Speaker 1: Welcome to the Bloomberg Surveillance Podcast. Hometom Keene along with
Speaker 1: Jonathan Ferroll and Lisa Brownwitz Jaylie, we bring you insight
Speaker 1: from the best and economics, finance, investment and international relations,
Speaker 1: Fine Bloomberg Surveillance and Apple podcast SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. We've got a
Speaker 1: fantastic guest joining us from Washington. Now. I'm pleased to
Speaker 1: say the former governor of Michigan, the current Secretary of
Speaker 1: Energy here in the United States, Jennifer Granham, joins us
Speaker 1: right now. Secretary, thank you very much for joining us
Speaker 1: this morning. I'm about to commit an interview sin so
Speaker 1: forgive me. I'm gonna start really really narrow on the
Speaker 1: oil reserves in the spr they're gonna be released as
Speaker 1: part of the pay for I didn't see in the
Speaker 1: White House release, And forgive me if you've done it subsequently,
Speaker 1: how much you're looking to raise from that? What is
Speaker 1: the number? Yeah, there's there wasn't a number in there,
Speaker 1: probably strategically because some of this still has to be negotiated.
Speaker 1: But no, that it's not selling off all of the
Speaker 1: strategic petroleum reserves. It is really it will be a
Speaker 1: limited sale to be able to meet the goal, which
Speaker 1: is too I mean, the president's goal was he did
Speaker 1: not want any of these paid force as you know,
Speaker 1: to raise taxes on those earning over under four hundred thousand.
Speaker 1: He didn't want to see UH tax on electric vehicles
Speaker 1: or gas tax. So this is one of several elements
Speaker 1: that were used as a paid for and again it's
Speaker 1: a limited sale. Sexty Groundhub. It was interesting that the
Speaker 1: Republicans put out a document circulated by Republican law micer
Speaker 1: Is that had the number six billion dollars in there
Speaker 1: the amount of money that they would raise from the
Speaker 1: set of emergency all reserves. As you say, of course,
Speaker 1: not the entirety a pultion off them. Is that number wrong.
Speaker 1: I'm not saying it's wrong. I'm just saying that that is.
Speaker 1: You know, this is a framework that was announced. Everything
Speaker 1: is set in stone, and it may you know, it
Speaker 1: may move a bit, but the bottom line is it
Speaker 1: is a limited sale. Secretary grind Home, how far does
Speaker 1: this deal get toward moving to an electric future? I'm
Speaker 1: talking about vehicles in particular, given the fact that there
Speaker 1: isn't necessarily provisions for taxes on gas, higher taxes on gas,
Speaker 1: and the provision for electric vehicle charging stations is just
Speaker 1: seven and a half billion dollars versus the call for
Speaker 1: a hundred and seventy four billion dollars of Biden originally
Speaker 1: had for electric vehicle initiatives. Yeah, I mean part of
Speaker 1: that one and seventy four was a big part of
Speaker 1: it was the point of sale tax uh, you know, incentives,
Speaker 1: point of sale incentives for the purchase of electric vehicles
Speaker 1: so that they are at the same level of as
Speaker 1: internal combustion vehicles. And that's something that the President will
Speaker 1: still fight for in the second part of the two
Speaker 1: step dance that is being done, Um, the first part
Speaker 1: being the bipartisan part and the second part being reckon insciliation,
Speaker 1: which I'm sure your viewers know is the is the
Speaker 1: budget reconciliation process, and that in that part he's going
Speaker 1: to fight for a lot of the climate related measures
Speaker 1: that he put forth in the American Jobs Plan, as
Speaker 1: well as the measures in the American Families Plan, which
Speaker 1: involves you know, preschool, it involves two years of free
Speaker 1: community college, it involves the care economy. So this first
Speaker 1: step important, uh, and important I'll say this in terms
Speaker 1: of electrifying the futures, that we have a strong transmission grid.
Speaker 1: And you you saw that there was seventy four billion
Speaker 1: dollars UH in the power sector. Good chunk of that
Speaker 1: for expanding the capacity. The resiliency of the transmission grid
Speaker 1: hugely important for electrifying. Secretary, are you disappointed by the
Speaker 1: fact that there wasn't more momentum behind some of these
Speaker 1: initiatives that would push the United States further toward some
Speaker 1: of the clean energy goals. I'm I'm not surprised that
Speaker 1: this first package, this first framework doesn't include a lot
Speaker 1: of that, because there have there's you know, it's been
Speaker 1: um difficult to get a lot of tax incentives behind
Speaker 1: clean energy from the Republicans, but there's a lot of
Speaker 1: Republicans who are benefiting from it as well. And so
Speaker 1: in the second package, as the President mentioned yesterday, he's
Speaker 1: going to continue to fight for those climate measures, including
Speaker 1: a clean energy standards. So the bottom line is this
Speaker 1: is just one step, but we gotta take the second
Speaker 1: step as well to get the President's full agenda through
Speaker 1: some of the items as well that we're looking at.
