Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz. 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, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg terminal.
Speaker 1: He has been the big winner of the last eighteen months.
Speaker 1: Michael Wilson, chief US equity strategist at Morgan Stanley, was
Speaker 1: out front with a cute week to week talk about
Speaker 1: a bear market, and then up in June, down again,
Speaker 1: and now up again. An important conversation, John, why don't
Speaker 1: you lead off with Mr Wilson? I think we could
Speaker 1: have got to mix Chrystal Bull Mike. I think the
Speaker 1: code of the year wasn't the code of the start
Speaker 1: of the year. It was that tactical rally, that buddish
Speaker 1: cool you made about a month or sub ago, and
Speaker 1: Mike were seen it play out, and I think we're
Speaker 1: all wondering whether you said it's much more upside from here. Well,
Speaker 1: thanks John, good to see you guys, And look, I
Speaker 1: I mean we talked about this the last time. I
Speaker 1: was on the tactical rally. I felt like the move
Speaker 1: to four thousand was was pretty much in the cards,
Speaker 1: and then we said, look, we don't know if we're
Speaker 1: gonna get another level to this. If it's going to happen,
Speaker 1: we're gonna need rates to come in further. Uh. And
Speaker 1: that's what That's what's happening now, and it's gonna be
Speaker 1: probably led by you know, the NASDAC and also the
Speaker 1: you know stocks that are most heavily shorted as rates
Speaker 1: come down along duration plays and that's exactly what we
Speaker 1: saw yesterday. And so we have more confidence that this
Speaker 1: rally will continue into December. It's not gonna be easy
Speaker 1: because I want to make it clear, as we said
Speaker 1: last time as well, it's still a bear market. Um,
Speaker 1: these things are tricky, but we have to try and
Speaker 1: trade these. When you get moves to go against you,
Speaker 1: you don't want to miss it. And sometimes we get
Speaker 1: it right. Sometimes we know this one we did. So
Speaker 1: we're we think it can extend here. Now, we think
Speaker 1: rates will go lower. We think you know, Polle's commentaries
Speaker 1: right in line with what we've been saying, which is
Speaker 1: that they're going to pause probably in January. And the
Speaker 1: market is getting in front of that, and this is
Speaker 1: a this is a classic uh you know, kind of
Speaker 1: uh kind of bed pause stock market rally and then
Speaker 1: ultimately you think we get beaten around the head with
Speaker 1: Paul earnings as we got into three. Now, Mike, I'm
Speaker 1: going to read you a quote and it reads as follows.
Speaker 1: Previous slows and equity markets are likely to be retested
Speaker 1: as there may be a significant decline in corporate earnings.
Speaker 1: We're inclined to think that this market decline could happen
Speaker 1: between now and the end of the first quarter of three. Now,
Speaker 1: if someone gave me that quote, Mike, I can't think
Speaker 1: it was you, except it wasn't. It was JP Morgan's
Speaker 1: Marko Kolanovich yesterday. Now, Mike, you like to be contrarian,
Speaker 1: you have been through much of this year. I have
Speaker 1: to say that view now of early twenty three earnings
Speaker 1: risk is almost consensus. Mike, How are you thinking about
Speaker 1: it as we go into a new year. Yeah, I mean,
Speaker 1: like you know, you can say for other people too.
Speaker 1: Were all trying to, you know, stand out with something
Speaker 1: that's you know, insafeful or different, and you're right, I mean,
Speaker 1: our our call this year now has become pretty much
Speaker 1: concerned it's this that. But that's why we flipped in
Speaker 1: in October quite frankly, as we felt like that call,
Speaker 1: the fire and ice call right fed tightening into a
Speaker 1: slowdown became consensus. Now we see kind of this idea
Speaker 1: that we're gonna make a lower low in the first quarter.
Speaker 1: I don't think that's quite consensus yet. But I tell
Speaker 1: you what's not consensus is this taxble rally, Okay, that
Speaker 1: we watched that you know, our competitors, we watch touch
Speaker 1: a lot of clients to try and get a sense
Speaker 1: for where that sentiment is. And I would say this
Speaker 1: is one of the most hated bear market rallies that
Speaker 1: I can recall, even more so than this summer. So
Speaker 1: I think the right set up now is this rally
Speaker 1: will go further and we'll probably drag people back into
Speaker 1: thinking that the bear market is over, and then that
Speaker 1: will be part of the signal for us to kind
Speaker 1: of press on the other side again. Pushing again, staid
Speaker 1: perhaps Mike, and this goes to Allen Setner and maybe
Speaker 1: jobs day tomorrow is what inflation does, what the economy does?
