Speaker 1: Welcome to the Bloombergs Surveillance Podcast Home. Tom Keene, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz jay Leie, we bring
Speaker 1: you insight from the best and economics, finance, investment and
Speaker 1: international relations, Fine Bloomberg Surveillance and Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course on the Bloomberg Tournament. Joining
Speaker 1: us on Bloomberg Television and on radio. I'm pleased to
Speaker 1: say the New York Fed President John Williams joins us
Speaker 1: alongside Bloomberg's Michael McKee. President Williams, always great to catch
Speaker 1: up with you, sir, and if you don't mind going
Speaker 1: to start the conversation with the quote of yours you
Speaker 1: went on to say, in the last day or so,
Speaker 1: from my perspective, we are quite a ways from achieving
Speaker 1: my interpretation of substantial further progress. So President Williams, I
Speaker 1: imagine you anticipated this trillion dollar question, what is substantial
Speaker 1: further progress? Well, you know that's something will be analyzed
Speaker 1: and I'll be studying very carefully looking at the progress
Speaker 1: we're making about getting back to maximum employment and also
Speaker 1: our goals around a two inflation on average over time.
Speaker 1: So it's really looking at all the data that indicators
Speaker 1: and really seeing that actual achieved progress both in terms
Speaker 1: of employment and also in terms of underlying inflation trans
Speaker 1: back to two. So it's really looking carefully at all
Speaker 1: the um data and indicators and assessing that to come
Speaker 1: to conclusion. President Williams, for the benefit of our audience
Speaker 1: on radio, as I asked that question, you smiled because
Speaker 1: clearly you anticipate to there. I just wonder why keeping
Speaker 1: what constitutes substantial further progress vague is a feature and
Speaker 1: not a bug of policy. Well, you know, it's we
Speaker 1: we are not following some mechanical formula for making monetary
Speaker 1: policy that we have to look at a wide range
Speaker 1: of information and different indicators, and we also have to
Speaker 1: think about where the uncertainties and risks to the outlook
Speaker 1: are too. So I wouldn't say it's a a. I
Speaker 1: think it's pretty clear. We've laid out very clear indicators
Speaker 1: about how we think about maximum employment and price stability UH.
Speaker 1: But it's there's no kind of a numerical UH threshold
Speaker 1: or something that we're looking at. We're really looking at
Speaker 1: the full set of data around around these goals and
Speaker 1: taking into count all the extreme you know, extraordinarily high
Speaker 1: levels of uncertainty uh in the economy that we've experienced
Speaker 1: for the past year and a half and uh and
Speaker 1: we're continue to experience as the economy reopens. Well, John
Speaker 1: the there's a lot of uncertainty, but that stern taskmaster J.
Speaker 1: Powell makes you write down your forecasts. And I'm just
Speaker 1: wondering on the FED spectrum from the Survey of Economic Projections,
Speaker 1: what you think growth will be this year and in
Speaker 1: two thousand twenty two, and what do you think PC
Speaker 1: inflation will be. Well, you know, we're seeing you know,
Speaker 1: great um, you know, signs of the reopening of the
Speaker 1: economy in the past several months. So I have an
Speaker 1: uh pretty optimistic view of what GDP growth will look
Speaker 1: like this year. Uh So my my view is the
Speaker 1: growth will be about seven percent on a Q four
Speaker 1: of a Q four basis for real GDP, which is
Speaker 1: the best number if you know that forecast is true,
Speaker 1: that will be the best number since nineteen eight four.
Speaker 1: So I feel very good about you know, the progress
Speaker 1: we're making on vaccinations, on growth supported by strong fiscal support.
Speaker 1: And so that's that's my forecast. And I see the
Speaker 1: unemployment rate coming down to around four and a half
Speaker 1: percent by the end of the year, which is again
Speaker 1: really great UM signs of progress. Looking to next year,
Speaker 1: I think growth will be uh GDP. Growth will probably
Speaker 1: be around three to three and a half percent UM
Speaker 1: slower than this year because we're not going to get
Speaker 1: as much of that reopening dynamic and some of the
Speaker 1: very strong fiscal support we saw last year and this
Speaker 1: year will be I mean uh next year in terms
Speaker 1: of its contribution to growth, I still see the end
Speaker 1: the labor market continuing to recover next year, and employment
Speaker 1: trending down. In terms of inflation, you know, I do
Speaker 1: see the very um you know shark rice and prices
Speaker 1: we've seen in the past few months is mostly temporary.
Speaker 1: So after inflation being at three percent or so this year,
Speaker 1: I expect both core and overall inflation rates to come
Speaker 1: back down next year to around two as some of
Speaker 1: the reopening dynamics you know UM play out and some
Speaker 1: of these big increases in some of these prices like
Speaker 1: used cars and things like that subside. Well, let's let
Speaker 1: me put it the way the FED has always put it.
Speaker 1: If the economy performs as you expect, would it be
Speaker 1: likely that we would see you begin to taper in
Speaker 1: the fourth quarter of this year or is that too early. Well,
Speaker 1: it's really going to be driven by the day to
Speaker 1: you know, Mike, you know, you know, I'm very data
Speaker 1: dependent in my views on policy, and right now we're
Speaker 1: still in the midst of just a really an extraordinary
Speaker 1: and positive set of developments in terms of the economy,
Speaker 1: in terms of vaccinations and other things. So right now
Speaker 1: it's really about watching the data, seeing how quickly this
Speaker 1: economy can recover and get back to you know, uh,
Speaker 1: to its full potential. And so any views I have
Speaker 1: about when, um, you know, when we'll get to that
Speaker 1: point that we can start uh slowing the pace of
Speaker 1: our asset purchases, that will be driven really like what
Speaker 1: what's happening in the data, the as I mentioned before,
Speaker 1: the kind of the risks they're out there, and in
Speaker 1: terms of the economic outlook, and and doing it in
Speaker 1: a way hope that you know, really will be uh
Speaker 1: communicated very transparently and done in a very orderly way.