Speaker 1: And I hearkened back on some of my Muni days, uh,
Speaker 1: Miss Secretary about fixing bridges. I mean, of course we
Speaker 1: talked about the electrification of buses, but it's more than that.
Speaker 1: It's updating the airports, it's fixing waterways, it's it's beyond
Speaker 1: just the size and scope of an electrification. Are those
Speaker 1: two though, enough of a green energy for you? Well,
Speaker 1: it's certainly. I mean, this is and historic investment in water.
Speaker 1: So what they're gonna do is make sure that every
Speaker 1: home in America has pipes that are safe to drink from,
Speaker 1: so that there's not lead in the pipes and so
Speaker 1: children are not poison every home, that every home in
Speaker 1: America has access to high speed internet. It's in a
Speaker 1: historic investment in rail, it's an historic investment in transit,
Speaker 1: as you suggest, and of course it's an historic investment
Speaker 1: in the transmission grid. So all of those pieces are
Speaker 1: very important for America's future, and frankly, all of them
Speaker 1: are pieces that the public, whether they're Democrats are Republicans,
Speaker 1: overwhelmingly support because who you know, who cares whether you're
Speaker 1: a Democrat or Republican. You want to have water that's
Speaker 1: safe to drink. Can we also just talk quickly about
Speaker 1: the grid. What you can do from a national level.
Speaker 1: We're coming off of Texas that we just saw. I'm
Speaker 1: from California. The power goes out in the summer every afternoon.
Speaker 1: You have to unplug your appliances. You try to go
Speaker 1: to dinner and they say, we're out of power. Too bad.
Speaker 1: What can we do on a national level to make
Speaker 1: sure that we are shifting to being more climate friendly
Speaker 1: but also maintaining reliability really important question. So what we
Speaker 1: need to do is to add capacity to the transmission
Speaker 1: to grid grid to bring the clean energy that's being
Speaker 1: generated in the states that have a lot of wind
Speaker 1: and solar to the places that have load centers which
Speaker 1: are using a lot of electricity. We have to make
Speaker 1: sure that we do what the Department of Energy is doing,
Speaker 1: which is investing in the research that allows for expanded
Speaker 1: significant storage movement on energy storage so that we can
Speaker 1: use these clean energy assets. Seven. But the President also
Speaker 1: wants to see an investment, for example, in keeping the
Speaker 1: nuclear plants that we have online open, or investment in
Speaker 1: next generation nuclear which is baseload clean power, investment in
Speaker 1: geo thermal which is baseload clean power, investment, investments in
Speaker 1: hydro power, which is baseload clean power. All of at
Speaker 1: has to happen. Not all of that was included in
Speaker 1: this first piece, but um, we're going to fight to
Speaker 1: make sure that all of that is included in the
Speaker 1: second bit of legislation that we hope will arrive at
Speaker 1: the President's desk this summer. We're speaking with Jennifer Grandholme,
Speaker 1: U S Secretary of Energy and Secretary Grandholme, there's a
Speaker 1: question about the shale producers here. Even as we try
Speaker 1: to talk about a transition to clean energy. Shell producers
Speaker 1: have been behind a huge surge and economic activity for
Speaker 1: the United States, a huge concept of US oil independence.
Speaker 1: And now we've seen shale production fall up substantially during
Speaker 1: the pandemic and not really come back as much, no
Speaker 1: longer thought of as the swing producers. How important is
Speaker 1: it in your view to get that production back up
Speaker 1: and running at the capacity that it has versus the
Speaker 1: discipline that we're hearing out of the CEO is from
Speaker 1: a lot of these companies. Well, I think this is
Speaker 1: a really important question because the world, as you know,
Speaker 1: is moving to clean electricity, clean power, and and um
Speaker 1: natural gas an important baseload fuel has some problems with
Speaker 1: clean I mean, it is cleaner than coals, certainly, but
Speaker 1: it has methane emissions, which is a very potent greenhouse gas.
Speaker 1: It's got it's got CEO two emissions. What's so, what's
Speaker 1: interesting is in the framework that was announced yesterday there
Speaker 1: are demonstration significant amount of money for demonstration projects in
Speaker 1: what is known as carbon capture and sequestration which could
Speaker 1: be used to to decarbonize the fossil fuel sector. And
Speaker 1: that to me is another very important technological step and
Speaker 1: step that helps our climate goals UH. And and it's
Speaker 1: technology that can be used here but also helped around
Speaker 1: the world to decarbonize and everybody get to the goal
Speaker 1: that all these countries have signed onto, which is at
Speaker 1: the Paris Agreement, that we get to that zero carbon
Speaker 1: emissions by I think that will help. Those kind of
Speaker 1: technologies will help for this UH, for the oil gas sector,
Speaker 1: the gas sector in particular, to be able to ramp
Speaker 1: up production but in a way that is clean. Government
Speaker 1: just quickly just around on this interview. What's the future.
