WEBVTT - (Mis)interpreting the Fed 0:00:13.680 --> 0:00:16.880 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:16.960 --> 0:00:18.959 My name is Mike Reagan. I'm a senior editor at 0:00:19.000 --> 0:00:23.279 Bloomberg now Madonna higher across asset reporter with Bloomberg at 0:00:23.320 --> 0:00:26.000 this week on the show, Well, as you may have heard, 0:00:26.440 --> 0:00:28.960 both the stock and bond markets have gotten off to 0:00:29.040 --> 0:00:31.880 a rip roaring start this year, and that meant that 0:00:31.920 --> 0:00:35.040 basically everyone and their dog was predicting that Fed Chair 0:00:35.159 --> 0:00:37.520 Jerome Pow would come out to the podium this week 0:00:37.560 --> 0:00:40.240 and ruin all the fun for everyone. But he didn't 0:00:40.320 --> 0:00:43.600 quite do that, and stock prices continue to rip higher, 0:00:43.800 --> 0:00:47.440 bond yields continue there to sent back to Earth. So 0:00:47.520 --> 0:00:50.320 what's the deal? What's going on? Doesn't the Fed still 0:00:50.400 --> 0:00:53.720 want to tighten financial conditions? We'll get into it with 0:00:53.880 --> 0:00:56.320 a chief investment officer from a firm I think you've 0:00:56.320 --> 0:01:00.200 probably heard of, but Vildonna. Before that, I've got play 0:01:00.200 --> 0:01:04.440 a little word association with you. If I say to 0:01:04.560 --> 0:01:08.000 you the song remains the same, what's the first thing 0:01:08.040 --> 0:01:13.880 that pops into your head? Jerome Paul Jerome pal is 0:01:13.920 --> 0:01:16.400 the first thing that pops into your head? All right? 0:01:16.600 --> 0:01:19.280 How about if I say the end is near? What 0:01:19.400 --> 0:01:24.800 pops into your head. Um, I don't know some apocalyptic movies. 0:01:25.800 --> 0:01:28.040 I'm really bad at this. Okay, I'm really bad at this, 0:01:30.000 --> 0:01:32.319 so well, to me, it's my old record collection, because 0:01:32.360 --> 0:01:36.000 I think the sweet guest has a similar record collection. 0:01:36.040 --> 0:01:38.520 To mind, the song remains the same, is of course 0:01:38.600 --> 0:01:42.759 led Zeppelin song album and movie I total, I believe, 0:01:43.000 --> 0:01:44.839 and I'm not sure, but I think he was referring 0:01:44.840 --> 0:01:47.160 to Sinatra with the End is Near, but we'll have 0:01:47.200 --> 0:01:50.240 to find out. Okay, you're just dating our guests. Basically 0:01:50.320 --> 0:01:53.320 I'm dating myself a little bit too. And you just 0:01:53.320 --> 0:01:56.880 showed off you're too young to know who led Zeppelin is. 0:01:57.000 --> 0:01:59.000 You didn't have a gene jacket in the eighties with 0:01:59.040 --> 0:02:01.559 the led Zeppelin huge led Zeppelin patch on the back 0:02:02.800 --> 0:02:06.800 obviously not did I you're asking me? No, I was 0:02:06.840 --> 0:02:13.400 born in Hello, Okay, so let's see if if our 0:02:13.480 --> 0:02:17.520 guess is um mad at being dated by you. But 0:02:17.560 --> 0:02:20.560 it's Jim Karen. He's co chief investment Officer of Global 0:02:20.600 --> 0:02:23.880 Balance Funds at Morgan Stanley Investment Management. And Jim, thank 0:02:23.919 --> 0:02:26.360 you so much for joining us and apologies for for 0:02:26.480 --> 0:02:32.000 Mike's comments. No, no, my pleasure. I'm glad. He got 0:02:32.040 --> 0:02:35.440 the references. Those are exactly the references. And I did 0:02:35.480 --> 0:02:38.520 have a gene jacket in the seventies and also in 0:02:38.560 --> 0:02:41.560 the eighties, I did have like the little pins on 0:02:41.600 --> 0:02:45.040 the gene jacket. And part of the reference to is 0:02:45.160 --> 0:02:48.919 that that the record label for led Zeppelin was Swan signed. 0:02:49.280 --> 0:02:51.040 So the other reference is that this is also a 0:02:51.080 --> 0:02:53.760 Swan sign for the rate hiking psychos. There's a lot 0:02:53.800 --> 0:02:57.679 of references that are going on multi layer there, all right, 0:02:57.760 --> 0:03:00.240 I do understand this finance stuff after all, the don 0:03:00.320 --> 0:03:02.840 I I clearly, I clearly don't. This stuff should be 0:03:02.840 --> 0:03:05.320 on the CFA exam for sure. But it's funny though, 0:03:05.360 --> 0:03:08.440 you know, uh strategists realized they'll get a lot of 0:03:08.520 --> 0:03:11.240 readers of a certain age to to you know, read 0:03:11.280 --> 0:03:13.720 their stuff when they throw in those classic rock references. 