Speaker 1: What are your analysts and Morgan Stanley say about the
Speaker 1: mystery of revenue growth at the top line next year,
Speaker 1: and if you get better revenue growth because of high
Speaker 1: nominal GDP, how does that redound upon margins. Yeah, this
Speaker 1: has been an ongoing debate we've had with clients since
Speaker 1: really April. Uh, you know, we were out in front
Speaker 1: on earnings disappointing at some point into twenty three. And
Speaker 1: but it does contrast with this idea that we have
Speaker 1: in a nominal world. Uh, you know GDP. Nomenal GDP
Speaker 1: is probably gonna stay positive next year, even if we
Speaker 1: have a recession. You know, Ellen's forecast next year is
Speaker 1: for not a recession, but basically zero percent real growth,
Speaker 1: So it's gonna feel like a recession. What's your point
Speaker 1: if you get you know, if inflation is still positive,
Speaker 1: you can have positive revenue growth. We have that baked
Speaker 1: into our numbers time when in other words, our base
Speaker 1: case a D nine dollars next year assumes if we
Speaker 1: still have positive revenue growth about three percent due to
Speaker 1: you nominal GDP staying in positive territory. But it all
Speaker 1: comes down to margins. And this is the part of
Speaker 1: the story that we think is underappreciated by a lot
Speaker 1: of investors, which is, you know, inflation is what drove
Speaker 1: profits higher, and so as inflation comes down next year,
Speaker 1: as we're forecasting we have inflation going back towards to
Speaker 1: two two three by the end of the next year.
Speaker 1: That's actually bad for equities, good for bonds, but bad
Speaker 1: for equities because it's going to crush margins. And this
Speaker 1: is the story that we think is once again under
Speaker 1: appreciate the negative operating leverage that we're seeing in business
Speaker 1: models as companies scrambled for supply six eight months ago
Speaker 1: and over higher. That has to be you know, run
Speaker 1: through the income statement now and that's gonna be the
Speaker 1: that's gonna what that's gonna be what makes the low
Speaker 1: in the first and second quarter. So I would say
Speaker 1: where people are maybe catching up on the earning story,
Speaker 1: I don't think they're bearish enough in terms of this
Speaker 1: margin degradation. Mike, you said that there perhaps could be
Speaker 1: a trough of three thousand and thirty two hundred in
Speaker 1: the first quarter of next year as we do get
Speaker 1: that reality check from earnings, have the recent data with
Speaker 1: respect to the latest CPI, with respect to some of
Speaker 1: the other metrics that people are seeing a softening in
Speaker 1: and that we're hearing a change in tone from the
Speaker 1: rhetoric of J. Pow perhaps yesterday. Have you changed that view?
Speaker 1: Does that seem further away in terms of that fair
Speaker 1: case scenario? Well, once in in, I mean the bearcase
Speaker 1: scenario assumes we have probably a modest recession next year.
Speaker 1: And in that scenario, all we're all that happens is
Speaker 1: revenue growth goes flat, maybe maybe slightly negative, but that
Speaker 1: will make the negative operating leverage even worse. And so
Speaker 1: that's a hundred eighty dollars and earnings next year. So
Speaker 1: with a hundred eighty dollars and earnings next year, you know,
Speaker 1: three thousand is not is not really a stretch. So look,
Speaker 1: we don't you know, we don't have a crystal ball. Unfortunately,
Speaker 1: I wish I did. In terms of what I'm most
Speaker 1: uncertain about is the timing of this. You know, we
Speaker 1: thought it could have actually happened in the fourth quarter
Speaker 1: of this year, needing these earnings revisions, and that's one
Speaker 1: of the reasons we flipped positive in octobers. We felt
Speaker 1: like it's gonna be pushed out and that's what's happening.
Speaker 1: Couldn't get pushed out further into the middle of next year. Yes,
Speaker 1: do we think we can avoid it? No, so we're
Speaker 1: you know, we think at a minimum will take out
Speaker 1: thirty sometime in the first half of next year. And yes,
Speaker 1: that bearcase, unfortunately is alive, and that's three thousand. In
Speaker 1: the meantime, let's get one final call from you. What
Speaker 1: would you buy and hold right now? Got into your rend?
Speaker 1: What would it be? And it could be a wife
Speaker 1: in the index she's how may Yeah, well, I think
Speaker 1: it's bonds. I mean like we're you know, I think
Speaker 1: that that that if you think about bear markets that
Speaker 1: are punctuated by a either economic or earnings recession, we
Speaker 1: think we're gonna get at least one of those, the
Speaker 1: earnings recession, the CE. The sort of order of operations
Speaker 1: is very clear. You want to buy a cat, you
Speaker 1: want to be cashed first, then you want to buy
Speaker 1: treasuries long duration, then you want to buy credit, and
Speaker 1: you want to buy equities last. So you know, we're
Speaker 1: already a lot already overweight cash. So front end cash
Speaker 1: or you own back end treasuries. Now for a trade, Okay,
Speaker 1: we think it's Nasdaq or you know, long duration stocks
Speaker 1: will will like that move in rates lower. It's but
Speaker 1: that's more speculative. That's for the training community, I think
Speaker 1: for the investment community and for asset owners it's basically
Speaker 1: bonds might just phenomenal. Thanks for your time and let's
Speaker 1: catch up before year Rent, Mike Wilson, what we news
Speaker 1: dive into this with Joy and Rochester? G turn effect
Speaker 1: strategist number. I'm gonna ask one question here and how
Speaker 1: do you not lose money? And then John's going to
Speaker 1: pick it up and the currency dynamics you just mentioned.
