WEBVTT - Surveillance: Fed's Inflation War With Dudley 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa A. Brawnowitz Jaily. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.360 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.520 dot Com, and of course on the Bloomberg terminal. Right now, 0:00:29.560 --> 0:00:32.640 a really important conversation for global Wall Street. We're gonna 0:00:32.680 --> 0:00:34.599 go geek on you and we want you to keep up. 0:00:35.200 --> 0:00:39.400 Robert Lucas invented my concept of expectations. The Giant from 0:00:39.479 --> 0:00:43.080 Chicago was one of my first interviews when I joined Bloomberg. 0:00:43.400 --> 0:00:48.159 Always controversial within economics. And William Dudley of Berkeley Goldman Saxon, 0:00:48.200 --> 0:00:50.919 of course, the former Fed President for New York, has 0:00:50.960 --> 0:00:54.480 driven the conversation this morning, making it clear this is 0:00:54.560 --> 0:00:59.120 a federal reserve system is fighting the last war. Let 0:00:59.200 --> 0:01:02.440 us go to the ornament. The economist Deshel Hammett, this 0:01:02.480 --> 0:01:06.040 is some Jeremy Rudd's controversial paper right now. This is 0:01:06.080 --> 0:01:09.920 the great detective author of another time in place. Nobody 0:01:09.959 --> 0:01:13.120 thinks clearly, no matter what they pretend, that's why people 0:01:13.200 --> 0:01:16.240 hang on so tight to their beliefs and opinions, because 0:01:16.280 --> 0:01:20.000 compared to the haphazard way they've arrived at it, even 0:01:20.000 --> 0:01:24.960 the goofiest opinions seems wonderfully clear, sane, and self evident. 0:01:25.200 --> 0:01:29.080 Bill Dudley. That's in Jeremy Rudd's paper on expectations is 0:01:29.160 --> 0:01:34.440 our belief in inflation? Expectations are belief in gaining the 0:01:34.560 --> 0:01:39.000 future through what people believe the future will believe. Is 0:01:39.040 --> 0:01:42.400 it over? I think the key question is how to 0:01:42.600 --> 0:01:46.960 households respond to high inflation. They revise up their expectations 0:01:47.000 --> 0:01:50.160 of inflation, and is that effect their behavior or are 0:01:50.160 --> 0:01:52.760 their threshold effects which Jeremy Rudd talks about, where in 0:01:52.800 --> 0:01:55.680 other words, they only react one's inflation and we just 0:01:55.760 --> 0:01:58.000 get to a certain level by actually starting to change 0:01:58.120 --> 0:02:00.800 where they are actually willing to, you know, switched it 0:02:00.840 --> 0:02:03.200 from one employer to another. I think Jeremy is raising 0:02:03.240 --> 0:02:06.440 some interesting questions about is our model of how inflation 0:02:06.520 --> 0:02:09.919 is generated correct or not? Built the essence of your 0:02:09.919 --> 0:02:12.160 pace this morning, I think it's been at the epicenter 0:02:12.200 --> 0:02:14.480 of your call for much of this year. You think 0:02:14.480 --> 0:02:16.440 the Federal Reserve is gonna be too late, and when 0:02:16.480 --> 0:02:18.720 they start, they're gonna have to move quickly. They're gonna 0:02:18.720 --> 0:02:21.320 have to move faster than people expect. What's the argument 0:02:21.360 --> 0:02:25.600 that underpins that, cold Bill Well, I think the issue 0:02:25.639 --> 0:02:28.320 is that the FED learned some lessons from the last crisis, 0:02:28.360 --> 0:02:31.840 but they don't really apply to the current recovery. Lessons 0:02:31.840 --> 0:02:34.160 from the last crisis, where it was that inflation we 0:02:34.200 --> 0:02:37.760 had trouble get pushing inflation back up to two uh. 0:02:37.800 --> 0:02:40.880 They thoughtful employment was at a higher level of the 0:02:40.919 --> 0:02:43.400 unemployer rate than it actually turned out to be. So 0:02:43.600 --> 0:02:46.000 they revised their mo entary policy framework and they said, well, 0:02:46.040 --> 0:02:48.560 we're really going to really work really hard to push 0:02:48.560 --> 0:02:50.720 inflation up, and we're gonna work really hard to push 0:02:50.760 --> 0:02:55.480 the unemployment down to level past full employment. Well that's 0:02:55.520 --> 0:02:58.120 great for that last cycle, but what about this cycle. 