Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Right now, our
Speaker 1: conversation of the day, John and Lisa on economics. Peter
Speaker 1: Hooper joins us, of course with Deutsche Bank. His deck
Speaker 1: on economics hugely anticipated on Wall Street. Peter, I want
Speaker 1: to go to the heart and soul of your must read,
Speaker 1: and that is simply you look for upside risk to
Speaker 1: g d P and an unemployment rate that drives us
Speaker 1: down to a fully employed America. Balance that forest right now?
Speaker 1: Will that occur within market stability and national stability? Tom?
Speaker 1: That's uh, that could be a tall order. But look,
Speaker 1: there's an awful lot driving growth at this parent point.
Speaker 1: We have the course, the normalization of demand coming out
Speaker 1: of COVID as people are being vaccinated. We have we
Speaker 1: have a tremendous fiscal support both behind us and ahead
Speaker 1: of us. Here. Uh. We we think that we're probably
Speaker 1: at least a half percentage point out of GDP on GDP,
Speaker 1: out of what's still to come. But but the the
Speaker 1: household income support that we've gotten so far, building up
Speaker 1: a war chest of household saving that's going to get
Speaker 1: to something like ten percent of g d P waiting
Speaker 1: in the wings to be spent um. There's there's no
Speaker 1: way we're going to see less than six seven percent
Speaker 1: growth this year. Our own forecast is above the census
Speaker 1: at seven and a half percent, so that that that's
Speaker 1: certainly enough to get the labor market by that can
Speaker 1: happen next year back down to the three and a
Speaker 1: half percent unemployment rate that we saw pre crisis. In
Speaker 1: the dynamics that Matthew Lozetti work through for you. You
Speaker 1: took your coin of phrase and you talk about the
Speaker 1: amazon Ization. I hope I got that right, the Amazonization
Speaker 1: of the American economy. Do we underestimate the cardboard boxes
Speaker 1: and the cloud that's out there from Mr Bezos? Well,
Speaker 1: I mean the good thing. Amazonization has a number of facets,
Speaker 1: but one very important for the FED is despite this
Speaker 1: very rapid growth and a tightening of the labor market,
Speaker 1: unlikely what we've seen for quite some time Amazonization is
Speaker 1: a factor that we think is going to keep inflation
Speaker 1: from getting out of control. Uh. Certainly, the vast increase
Speaker 1: improvement in information flow about about supply and demand of
Speaker 1: all kinds of commodities and services price information now globally
Speaker 1: is going to keep we think after some some initial
Speaker 1: disruptions as as bottlenecks appeared during this normalization process, amazonization
Speaker 1: working in the background is certainly going to be there. Uh, Peter, great,
Speaker 1: to catch up, he said, Let's just run things out
Speaker 1: with a couple of thoughts on this for the Federal
Speaker 1: Reserve at the moment, the difference between transitory and persistent.
Speaker 1: You know, we talk and Joe call morning about this
Speaker 1: and Tom has a drink because the drinking game we play,
Speaker 1: and I think vice check cloud had joined in recently too.
Speaker 1: What is the difference for you? What defines that as
Speaker 1: the year goes on? Okay, Well, one thing the feeds
Speaker 1: been wanting to see is a string of good information
Speaker 1: on the labor market. I think that's four or five
Speaker 1: months of something approaching a million on on payrolls before
Speaker 1: before they give us any indication they're going to be
Speaker 1: uh giving us a hint about apring to come. Uh,
Speaker 1: there's another another issue here is transitory versus persistent on inflation. Yes,
Speaker 1: we're gonna get some We are going to get a
Speaker 1: bulge in in price increases the middle of this year
Speaker 1: as growth normalizes, as the economy normalizes. But another thing
Speaker 1: to keep in mind here, going back to this amazonization
Speaker 1: is we've been above well above trend in consumption of goods.
Speaker 1: Uh COVID meant people who dropped back sharply on their
Speaker 1: demands or services. I think as things normalize, you're gonna
Speaker 1: see a shift back towards services, and that means taking
Speaker 1: some of the pressure off the good sector. So, yes,
Speaker 1: we're seeing a lot of shortages. Yes, we're gonna see
Speaker 1: some some real disruptions as these demand patterns shift and
Speaker 1: things normalized. But we've been encouraged by the extent to
Speaker 1: which labor supply in in the hospitality sector for example,
Speaker 1: has picked up. Hiring is picked up, there's a lot
Speaker 1: of there's an awful lot of unemployed people that need
Speaker 1: to get jobs. Still, so um, there'll be some disruption,
Speaker 1: we will see some transitory price increases, but our expectation
Speaker 1: is on inflation, which could get to two and a
Speaker 1: half percent in the middle of this year, maybe a
Speaker 1: little higher. We'll be back to or below two percent
Speaker 1: by next year. That's not a persistent problem, Peter, what's
Speaker 1: the economic effect of higher taxes? Economics? So, I mean,
Speaker 1: looking looking ahead at what we're what we we might get.