Speaker 1: Jordan Rochester, you, like every adult out there, uses a
Speaker 1: thing like stop losses. You've been enjoying being stopped out
Speaker 1: of trades right now explained to our audience why it's
Speaker 1: amateur our If you don't have stops, well, I don't
Speaker 1: enjoy being stopped out, Tom, but they're absolutely essential to
Speaker 1: your risk management. I think with the FTX scandal that
Speaker 1: I think the ANAMDA bragged that they didn't have stop losses,
Speaker 1: So that's quite clear what can happen if you don't.
Speaker 1: But look what's happening in the markets, Tom, how to
Speaker 1: avoid losing money? Here is the markets looking at US
Speaker 1: energy prices. They've cooled off year on year, that leads
Speaker 1: PPI producer prices lower, that leads headline inflation with a
Speaker 1: lag lower. So it's quite hard to see reasons why
Speaker 1: the Fed would get suddenly more hawkish, especially after Chair
Speaker 1: Pal's speech last night signaling that slow down to fifty
Speaker 1: basis points. You had a green light from the Fed
Speaker 1: chair last night to sell the dollar and by risk appetite,
Speaker 1: and that's why you've seen the NaSTA cup over four
Speaker 1: percent yesterday. In ffex Tom, the correlations between foreign exchange
Speaker 1: and interest rates have really dropped off a cliff. The
Speaker 1: most predominant fact that's driving everything right now is where
Speaker 1: global equities are going. So I'm currently long euro dollar.
Speaker 1: We do have a stop on that round one oh one,
Speaker 1: one oh one seventy, but I think that's gonna go
Speaker 1: towards one oh eight. I think that's gonna be something
Speaker 1: that could go towards one ten in the new year
Speaker 1: because of what's happening in China, because the low energy
Speaker 1: prices we've seen over recent weeks in Europe as well,
Speaker 1: helping boost European production. So that risk on sentiment that
Speaker 1: you see in equities feeds directly to the dollar. Now
Speaker 1: does that famous spider meme spider man meme on Twitter
Speaker 1: where everyone points at each other blaming each other surveillance.
Speaker 1: So as EFEX guys say it's equities driving everything, empty
Speaker 1: guys say it's effects. Well, I just the main point
Speaker 1: I would say is if you think that this risk
Speaker 1: on carry on in the SMP five hundred, it means
Speaker 1: the dollars will continue to weaken into your end and
Speaker 1: you play that through the Euro. Where does Sterling fit in? Well,
Speaker 1: we had short Sterling Swiss on because we thought we
Speaker 1: needed some RV to hedge are sort of risk one position.
Speaker 1: Sterling Swiss had been less correlated to the equity market
Speaker 1: than of of acrosses. But you can't ignore that Swissy
Speaker 1: is a risk off hedge. So what's happen is we
Speaker 1: got stopped at that short Sterling Swiss, not because we
Speaker 1: had some amazing news out of the UK, but for
Speaker 1: two reasons. One, everybody agreed with the trade, and that
Speaker 1: always tells you that everyone's position the same way as you.
Speaker 1: And to risk one, Sterling always does well when the
Speaker 1: equity markets rally. It's very rare that it doesn't. Only
Speaker 1: during Brexit. Really did we see that change in so
Speaker 1: for the likes of sterling, we think that you could
Speaker 1: climb towards one by the end of next year. And
Speaker 1: in these markets, guys, we're seeing big moves and dolly
Speaker 1: and for example, four four big figures in just twenty
Speaker 1: four hours. You know, one is not that big of
Speaker 1: a push to see earlier if we have more good news.
Speaker 1: But based on what we know right now, it's gonna
Speaker 1: be a slow grind higher. It's hard for me to
Speaker 1: see any of this other than a big dollar story.
Speaker 1: And everyone else is coming along and rationalizing it in
Speaker 1: some way or another. I mean, it was pretty much
Speaker 1: all of the major currency pairs were really big gainers
Speaker 1: in the past month versus the dollar, and our people
Speaker 1: getting ahead of themselves with this idea of fading inflation
Speaker 1: and a fair that's going to somehow respond to that.
Speaker 1: I mean, could this really whips are in the other direction?