0:03:13.760 --> 0:03:16.160 So I I applaud you, Jim. I definitely want to 0:03:16.160 --> 0:03:18.000 get into the markets talk. But I was I was 0:03:18.040 --> 0:03:21.600 just going through your background. And it's funny because I 0:03:21.680 --> 0:03:26.000 have this recurring dream where I'm back in college for 0:03:26.040 --> 0:03:28.360 a second bachelor's degree and everyone's like, what are you 0:03:28.360 --> 0:03:30.360 doing getting a second batrilo's degree. I'm like, I don't know. 0:03:30.360 --> 0:03:32.160 It just it just felt right. But I find it 0:03:32.200 --> 0:03:37.560 fascinating your education. So bachelor's in physics UH from Bowden 0:03:38.280 --> 0:03:43.240 then and other bachelor's UH in Aeronautical engineering from Californy 0:03:43.320 --> 0:03:48.160 Institute of Technology. Very interesting background, and it's always fascinating 0:03:48.160 --> 0:03:50.480 to me the different paths people take to Wall Street. 0:03:50.520 --> 0:03:53.240 A lot of times it is that physics or engineering background. 0:03:53.360 --> 0:03:55.440 So what were you thinking back then where you It 0:03:55.480 --> 0:03:57.440 sounds like you wanted to be a rocket scientist when 0:03:57.440 --> 0:04:01.040 you're when you're a kid. Yeah, that's that's probably correct. 0:04:01.080 --> 0:04:03.200 So I was on a program what was called a 0:04:03.280 --> 0:04:05.560 three two programs, So I spent three years of Bowden, 0:04:05.680 --> 0:04:07.720 got a physics degree, and then went to cal Tech 0:04:08.160 --> 0:04:12.120 to do engineering. And I always loved the markets, and 0:04:12.200 --> 0:04:14.920 I always thought of the markets as as almost like 0:04:14.920 --> 0:04:18.520 a financial engineering experience. That plus the fact that I 0:04:18.560 --> 0:04:21.120 was graduating during the time where there was a big recession, 0:04:21.160 --> 0:04:23.880 a big piece dividend was being paid. UM, the Berlin 0:04:23.880 --> 0:04:26.800 Wall had come down, a lot of the engineering work 0:04:27.000 --> 0:04:30.039 was going into the defense sector, which was being you know, 0:04:30.640 --> 0:04:35.479 eliminated pretty much. So UM, I really started to get 0:04:35.520 --> 0:04:38.840 interested in the markets, and that's where it led me 0:04:38.880 --> 0:04:41.720 and I loved all of the math and the complexity 0:04:41.880 --> 0:04:44.840 that was going through at the time. And it was 0:04:44.880 --> 0:04:47.760 actually when actually Bloomberg in some ways was it. It 0:04:47.800 --> 0:04:50.440 was in its infancy and today people take it as 0:04:50.520 --> 0:04:52.680 a as a granted, but I used to do a 0:04:52.760 --> 0:04:55.279 lot of my calculations on a calculator called him Monroe, 0:04:56.000 --> 0:04:58.360 and we would and that was the Bloomberg of the time. 0:04:58.400 --> 0:05:00.200 That was the high technology of the time. It was 0:05:00.200 --> 0:05:03.240 one of those big hand calculators. So I really have 0:05:03.279 --> 0:05:06.600 an appreciation for how things get done, how things come together, 0:05:06.720 --> 0:05:10.160 how things actually work. And I think of the broader 0:05:10.200 --> 0:05:12.560 markets is almost like a machine or or or an 0:05:12.560 --> 0:05:15.720 engine in some ways where everything needs to be just 0:05:15.880 --> 0:05:19.160 right for for it to run smoothly. So so that's 0:05:19.160 --> 0:05:22.360 the association that I have between the engineering and science 0:05:22.360 --> 0:05:26.919 background versus what's going on in markets today. I really 0:05:26.960 --> 0:05:29.760 like that and I like your description of it, and um, 0:05:29.800 --> 0:05:32.200 it's a perfect segue into what is going on in 0:05:32.240 --> 0:05:35.360 markets today. Because we did hear from the