0:02:58.200 --> 0:03:01.680 We already have inflation above the offense target UM, and 0:03:01.760 --> 0:03:03.280 we have a lot of uncertain about how much slack 0:03:03.320 --> 0:03:04.799 there actually is in the libor market. So I think 0:03:04.800 --> 0:03:07.480 the risk is that they're fighting the last war. The 0:03:07.480 --> 0:03:10.320 problem isn't inflation too low, that the problem is inflation 0:03:10.360 --> 0:03:12.960 too high UM. And I think we also have all 0:03:12.960 --> 0:03:15.960 this all these questions about you know, how much slack 0:03:16.000 --> 0:03:17.560 do we actually have in the U S. Libor market. 0:03:17.760 --> 0:03:19.720 The one question is always hard, but what it's a 0:03:19.840 --> 0:03:22.240 question we have to ask, when do you think this 0:03:22.320 --> 0:03:25.239 Federal Reserve will realize come to a realization of what 0:03:25.600 --> 0:03:27.800 you believe, and what will lead them to have that 0:03:27.880 --> 0:03:32.040 read think well, I think the interesting question they have 0:03:32.280 --> 0:03:34.160 in the current set of projections is they have the 0:03:34.240 --> 0:03:37.160 unemployer right going below their view of what's maximum sustainable 0:03:37.160 --> 0:03:42.200 employment in two UH and staying there through if they 0:03:42.200 --> 0:03:45.760 have in their forecast inflation falling over that period, and 0:03:45.800 --> 0:03:47.920 they have the Fed not getting back even to a 0:03:47.960 --> 0:03:51.320 neutral monetary policy setting by the end of four So 0:03:51.360 --> 0:03:53.520 I think what they're going to realize is that if 0:03:53.640 --> 0:03:56.560 Monterrey policy is this easy for this long, at this 0:03:56.600 --> 0:03:58.880 type of a labor market, they're going to have more 0:03:58.880 --> 0:04:01.800 of an inflation consequince they have written what they've written 0:04:01.800 --> 0:04:05.720 down in their current set of projections. Bill, if you're right, faster, Bill, 0:04:05.760 --> 0:04:08.440 if you're right, why have we not seen more material 0:04:08.480 --> 0:04:11.520 wage pressure, wage increases that actually exceed the pace of 0:04:11.600 --> 0:04:16.159 consumer inflation more dramatically. I think it's still early days. 0:04:16.160 --> 0:04:18.640 I mean, we've just emerged from the pandemic over the 0:04:18.680 --> 0:04:21.120 last year, and the employment rates come down sharply over 0:04:21.120 --> 0:04:23.720 the over the last year. I think it's really too 0:04:23.720 --> 0:04:26.000 soon to say what's going to happen to wages. Uh, 0:04:26.000 --> 0:04:29.200 the Employment cost Index is the most reliable indicator on 0:04:29.279 --> 0:04:32.040 wages that only comes out once a quarters. So we're 0:04:32.040 --> 0:04:34.640 still looking, we're looking backwards. That's sort of old information. 0:04:35.160 --> 0:04:36.760 But you've made the argument, I have to get back 0:04:36.760 --> 0:04:39.200 to neutral more quickly. You've talked about the speed Let's 0:04:39.200 --> 0:04:41.200 talk about a speed limit. What is the speed limit? Now? 0:04:41.360 --> 0:04:43.359 How high can they go with the Fed funds right 0:04:43.400 --> 0:04:46.200 in an economy like this one. Well, I think they 0:04:46.240 --> 0:04:47.960 can go a lot faster than what they pencil in. 0:04:48.040 --> 0:04:50.000 I mean, if you look what people have reacted to 0:04:50.040 --> 0:04:52.560 the last from C Minute meeting as as the Fed 0:04:52.600 --> 0:04:54.559 being really hawkish. But if you look, if it takes 0:04:55.040 --> 0:04:57.320 three years to get to a median federal fund rate 0:04:57.360 --> 0:04:59.800 at one eight percent, that's not a very fast rate 0:04:59.839 --> 0:05:03.000 of obtaining. A comparison would be the two thousand four, 0:05:03.120 --> 0:05:06.080 two thousand sixth episode for the FED raised the fund 0:05:06.160 --> 0:05:09.719 raid a quarter point seventeen consecutive from meetings, taking the 0:05:09.720 --> 0:05:11.919 fund raid from one percent to five and the quarter percent, 0:05:13.480 --> 0:05:15.880 but it could be but it could