Speaker 1: Based on positioning, I think it really cood li SA
Speaker 1: But not now. That's that's problem markets. We could have
Speaker 1: a view about what could happen in Q two or
Speaker 1: Q three next year, but the markets don't trade that
Speaker 1: just yet. Sometimes, and I think the risks are for
Speaker 1: all my leading indicators for inflation in the US, they
Speaker 1: all point down. There's none of them pointing up. I
Speaker 1: can't really say, oh my god, watch out for this
Speaker 1: inflation risk. Look at this chart. They're all pointing to
Speaker 1: lower entery prices, lower inflation. Therefore, you can say CPI
Speaker 1: has peaked, and it's quite clearly peaked. We're looking for
Speaker 1: no point three pc on the core again month on month.
Speaker 1: Namura was the only team, the economics team in the
Speaker 1: US to get that number right last month. So if
Speaker 1: they get that right again and we have another nor
Speaker 1: point three or even lower, it's kind of hard for
Speaker 1: the dollar to rally. But let's look to next year.
Speaker 1: We could have in Q two China's reopen. Q three
Speaker 1: we start to feel the impact of that in energy markets,
Speaker 1: and the FED doesn't cut rates. Perhaps that's the risk
Speaker 1: we think they will, But the risks are we have
Speaker 1: a wave of energy inflation again next year in Q
Speaker 1: three as energy markets tighten up and demand comes back,
Speaker 1: and that could change the narrative quite a lot. So
Speaker 1: right here, right now, I don't think we're getting ahead
Speaker 1: of ourselves. I think the dollar can can continue to
Speaker 1: weaken against the euro at least and that should feed
Speaker 1: free to risk on another G ten crosses toward. One
Speaker 1: reason why I love reading our reports is because you've
Speaker 1: got this confidence metric and you have, you know, three
Speaker 1: out of five, five out of five. I remember back
Speaker 1: when you were five out of five. Now you're three
Speaker 1: out of five. How much are you seeing a lack
Speaker 1: of conviction or pulling back or humility in some of
Speaker 1: the positioning that you're seeing across effects as you sort
Speaker 1: of sort out all of these uncertainties that are lying ahead. Well,
Speaker 1: I think there's a lot of uncertainty. What we tend
Speaker 1: to have in this market is prices moving, make narratives.
Speaker 1: Narratives then drive research pieces, but fundamentals ultimately drive where
Speaker 1: prices will be. Right now, the fundamentals are that we
Speaker 1: could perhaps see software inflation therefore week or dollar. But
Speaker 1: we're getting to year end and a lot of accounts
Speaker 1: were sat long dollar for most of this year, including
Speaker 1: ourselves since February pretty much of of the year when
Speaker 1: Russia invaded Ukraine. Why wouldn't you be along the dollars?
Speaker 1: So that trade is still being unwound in certain sectors,
Speaker 1: and that means perhaps everything we're seen right now is
Speaker 1: just position reduction and no one really changing their optimism
Speaker 1: for next year. For US, we think there's gonna be
Speaker 1: recession risks. Usually when there's a recession the dollars as well.
Speaker 1: The problem is we start we're starting to see signs
Speaker 1: of early rebounds in European p M mice for example,
Speaker 1: China's credit impulses going up. So there are fundamental reasons
Speaker 1: why you could see this risk and be sustained. You
Speaker 1: just need hope to prevail. And we do have risk
Speaker 1: coming up. We've got OPEC next week, We've got the
Speaker 1: EU oil sanctions on Monday as well. That's twenty one
Speaker 1: of the e use oil imports from Russia being sanctioned
Speaker 1: from Monday onwards. I'm not sure where they're going to
Speaker 1: get that one of their total oil imports from in
Speaker 1: the next month, So there's there are certainly risks to
Speaker 1: this outlook. Jordan, you've got twenty seconds. Are you more
Speaker 1: confident about your europe dollar call or England getting past
Speaker 1: Senegale later this weekend? I'm pretty comfroment the England team.
Speaker 1: I mean, we've had the US Gay game. USA game
Speaker 1: was a bit boring, was like watching paint dry, But
Speaker 1: what a fantastic Wales game and hopefully they'll bring that
Speaker 1: back to the pitch. Should Jack Grayler should be playing more?
Speaker 1: You're asking a Birmingham boy where the Jack really should
Speaker 1: be playing more? I just already know what Jordan's going
Speaker 1: to say. I'm happy with him playing every game, at
Speaker 1: least in the second half. He gets a showing you know,
Speaker 1: you've got one of the goals as well in the
Speaker 1: first game of the World Cup. So this is fantastic
Speaker 1: for Birmingham. And it's not just greedish. Now I've got
Speaker 1: to betting into He's grillish is on the urge of Gareth.
Speaker 1: I mean, he gets on the field and things happen.