FED. The 0:05:35.440 --> 0:05:38.360 tone of the press conference was very different from what 0:05:38.440 --> 0:05:41.920 investors had been expecting. So maybe just like layout for 0:05:41.960 --> 0:05:45.320 our listeners, what do we get from the FED? UH 0:05:45.320 --> 0:05:49.039 and what your main takeaways were from from the pressor so. 0:05:49.160 --> 0:05:53.039 I think it's very interesting to the extent that how 0:05:53.279 --> 0:05:55.840 is really trying to walk a very very fine line, 0:05:56.000 --> 0:05:58.719 to the extent that he wants to signal that the 0:05:58.839 --> 0:06:01.200 rate hiking cycle is coming to an end. And he 0:06:01.240 --> 0:06:03.880 even made reference to that, and he said, we're talking 0:06:03.920 --> 0:06:05.960 about a couple of more hikes. Well, a couple to 0:06:06.040 --> 0:06:09.800 me means to possibly too. But at the same time, 0:06:10.240 --> 0:06:13.920 he doesn't want to let financial conditions become very very easy, 0:06:14.160 --> 0:06:17.360 have stock markets go up at credit spreads tightened very quickly, 0:06:17.960 --> 0:06:21.640 and all of a sudden bring in those inflationary pressures again, 0:06:21.640 --> 0:06:24.919 and that would really work against him. So in one sense, 0:06:24.960 --> 0:06:27.840 he wants to say, I'm slowing the pace of rate 0:06:27.920 --> 0:06:30.240 hikes and I might be coming towards the end, but 0:06:31.080 --> 0:06:36.440 the terminal policy rate has not yet been determined. Now, obviously, 0:06:36.680 --> 0:06:38.839 if you say we have a couple of more hikes 0:06:38.880 --> 0:06:41.280 to do, or we're you know, coming towards the end 0:06:41.320 --> 0:06:43.119 of this, you know, we can all do the math 0:06:43.160 --> 0:06:45.640 and say, well, then the fens either done in March 0:06:46.160 --> 0:06:48.800 with the next bases point rate hike, or or they're 0:06:48.839 --> 0:06:51.800 done on May three, which is their meeting after the 0:06:51.839 --> 0:06:55.719 March meeting with so they're either done at five or 0:06:55.760 --> 0:06:59.800 five point to five. And I think that is essentially 0:07:00.800 --> 0:07:03.320 what the market started a key off of if we 0:07:03.400 --> 0:07:07.120 think back to what the December Summary of Economic projections were, 0:07:07.240 --> 0:07:10.120 so the big meeting before this meeting that we had 0:07:10.160 --> 0:07:14.880 on Wednesday, it basically told us that the terminal policy 0:07:15.000 --> 0:07:17.240 rate was going to be somewhere between five and five 0:07:17.360 --> 0:07:21.760 point five. And now it seems like that's even coming 0:07:21.760 --> 0:07:25.080 down to a more truncated five to five point to five. 0:07:25.360 --> 0:07:28.400 But let's just say by by the end of the 0:07:28.400 --> 0:07:32.400 second quarter the FETE is done. Um, probably by the 0:07:32.440 --> 0:07:35.320 beginning of the second quarter, the FETE is going to 0:07:35.360 --> 0:07:37.760 be done. And I think the markets are taking some 0:07:37.880 --> 0:07:40.360 solace in that, and you're seeing interest rates come down 0:07:40.440 --> 0:07:43.400 and you're seeing equity prices move up as a result. Yeah, 0:07:43.520 --> 0:07:46.320 And it's interesting and he even refer to the past 0:07:46.360 --> 0:07:49.280 where they would you know, high creates every other meeting 0:07:49.320 --> 0:07:52.280 almost you know, perhaps signaling that that's a possibility that 0:07:52.320 --> 0:07:55.240 maybe they'll pause, pause in March and then come again 0:07:55.240 --> 0:07:58.320 in maybe What's I find fascinating, Jim, is you know, 0:07:59.160 --> 0:08:03.400 all of Wall Street, the financial world watching Pal's press 0:08:03.400 --> 0:08:06.280 press conference on one screen and on their their other screen, 0:08:06.280 --> 0:08:08.960 they've got the markets, you know, whether Bloomberg terminal or 0:08:09.040 --> 0:08:11.080 I don't know, there's something else other people use. But 0:08:11.200 --> 0:08:14.080 is there anything else? I don't know, I don't know, 0:08:14.480 --> 0:08:17.679 But you know, I almost wish Pal