Speaker 1: So that's that's how I view that the timings can
Speaker 1: be driven by the you know, how how the data evolved,
Speaker 1: and really my focus is on providing the appropriate amount
Speaker 1: of monetary support for full and complete economic recovery and
Speaker 1: with inflation averaging two person, Well, let's talk a little
Speaker 1: bit about what's appropriate. What do we get for a
Speaker 1: hundred and twenty billion dollars right now a month in
Speaker 1: purchases that we wouldn't get from less given the state
Speaker 1: of the economy. And are you worried that the minute
Speaker 1: you announced that you might begin tapering, we get a
Speaker 1: taper tantrum. Does that keep you pinned in place? Well,
Speaker 1: you know, we really, in my view, we need to
Speaker 1: focus on getting monte policy in the right place to
Speaker 1: support the very strong economic recovery. Um. And you know,
Speaker 1: the ur two percent inflation goal. I think, you know,
Speaker 1: one of the lessons from the experience of the taper
Speaker 1: from years ago is the importance of uh, you know,
Speaker 1: not only getting the right decision at the right time
Speaker 1: for the decision, but also you know, doing our very
Speaker 1: best to communicate that has transparently uh and um, you
Speaker 1: know kind of clearly to the public. I do think
Speaker 1: that you know, this is this time we have a
Speaker 1: really strong economy. Uh. In terms of the recovery, the
Speaker 1: pace of recovery is of a long ways to go
Speaker 1: to get to maximum employment. But we're on a very
Speaker 1: good track for that. And I think that in the
Speaker 1: context of a strong recovery UM and a good economic,
Speaker 1: very good economic outlook, then we can you know, we
Speaker 1: can adjust Monterey policy hopefully without any undo market um uh,
Speaker 1: you know, turmoil or things like that you just mentioned.
Speaker 1: President Williams might cast that question and already polite fashion,
Speaker 1: so I'll be a little bit more plund Does this
Speaker 1: housing market in America need the FED support? Well, you know,
Speaker 1: the obviously the housing market is one of the key drivers,
Speaker 1: along with consumer spending in business investment, of the strong
Speaker 1: growth UM. Now, my view is the monetary accommodation that
Speaker 1: we're providing, both in terms of little very low event
Speaker 1: funds rate and also our asset purchases is supporting overall
Speaker 1: financial conditions, really lowering the cost of um, you know,
Speaker 1: financing for households, for businesses in general. It's not you know,
Speaker 1: specifically targeted to you know, do the housing market UM
Speaker 1: in terms you know, My my view one this is
Speaker 1: we need to focus on our maximum employment and price
Speaker 1: stability goals and and as the economy um you know,
Speaker 1: makes this substantial, further progress on those goals, we can
Speaker 1: make decisions around adjusting asset purchases and and then further
Speaker 1: down the road in terms of our interest rates. So
Speaker 1: it's really my focus is on on those goals where
Speaker 1: it's not really about supporting or not supporting the housing
Speaker 1: market in particular. Just a little hint from you there
Speaker 1: on what your view might be when it does come
Speaker 1: the time to reduce asset purchases on the composition of
Speaker 1: that reduction, President is re biased to reduce say the
Speaker 1: purchase of mbs the treasuries or what I'm hearing from you,
Speaker 1: maybe not. Well, you know, those are the issues that
Speaker 1: we need to think about in terms of not only
Speaker 1: the timing of the adjustment of the of the purchase pace,
Speaker 1: but the timing over which that would happen, and also
Speaker 1: the composition of any adjustments that we, you know, we make.
Speaker 1: So those are issues that we need to analyze very careful,
Speaker 1: we um and think through in terms of again achieving
Speaker 1: or a maximum employment and price supportability. But you're talking
Speaker 1: about it right now because the chairman told us so,
Speaker 1: President Williams, from your standpoint, what is the optimal approach
Speaker 1: to that conversation? The optimal approach to the conversation around
Speaker 1: the asset purchases. Yeah, well I think we just you know,
Speaker 1: we do what we do, very are the best. We
Speaker 1: analyze all the data, analyze the options we have in
Speaker 1: front of us, and and really focus on the big
Speaker 1: picture of our the goals that we're trying to achieve,
Speaker 1: the progress for making on those, and how to best
Speaker 1: um set our policy, um, you know, instruments as we
Speaker 1: can to achieve those goals. Will forgive me for jumping
Speaker 1: in because you're too good at this. When it comes
Speaker 1: to the asset purchase program, do you view it as
Speaker 1: a hundred and twenty billion a month or a mix
Speaker 1: of purchases that needs to be reduced independent of one another.
Speaker 1: Would you hit focus on MBS of a treasuries treasury
Speaker 1: over MBS or do you just look at the whole
Speaker 1: package that needs to be reduced equally? What's the optimal
Speaker 1: approach to that? Oh? Yeah, so you know, I clearly
Speaker 1: see them the to supporting a comedy of financial conditions broadly.