Speaker 1: Obviously from listening to semi earlier discussion, a lot of
Speaker 1: uncertainty about just what's going to go through Congress here.
Speaker 1: But if Biden gets the program, if we get if
Speaker 1: we get this UH to and a quarter trillion UH
Speaker 1: jobs plan with the corporate texts um UH package to
Speaker 1: go with it, UH, that's worth about one percent. I mean,
Speaker 1: assuming roughly ten percent is the SPA then comes in
Speaker 1: the first year, and that the tax program goes through
Speaker 1: as planned, we're seeing about a percentage point of GDP
Speaker 1: growth out of the spending side, and roughly a half
Speaker 1: a percentage point offset from tax increases. The total tax
Speaker 1: increase over the next year something on the order of
Speaker 1: by next year or something on or of nine billion dollars,
Speaker 1: a little little lesson half a percentage GDP. So yes,
Speaker 1: it's I mean, there are all kinds of questions about
Speaker 1: what impacts the particular form at tax has across different
Speaker 1: parts of the of the corporate sectors as well as households.
Speaker 1: But but the broad the broad view macro view is
Speaker 1: we're looking at something like overall half percentage point stimulus
Speaker 1: to growth would be more if it weren't for this
Speaker 1: half point dragged from from the from the tax side.
Speaker 1: You know, Tom, it just strikes me the degree of
Speaker 1: policy uncertainty right now for economists to factor in. You
Speaker 1: got that two point three trillion dollar stimulus plan that
Speaker 1: may or may not see the light of day, followed
Speaker 1: by a one and a half trillion dollar plan expected
Speaker 1: to be announced this week, followed by potentially tax hikes
Speaker 1: that could have a negative impact. How do you game
Speaker 1: this all out? I think you game it out with
Speaker 1: five seats in the House come November of two thousand
Speaker 1: and twenty two, I would suggest, Lisa, the politics is
Speaker 1: going to take it over. Peter Hooper, You've got a
Speaker 1: fifty five page deck, and there is one page which
Speaker 1: describes the foolishness of this all. It is stunning how
Speaker 1: the savings of this fiscal strategy has gone to the wealthy.
Speaker 1: It's absolutely a breathtaking chart. Folks, We protect the copyright.
Speaker 1: Go to Deutsche Bank to get the chart, Peter, how
Speaker 1: how far apart are the two America's right now? Uh? Tom,
Speaker 1: They've obviously grown ever further apart, certainly over the last
Speaker 1: decade and accelerating over the last four years with tax
Speaker 1: cuts with with into the last year with the asset
Speaker 1: very asset gains and stock and housing markets. So um,
Speaker 1: no question. Uh. Politically, something's got to be done about this.
Speaker 1: It's going to be painful when it comes, but that
Speaker 1: is certainly one reason to be considering taxes more heavily
Speaker 1: at the at the upper income levels at this point
Speaker 1: going forward, Peter, We've got to leave it there, have
Speaker 1: Peter Hope of that Doute Bank globe ahead of economic
Speaker 1: research and chief economist. You want to bring in, James
Speaker 1: pev CL investment officer, James, you like the minus right
Speaker 1: now in Europe? Sure, I absolutely do. I think there
Speaker 1: are some great quality opportunities. And what I was interesting
Speaker 1: me is the ratio between the copper price and the
Speaker 1: gold price suggests to me that ten U s treasury
Speaker 1: yield should now be it around two and a half cent.
Speaker 1: Now we know it's not that principally because Japanese investors
Speaker 1: have been buying fantasy almost r yields within their own market.
Speaker 1: But I would have a side bet with you that
Speaker 1: we will see the tenure yield at two by the
Speaker 1: end of the calendar year. And that's a reglisively big move,
Speaker 1: given that we only got through one on the first
Speaker 1: trading day of the current calendar year. Is that a
Speaker 1: move that looks like the movie saw in Q one?
Speaker 1: A move that's accompanied by better banks, better bank stock performance,
Speaker 1: better cyclical performance, better small camp performance. To the cygnicals
Speaker 1: perform in line with that move higher on two on
Speaker 1: tens to too during I don't think they do. I
Speaker 1: think interesting and have a very difficult time. I would
Speaker 1: observe that the banks are now awash with overnight deposits.