be something a 0:05:15.880 --> 0:05:18.160 lot more than what they've got. Christ In, it's seventeen 0:05:18.200 --> 0:05:19.760 and it's not that extreme, Bill, But I'm just trying 0:05:19.760 --> 0:05:22.120 to understand whether this economy with this much deck can 0:05:22.320 --> 0:05:25.240 can take those kind of moves. Well, I think you're 0:05:25.400 --> 0:05:27.240 right that that they're not going to get all the 0:05:27.240 --> 0:05:29.640 way to probably five percent, because the economy will start 0:05:29.680 --> 0:05:32.720 to you know, react to that, to that burden. But 0:05:33.240 --> 0:05:35.200 it seems to me that it's reasonable to think that 0:05:35.200 --> 0:05:36.520 the fall Reserve is gonna have to get to a 0:05:36.600 --> 0:05:41.480 kpe montary policy setting before the end of belt. Great 0:05:41.480 --> 0:05:44.800 conversation and fantastic pace. Bloomberg column out this morning on 0:05:44.839 --> 0:05:47.360 Bloomberg dot Com and on the Bloomberg Terminal built Duntley 0:05:47.360 --> 0:05:49.560 There the Waterful built Downtley, formerly in the New York 0:05:49.560 --> 0:05:52.520 Fed and now Bloomberg opinion columnists and senior adviser to 0:05:52.640 --> 0:06:01.400 Bloomberg Economics, Christian Nelson, Jotscha Bank, Private Bank leve We'll see, Christian, 0:06:01.839 --> 0:06:04.760 what should these central banks do in the environment like 0:06:04.760 --> 0:06:08.000 the warm we're in right now? So I think very important. 0:06:08.080 --> 0:06:10.160 Right where the market is changing, it's not new that 0:06:10.200 --> 0:06:12.919 there is inflation coming in. We have always talked about 0:06:12.920 --> 0:06:16.800 base effect, but now, especially in Europe, gas prices really 0:06:16.800 --> 0:06:20.880 skywriting yesterday and today even more. I think there's really 0:06:20.920 --> 0:06:24.719 the scenario that there is this call its deflationary supply 0:06:24.839 --> 0:06:27.080 side chock. And of course you have the question what 0:06:27.120 --> 0:06:29.479 the center banks should be doing. And let's not forget 0:06:29.520 --> 0:06:31.760 you talked about the fat um here. The e c 0:06:31.839 --> 0:06:34.560 D is not having the goal of of really economic growth. 0:06:34.600 --> 0:06:37.440 It's just price stability, and that's why they are probably 0:06:37.480 --> 0:06:39.560 concerned about this if we stay at these levels or 0:06:39.600 --> 0:06:41.960 even go further up. But I think they are not 0:06:42.080 --> 0:06:45.040 in a situation to really increase rates as you would 0:06:45.080 --> 0:06:47.640 normally do. If you see your flationary pressures, they are 0:06:47.640 --> 0:06:50.280 still saying it's transitory. We are more in the camp 0:06:50.360 --> 0:06:52.559 that inflation will stay higher. And if you talk about 0:06:52.600 --> 0:06:55.400 fighting war was I agree, it's not the inflationary war 0:06:55.880 --> 0:06:59.000 is a bit more inflationary. However, that's not bad for 0:06:59.040 --> 0:07:01.200 the central banks if you get a bit more inflation. 0:07:01.279 --> 0:07:04.080 In the question though, is is it too fast now 0:07:04.080 --> 0:07:08.880 and they need to act? Christian is tapering tightening? I 0:07:08.920 --> 0:07:11.760 would say, of course it is yes, because you take 0:07:12.080 --> 0:07:14.600 let's say money you don't supply to the market, anymore. 0:07:15.200 --> 0:07:18.040 The question though, is what's the speed of tapering? Do 0:07:18.080 --> 0:07:20.320 you do you step by step or do it very fast? 0:07:20.400 --> 0:07:22.400 And the markets can react to that, and I think 0:07:22.720 --> 0:07:25.080 that's where the center branks are quite confident to get 0:07:25.120 --> 0:07:27.640 this done. So I would not conum. Let's say it's 0:07:27.680 --> 0:07:30.800 the same situation combined this with two thousand thirteen tape 0:07:30.800 --> 0:07:33.120 on tantrum. That's I think not the Christian you admire. 