Speaker 1: So that's that's how I think about thinking to your question, Now,
Speaker 1: can we do we have options in terms of adjusting them?
Speaker 1: Um in different ways? The different the purchases of nbs
Speaker 1: and and treasuries. Clearly we have options to do that.
Speaker 1: From my point of view, the main purpose of these
Speaker 1: is really to provide strong support for that kind of Well, John,
Speaker 1: if you do start the tapering process, do you go
Speaker 1: through tapering completely before you get to rate increases? Do
Speaker 1: you stop QUIE purchases altogether before you would consider raising rates? Well,
Speaker 1: mikecause you know, you know, last time, we we had
Speaker 1: a sequence of of UH decisions that were made around that.
Speaker 1: I think this time, you know, clearly we can UM.
Speaker 1: We've learned a lot from the experience of UH, the
Speaker 1: slowing of the asset purchases last time, and then eventually
Speaker 1: the normalization monetary policy. So those are lessons that I
Speaker 1: think are important to take. But you know, this time
Speaker 1: is very different to the economic of the recession, the recovery,
Speaker 1: or just very different from the global financial crisis because
Speaker 1: of the you know, the nature have been driven by
Speaker 1: the pandemic. So I think it's really important that we
Speaker 1: don't sit here and just think like what's going to
Speaker 1: happen necessarily a year or two years ahead and think
Speaker 1: through exactly all of those but really watch the data
Speaker 1: see how the economy evolves. And see how our policy
Speaker 1: you know, decisions can best support the achievement of our goals.
Speaker 1: So those are those are you know, issues that will
Speaker 1: obviously think about carefully, but also they're they're well off
Speaker 1: in the future, and we really should be based on
Speaker 1: how the economy is evolving rather than um, you know,
Speaker 1: kind of where where things are right now in June. Well,
Speaker 1: let's talk about the raising interest rates and your view
Speaker 1: on it. Where is your dot did you move it
Speaker 1: at the last meeting? Are you in two thousand twenty two,
Speaker 1: two thousand twenty three? And you're not going to be
Speaker 1: surprised by my answers. I'm not going to talk about
Speaker 1: my specific you know view. It's as the chair uh
Speaker 1: you know put uh you know has said on last
Speaker 1: week is um uh that you know, these are just
Speaker 1: projections based on a modal outlook. Each person comes into
Speaker 1: the meeting and has a view on that. And so
Speaker 1: you know, I don't think really right now that the
Speaker 1: key issue for the FMC is, you know, when when
Speaker 1: is the economy going to get to this point where
Speaker 1: we meet these um you know, these uh, these conditions
Speaker 1: that we've set out in the FMC statement about time
Speaker 1: for for the lift off of the funds rate, that's
Speaker 1: still a way off in the future right now. Really,
Speaker 1: I think the attention is on the on the table.
Speaker 1: In terms of my own views, my focus is really
Speaker 1: on the framework. Is our new policy framework introduced last
Speaker 1: year is I think positions is really well to deal
Speaker 1: with the situations that we're dealing with today and will
Speaker 1: over the next few years. And I think our FOMC
Speaker 1: guidance around the funds rate is is a very strong
Speaker 1: place to be. And that's you know, so when we
Speaker 1: get to that point where the economy is is meeting
Speaker 1: those um, you know, conditions we've laid out in the
Speaker 1: FROMC steam, you know, I think that's when we'll get
Speaker 1: to the discussion about whether the Fed funds right, Um,
Speaker 1: you know, what's the appropriate stance of the Fed funds right?
Speaker 1: That's still quite a waste off from today. Well, if
Speaker 1: you won't tell us where your dad is, let me
Speaker 1: ask it this way. You were quite bullish yesterday in
Speaker 1: your speech, and yet we're still quite a ways from
Speaker 1: substantial further progress. Are we getting to that substantial further
Speaker 1: progress more quickly than you thought? Does the economy's speed
Speaker 1: uh surprise you? And is the inflation number to you surprising, Well,
Speaker 1: let me start with the inflation. Clearly inflation, that recent
Speaker 1: inflation number has been very high. Um. That's and you
Speaker 1: know obviously get a lot of attention, uh from us
Speaker 1: and from everybody, and and really being we need to
Speaker 1: be very careful watching that data. See to what extent
Speaker 1: these are just you know, transitory temporary factors or or
Speaker 1: do they you know, still into underlying inflation over the
Speaker 1: next few years. So clearly inflation has moved up quite
Speaker 1: a bit. That's something that's um, you know, part of
Speaker 1: the picture. In terms of employment, you know, I do
Speaker 1: tend to go back to indicators like UM, the employment
Speaker 1: of population ratio UM and the unemployment rate and a
Speaker 1: lot of other indicators of the health of the labor market.
Speaker 1: And we have made you know, progress for sure since
Speaker 1: December of last year. But you know that progress is
Speaker 1: still I still don't think it's close to the substantial
Speaker 1: further progress that we set out on. And you know,
Speaker 1: really it's gonna you know, my views on this we
Speaker 1: depend on how the data evolve over you know, overcoming months.
Speaker 1: You know, see can the are we adding a large
Speaker 1: number of jobs? We see employment of population continue to
Speaker 1: move back up, and watching obviously all the other cares
Speaker 1: as well. So I'm really focused on employment because that's
Speaker 1: what our mandate is, and are we making really strong
Speaker 1: progress towards UH, the maximum employment goal that we have John.