Speaker 1: That's extremely bad news. The banks seeking to lend on
Speaker 1: what they want our time deposits. They want long term deposits.
Speaker 1: They don't want all the money, and I think therefore
Speaker 1: that the banks have had their day in the side.
Speaker 1: I would only in the case of the States, wants
Speaker 1: to be invested in JPMorgan and Bank America, both of
Speaker 1: which I think have excellent opportunity cut off support long
Speaker 1: term returns. The middle bank ranking banks However, again a
Speaker 1: really struggle, and that I would say is going to
Speaker 1: be one of the challenges for fixnicals writ large, they
Speaker 1: discount a lot of bad news. When I'm looking at
Speaker 1: circles today, I'm looking at the better quality, defensive circles
Speaker 1: to some of the telecommunication companies, some of the drinks
Speaker 1: companies like the Age, which I still think looks too cheap.
Speaker 1: James Bevan, I want you to rationalize thirty five times earnings.
Speaker 1: My one estimate of Microsoft is the twelve months forward
Speaker 1: view is thirty five times earnings. Justify owning Microsoft right now.
Speaker 1: Let's let me rationalize it by talking about the earning
Speaker 1: zeald rather than the price earnings multiple, because of course,
Speaker 1: the earning zeal is the price ownings multiple reversed, and
Speaker 1: an earning zeal of three percent needs to be considered
Speaker 1: in the context of where cash rates currently are exter
Speaker 1: risk premier payment for taking everty risk relative to to
Speaker 1: cash as the three race of return does remain relatively elevated,
Speaker 1: and that puts all of the focus on whether or
Speaker 1: not we are going to get real growth. And I
Speaker 1: am in the camp that says we will get a
Speaker 1: short term acceleration and inflation that seems for me absolutely
Speaker 1: baked in the cake. Nothing we can do that. But
Speaker 1: I do also believe that inflation is going to come
Speaker 1: down again, and I would say that that is driven
Speaker 1: by the demographic changes, disruptive technologies, high levels of embedded indebtedness,
Speaker 1: and the continuing globalization and notwithstanding the trade tensions does
Speaker 1: mean that there is a lid put on the capacity
Speaker 1: for domestic businesses to raise costs and prices generally. And
Speaker 1: that allows me to believe that a three and earning
Speaker 1: zeal coupled with long term growth still leaves a company
Speaker 1: like Microsoft offering premium returns to corporate and also very
Speaker 1: much to government. That if you're listening to markets, though, James,
Speaker 1: I'm looking right now at earnings that have beaten expectations
Speaker 1: by twenty six percent, even if you strip out financials
Speaker 1: versus the average of five percent during earning seasons. This
Speaker 1: from UBS is Mark Hathlet. How do you explain the
Speaker 1: fact that you have not seen a cheer from equity traders.
Speaker 1: You haven't seen this excitement about this growth that's beating
Speaker 1: expectations in what is expected to be a low rate
Speaker 1: world for a long time because of what you just said, Lisa.
Speaker 1: I think that one of the problems we have with
Speaker 1: earnings numbers is year on your comparisons are flattered by
Speaker 1: the extraordinary down draft that we saw in March and
Speaker 1: April last year, and what investors are looking at is
Speaker 1: the trend growth rather than the one off growth for
Speaker 1: the period. And looking forward, I think that we are
Speaker 1: going to see well over a hundred and eighty dollars
Speaker 1: of earnings for the SMP five hundreds. That allows me
Speaker 1: to project and in X will stoundints by the end
Speaker 1: of this year. And my greater concern is we get
Speaker 1: to that level earlier on the back of this extraordinary
Speaker 1: liquiditcy environment engineered by the Federal Reserve and Treasury, and
Speaker 1: that would be the moment to take money off the table.
Speaker 1: But now I think that index earnings on trend our
Speaker 1: game well, I think the year on your comparisons, so
Speaker 1: that will get to be ignored. James, it's gonna see
Speaker 1: You're gonna catch up as always, Thank you, mate, James.
Speaker 1: Bob and c C l A Chief Investment Officer. Right
Speaker 1: now on the President's speech on infrastructure, John Lieber joins
Speaker 1: us with your RAISIA group and his important experience with
Speaker 1: Senator McConnell in Kentucky. John, I want to go down
Speaker 1: to the reality which I'm sure you faced years ago
Speaker 1: a Senator McConnell, which is a bridge over the Ohio River.