had the benefit 0:08:17.720 --> 0:08:19.680 of having a terminal in front of him when he's speaking, 0:08:19.720 --> 0:08:22.800 because you don't quite you know, it's the question is 0:08:22.800 --> 0:08:26.200 always you know, did he sort of not get the 0:08:26.240 --> 0:08:29.640 intended message that he wants out? You know, is there 0:08:29.680 --> 0:08:33.880 going to be some hawkish commentary coming from some of 0:08:33.880 --> 0:08:36.559 the other speakers in the next few weeks and from 0:08:36.600 --> 0:08:39.760 him himself to sort of walk back this loosening in 0:08:39.800 --> 0:08:42.079 financial conditions that we have to. I mean, we really 0:08:42.520 --> 0:08:46.600 quite loose all year, and looser after the press conference 0:08:46.640 --> 0:08:49.599 in terms of you know, stocks ripping, higher yields and 0:08:49.640 --> 0:08:51.680 spreads coming in. Do you think we'll get a little 0:08:51.679 --> 0:08:55.480 bit of that, a reminder that hey, you know, we're 0:08:55.520 --> 0:08:57.320 still going to keep these rates high, We're not gonna 0:08:57.360 --> 0:08:59.160 cut this year. You know, is is there sort of 0:08:59.160 --> 0:09:02.600 a whiplashed to expect in the coming weeks? You know, 0:09:02.640 --> 0:09:05.760 there was whiplash during the press conference, so so so Yes, 0:09:05.960 --> 0:09:08.800 I think, Look, I think this is a great question, 0:09:08.880 --> 0:09:10.960 because this is one of the risks that I think 0:09:11.000 --> 0:09:13.160 that we have coming up over the next few weeks, 0:09:13.600 --> 0:09:16.840 is that if the intended market reaction, if there even 0:09:17.000 --> 0:09:20.240 was one, doesn't match what the intended statement was supposed 0:09:20.240 --> 0:09:23.360 to convey, then, as is typical, there's going to be 0:09:23.360 --> 0:09:26.400 some walking back of this. And I want to really 0:09:26.480 --> 0:09:30.560 highlight this because I think it's extremely extremely important. What 0:09:30.720 --> 0:09:35.280 Powell said in the statement was viewed as relatively hawkish, right, 0:09:35.440 --> 0:09:38.240 and then all of a sudden, he starts his uh, 0:09:38.280 --> 0:09:41.960 he starts his his press conference, and he basically says 0:09:42.040 --> 0:09:44.080 the exact same thing that he said back in December. 0:09:44.120 --> 0:09:46.960 It was almost a carbon copy of of of the issues. 0:09:47.320 --> 0:09:50.760 First one was that labor markets remain tight, which is 0:09:51.200 --> 0:09:55.160 keeping inflation risks elevated. Second point that he made was 0:09:56.440 --> 0:09:58.760 he started to call out, you know, despite the decline 0:09:58.760 --> 0:10:01.080 and CPI and wageing for sation, it's still too high 0:10:01.080 --> 0:10:05.600 to be consistent with inflation becoming um anchored at at 0:10:05.679 --> 0:10:08.040 target levels. So he's still worried about it. And then 0:10:08.080 --> 0:10:11.160 he goes further and he starts to talk about again 0:10:11.200 --> 0:10:14.439 exactly what he talked about in December, the service sector 0:10:14.440 --> 0:10:17.480 inflation versus the goods sector inflation. And he said, look, 0:10:17.480 --> 0:10:21.800 we know why inflation is coming down. Durable goods, supply chains, 0:10:21.840 --> 0:10:24.120 all of these things are are certainly coming down, but 0:10:24.320 --> 0:10:28.600 service sector inflation is not coming down as fast as 0:10:28.600 --> 0:10:30.840 they like. And then he even went further up the 0:10:30.920 --> 0:10:34.480 anti on that even more, and he said that in fact, 0:10:34.760 --> 0:10:37.640 the service sector and inflation, if we look at it 0:10:37.760 --> 0:10:42.640 core services x housing again, core services x housing, that's 0:10:42.679 --> 0:10:44.280 what he's looking at, and that's what we should all 0:10:44.360 --> 0:10:47.959 be looking at. He said, hasn't even started to fall. 0:10:48.480 --> 0:10:50.920 So as I'm listening to this, this is a guy 0:10:50.920 --> 0:10:54.520 who's worried about inflation. This is somebody who's not done 0:10:54.960 --> 0:10:58.640 tightening by