0:07:33.120 --> 0:07:37.000 With this weakness in the secuity market this morning, sorry 0:07:37.040 --> 0:07:39.200 say again you are buyer of the weakness we're seeing 0:07:39.240 --> 0:07:43.080 on the screens this morning in the secuity Yeah, cautious 0:07:43.080 --> 0:07:45.600 in the markets. We have been expecting a downturn and 0:07:45.640 --> 0:07:48.280 we don't think it's too too early now, so we 0:07:48.320 --> 0:07:50.320 are waiting a little bit too to go back into 0:07:50.320 --> 0:07:52.800 the markets. I would say if you look at the US, 0:07:52.840 --> 0:07:55.160 for example, I wouldn't be surprised if you see a 0:07:55.240 --> 0:07:57.240 setback to the two on a day moving average in 0:07:57.280 --> 0:08:00.160 the SNP. I wouldn't do that out because they are 0:08:00.320 --> 0:08:03.520 some some topics that could weigh on the market also 0:08:03.560 --> 0:08:05.120 in the next days and weeks. So you see the 0:08:05.240 --> 0:08:08.680 energy prices, gas prices in Europe, cold prices in China, 0:08:09.240 --> 0:08:12.960 so China GDP from becoming maybe even weaker than expected. 0:08:13.040 --> 0:08:16.119 You have the earning season to start where I would 0:08:16.120 --> 0:08:17.920 say the growth rate is not the same as we 0:08:18.000 --> 0:08:20.640 have seen before, and that's because they're both there. Don't 0:08:20.640 --> 0:08:22.680 get me wrong, but I think there will be some 0:08:22.800 --> 0:08:25.920 better opportunities throughout the next days and weeks. Christian were 0:08:25.960 --> 0:08:28.520 being buffeted by the temporary as you write in your 0:08:28.560 --> 0:08:32.839 important note recently, how do corporations in Europe, how do 0:08:32.960 --> 0:08:37.920 corporations in America? How do corporations in Asia adapt to 0:08:38.000 --> 0:08:43.679 the temporary six standard deviation shock of net gas? Well, 0:08:43.679 --> 0:08:46.439 the issue with gases with the companies is that they 0:08:46.480 --> 0:08:49.040 normally have to take contracts with their clients, so they 0:08:49.040 --> 0:08:52.160 cannot increase the prices as the incoming prices, and that's 0:08:52.160 --> 0:08:55.680 why their margin is drinking or even getting negative. And 0:08:55.720 --> 0:08:59.560 that's why some companies have been saying we are reducing output, 0:09:00.160 --> 0:09:02.360 and of course that's weighing on growth. And then you 0:09:02.400 --> 0:09:04.960 have an issue with with the growth in general, because 0:09:04.960 --> 0:09:08.520 everyone needs energy, and I think that's why it's so important. 0:09:08.520 --> 0:09:10.640 If it's going so fast, I would expect that this 0:09:10.800 --> 0:09:13.760 is the governments are saying, Okay, what can we do 0:09:13.880 --> 0:09:17.199 through this, do we take some actions on price cips. 0:09:17.200 --> 0:09:19.760 We've seen that already in Europe, in Spain, for example, 0:09:20.200 --> 0:09:22.720 the UK is obviously just nothing that, but also European 0:09:22.800 --> 0:09:25.440 Union with let me discussed that. Christine greed to catch up. 0:09:25.480 --> 0:09:28.319 What a morning for it, Christian Deutsche Bank, Private Bank, 0:09:28.360 --> 0:09:37.800 Globo see. I Oh, this is a joy. It's always 0:09:37.800 --> 0:09:40.160 a joy because she is what we try to do 0:09:40.200 --> 0:09:43.160 in America. I'm not gonna mince words, she started out, 0:09:43.320 --> 0:09:47.280 challenged overcame dyslexia, was picking up a phone at a 0:09:47.320 --> 0:09:50.360 real estate company and said, wait a minute, I can 0:09:50.400 --> 0:09:52.960 do this. This is the only voice I want to 0:09:53.000 --> 0:09:56.520 talk to on the insanity of real estate right now, 0:09:56.840 --> 0:09:59.040 Barbara Corker. And of course you order from Shark Tank, 0:09:59.120 --> 0:10:01.680 she joins us. Now, but Barbara, as you give the 0:10:01.720 --> 0:10:05.080 spirit the small business and all like you invented, I 0:10:05.120 --> 0:10:07.960 need to talk to you about the pricing of housing 0:10:08.320 --> 0:10:11.360 in America. I just looked up at Corcoran Group and 0:10:11.400 --> 0:10:15.000 I'm gonna pay thirty four thousand dollars on taxes on 0:10:15.080 --> 0:10:18.320 a piece in Brooklyn. How have we done this? How 0:10:18.320 --> 0:10:24.200 have we priced America out of real estate? Well, most 0:10:24.240 --> 0:10:26.760 people are priced out of the market here exactly right. 