Speaker 1: When it comes to the participation rate in the US
Speaker 1: labor market, do you have any conviction around what that
Speaker 1: looks like, how that progresses through the next twelve months.
Speaker 1: How unknown is that? Yeah, that's that's obviously a really
Speaker 1: hard quest. And UM participation changes for variety of reasons.
Speaker 1: We've seen a lot of churn in the labor market
Speaker 1: in the in the past few months, people exiting the
Speaker 1: labor market, coming in, you know, a lot happening with
Speaker 1: the reopening of the economy, UH and and all the
Speaker 1: events of the past year and a half of the pandemic.
Speaker 1: So I think right now it's hard to get a
Speaker 1: clear read on the underlying trends. I do tend to
Speaker 1: look at, you know, one category UM in the data,
Speaker 1: which is the employment of population for twenty five to
Speaker 1: fifty four year olds, which probably you know, more in
Speaker 1: the middle of people's careers. And you know, if you
Speaker 1: look back before the UM, you know, before the pandemic
Speaker 1: that was over eight percent, So I think that, you know,
Speaker 1: hopefully we can get back towards the number like that.
Speaker 1: But um, and you know, for the overall population, we
Speaker 1: have seen uh, some retirements from some older workers, where
Speaker 1: I think we have to carefully analyze that data to
Speaker 1: see if that's um, you know, shifted the trans somewhat
Speaker 1: in terms of lay before participation. So I think, you know,
Speaker 1: we have to just look at the data. Are employee
Speaker 1: analyze it, um, and you come to our best assessment
Speaker 1: of what you know, a maximum employment was. Now. One
Speaker 1: thing I just wanted to say is we had an
Speaker 1: unemployment rate of three and a half percent before the pandemic.
Speaker 1: We had very strong labor force participation UM. And I
Speaker 1: don't see any reason, um that our economy can't reattain
Speaker 1: a really strong labor market similar to that. It may
Speaker 1: be slightly different in terms of participation in some of
Speaker 1: the other issues, but it should still be an economy
Speaker 1: that is really a very strong one with maximum employment
Speaker 1: Indian with our two percentization. It coming forward from here,
Speaker 1: President Williams, as you know, you do get a lot
Speaker 1: of criticism over the current policy stance, and often the
Speaker 1: federal reserve will bring up the labor markets support the
Speaker 1: current policy stance. We had a story from the Wall
Speaker 1: Street Journal this morning on black Stone agreeing to buy
Speaker 1: a company that buys some rents single family homes and
Speaker 1: a six billion dollars deal. This is Wall Street competing
Speaker 1: with Main Street for single family homes. It's the Federal reserve.
Speaker 1: Part of the problem when it comes to this, Well,
Speaker 1: in know this we're doing, you know, conducting monetary policy,
Speaker 1: which is really just really about setting interest rates and
Speaker 1: supporting the strong economic recovery and our inflation goals. You know,
Speaker 1: there's always developments in the markets that um um, you know,
Speaker 1: or maybe they're affected somewhat by interest rates, but I
Speaker 1: think are really driven by other factors. And it just
Speaker 1: remind people to, you know, when we think about why
Speaker 1: interest rates are so low and maybe how people behaving
Speaker 1: around very low interest rates, I think, I keep part
Speaker 1: of this is is that this is a structural change
Speaker 1: in our the global economy. We have very low interest
Speaker 1: rates globally, not just because the FED is holding interest
Speaker 1: rates lower right now to support the recovery, which we're doing,
Speaker 1: but even once the economy is fully recovered, we've achieved
Speaker 1: our goals, the neutral or kind of longer run interest
Speaker 1: rate is still very low. So I think just when
Speaker 1: we watch, you know, kind of things like this, we
Speaker 1: have to keep in mind that part of low interest
Speaker 1: rates is is obviously the intentional by FED policy, but
Speaker 1: part of it is really a big part of the
Speaker 1: decline interests race over the past few decades is driven
Speaker 1: by more structural things like demographics and proctivity. Usage of
Speaker 1: the feds overnight reverse repo facility has surged to hit
Speaker 1: a record yesterday seven sixty five billion. Why isn't that
Speaker 1: a signal that there is too much cash in the
Speaker 1: markets and you don't need to add more. Well, the
Speaker 1: goal here is not to add cash to the markets.
Speaker 1: Markets is through uh you know, with our asset purchases,
Speaker 1: is to provide really strong um financial conditions to support
Speaker 1: economic growth. And effect of that is that um, you
Speaker 1: know that our purchases of assets, UM and other other
Speaker 1: developments tend have been pushing uh, you know, up the
Speaker 1: amount of reserves that would be in the banking system.
Speaker 1: Now we've we created the overnight reverse repo facility, which
Speaker 1: you just mentioned years ago, uh, specifically to make sure
Speaker 1: that interest rates are in the range that the FMC set.
Speaker 1: So the FMCS at a target range for the bed
Speaker 1: funds rate of zero tooint flap basis points, and it's
Speaker 1: you know, we want to make sure the interest rates
Speaker 1: stay well within that range and not all below it
Speaker 1: or not be above it. And so one of the
Speaker 1: ways that we do that is by through the overnight
Speaker 1: reverse repo putting a floor on on interest rates. So
Speaker 1: what we're seeing here is I think of the natural
Speaker 1: operation of of uh you know this UM kind of
Speaker 1: arrangements that we've set up to control interest rates. So
Speaker 1: you know, banks can hold reserves UH and do that. UM.