Speaker 1: He's great, a really classy player, Jordan Ranchester. During you
Speaker 1: and World Cup, we're breaking it down city to city
Speaker 1: where these players come from. Tim, You'll get into another level,
Speaker 1: another level, thank you. I'm just doing it because of
Speaker 1: our love. It's so deep. What we do every day
Speaker 1: is our guests, and it starts and ends with the
Speaker 1: research capabilities of vincent Reinhart, Assistant chair in green Span
Speaker 1: over many many years at the Federal Drive US Melon
Speaker 1: Holding Court and important writings in the pandemic about the
Speaker 1: state of our economy, vince Reinhart, just a general question
Speaker 1: of a two hour conversation. Do you buy the idea
Speaker 1: we're heading for recession? In your years with green Span,
Speaker 1: were you able to predict a recession? Nobody really predicts
Speaker 1: a recession. What you can say is there's an elevated
Speaker 1: chance of it, just like you could say you have
Speaker 1: an elevated chance of infection if you go into bad
Speaker 1: places without a mask. Uh. There is an extremely elevated
Speaker 1: chance of recession. Uh. And if you had to place
Speaker 1: your money, I bet that within twelve months the economy
Speaker 1: is in downturn. I look at this vents, and then
Speaker 1: I look at the parlor game of the FED, which
Speaker 1: is now different than when you were holding court at
Speaker 1: the Echos building. And the basic idea here is there
Speaker 1: gaming out a rate movement higher and then we are
Speaker 1: quote unquote going to figure out to pivot and guess
Speaker 1: when that occurs. Have you ever seen anything like this
Speaker 1: or is this mound territory? This? This is old style
Speaker 1: monetary policy right now. Monetary policy is hard but simple.
Speaker 1: It's hard in the sense they have to inflict point
Speaker 1: pain on the economy to get inflation down. It's simple
Speaker 1: because the strategy is, if you don't know what the
Speaker 1: right neutral funds rate is, put it at a level
Speaker 1: you sure is restrictive, and then keep it there until
Speaker 1: you have demonstrable evidence that in flaition is going back
Speaker 1: to goal. So if you're not exactly sure how to
Speaker 1: calibrate policy, don't put it at a plateau next year
Speaker 1: and just wait. That's what cheer pal poll is yesterday?
Speaker 1: Is that what he told us yesterday? Incidant, did you
Speaker 1: hear perhaps a little bit more of a concession around
Speaker 1: perhaps moderating their stance in order to avoid a hard landing.
Speaker 1: I don't get how most of the headlines came out
Speaker 1: of that UH remarks. Yesterday afternoon, he repeated his press
Speaker 1: conference UH characterization, you were raising rates till we get
Speaker 1: them to a level, and then we're going to keep
Speaker 1: them there. He dismissed a lot of data with regard.
Speaker 1: I don't don't want to be on the other side
Speaker 1: of Mike's argument, but I think I have to be. Yesterday,
Speaker 1: Chair Pal said inflation moves around sometimes, UH, after good numbers,
Speaker 1: bad numbers come out, so I think that they would
Speaker 1: down down Wait the pce ace part of this, and
Speaker 1: then what he was saying was we've got to keep
Speaker 1: the pace of aggregate demand below that a trend, so
Speaker 1: he should be worried about the spending part about it.
Speaker 1: This is not a good morning for the Fed. Well vincent.
Speaker 1: This is really the key point. A lot of people
Speaker 1: are saying that there is a downward shift in inflation
Speaker 1: and it's coming at a pace that's surprising analysts that
Speaker 1: this is good news, is going to allow the Fed
Speaker 1: to move away from some of the rate hikes and
Speaker 1: even cut rights student than previously expected. Do you think
Speaker 1: people are getting ahead of themselves, that really those inputs
Speaker 1: are not declining quickly enough and that they could even
Speaker 1: re accelerate basis some of the rollover effects in areas,
Speaker 1: For example, I used cars, events always look bigger in
Speaker 1: the rear view mirror than they really are. I think
Speaker 1: there is a tendency to over over overweight this incoming information.
Speaker 1: Chare Pal said that yesterday. By the way, he said,
Speaker 1: inflation ballattle. Sometimes after good readings, you get bad readings.
Speaker 1: He was basically telling us not to be so stressed
Speaker 1: about it. Do I believe inflation is off its peak?
Speaker 1: Absolutely goods price inflation has come off the boil because
Speaker 1: supply chains have been been improving and market economies work
Speaker 1: by bringing resources into sectors that are overheated. But it's
Speaker 1: spill over to service inflation. That's what you gotta worry about.
Speaker 1: That's what pals worried about, the durable part, part of
Speaker 1: inflation that's still above the FED goal. Vincent reinhard Olivia,
Speaker 1: Blanchard reaffirmed higher level of inflation we can be comfortable with.