any stretch of the imagination. And and then 0:10:58.640 --> 0:11:01.320 he said that that was about percent or the majority 0:11:01.480 --> 0:11:03.880 of or a large part of the core PC in 0:11:04.040 --> 0:11:07.120 the index, which is what the FEDS favorite gauge of 0:11:07.120 --> 0:11:10.080 of inflation is. So if the core services X housing 0:11:10.240 --> 0:11:12.920 isn't hasn't even begun to fall yet and they look 0:11:12.960 --> 0:11:17.320 at core that the core PC index, um, he still 0:11:17.320 --> 0:11:19.839 believes it's going to be elevated. Then he went on 0:11:19.960 --> 0:11:23.120 even further to say wouldn't it be a shame if 0:11:23.240 --> 0:11:26.360 just when we had inflation on the brink of being, 0:11:26.600 --> 0:11:30.520 you know, a solved problem, that we didn't tighten enough, 0:11:30.679 --> 0:11:32.760 and then all of a sudden it started to resurge 0:11:32.880 --> 0:11:36.640 later on. That would be That would be really bad. 0:11:36.760 --> 0:11:39.440 And to me, that is my core risk. If somebody 0:11:39.480 --> 0:11:41.640 asks me, what's the risk that keeps you up at night? 0:11:41.920 --> 0:11:45.200 Aside from all the geopolitical potential risks, the risk that 0:11:45.280 --> 0:11:47.720 keeps me up at night is that we get this 0:11:47.800 --> 0:11:49.880 decline in inflation in the first half of the year, 0:11:49.920 --> 0:11:52.160 which we know is happening, but all of a sudden 0:11:52.200 --> 0:11:54.240 we realize in the second half of the year that 0:11:54.320 --> 0:11:56.719 it's not anchored. It comes down, but then all of 0:11:56.760 --> 0:11:59.240 a sudden starts to show signs and it may start 0:11:59.280 --> 0:12:02.880 to bubble up in four and beyond, and then they 0:12:02.920 --> 0:12:05.640 have to come back in and start hiking again from 0:12:05.679 --> 0:12:08.880 an already high base. The markets do not have this 0:12:08.960 --> 0:12:11.720 priced in. Everybody's talking about the pivot and FED funds 0:12:11.720 --> 0:12:13.960 and the expectation for rates to come down and what 0:12:14.080 --> 0:12:18.040 have you. It would be a significant surprise and really 0:12:18.040 --> 0:12:21.040 bad per house of prices if in fact that this 0:12:21.160 --> 0:12:24.000 all got turned on its head, and all of a sudden, 0:12:24.000 --> 0:12:26.319 the FED said, no, we actually have to start restart 0:12:26.360 --> 0:12:28.640 our hiking cycle, or we started to price that back 0:12:28.679 --> 0:12:32.319 in if that were to happen, if inflation became unanchored. 0:12:32.320 --> 0:12:34.000 And he again he mentioned this, so this is this 0:12:34.080 --> 0:12:36.960 is him saying this, So this does not sound like 0:12:37.000 --> 0:12:44.000 a person that is UM is ending their inflation fighting plight. UM. 0:12:44.080 --> 0:12:46.600 But then in the second part of the press conference 0:12:46.640 --> 0:12:48.080 he went on to say, yeah, but you know what, 0:12:48.120 --> 0:12:50.120 we're probably just talking about a couple of more hikes, 0:12:50.120 --> 0:12:52.040 and then he became a lot more devish in the 0:12:52.080 --> 0:12:55.079 market just seized on that. So I do think over 0:12:55.120 --> 0:12:58.160 the next couple of weeks we're going to see other 0:12:58.200 --> 0:13:02.280 FED officials come out and try to rebalance that statement 0:13:02.400 --> 0:13:05.400 so that there's two sided risk in the market that 0:13:05.600 --> 0:13:07.920 it shouldn't be taken according to the Fed as a 0:13:07.960 --> 0:13:11.440 done deal, that they're done, that that there may still 0:13:11.480 --> 0:13:13.480 be more to go. And I think this is really 0:13:14.360 --> 0:13:17.000 the key here, which is creating confusion. But you know, 0:13:17.040 --> 0:13:19.760 obviously in March there's gonna be a new summary of 0:13:19.800 --> 0:13:23.839 economic projections, their forecasts for the next quarter um or 0:13:23.960 --> 0:13:25.640 not just for the next quarter, but for the next 0:13:25.640 --> 0:13:29.480 few years, they redo their forecasts and we'll have a 0:13:29.520 --> 0:13:33.240 better understanding as to what they see in terms of 0:13:33.280 --> 0:13:44.040 inflation expectations and policy expectations. So I wonder, you know 0:13:44.120 --> 0:13:46.480 that risk that's keeping you up at night, how do 0:13:46.520 --> 0:13:48.600 you categorize it is at a tail risk? Or do 0:13:48.600 --> 0:13:51.520 you think that's something we're really got to worry about? 