Speaker 1: We the FED UM and they offered you know, deposit
Speaker 1: rates and other services to their customers. UH. Customers look
Speaker 1: at what the banks are offering into terms and deposit rates.
Speaker 1: They also look at money market mutual funds and other
Speaker 1: investments and think about where is it best to park
Speaker 1: their cash. So we see a natural movement between these two.
Speaker 1: Especially with the large amount of reserves, we're seeing UH
Speaker 1: investors move finding the money market mutual fund UH, so UM,
Speaker 1: you know, option more advantageous, and so we're seeing a
Speaker 1: lot more money moving the overnight reverse repot facility. And
Speaker 1: that has shifted over time. That's exactly how the system
Speaker 1: is supposed to work. Interest rates well within the range,
Speaker 1: just as the FOMC wants, and we're not seeing any
Speaker 1: problems with market functioning or anything. It's it's working exactly
Speaker 1: it's assigned. And I'm not concerned about the large amount
Speaker 1: of overnight reverse reposess. That's exactly what you'd expect, even
Speaker 1: you know, conditions in money markets. So this is a
Speaker 1: I think a good sign. President Williams, You've been kind
Speaker 1: with your time and it's always try to catch up.
Speaker 1: We appreciate It's the President of the New York Fed,
Speaker 1: John Williams there alongside Mike McKay. It is the way
Speaker 1: it is gotten there. And of course this is all
Speaker 1: about the microeconomics and the underpinning of supply and demand.
Speaker 1: Someone expert on this and consistent in well written thought
Speaker 1: as Francisco blanche a Bank of America Securities head of
Speaker 1: Global Commodities and Derivative Research. I want to go right away,
Speaker 1: Francisco to what is less talked about, and that is
Speaker 1: a demand I MAC, what do you envision to be
Speaker 1: the demand dynamic that gets you to your acclaimed a
Speaker 1: hundred dollars of barrel. Hey Tom, Hey, thanks for having me.
Speaker 1: So three things are key here. First, there's a lot
Speaker 1: of pent up demand. We've all been looked up in
Speaker 1: our living rooms in my case, but really with very
Speaker 1: little movement, whether it's business or personal. There's a huge
Speaker 1: amount of pent up demand that we're already seeing in
Speaker 1: the US. The rest of the world's going to join soon.
Speaker 1: Europe is maybe a couple of months behind. An emerging
Speaker 1: markets are between six and folve months behind the US.
Speaker 1: They're the big laggers, but we think they're gonna come
Speaker 1: back in in a in a huge way over the
Speaker 1: next twelve months as vaccines get get distributed. Second reason,
Speaker 1: Tom is really around what what we what we call
Speaker 1: the avoidance of mass transit. People are gonna be using
Speaker 1: more private vehicles, avoid subways and buses for an excellent
Speaker 1: period of time. Third, recent really is what we call
Speaker 1: the new work from home or as we put it,
Speaker 1: work from a car situation. People are gonna be can
Speaker 1: remotely one or twodays a week in the future. Um,
Speaker 1: and that's going to lead to more driving, not less driving.
Speaker 1: In in our view again, and we're based in this
Speaker 1: opinion on on estimates pre pandemic and studies pre pandemic
Speaker 1: that suggested that one or two days of working home
Speaker 1: eventually leads to more no less driving. Those are the
Speaker 1: three main reasons on the man side. Town of course,
Speaker 1: on the flip side, when it comes to the demand picture,
Speaker 1: business travel not coming back as quickly, with a lot
Speaker 1: of companies saying that they are going to return to
Speaker 1: just small fractions of what they used to do. How
Speaker 1: much does that factor into your estimates? Well, so, business
Speaker 1: travels is a big factor for airlines, but let me
Speaker 1: just give you one data. Uh in average travel was
Speaker 1: roughly two point three million passengers per day going through
Speaker 1: p s A checkpoints. We are back at two million,
Speaker 1: and we still don't have any business travel going on.
Speaker 1: So clearly, I think the pent up demand story seems
Speaker 1: to me is going to overwhelm the business travel story,
Speaker 1: at least over the course of the next flo eighteen months.
Speaker 1: I'm not claiming I'm not claiming this will last forever,
Speaker 1: but I think I think there's there's gonna be a
Speaker 1: huge search here over over the next few quarters. On
Speaker 1: the flip side, the supply picture, we have this morning
Speaker 1: a story about how Russia is arguing potentially for an
Speaker 1: opaque plus supply increase, a boost based on this increase
Speaker 1: in demand. You're starting to hear about shale producers eyeing
Speaker 1: what it would look like to bring a little bit
Speaker 1: more production online. How much do you expect that to accelerate.
Speaker 1: How does that affect the hundred dollars a barrel call?
Speaker 1: So so it certainly does. Um My, my expectation with
Speaker 1: regards to shale is that we are going to be
Speaker 1: see We're gonna see producers lagging for the most part. Remember,
Speaker 1: there's three elements of this that on the nonopic side
Speaker 1: that are going to hold back supply. Number one is
Speaker 1: the fact that government policies are going to pressure companies
Speaker 1: to invest less right. We are seeing that with international
Speaker 1: and eng Agency coin for it and two oil and
Speaker 1: gas investments to meet partis colin of goals. Second reason
Speaker 1: is we are seeing investors pressuring companies, whether it's for
Speaker 1: financial reasons to see more more cash balls coming back
Speaker 1: or for e sd reasons to reduce investment. And the
Speaker 1: third element really is the jewiciary. We were now seen
Speaker 1: with the case of shell Um that the jewiciary can
Speaker 1: also get involved and force you legally to reduce your
Speaker 1: emissions with regards to OPEC, it is the big risk
Speaker 1: in our call. Does OPEC discipline hold? My guess it
Speaker 1: probably will. Remember we've only average sixty four doors barrel
Speaker 1: so part this year the average open budgets at seventies.