0:10:27.160 --> 0:10:31.400 The market has been going absolutely bonkers with no end 0:10:31.440 --> 0:10:35.240 in sight. No prices nationwide have gone up. I have 0:10:35.360 --> 0:10:38.079 never seen an increase like that in the thirty years. 0:10:38.080 --> 0:10:40.079 The last thirty years, I think it was the last time. 0:10:40.760 --> 0:10:42.920 No one could believe what's going on. In fact, if 0:10:42.960 --> 0:10:44.760 you want to buy a house, I don't know how 0:10:44.840 --> 0:10:48.160 you did on your purchase, but everything is being sold 0:10:48.160 --> 0:10:50.400 in bidding wars A six of the houses. I mean, 0:10:50.480 --> 0:10:53.560 people are so uncomfortable, and yet they keep paying the 0:10:53.600 --> 0:10:55.920 prices in this no end insight. Barbara, I looked at 0:10:55.960 --> 0:10:58.720 the meat, the regression rather of housing and oh four 0:10:58.880 --> 0:11:01.240 oh five, oh s X and you know what, we 0:11:01.440 --> 0:11:04.199 regress back to the mean you live that at Cork 0:11:04.360 --> 0:11:06.360 and group. Are we going to do the same thing 0:11:06.440 --> 0:11:09.839 this time I did? Are we going to do it again? No, 0:11:10.040 --> 0:11:13.160 it's not the same kind of a market. No, no, no, no, 0:11:13.240 --> 0:11:15.520 you know what you have it says, market is fueled 0:11:15.520 --> 0:11:18.520 by individual buyers who want a better place to live. 0:11:18.640 --> 0:11:21.000 They bring their businesses home, they want to raise their kids. 0:11:21.280 --> 0:11:24.319 When we had that drop off, it was fueled by investors, 0:11:24.360 --> 0:11:29.120 house flippers, poor mortgages that shouldn't have been a mortgage, 0:11:29.400 --> 0:11:31.800 mortgage companies that should have been lending money at the time. 0:11:32.080 --> 0:11:34.240 I mean, it was a it was a false market 0:11:34.280 --> 0:11:36.640 with a false bottom and it fell. We're not going 0:11:36.679 --> 0:11:39.120 to have that now. I'm just hoping that the price 0:11:39.240 --> 0:11:42.080 is cool down a bit, because, as you started to 0:11:42.160 --> 0:11:44.680 say just a minute ago, so many people are left 0:11:44.720 --> 0:11:46.920 out of the market. It just seems unfair. Just to 0:11:46.960 --> 0:11:49.360 have a house, you have to feel like you have 0:11:49.440 --> 0:11:52.400 to be a pro investor bidding up the prices. It's 0:11:52.440 --> 0:11:54.880 it's just insanity. I've never seen anything like it, Barba. 0:11:54.960 --> 0:11:57.840 This is for individuals, but it's also for small corporations, 0:11:57.880 --> 0:11:59.600 and I know you do speak with a lot of them. 0:11:59.600 --> 0:12:03.760 I'm one during how much this dampens their enthusiasm, their optimism, 0:12:03.760 --> 0:12:06.800 their willingness to hire, to expand. If the fixed costs 0:12:06.840 --> 0:12:11.800 are going up as quickly as they are. With the 0:12:11.840 --> 0:12:14.840 fixed costs going up for business, that's not always true, 0:12:14.920 --> 0:12:18.400 all right, Commercial rents are much lower than they were 0:12:18.640 --> 0:12:24.200 if you were talking about business. I'm assuming, right, yes, yeah, yeah, 0:12:24.240 --> 0:12:26.679 so that their fixed costs are actually lower. People are 0:12:26.720 --> 0:12:30.720 renting less space. People who have large floor plates in 0:12:31.080 --> 0:12:33.560 large ventro Politan areas are negotiating their way out of 0:12:33.559 --> 0:12:37.200 the leases, the subleasing, the space. Retail prices have come down. 0:12:37.640 --> 0:12:40.040 No one wants a large retail space anymore because it's 0:12:40.040 --> 0:12:42.840 a shop front versus holding all of the inventory. They 0:12:42.840 --> 0:12:45.440 don't do that anymore. They sell it online. So actually 0:12:45.480 --> 0:12:48.520 the cost of doing business has come down. And of 0:12:48.600 --> 0:12:52.960 course the problem, the main problem with all of business 0:12:53.080 --> 0:12:55.320 right now is finding the right people. That is the 0:12:55.400 --> 0:12:58.240 single largest challenge. Whether you own a restaurant or shoe 0:12:58.280 --> 0:13:01.920 shop or a giant corporate ration, hiring and finding and 0:13:02.120 --> 0:13:04.920 luring in the right people has been the biggest challenge. 