0:13:52.080 --> 0:13:55.720 And what would cause that sort of resurgence in inflation? 0:13:55.760 --> 0:13:58.520 Would we need some sort of exogenous event, oil price 0:13:58.559 --> 0:14:00.680 shock or something like that. Where is it just a 0:14:00.720 --> 0:14:03.920 matter of look, you know, uh, this is unchartered water, 0:14:04.400 --> 0:14:07.560 and inflation can can be unpredictable. Yeah, So so let 0:14:07.559 --> 0:14:09.560 me split the difference on the level of risk, and 0:14:09.559 --> 0:14:11.679 I'll say it's a fat tail risk. Right, So it's 0:14:11.679 --> 0:14:14.240 a tail risk, but it's a fat tail meaning that 0:14:14.320 --> 0:14:19.000 it has a higher than ordinary probability for um uh 0:14:19.320 --> 0:14:22.080 for the event to occur. And I would even subjectively 0:14:22.120 --> 0:14:24.880 put that as high as right, which is to me, 0:14:25.000 --> 0:14:28.080 that's you know, we can debate as a tail risk, right, 0:14:28.080 --> 0:14:30.960 I mean, it's it's a reasonable risk, but it's not 0:14:31.240 --> 0:14:33.840 to me, it's not in the majority. So so what 0:14:34.040 --> 0:14:37.840 creates that? Well, certainly energy prices could do that right. Certainly, 0:14:37.920 --> 0:14:40.640 that is um something that's out there. We know that 0:14:40.680 --> 0:14:43.920 there's been you know, not enough productive production relative to 0:14:44.000 --> 0:14:46.320 the demand, and we know all of the different factors. 0:14:46.320 --> 0:14:49.360 Their energy has come down for various reasons. In the 0:14:49.400 --> 0:14:52.400 second half of two it's started to come down, and 0:14:52.440 --> 0:14:56.160 it's it's still staying relatively low. But to me, that's 0:14:56.200 --> 0:14:59.800 not really the main issue here. The main issue is 0:14:59.800 --> 0:15:03.640 the labor market. The labor market is what's perplexing everybody, 0:15:03.680 --> 0:15:06.440 and everybody has different theories and different views on it, 0:15:06.520 --> 0:15:08.360 and there's one thing in common is that it really 0:15:08.480 --> 0:15:10.720 most models really just haven't worked in terms of trying 0:15:10.720 --> 0:15:14.080 to predict labor. And the issue that we have right 0:15:14.120 --> 0:15:16.760 now is that there's that there's a lot of tightness 0:15:16.760 --> 0:15:18.880 still in the labor market. Look, we got a Jolts 0:15:19.080 --> 0:15:23.080 survey that came out you know, this past week, and 0:15:23.320 --> 0:15:26.160 essentially it showed eleven million job openings, right, so the 0:15:26.240 --> 0:15:29.120 job opening is actually ticked up. They haven't been going 0:15:29.200 --> 0:15:33.200 down as as expected, again baffling most people's forecasts. The 0:15:33.240 --> 0:15:37.440 other is that the vacancy to unemployment rate, so the 0:15:37.560 --> 0:15:41.560 number of jobs open for every unemployed person is sitting 0:15:41.640 --> 0:15:44.000 at about one point nine to one. Let's call that 0:15:44.040 --> 0:15:46.080 two to one, So there are two jobs open for 0:15:46.120 --> 0:15:50.480 every unemployed person. So while consumer confidence is coming down 0:15:50.560 --> 0:15:54.320 because we're hearing about layoffs in the tech sector and 0:15:54.520 --> 0:15:57.440 in these big gargangea win numbers that are being thrown 0:15:57.440 --> 0:15:59.680 out there, the reality is is that when we look 0:15:59.680 --> 0:16:02.200 at all this claims, when we look at the unemployment 0:16:02.280 --> 0:16:04.840 rate um, and when we look at the BLS, UH 0:16:05.080 --> 0:16:08.720 surveys and statistics, what we're finding is that these people 0:16:08.720 --> 0:16:11.520 who are being laid off in the tech sector are 0:16:11.640 --> 