Speaker 1: So they just they want to make up for the
Speaker 1: lost last year in terms of in terms of ground, Francisco.
Speaker 1: As we speak, bitcoin bakes down, Brad. Maybe we've got
Speaker 1: an internet chart a bitcoin to help us out here.
Speaker 1: We've had people on Bloomberg talking up bitcoin. It's stability, Francisco.
Speaker 1: I want to cut to the chase, a grizzled pro
Speaker 1: like you. Is bitcoin linked to gold? Is there a
Speaker 1: compare and contrast, a correlation, a relationship a bitcoin to gold? Okay,
Speaker 1: so let me let me get to a chase. You know,
Speaker 1: I put a pretty pretty negative piece on bitcoin back
Speaker 1: in March entitled Bitcoins Dirty Little Secrets, where I argued
Speaker 1: that bitcoin had serious environmental issues and obviously there was
Speaker 1: a big new turning. Agrees with you, and China agrees
Speaker 1: with us too as well, of course, because they are
Speaker 1: burning a huge amount of call to produce those those
Speaker 1: bitcoin to mind those bitcoins. Um, this is my take
Speaker 1: on bitcoin. Bitcoin it was completely uncorrelated to other asset classes.
Speaker 1: It became more of a risk asset in the past
Speaker 1: love months. It was highly correlated to equities, to Mexican
Speaker 1: pay so to cover um and and gold is a
Speaker 1: safe asset. Is typically correlated to ten your treasuries to
Speaker 1: Japanese yend. So to your question, our bitcoin and and
Speaker 1: gold linked in a way. They are because one is
Speaker 1: a risk asset, it runs a safe asset, so so
Speaker 1: they're they're very different characteristics. Now, what is going to
Speaker 1: be the long run story for bitcoin, I don't know.
Speaker 1: What I know now is there's a risk asset and
Speaker 1: golds are safe. Fact Um and gold spin a safe
Speaker 1: facet for a very very long period of time. So
Speaker 1: I'm pretty confident gold stage a safe facet. Bitcoin could
Speaker 1: could keep changing, but for now they're inversely correlated, quite
Speaker 1: inversely correlated. Francisco, you make it such a such a
Speaker 1: good point, and I want to finish on this. You
Speaker 1: can have a risk on asset and a risk off asset,
Speaker 1: both in inflation re environment. So you can be risk
Speaker 1: on in an inflationary environment and it likes a bitcoin
Speaker 1: as well, and risk off in an inflation real environment
Speaker 1: and the likes of gold should do. What is that
Speaker 1: what you're saying, Francisco? Not not quite, I guess, not
Speaker 1: quite what I'm saying. And I'm not sure I see
Speaker 1: bitcoin as an inflationary asset. Okay, I think. I think
Speaker 1: bitcoin if you look at the correlations to five year
Speaker 1: five year forwards. If you look at correlation, then your inflation.
Speaker 1: You look at correlation CPI, there is not much there.
Speaker 1: I think. I think what bitcoins is good, uh work
Speaker 1: is this is creating a new ecosystem of value transfer.
Speaker 1: Um is creating a new a new economic organization based
Speaker 1: on the stakeholder economy as opposed to the shareholder economy
Speaker 1: that we have today. And again Bitcoin is the base
Speaker 1: of that, built on Ethereum, built on the rest of
Speaker 1: other coins that are coming behind it. That's what I
Speaker 1: think is ultimately going to shape up. It's it's basically
Speaker 1: communities of people that transfer value using the script occurrencies.
Speaker 1: Which is why the I R. S is so interested
Speaker 1: in taxing this because they realize there is a lot
Speaker 1: of economic activity, real economic activity, not just not just
Speaker 1: um criminal gangs. It's also a lot of people that
Speaker 1: are actually transferring with its uh you know, music or
Speaker 1: videos or anything they produced via the digital ass world.
Speaker 1: It's it's clarified, isn't it. Francisco, thank you sir. It's
Speaker 1: got to see it. A thank you sir from thank
Speaker 1: America right now. And this is a joy to bring
Speaker 1: a bigor chot of Deutsche Bank, their chief global strategist
Speaker 1: tons to talk about in a three hour conversation with
Speaker 1: making Out, we'll bring in a little tight and biking.
Speaker 1: I want to first shout out the invention of modern
Speaker 1: Deutsche Bank strategy and economics. You guys are on fire.
Speaker 1: David Folkers land Out is looking out three and four
Speaker 1: years to inflation. Your colleague George Sarah Ellis is near
Speaker 1: term maybe going the other way. Are you caught in
Speaker 1: the middle between dfl and Sarah Ellos? I think I
Speaker 1: wouldn't describe it as being caught in the middle. I mean,
Speaker 1: I think you know, if you take an issue like inflation,
Speaker 1: which we really haven't had for fifty years now, you
Speaker 1: know it's it's the most reasonable outcome is that reasonable
Speaker 1: people will have very different views. And uh, I think
Speaker 1: that's exactly where we are. We've got a baseline view
Speaker 1: that inflation is a risk, and just that a risk.