0:13:05.000 --> 0:13:07.720 But Barbara, we have not seen the increase in wages 0:13:07.760 --> 0:13:09.960 that we would have expected given all of the labor 0:13:10.000 --> 0:13:12.480 market shortages that we hear about. In fact, it still 0:13:12.559 --> 0:13:16.080 lags behind the pace of inflation. Bill Dudley, formerly of 0:13:16.080 --> 0:13:17.440 the New York Fed, was just on the show and 0:13:17.480 --> 0:13:19.880 he was saying he thinks it will accelerate pretty dramatically 0:13:19.920 --> 0:13:23.400 in the near term. Do you see evidence from small 0:13:23.440 --> 0:13:26.720 business owners that they are willing to pay up that 0:13:26.880 --> 0:13:29.600 much more dramatically in the upcoming months that will lead 0:13:29.640 --> 0:13:33.839 to that kind of wage inflation. You know, if they 0:13:33.880 --> 0:13:36.360 had they're going to not have a choice. So far, 0:13:36.400 --> 0:13:38.880 they've had a choice. They've cut back on this staff. 0:13:39.120 --> 0:13:41.960 They intentionally cut back on their overhead. They got rid 0:13:42.000 --> 0:13:45.280 of everybody they really didn't want working for them. During 0:13:45.320 --> 0:13:48.400 the pandemic. I mean, all these companies slimmed down and 0:13:48.440 --> 0:13:51.040 got the house in order. Whether or not they're willing 0:13:51.080 --> 0:13:53.480 to pay a higher wage remains to be seen. But 0:13:53.600 --> 0:13:56.880 so far they are not people holding onto their profits 0:13:56.880 --> 0:13:59.040 and I'm very reluctant to let any of that money out. 0:14:00.240 --> 0:14:02.680 It's more I don't want to use the word selfish, 0:14:02.720 --> 0:14:04.920 but I would say, yes, people want to a little 0:14:04.920 --> 0:14:06.840 greed has set in, but they're gonna have to get 0:14:06.920 --> 0:14:10.480 They're gonna have to give something. Question you in support 0:14:10.520 --> 0:14:13.480 with A T and T are actually out there talking 0:14:13.520 --> 0:14:16.760 to real people. These are webinars and things like that 0:14:16.800 --> 0:14:21.280 where Barbara Corkrand Folks is talking to people about small businesses. 0:14:21.640 --> 0:14:23.440 Let me raise my hand in the back room of 0:14:23.480 --> 0:14:27.960 the zoom call, Barbara, could you do now what you did? Then? 0:14:32.400 --> 0:14:35.680 Yes I could, because you know what, the pandemic has 0:14:36.240 --> 0:14:38.720 proven that and that's what the purpose of the Business 0:14:38.800 --> 0:14:42.840 Unusual webinar series presented by A T and T actually is. 0:14:43.280 --> 0:14:46.320 We're trying to give people the tools they need to 0:14:46.480 --> 0:14:50.480 reinvent themselves with very little money in their hand. And 0:14:50.520 --> 0:14:56.000 today's market accommodates that everybody is rewriting their business plan, 0:14:56.400 --> 0:14:59.880 redoing the way they deliver their products to customers, reinvent 0:15:00.120 --> 0:15:03.680 how they could attract customers in And that's actually why 0:15:04.000 --> 0:15:06.000 A T and T decided to do the webinar series, 0:15:06.040 --> 0:15:07.800 because a lot of people don't know how to do that. 0:15:07.960 --> 0:15:10.120 I know how to do it. I know how people 0:15:10.160 --> 0:15:11.880 who could tell people how to do it. Barbara, I'm 0:15:11.880 --> 0:15:14.080 looking for four bedrooms upper East Side. See what you 0:15:14.080 --> 0:15:16.680 can do this afternoon, Barbara Corkrand, thank you so much 0:15:17.280 --> 0:15:22.960 with the a sublease on my place sub sub lease, 0:15:23.280 --> 0:15:32.480 Thank you so much. Barbara Corkin Serato, Japa joins US 0:15:32.520 --> 0:15:37.360 right now with Sucken Socigi General as a US rate strategist. Sobrata, 0:15:37.480 --> 0:15:40.080 it's an interesting movie here. Let's start with what has 0:15:40.200 --> 0:15:47.520 not happened? Why are yields not moving like net gas? Well, 0:15:47.560 --> 0:15:50.400 because of the fact that you know, we're a big 0:15:50.440 --> 0:15:53.840 market and we look at fundamentals um you know, and 0:15:54.360 --> 0:15:56.560 bond yields in general in the US have been some 0:15:56.640 --> 0:15:59.800 more you know, slow to react to what's happening on 0:15:59.840 --> 0:16:02.800 the commodity complex because it's not that big of an issue. 