0:16:15.800 finding jobs in other areas. Now, the nuance here is 0:16:15.840 --> 0:16:19.560 that the jobs that they're finding are lower pain. So 0:16:19.880 --> 0:16:21.920 now I want to be very very clear about this 0:16:22.320 --> 0:16:24.720 because I think this is an important point to make. 0:16:24.800 --> 0:16:31.120 Foreree is going to feel worse to Main Street and 0:16:31.200 --> 0:16:36.040 better to Wall Street. Felt worse for Wall Street and 0:16:36.160 --> 0:16:38.760 better for Main Street. So look, if we look at 0:16:40.200 --> 0:16:44.160 what we saw was inflation going to forty years highs, 0:16:44.200 --> 0:16:45.600 we'd have to go back to the eighties and the 0:16:45.640 --> 0:16:48.040 seventies to see the levels of inflation that we had. 0:16:48.280 --> 0:16:51.160 We had gas prices going up to sky high levels 0:16:51.160 --> 0:16:54.400 and all of these various things, but what we also 0:16:54.480 --> 0:16:57.840 had was job creation people were employed. The jobs market 0:16:57.880 --> 0:17:01.080 was still very, very strong and had our's weakened. So 0:17:01.160 --> 0:17:04.640 even though higher prices were coming into the economy, what 0:17:04.720 --> 0:17:08.120 people realized is that, well, they had a job, they 0:17:08.119 --> 0:17:10.200 could pay the higher prices. They would still go out 0:17:10.240 --> 0:17:12.760 to eat at restaurants and spend time at hotels and 0:17:13.040 --> 0:17:15.880 go on airplanes and do all these various things. So 0:17:16.000 --> 0:17:18.840 even though yes, all of that bad economic stuff was happening, 0:17:18.840 --> 0:17:21.480 and certainly the bond market took notice of that, bond 0:17:21.600 --> 0:17:25.000 yields rose quite a bit. Certainly equities took notice of that, 0:17:25.040 --> 0:17:26.720 and you know, we all know what the performance of 0:17:27.520 --> 0:17:32.520 equity prices were. But the consumer felt, Okay, now what 0:17:32.560 --> 0:17:35.320 we're seeing is the we're coming to the end of 0:17:35.359 --> 0:17:38.800 this inflation cycle. At least for now, it's starting to 0:17:38.840 --> 0:17:41.200 come down. We're coming to the end of this rate 0:17:41.240 --> 0:17:45.520 hiking cycle. So rates are coming down, equities are responding positively, 0:17:45.680 --> 0:17:49.280 bonds are responding positively. If you ask people on Wall Street, hey, look, 0:17:49.359 --> 0:17:51.800 things are pretty good. If you ask people on Main Street, 0:17:51.840 --> 0:17:56.080 they're saying the exact opposite thing. Now, why this now, 0:17:56.200 --> 0:17:58.879 all of a sudden becomes a lot more important. Is 0:17:58.920 --> 0:18:03.119 that in going into four starts the year of the 0:18:03.119 --> 0:18:07.040 political cycle of a presidential election. So all of these 0:18:07.040 --> 0:18:10.960 discussions around how do we control inflation? And I always 0:18:10.960 --> 0:18:14.040 think it's very informative that every press conference that Pal 0:18:14.240 --> 0:18:17.640 has started going back about you know, almost a year now, 0:18:17.960 --> 0:18:21.399 he starts off by apologizing to the American people. He says, listen, 0:18:21.400 --> 0:18:23.399 you know, we're sensitive to everybody's paying. We know that 0:18:23.440 --> 0:18:27.440 there's the unemployment rate. The employment situation may get worse 0:18:27.480 --> 0:18:30.080 in the future, but we think it's a necessary thing 0:18:30.200 --> 0:18:33.600 to do to control inflation. The reality is at the 0:18:33.680 --> 0:18:37.439 unemployment rate has stayed relatively low, with the jobs market 0:18:37.480 --> 0:18:40.679 has stayed relatively tight. So what that tells us is 0:18:40.720 --> 0:18:45.080 that if we do get into a situation where, um, 0:18:45.119 --> 0:18:47.560 where we do get a slowing in the economy, but 0:18:47.640 --> 0:18:51.840 the jobs market stays relatively robust, people still have uh 0:18:51.880 --> 0:18:54.600 you know, consumers still have dollars to spend um and 0:18:54.680 --> 0:18:58.280 consumption is GDP, that we could all of a sudden 0:18:58.400 --> 0:19:01.760 start