Speaker 1: But I think the risk, you know, the tails up
Speaker 1: pretty fat. And I think that's the key point. Thinking.
Speaker 1: We've had Wells Farnka on this morning, Federated on this morning,
Speaker 1: and when they are confronting the question whether you want
Speaker 1: to be long banks or big tech, they come to
Speaker 1: the banks, are you I'm I'm long the financials and
Speaker 1: and and and and the banks. I'm also long energy.
Speaker 1: I think, you know, one of the dynamics that one
Speaker 1: needs to keep in mind over the last eighteen months
Speaker 1: or so is that, you know, this is not a
Speaker 1: market that has, you know, except for the very early part,
Speaker 1: you know, trended very nicely. It's been a series of
Speaker 1: step functions. And so you know, when I look at
Speaker 1: the SMP five hundred, and I asked myself, what's not
Speaker 1: priced in and and and I would argue, you know,
Speaker 1: it's it's oil prices. I would argue, there's plenty of
Speaker 1: upside on you know, the global recovery continuing, especially if
Speaker 1: the dollar falls. Keep in mind that you know, you
Speaker 1: need three percent down on the trade really dollar to
Speaker 1: get ten percent in the oil prices. So I think
Speaker 1: it's very very reasonable that we will see eighty dollar
Speaker 1: oil by the end of the year. Uh and the
Speaker 1: other thing that's not priced in and that's completely out
Speaker 1: of whack or rates and and and so you want
Speaker 1: to be long basically the financials. Other than that, I
Speaker 1: would be pretty careful here, and I would say, you know,
Speaker 1: we continue basically to look for no a sizeable pullback,
Speaker 1: not the mini version that we had on Friday, uh
Speaker 1: and and and and you know that's gonna hurt both
Speaker 1: the financials and energy. But we can have independent moves
Speaker 1: oil prices and rates simply because of you know, where
Speaker 1: we are relative to where we can. Let's build on
Speaker 1: that banking you went on a tour of the asset classes.
Speaker 1: There can that banks call happen independent of what happens
Speaker 1: in right or is it dependent on what happens in rights?
Speaker 1: I think it is dependent on rates, because I mean,
Speaker 1: if you just look at the last eighteen months, financials
Speaker 1: have been trading, you know, very very closely with the
Speaker 1: US ten year yield uh and and and so the
Speaker 1: pullback is in the financial relative to the market is
Speaker 1: you know, very easily explained by simply what's happened to
Speaker 1: the ten year yield? Coming off, it's hots Binkie. At
Speaker 1: the core here, there is a tension between growth and inflation,
Speaker 1: two different things that are often conflated. And we're seeing
Speaker 1: inflation as you see oil prices heading towards eighty dollars
Speaker 1: of barrel at the end of the year, and we
Speaker 1: see it in certain commodities, which possibly is what China
Speaker 1: is responding to with selling from its strategic reserves of copper.
Speaker 1: But we're wondering how much this is asset price inflation,
Speaker 1: whether this is inflation of key goods that leads to
Speaker 1: SAG inflation, as your colleague George Saravellos seems to suggest.
Speaker 1: When do we have a sense of that, I would say,
Speaker 1: you know, stag inflation really has two parts to it,
Speaker 1: so the first being growth. I think the key issue
Speaker 1: and point here is that you know, growth generally peaks,
Speaker 1: uh you know, about a year into the recovery. That's
Speaker 1: kind of where we are. If you look at our
Speaker 1: House Economics forecast, if you look the Consensus Economics forecast,
Speaker 1: you know it growth rates a mental peak in the
Speaker 1: second quarter, and the stronger the second quarter is the
Speaker 1: more likely, uh, you know, the sharper the peak is
Speaker 1: going to be um and and I think that you know,
Speaker 1: there are always differences in every cycle. And and uh,
Speaker 1: you know, the market has so far sort of diminished
Speaker 1: the peak or you know, it's sort of ignored and
Speaker 1: shrugged off basically the peak growth thesis. Uh. And that's
Speaker 1: because you know, we have this big gap between goods
Speaker 1: and services right now. But I think anybody's investment thesis
Speaker 1: at this stage, you know, needs to confront a very
Speaker 1: simple chart. You have a retail sales growing for five
Speaker 1: years four percent trend rate. It's nominal, you know, purchases
Speaker 1: of goods and and and if you ask you know,
Speaker 1: where are we today? We are ten percentage points above
Speaker 1: the trend line. And that strongly argues for you know,
Speaker 1: not only slow or but very likely slow growth on
Speaker 1: the good side. So the big question is, you know
Speaker 1: what's going to happen on the services side, and and
Speaker 1: and and sure there will be an expansion, but services
Speaker 1: don't tend to go on the other side of the
Speaker 1: trend line. And so that on the whole, you know,
Speaker 1: basically argues for slow growth on the inflation side. You know,
Speaker 1: I would argue, you know, this summer, yes it is important,
Speaker 1: but remember that inflation, you know, generally lacks. So this
Speaker 1: problem is not going away. I mean, if you look
Speaker 1: at historically how inflations behaved relative to you know what
Speaker 1: people talk unemployment, the output gap, it's next year that's
Speaker 1: going to be the problem. The great missed call of
Speaker 1: the decade or two decades has been the certitude of
Speaker 1: single digit equity returns wrong, wrong, wrong, wrong sp X
Speaker 1: six per year for the last ten years. I think,
Speaker 1: are we going back to a single digit structure? I
Speaker 1: mean everyone's predicted it, yet you and the other optimists
Speaker 1: have said, no, you gotta play, you gotta be in
Speaker 1: the game. So so you know, I would keep in
Speaker 1: mind that total returns us in people. I heard it
Speaker 1: last hundred a years since you did bring it up.