Speaker 1: It is the Brent Spence Bridge, and it says all
Speaker 1: about how we can't fix our infrastructure in America. How
Speaker 1: do we fix the Brent Spence the Brent Spence Bridge
Speaker 1: given the President's initiative. Yeah, that's a great example of
Speaker 1: really important piece of interstate of infrastructure that carries quite
Speaker 1: a bit of interstate commerce and should be oppressing national
Speaker 1: issue that Congress wants to try to fix that's really
Speaker 1: non neglected for far too long. So, you know, I
Speaker 1: think the reality is Biden's guts the party in the alignment,
Speaker 1: he needs to pass a very large infrastructure bill. UM.
Speaker 1: One of the biggest challenging challenges of the last ten
Speaker 1: years has been the declining revenues in the Highway Trust Fund.
Speaker 1: That's made paying for these types of repairs extremely difficult.
Speaker 1: But right now we're in an environment where the Democrats
Speaker 1: are basically united and around increasing taxes on corporations and
Speaker 1: wealthy Americans to get this stuff done. And probably by
Speaker 1: the end of the year, you know they're going to
Speaker 1: have the authority to start the money flowing over the
Speaker 1: next five to ten years to fix these kind of things.
Speaker 1: Do you look for a compromise of focuses on projects
Speaker 1: like the Brent Spence Bridge or are we going to
Speaker 1: look for a more omnibus bill. I'd be surprised to
Speaker 1: see Republicans even being really relevant in this process. Frankly,
Speaker 1: I think that they have. You know, the Democrats have
Speaker 1: the votes probably to do most of the infrastructure projects.
Speaker 1: They've got big ambitions beyond physical infrastructure with this human
Speaker 1: infrastructure side, focused on childcare and subsidies for education and healthcare.
Speaker 1: And you know, Republicans just aren't going to play ball
Speaker 1: for that. And most importantly, they don't want to raise
Speaker 1: taxes to pay for it, and that's going to be
Speaker 1: the biggest stumbling block. I think that makes this a
Speaker 1: basically a partisan exercise, and I want to go a
Speaker 1: little bit deeper into that. Given your work with Senate
Speaker 1: Majority Leader Mitch McConnell or a former Senate Majority leader,
Speaker 1: there is a question of whether they would be open
Speaker 1: the Republicans to any tax hikes. When you were working
Speaker 1: for him. Did he talk about the necessity for paying
Speaker 1: for different projects or did he believe that things would
Speaker 1: pay for themselves if you had the right projects. I
Speaker 1: think I'd say that the kind of your your average
Speaker 1: Republican manager member believes in the in the user pay
Speaker 1: no shan when it comes to infrastructure. So for a
Speaker 1: long time, that user pay idea was embodied in the
Speaker 1: Highway Trust Fund, where gas tax fueled the Highway Trust
Speaker 1: Fund and then the highly trust pumps used to pay
Speaker 1: for service transportation projects. And now you've got people driving
Speaker 1: less cars and coming more fuel efficient, and the gas
Speaker 1: bax hasn't gone up in in generation, so those revenues
Speaker 1: are declining. But if you ask, you know, your average
Speaker 1: Republican if they want to raise taxes on incorporations there
Speaker 1: or a small business owner to pay for infrastructure, the
Speaker 1: answer is going to be no um. And this dynamic
Speaker 1: is just making it really difficult to get even done.
Speaker 1: Given your experience in Washington, d C does a nine
Speaker 1: hundred billion dollar skinny infrastructure bill, and it is funny
Speaker 1: that we're calling a nine hundred billion dollar plan skinny.
Speaker 1: Does it seem feasible and likely to be the outcome
Speaker 1: of some of these negotiations. Yeah, you raised a good point.
Speaker 1: I mean it's absolutely while. Um, two years ago, the
Speaker 1: Senate Committee the Deals with Infrastructure put together a bipartis
Speaker 1: bill that was around four a billion dollars and it
Speaker 1: was considered historic achievement. And now many of the Democrats
Speaker 1: that were involved in that process basically rolled their eyes
Speaker 1: at the Republicans six d billion dollar proposal. And it
Speaker 1: just shows you how how far the goalposts have moved. Um.
Speaker 1: But no, I think the challenge you're at the House
Speaker 1: and that even if there were a Senate compromise that
Speaker 1: ended up around nine under billion dollars, which I'm extremely
Speaker 1: skeptical because of that. You know, the House sensers an
Speaker 1: opportunity here and Joe Biden sensers an opportunity here to
Speaker 1: go much much bigger in a in a way that's
Speaker 1: going to be really transformative for American's anti poverty programs
Speaker 1: and really change the game when it comes to green
Speaker 1: energy and sentence. And that's really what this is about.