to get a resurgence in demand. Now, remember when 0:19:01.760 --> 0:19:03.879 the Fed heights interest rates, what they're trying to do 0:19:03.960 --> 0:19:07.199 is push down demand. But if we get through this 0:19:07.320 --> 0:19:11.320 soft patch, this corrective patch of Fed policy, inflation and 0:19:11.600 --> 0:19:13.960 everything else, and we come through this with a soft 0:19:14.040 --> 0:19:17.320 landing or maybe a mild recession, then we're going to 0:19:17.440 --> 0:19:21.399 come out of that like wild horses, right, and that 0:19:21.640 --> 0:19:25.720 wage inflation, that inflation could then go on to create 0:19:25.760 --> 0:19:28.239 what what Powell calls and what the central bankers call 0:19:28.600 --> 0:19:32.119 the wage price spiral inflation. And he always says, look, 0:19:32.160 --> 0:19:33.800 there's no evidence of it yet, but as soon as 0:19:33.800 --> 0:19:35.919 we see it, game is already over right, So you 0:19:36.000 --> 0:19:39.040 never want to get to that point. And so that's 0:19:39.080 --> 0:19:41.800 why that's the risk that keeps me up is that 0:19:41.840 --> 0:19:45.360 I think that there could be some underpinnings to say, well, 0:19:45.680 --> 0:19:48.679 let's slow down the hikes right now, because you know, 0:19:48.720 --> 0:19:50.639 we need to be sensitive to you know, politically and 0:19:50.960 --> 0:19:55.080 everything else. But it doesn't do the inflation fighting job, 0:19:55.440 --> 0:19:57.520 and then we have a worse problem a year later, 0:19:57.840 --> 0:20:00.600 eleven million job openings out there. So it's so, you know, 0:20:00.800 --> 0:20:05.080 it's it's that labor market is still red hot. So so, Jim, 0:20:05.119 --> 0:20:07.600 what did you make of um Powell almost taking a 0:20:07.720 --> 0:20:11.200 victory lap when he said, this is the first time 0:20:11.359 --> 0:20:15.080 that the Fed can actually admit we are seeing disinflation, 0:20:15.160 --> 0:20:19.920 which was a common that really struck me. I think 0:20:19.960 --> 0:20:22.760 he wishes that he could take that word back, because 0:20:23.160 --> 0:20:27.000 that as soon as he said that, the markets took 0:20:27.040 --> 0:20:28.720 off like a rocket. I mean you could time it 0:20:28.800 --> 0:20:31.160 to that statement, and it was only he was only 0:20:31.200 --> 0:20:36.120 referring to goods prices too, you know. Specifically. I think, well, 0:20:36.720 --> 0:20:40.639 we'll see, now you were paying attention. Other people just 0:20:40.680 --> 0:20:43.199 heard the word, you know, disinflation, and they hit the 0:20:43.200 --> 0:20:44.800 buy button and they just left the finger on the 0:20:44.800 --> 0:20:47.720 button until all their orders were filled. Well, that's right, 0:20:48.000 --> 0:20:50.120 you know, And I think that's going to be part 0:20:50.160 --> 0:20:51.919 of the walk back is to say, well, what I 0:20:51.920 --> 0:20:55.119 said disinflation, what I really meant was goods disinflation, and 0:20:55.160 --> 0:20:58.359 that should be a good You know, he's getting too 0:20:58.720 --> 0:21:01.760 nuanced in these things, right, you have to really be 0:21:01.840 --> 0:21:04.520 a professional listening to this. I think most people are 0:21:04.600 --> 0:21:07.560 kind of listening to it out of one ear and 0:21:07.560 --> 0:21:11.080 and then they're trading in the markets, you know, um 0:21:11.119 --> 0:21:14.800 at the same time. So yeah, I think that he's 0:21:14.840 --> 0:21:18.560 correct in saying that about goods prices. I wish he 0:21:19.480 --> 0:21:23.600 framed it differently because I think it just creates more 0:21:23.800 --> 0:21:27.560 volatility markets. Yeah, can I can? I also ask you then, 0:21:27.640 --> 0:21:30.920 just to go back to the financial discussion about financial 0:21:30.920 --> 0:21:34.879 conditions because obviously the FED doesn't want looser financial conditions, 0:21:35.160 --> 0:21:39.680 but and we already mentioned this, they are looser because 0:21:39.960 --> 0:21:42.440 of the value we've seen in the stock market, etcetera. 0:21:43.400 --> 0:21:46.800