Speaker 1: It's about eleven percent. It's a very very clear trend channel.
Speaker 1: And the gloom crew is saying it's single digit. Yeah,
Speaker 1: So I would say, given what's happened last year and
Speaker 1: this year, you know, I mean, we have brought forward
Speaker 1: some of that return, so single digits you know, next
Speaker 1: few years is not unreasonable. Thank you Channing in the
Speaker 1: studio from Deutsche Bank, the chief global strategist and it
Speaker 1: had joined us. Now equate her pants on one leg
Speaker 1: a tak you want to go there, right down, Anna,
Speaker 1: I'm going to keep things down a minute with markets.
Speaker 1: Let's get to the equity market. And there is anything
Speaker 1: about your rout look shifted in the last week. There
Speaker 1: has been some shifts, especially in the last week. What
Speaker 1: you did see is that more people on the FED
Speaker 1: are expecting a little bit of a sooner rate hike.
Speaker 1: But you know, that move, as much as it was
Speaker 1: a bit surprising, wasn't all that um mind blowing you
Speaker 1: saw go from to maybe a hike at two That
Speaker 1: probability distribution has been pulled forward in a time frame.
Speaker 1: But that's not the biggest move to us. I think
Speaker 1: more surprising in the market was hearing taper talk start.
Speaker 1: But you know when is tapering actually gonna begin? We
Speaker 1: don't think that's going to happen until the end of
Speaker 1: this year. And your note is brilliant. The way your
Speaker 1: dovetail g d P and is great. I've been I've
Speaker 1: been harpered on this for a week and a half.
Speaker 1: I'm putting my pants on one leg at a time,
Speaker 1: and I want you to tell me right now what
Speaker 1: your own power putting his pants on one leg at
Speaker 1: a time. What we do with eleven point three percent
Speaker 1: nominal GDP your new statistic up seven point three percent
Speaker 1: plus four percent inflation. I think that math is eleven
Speaker 1: point three percent, and that's a boom economy. Stocks go up. Yeah,
Speaker 1: when you looked historically, you know, equities can go higher
Speaker 1: even as rates are moving higher. Uh, And that's because
Speaker 1: it's the level at which they're coming off of. Where
Speaker 1: we're lifting off of mind, you look at where the
Speaker 1: tenure is. But with these kind of changes to our projection,
Speaker 1: the big driver there is going to be consumer expenditure.
Speaker 1: What maybe a risk to our outlook we're keeping a
Speaker 1: very close eye on, especially with upcoming earnings, is going
Speaker 1: to be how the supply chain and inventories hold up. Anna,
Speaker 1: you talked about the surprise of potential tapering. What would
Speaker 1: the implication be, what's the reaction of equities should the
Speaker 1: Feds start to taper their bond purchases sooner? Well, you know,
Speaker 1: they're buying a hundred twenty billion dollars a day, and
Speaker 1: I think rather than being a crutch at this point,
Speaker 1: it's just something like we've gotten so used to it,
Speaker 1: we've come dependent on it. Having that liquidity. As they
Speaker 1: taper that back, I think that risk appetite will be
Speaker 1: part back a bit. And that's natural when you have
Speaker 1: accommodation coming off the table. People are going to have
Speaker 1: to adjust their risk outlook and see what kind of
Speaker 1: cyclical exposure they want. But that doesn't mean necessarily it's
Speaker 1: time to head for defensives. In fact, the macro theme
Speaker 1: and play still remains reflation recovery here. It's just a
Speaker 1: bit of a little shift and it's different mentality than
Speaker 1: we saw from a year ago. So if you had
Speaker 1: to won one sector into year end and it would
Speaker 1: be financials or would it be big tech, I would
Speaker 1: go with financials. You know, the millennial in me still
Speaker 1: believes that tech has more upside to go. But you know,
Speaker 1: the out performer here, especially in the back of of
Speaker 1: this year, of the next six months, I put my
Speaker 1: money on banks and financials. How much is this a
Speaker 1: bit on a stepening yield curve? You know that steepening
Speaker 1: yield curve has been uh, you know, it's been a
Speaker 1: headwind for banks and financials in the last quarter. You
Speaker 1: saw what happens when the bat came down. You saw
Speaker 1: what happened last week when that yeeld curve has been flattening. Uh,
Speaker 1: and it can be a challenge, but I think that's
Speaker 1: something that the market is going to get through. I
Speaker 1: think that something that's going to see that trend returned
Speaker 1: to a Stephenie yield curve, especially as you see more
Speaker 1: data come out. But one of the things we got
Speaker 1: to watch out for as well is you know, how
Speaker 1: long is that inflation going to be marred or when
Speaker 1: can it continue? Can the supply chain really slow it
Speaker 1: down and keep that suppressed for the next several months.
Speaker 1: I think that's going to be a part of the market.
Speaker 1: We look as a signal for that, and I always
Speaker 1: great thank you and hand that at last. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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