Speaker 1: This isn't about repairing potholes, fixing the Branch Spence Bridge
Speaker 1: and doing a couple of projects on infrastructure. This is
Speaker 1: about doing big things to accomplish the Biden agenda. It's
Speaker 1: why he ran, that's why he was. They think that's
Speaker 1: why he wants and that's their goal. How does the
Speaker 1: big thing's tone sold into the beginning of the run
Speaker 1: to November of two thousand twenty two. Well, remember two
Speaker 1: is an interesting year. I mean, the president, the president,
Speaker 1: the party in power almost always loses seats, really always.
Speaker 1: I mean there's very few exceptions as this rule that
Speaker 1: the party in power loses seats in the mid terms.
Speaker 1: It's possible this cycle is a little different because the
Speaker 1: fact that Biden didn't have any cotails. So this isn't
Speaker 1: like the Democrats have an extra members in the House
Speaker 1: as some majorities do. But you know, the odds are
Speaker 1: and the historical trend would be that the Democrats lose
Speaker 1: probably the House and potentially the Senate as well, which
Speaker 1: means that Biden, like Obama and Trump, is going to
Speaker 1: lose his ability to do any legislation after his first
Speaker 1: two years. So if you think that your elect came
Speaker 1: to Washington to get things done, this is your window
Speaker 1: to do it as a Democrat, and I think ultimately
Speaker 1: that drives them to a partisan deal by the end
Speaker 1: of the year, John, it's gonna say you're gonna hear
Speaker 1: from you John Labor there. So let's bring in Jennifer Lea.
Speaker 1: Shall we beat my capital market sen economists? Jen, can
Speaker 1: we start right there just on how you're reading some
Speaker 1: of the corporate guidance around cost pressures around the labor market. Well,
Speaker 1: good morning everyone. So this is where as they're all saying,
Speaker 1: the the incertainty is lying how much inflation is really
Speaker 1: building built up through the system. Like if we were
Speaker 1: talking about this like say nine months ago, you know
Speaker 1: a lot of people were saying that inflation is going
Speaker 1: to be very slow to come back, but we all
Speaker 1: know that at some point when things open up, and
Speaker 1: they are opening up clearly, Um, it's difficult as some
Speaker 1: some companies are having it, but they are opening up.
Speaker 1: Price pressures are turning to rise. And this is why
Speaker 1: I'm always interested in watching things like the I s
Speaker 1: M surveys. Data are obviously clearly important, but what people
Speaker 1: are saying, what companies are saying out of the ground
Speaker 1: are is very key. Um. So again, one of the
Speaker 1: I SEN surveys, like the manufacturing ones that have always
Speaker 1: been talking about what the respondents have always been referring
Speaker 1: to higher price pressures and finding how labor is difficult
Speaker 1: to come by these days, and they're paying more for
Speaker 1: wages and all that. So those sorts of UM commented
Speaker 1: those sorts of comments, Um, what companies are saying. I
Speaker 1: think it's very critical to our the inflation outlook, and
Speaker 1: we do see inflation inflation perking higher in the months ahead.
Speaker 1: Do you model in wage inflation is part of that
Speaker 1: new inflation we do? I mean, wage inflation is obviously
Speaker 1: part of the entire inflation picture, not just goods and
Speaker 1: services which are also on the rise, but with labor
Speaker 1: shortages and people or companies struggling to meet this newfound demand,
Speaker 1: they need people to create these you know, to create
Speaker 1: these witches, to be on the factory floor for example,
Speaker 1: to be at the restaurant floor. And so in order
Speaker 1: to get more people, obviously they're gonna have to start hiking, um,
Speaker 1: hiking wages and bringing in and introducing more benefits to
Speaker 1: lure people back into the labor force. Does it still
Speaker 1: feel transitory, Jennifer Um A little bit, yes, because they're
Speaker 1: not always there yet. UM. You know, this pandemic is
Speaker 1: still you know, front and foremost on everyone's minds and
Speaker 1: everywhere in the world. So things are moving forward, but
Speaker 1: you know, obviously it's doing depend on what you know,
Speaker 1: which area, which country we're talking about. In the in
Speaker 1: the US has been you know, at the at the
Speaker 1: forefront and has been moving for very quickly thanks to
Speaker 1: the fast piece of vaccinations you know, the UK as well,
Speaker 1: So things are opening up. So it's it's looking better.
Speaker 1: It's it's definitely looking a lot better, uh, this year
Speaker 1: than you have other countries who are not who are
Speaker 1: still struggling on vaccinages, like in Europe and an India
Speaker 1: of course, and that's where things are still you know,
Speaker 1: although thin were transitory yet we're still at the beginning stages.
Speaker 1: It's got to be the word of the year already.
Speaker 1: Jennifer A. Thank you be mal Capital Market Senior economists.
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