Speaker 1: He went from four percent in the crisis of oh
Speaker 1: eight oh nine down to something more like a three
Speaker 1: percent level. Is the new two percent without going into
Speaker 1: the details of the Blanchard essay and the ft, is
Speaker 1: he onto something here which we are going to rationalize
Speaker 1: our way away from the two percent level. So yes
Speaker 1: and no. The the s part is back in the
Speaker 1: mid nineties when central banks settled on a two percent
Speaker 1: inflation goal, it's not like they had a great conversation
Speaker 1: about the costs and benefits of that long term goal.
Speaker 1: And we know more about problems with the zero lower
Speaker 1: abound and so we should have a serious discussion of
Speaker 1: what the right goal is In the United States. It's
Speaker 1: got to inconclude the Congress by the way, because it's
Speaker 1: a Congress that's specifies price stability. That's my note part.
Speaker 1: I wouldn't want to have a conversation with the Congress
Speaker 1: about the federal reserves goals most times, certainly not in
Speaker 1: the next in the next two years. Moreover, it's one
Speaker 1: thing to redefine the goal when you're succeeding. It's another
Speaker 1: thing to redefine the goal when you're failing. That that's
Speaker 1: just base drift that you just can't do. It said,
Speaker 1: that was really wonderful. Thank you, Meta net Reveala Ferokie
Speaker 1: joins US now Chief US Economist with Carl Weinberg at
Speaker 1: High Frequency Economics. Reveala, what is the distinction of what
Speaker 1: we're gonna hear Friday tomorrow at eight thirty What matters
Speaker 1: to you and Carl? Good morning, Thanks for having me.
Speaker 1: What we're really looking at beyond you know the usual
Speaker 1: you know the headline job numbers, at the participation rate,
Speaker 1: its wages, right. The chair Poud made it very clear
Speaker 1: yesterday what they're focusing on in terms of the inflation uh,
Speaker 1: you know, dynamics, and that is what we're going to
Speaker 1: be looking at. We're looking for a very small deceleration
Speaker 1: but really very far above where the pre pandemic trend was,
Speaker 1: very far above with what the FED is saying is
Speaker 1: consistent with the two percent inflation target. So you know,
Speaker 1: just definitely is going to be something we're focusing on,
Speaker 1: but not something that we're going to see, uh, you know,
Speaker 1: imminent imminent improvement on either. I want to dovetail with
Speaker 1: the academic site. Guys, it's out there Rebelia and this
Speaker 1: is the academic saying maybe the labor partition just like
Speaker 1: labor participation rate is not accurate because of the pandemic
Speaker 1: and older people retiring. Is this good math that we
Speaker 1: see Friday? I mean, we've seen that this adjustment right
Speaker 1: post pandemic where you've seen access retirements. So we really
Speaker 1: shouldn't be looking for the participation rate to improve too much.
Speaker 1: But if you remember, you know, before the pandemic, when
Speaker 1: the labor market was strong, job growth was strong, but
Speaker 1: people were coming back into the labor market. So what
Speaker 1: is the dynamic here? Is growth going to slow off
Speaker 1: slow enough that people will want to get back into
Speaker 1: the labor market. Are their savings going to diminish enough? Uh,
Speaker 1: you know, is the cushion from uh you know the
Speaker 1: income support that they've had, is that going to dissipate
Speaker 1: and they are going to be motivate do to come
Speaker 1: back into the labor market certainly a possibility, not our
Speaker 1: base case right now, not the first blase case certainly.
Speaker 1: You know, if you heard pout yesterday, that's not what
Speaker 1: they are expecting to see. So I think those dynamics
Speaker 1: that that both pandemic distortion is probably going to last
Speaker 1: for some time. Really, you mentioned fed cher J. Powey
Speaker 1: in his speech yesterday. Some people, a lot of people
Speaker 1: thought that it was more devish than expected. At least
Speaker 1: he didn't come out with a hawkish rebud of some
Speaker 1: of the gains that we've seen in the equity markets. However,
Speaker 1: to your point, he talked about the labor market tightness
Speaker 1: and how significant of a concern this is for him.
Speaker 1: How much geth view that that is causing the FED
Speaker 1: to raise rates higher than the market is currently pricing.
Speaker 1: And even after yesterday's rally, even after yesterday's perhaps shift
Speaker 1: slightly in tone from J Power. So you know, what
Speaker 1: I've heard from what he said yesterday is that higher
Speaker 1: for longer, right, rates have to rise further. They don't
Speaker 1: really know how restrictive because they don't really know where
Speaker 1: that level is. But certainly we're going to move higher,
Speaker 1: you know, our base cases, they're going to go fifty,
Speaker 1: then another fifty in the first quarter, top out around five.
