaker 1: coming over, gasoline prices coming down, but I think you
Speaker 1: still have the shelter costs, right, You still have that
Speaker 1: housing affordability has deteriorated substantially, and so that balance that
Speaker 1: the average consumer is really walking through. So I think
Speaker 1: you can see spending patterns in credit cards, you can
Speaker 1: see overall consumer patterns there, and then looking through in
Speaker 1: terms of the inflation dynamics that we're facing and whether
Speaker 1: some of that core inflation is stickier than expected. Kristen
Speaker 1: Supercocious to catch up Kristin Bidley the Citsy. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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