0:16:02.840 --> 0:16:05.520 I think that the specul moves in that gast especially 0:16:06.000 --> 0:16:09.480 are quite speculative, so I'm not sure that there should 0:16:09.480 --> 0:16:12.160 be a reaction in the bottom market from moves in 0:16:12.200 --> 0:16:16.600 that gas. But broadly speaking, I think higher oil prices 0:16:16.640 --> 0:16:20.920 and fears of inflation have been driving yields higher. Nothink 0:16:20.920 --> 0:16:22.680 that sort of trend is here to stay for the 0:16:22.680 --> 0:16:25.520 remainder of the year. Among others, Lisa Brandow's has really 0:16:25.560 --> 0:16:29.160 emphasized the paper out there in the insatiable demand for it. 0:16:29.600 --> 0:16:33.240 If I like yield at one point three five priced down, 0:16:33.360 --> 0:16:36.120 yield up, I gotta really like it at one point 0:16:36.160 --> 0:16:39.440 five five. Is there a huge thirst here to buy 0:16:39.480 --> 0:16:43.200 the dip in bonds. I think what you're going to 0:16:43.280 --> 0:16:46.000 see from investors is some level of caution given the 0:16:46.040 --> 0:16:48.720 fact that we've seen this sort of very sharp move 0:16:48.920 --> 0:16:51.400 from around one thirty prior to the f o MC 0:16:51.520 --> 0:16:54.480 meeting a couple of weeks ago to around one fifty five, 0:16:54.600 --> 0:16:57.160 and the momentum seems to be towards higher yields given 0:16:57.200 --> 0:17:00.240 headlines around inflation. I think what you're going to see 0:17:00.280 --> 0:17:03.800 over the next coming weeks is more cautious approach in 0:17:03.840 --> 0:17:05.800 the barn market. You know, you're not going to see 0:17:05.840 --> 0:17:08.800 deep buyers coming right away. They're going to need to 0:17:08.840 --> 0:17:11.760 see tenure yields stabilize. I would say between say one 0:17:11.800 --> 0:17:15.040 fifty and one seventy before they come in and start 0:17:15.080 --> 0:17:17.320 buying the market here. So I think over the new 0:17:17.480 --> 0:17:20.080 term they probably stay in the sidelines, especially heading into 0:17:20.200 --> 0:17:23.000 payrolls this weekend, and then beyond that I think that 0:17:23.040 --> 0:17:25.280 would be stabilized into a new range. Then you'll start 0:17:25.280 --> 0:17:27.639 seeing investors coming in and buying the depth. So Beno, 0:17:27.680 --> 0:17:30.800 many investors, many legends of the investment world are worried 0:17:30.800 --> 0:17:32.840 about this s word, and I want to discuss it 0:17:32.880 --> 0:17:34.280 with you. I think it's a difference between being an 0:17:34.320 --> 0:17:37.200 economist and looking at stagflation and saying the stack piece 0:17:37.200 --> 0:17:39.480 of this does not work. We just had anice M 0:17:39.520 --> 0:17:42.560 north of sixty grosser expected to have a four handle 0:17:42.600 --> 0:17:46.160 through next year. That's not stagflation. Market participants are looking 0:17:46.200 --> 0:17:49.760 at rady change and saying, look, gross decelerating and inflation 0:17:49.840 --> 0:17:53.360 expectations are still elevated, and maybe they might accelerate into 0:17:53.400 --> 0:17:55.440 a new year. I want to understand how a bond 0:17:55.440 --> 0:17:58.600 market behaves in that kind of environment of decelerating growth 0:17:58.840 --> 0:18:01.520 and persistently high and like what does that look like? 0:18:03.160 --> 0:18:06.680 So I think that inflation expectations should rise modesty, especially 0:18:06.720 --> 0:18:10.840 given where inflation expectations are in the UK or Europe. 