Speaker 1: But if the labor market does not start responding our
Speaker 1: base cases, it is right, I mean, five percentage points
Speaker 1: of rate heights. We don't see how the economy doesn't
Speaker 1: respond to that. But if they, we don't see the
Speaker 1: type of improvement we need to see, and we don't
Speaker 1: see sustained easing ob wage pressures off of these levels,
Speaker 1: you know, four point seven percent to maybe three and
Speaker 1: a half is then yes, certainly the there's this risk
Speaker 1: that rates move higher. But I think what markets really
Speaker 1: need to understand is that the Fed does not want
Speaker 1: to overtighten now because then crash the economy and then
Speaker 1: come out on the other side and easy rates. So
Speaker 1: they're going to go gradually. They're going to watch what's
Speaker 1: happening in you know, in response to what they've already
Speaker 1: done so far, and then they're going to see how
Speaker 1: long they need to stay there. We think that you know,
Speaker 1: they reach be great whatever that rate is in the
Speaker 1: first quarter, and then they stay there for the rest
Speaker 1: of the year at least to see that sustained, you know,
Speaker 1: improvement in inflation from slightly restrictive policy stands. People would
Speaker 1: push back, including Ben Laidler, who says that if you
Speaker 1: look around, there is disinflation everywhere. Is there any area
Speaker 1: or that's not true? You're starting to see inflation starting
Speaker 1: to re accelerate. Well, I mean what we've seen is
Speaker 1: inflation readings right now are still not that far off peaks.
Speaker 1: I mean, seven point seven on the CPI down from
Speaker 1: nine pound point one percent, quite substantial, but still way
Speaker 1: above target for pc accelerating, they're going to see a
Speaker 1: slight we expect to see a slightly sederation, but these
Speaker 1: are not levels that are consistent with you know, what
Speaker 1: the FIT wants to see. Yes, there are signs of disinflation,
Speaker 1: but on the good sides of this, inflation is still
Speaker 1: very sticky. What Pow talked about in particular yesterday was
Speaker 1: that core services ex housing and that you know has
Speaker 1: a strong wage component to it. So adjustment in the
Speaker 1: labor market rebound, don't think it is necessary so that
Speaker 1: those which pressures can come under control, bitch will give
Speaker 1: them a little bit more room, you know, to sort
Speaker 1: of justice see where we're going from here. For a
Speaker 1: man who set that wasn't spice for nuance at the
Speaker 1: last news conference, I have to say there was a
Speaker 1: lot of nuance yesterday had And why thought I didn't
Speaker 1: anticipate rebate a fantastic as always rebate Ferriki that of
Speaker 1: high frequency economics. Somebody that was there when Mao took
Speaker 1: over China was Robert Dahl. He's chief investment officer at Crossbark.
Speaker 1: He's been doing this a few years along with me,
Speaker 1: and we're thrilled. He joins us in the studio. Uh,
Speaker 1: this morning, you got a little bit in your note there.
Speaker 1: For the first time in fifty years, we've been this gloomy.
Speaker 1: We've had this much gloom out there. And that's how
Speaker 1: I make the joke back. But part of that is
Speaker 1: years in my history is when inflation moves, it moves
Speaker 1: suddenly to disinflation. Is that where we are right now?
Speaker 1: I don't think we're quite there yet, Tom, unless you're
Speaker 1: going to call acceptable or disinflation three or four percent um.
Speaker 1: I think we can get there with what we've done,
Speaker 1: but not to nowhere close to two Okay, But not
Speaker 1: to two, but then we're there, and that means I've
Speaker 1: got nominal g d P which helps corporate revenues. Yes,
Speaker 1: who are the survivors of a better corporate revenue? Given
Speaker 1: an inflation milieu that you and I are the only
Speaker 1: two that have ever lived. Given that we want some
Speaker 1: pricing power, you've got to go to places where people
Speaker 1: can raise prices. We haven't been in that environment in
Speaker 1: a long long time. And I'm gonna tell Lisa You're
Speaker 1: gonna love this. I used to go up and down
Speaker 1: the elevator in Boston with the giant Philip Curay, who
Speaker 1: Bob and I worship, did I think four? And Mr
Speaker 1: Kuray would and it is Mr Kay. Mr Kay would
Speaker 1: talk about the bright lights of inflation. That's where we
Speaker 1: are now. So if we're gonna talk history, let's talk history,
Speaker 1: and let's talk a half a century ago, which was
Speaker 1: the last time that we saw three consecutive quarters of
Speaker 1: stock and bonds losing value together? What does history say
Speaker 1: and is it instructive in terms of what that means
Speaker 1: going forward? Well, first of all, the reason that happened
Speaker 1: was the rapid adjustment. We had essentially zero inflation and
Speaker 1: zero interest rates not to exaggerate by much. Then all
Speaker 1: of a sudden it fits, Oh it's not transitory, and
Speaker 1: we got to get moving. And so we've had the
Speaker 1: most rapid increase in FED funds, and you guys said
Speaker 1: it a few minutes ago. The lag is impossible to
Speaker 1: predict about the impact of that, and so we're going
Speaker 1: to have a slowing economy and that will help bring
Speaker 1: the inflation right down. The Fed's got it prey that
Speaker 1: the labor market quiets down. So one guest after another
Speaker 1: has talked about flooding into treasuries, flooding into duration. Even
Speaker 1: Michaelson and Morgan Stanley comes out, what would you be
Speaker 1: buying the equity strategistic bonds? Right? I mean how much
Speaker 1: do you lean into that versus step away and say,
Speaker 1: maybe people are overestimating how much inflation can drop. I think,
Speaker 1: Lisa that um owning some bonds is just fine. It's
Speaker 1: zero at the beginning of the year. You didn't want
Speaker 1: any When treasuries approach four on the tenure, we say
Speaker 1: you've gotta be nibbling away bonds. And we're not that
Speaker 1: far from that now. So the old sixty forty is dead.