0:18:10.880 --> 0:18:13.639 And this is not just a US phenomena. You're seeing 0:18:13.680 --> 0:18:17.840 global inflation expectations rise quite meaningfully. We actually did the 0:18:17.960 --> 0:18:21.439 chart comparing inflation expectations across different regions last week in 0:18:21.440 --> 0:18:24.840 our weekly and what you notice is that US tenure 0:18:24.840 --> 0:18:27.280 break evens, for instance, have been very much in a 0:18:27.480 --> 0:18:31.879 range and and sort of until yesterday they've kind of 0:18:31.880 --> 0:18:35.280 been hestited to break above two forties. So I think 0:18:35.280 --> 0:18:38.840 of inflation risks persist, you're going to see room for 0:18:39.320 --> 0:18:42.159 break evens to continue to rise from here on. But 0:18:42.280 --> 0:18:46.400 broadly speaking, I think that the fundamental picture is very supportive. 0:18:46.440 --> 0:18:49.320 Growth is quite strong. Um, you know, yes, we're seeing 0:18:49.320 --> 0:18:51.639 a revision revisions to growth in the third quarter, but 0:18:51.720 --> 0:18:56.320 that's just pushing out growth for into the the upcoming 0:18:56.400 --> 0:18:59.400 quarters as well as well into introllect here. So it's 0:18:59.400 --> 0:19:02.080 not growth that we're losing, it's just kind of getting postponed. 0:19:02.119 --> 0:19:05.400 There's no derailment, there's just a postponement if you will, 0:19:05.480 --> 0:19:08.159 on on growth. So in that sort of context, I 0:19:08.200 --> 0:19:11.320 think that you'll should continue to rise and entration expectations 0:19:11.520 --> 0:19:13.639 perhaps continue to rise as well, at least about with 0:19:13.640 --> 0:19:16.720 the classic em dilemma and AGAM. Central banker often confronts 0:19:17.119 --> 0:19:19.960 upside inflation risk, downside growth risk, and often they do 0:19:20.040 --> 0:19:23.000 one thing, they hike. I'm trying to understand what DM 0:19:23.160 --> 0:19:25.480 central banks are going to do through next year. Well, 0:19:25.520 --> 0:19:28.280 they have the patience, do you think the tolerance to 0:19:28.280 --> 0:19:32.400 sit this one through? I think they will. I think that, 0:19:32.520 --> 0:19:35.440 you know, like I think Fed Vice Hip Tarata said, 0:19:35.480 --> 0:19:38.400 they want to really see what the inflation prints are 0:19:38.520 --> 0:19:40.280 up to the end of the year and beyond to 0:19:40.359 --> 0:19:44.360 see if there's really a persistence of inflation. So they're 0:19:44.359 --> 0:19:47.840 not going to really rush into guiding the markets towards 0:19:47.920 --> 0:19:51.880 hiking or rate heights anytime soon. They're still focused on 0:19:52.000 --> 0:19:54.960 the taper announcement, which is probably going to come in November, 0:19:55.000 --> 0:19:58.440 regardless of what happens to the unemployment report on Friday. 0:19:58.760 --> 0:20:00.520 I think beyond that they're going to need to see 0:20:00.560 --> 0:20:05.000 some consistent pressure supply chain pressures, wage pressures before they 0:20:05.000 --> 0:20:07.199 start thinking about hiking. It's but what they're doing right 0:20:07.240 --> 0:20:10.280 now is setting up for the ability to be to 0:20:10.560 --> 0:20:13.280 raise rates in the second half of next year by 0:20:13.359 --> 0:20:16.000 finishing the tapering, perhaps by the middle of next year. 0:20:16.760 --> 0:20:18.840 They're going to be tapering bonds at a time when 0:20:18.840 --> 0:20:21.399 there is this market deceleration in growth. And I do 0:20:21.440 --> 0:20:24.160 want to circle back to this idea of the s word, 0:20:24.240 --> 0:20:27.920 the stag fit siflation debate. How high can yields get 0:20:28.200 --> 0:20:30.640 if we do experience an environment like that not later 0:20:30.680 --> 0:20:33.080 this year, but even next year as some of those 0:20:33.119 --> 0:20:35.840 bond purchases start to wear off, as we start to 0:20:35.840 --> 0:20:39.000 see a more normalized economy with the supply chain disruptions 0:20:39.080 --> 0:20:42.879 still in full force. So I think the tapering of 0:20:42.920 --> 0:20:47.240 acid purchases on margins should actually help push yields higher. 0:20:47.240 --> 0:20:49.400 If anything. I mean our forecast, we think the tenny 0:20:49.440 --> 0:20:51.960 years probably get to you know, two and a quarter 0:20:52.200 --> 0:20:55.040 by the by the third quarter of next year, so 0:20:55.080 --> 0:20:57.239 that's sort of the time frame that we're looking at 0:20:57.280 --> 0:21:00.639