Speaker 1: That we all preached a year ago. Not true anymore.
Speaker 1: Bonds have a place in the portfolio, especially if you
Speaker 1: believe inflation is coming down to three or four. Forget
Speaker 1: the two for the moment, my theme for next year.
Speaker 1: You're the only one breathing and remembers, especially coming up
Speaker 1: of years ago. Remember what is this to Bob and
Speaker 1: I remember whenever every wise guy in Manhattan said we
Speaker 1: got to roll up the chemical industry, remember this, we
Speaker 1: all want mental for eighteen months and turned it into
Speaker 1: three companies or whatever. I'm talking about the great zombie
Speaker 1: roll up next year, where we de market between profit
Speaker 1: making and cash flow making companies and everybody else. Do
Speaker 1: you agree with that that there's going to be a demarcation?
Speaker 1: So agree? And what that means more broadly, as fundamentals matter. Again,
Speaker 1: when interest rates are zero row, they're artificially low, and
Speaker 1: you can't really say that the good guy wins from
Speaker 1: a stockbright standpoint. How did Sears last so long? The
Speaker 1: answer is because they were given artificially low interest rates
Speaker 1: and that was tough for places like Target. Now in
Speaker 1: this environment, the Targets will do well and the Seares
Speaker 1: will struggle. Explain to people that under duress corporations adjust.
Speaker 1: How does that process actually happen. Yeah, it's slow because
Speaker 1: they've been so used to zero inflation and exactly and
Speaker 1: got used to operating in that sort of environment. This
Speaker 1: is a different world now, and we come back to
Speaker 1: can you raise your price? Can you attract customers and
Speaker 1: keep them as your price rises? Look look at what's
Speaker 1: happening in the steel stocks, for example. You mentioned chemicals,
Speaker 1: early steeler poking their head up, and this is telling
Speaker 1: us where an environment where inflation is not going back
Speaker 1: to zero. I don't think the US steel is still x.
Speaker 1: I haven't looked at that year. People are talking. People
Speaker 1: are talking about how the real economy is getting its revenge.
Speaker 1: That has been the theme for two and it's rearing
Speaker 1: its head, and that's why you're seeing the inflation under
Speaker 1: underpinning some of these commodity sectors. How much does that
Speaker 1: mean that the other areas that got bit up and
Speaker 1: thinking big tech in particular can't really come back in
Speaker 1: the same kind of way and won't necessarily drive indexes
Speaker 1: to the same extent. I think you're onto it. We've
Speaker 1: obviously seen it this this past year, but I think
Speaker 1: going forward, going to the same sort of issues. If
Speaker 1: your company that is operating only on unit growth, your
Speaker 1: unit growth going to be really strong to get you through.
Speaker 1: And tech is mostly unit growth, I think they will
Speaker 1: be a lagging sector. Again, what are your clients? What
Speaker 1: are you cross mark out of Houston and you know
Speaker 1: a nationwide and all that? Are they loaded up their
Speaker 1: eyeballs in cash? What are they actually doing with their money? Yeah?
Speaker 1: So people, people are asking a lot of questions. Too
Speaker 1: many people are frozen, um, but they're making investments. You
Speaker 1: have to hold their hand and draw them to the
Speaker 1: horst of the water and saying let go get something
Speaker 1: like that. It's something like that. But they're they're they're
Speaker 1: they're they're doing something. They're doing more get educated and
Speaker 1: buying some alternatives, Like we have an equity market neutral
Speaker 1: product that's getting some attention. You have an equity market
Speaker 1: neutral product. Yes, Bob do all the great Optimus, Thank
Speaker 1: you so much with cross market all the best global investments.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
Speaker 1: us live weekdays from seven to ten am Eastern on
Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six
Speaker 1: to nine am for insight from the best in economics, finance, investment,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on
Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.