Speaker 1: What's the role of the SPR in this administration? It's
Speaker 1: a it's an emergency stockpile essentially in the in case
Speaker 1: of in case we have obviously it was something that
Speaker 1: was that was generated in particularly important during like the
Speaker 1: the oil embargo and you know the OPEC crisis. We
Speaker 1: have this, We have this as an important, important measure
Speaker 1: in case there is UM shortages, in case we need
Speaker 1: to have it, and so we're going to keep it.
Speaker 1: And in fact it's in it's underneath the Department of
Speaker 1: Energy and we're putting it uh into a section of
Speaker 1: the Department of Energy that responds to emergencies. So what
Speaker 1: is it being used to rice money if there's an
Speaker 1: emergency every year? I'm telling this is not new. This
Speaker 1: is not a new understand that you can do get
Speaker 1: a release, but to raise money to pay for an
Speaker 1: intrastructure plan. That feels honestly, every year Congress uses it
Speaker 1: for some to pay for something or another that may
Speaker 1: not be related to the reserve itself. So the reserve
Speaker 1: will be will be solid. We've got lots in the reserve,
Speaker 1: it will continue to be UM. It will continue to
Speaker 1: be there for the purposes for which it was intended.
Speaker 1: But it also has this mechanism that it's being Some
Speaker 1: of it gets sold off every year for other reasons
Speaker 1: that Congress wants to fund and this is one of
Speaker 1: those occasions. Apparently, Secretary Fantastic to catch up. Secretary of Energy,
Speaker 1: Jennifer granhow, thank you. Let's continue this thing. We can
Speaker 1: do that with Republican Congressman French Hill of Arkansas. Congressman
Speaker 1: fantastic to get you on the program with us. Can
Speaker 1: we just start with the infrastructure plan just briefly. If
Speaker 1: you make looking at these numbers, you would think that'd
Speaker 1: be a big reaction here in the bond market, and
Speaker 1: we don't have one. So I want to understand from
Speaker 1: your perspective what you've heard in the last twenty four hours,
Speaker 1: what you think can actually be passed down on Capitol
Speaker 1: Hill in d C. I think the moderate Democrats and
Speaker 1: the Republicans in the Senate have been sort of thrown
Speaker 1: under the transit bus by their proposed compromise because immediately
Speaker 1: upon reaching a constructive bipartisan agreement with the President, Nancy
Speaker 1: Pelosi and Chuck Schumer said, well, we won't support this
Speaker 1: at all until we raise taxes on working people in
Speaker 1: business and pass our Green New Deal and other American
Speaker 1: family priorities through budget reconciliation. So, once again, I think
Speaker 1: President Joe Biden is a prisoner of the left wing
Speaker 1: of the Democratic Party here in Washington. So just quickly, Congressman,
Speaker 1: just to jump back in what was agreed yesterday, dead
Speaker 1: on arrival already. Well, the House Republicans proposed a four
Speaker 1: d billion dollar service transportation bill with a pilot program
Speaker 1: to have a vehicle's taxed on miles as opposed to
Speaker 1: the gas tax, which I think is a constructive approach.
Speaker 1: House Democrats are going to move a bill next week
Speaker 1: that's basically the Green New Deal priorities of about five
Speaker 1: and seventy billion, So it's not dead on arrival, but
Speaker 1: I wouldn't say that it's being acclaimed on both sides
Speaker 1: of the aisle and that it's not done remotely yet. Congressman,
Speaker 1: what would you be okay with when it comes to
Speaker 1: reconciliation in tandem with his bipartisan deal, Well, we need
Speaker 1: targeted spending and we need to get back to spending
Speaker 1: priorities instead of proposing to spend six trillion dollars and
Speaker 1: increase the size of the federal government way up over
Speaker 1: our gross domestic economy. We need to not raise taxes
Speaker 1: on workers and on businesses as we try to come
Speaker 1: out of the pandemic and get people back to work.
Speaker 1: So at least it's really a subject of not only
Speaker 1: the amount of money, but the target and the priorities,
Speaker 1: and that remains to be seen with the Democrats will
Speaker 1: propose in the Senate and propose in the House. So, Congressman,
Speaker 1: if there are no tax hikes attached to this or
Speaker 1: to minimus ones, ones that are more palatable to you,
Speaker 1: you would be willing to support a multi trillion dollar package,
Speaker 1: or at least not push back and vote on the
Speaker 1: bipartisan bill and allow the reconciliation to go forward. I
Speaker 1: don't think that's the way it's gonna go. Lest I
Speaker 1: think you're gonna try to have an infrastructure vote, but
Speaker 1: Nancy Pelosi and Chuck Schumer are not going to bring
Speaker 1: that infrastructure compromise approach to a vote until they get
Speaker 1: a vote on their reconciliation packed, which is a multi
Speaker 1: trillion dollar package with tax increases. That's what the Democrats
Speaker 1: in the House and the Democrats in the Senate are
Speaker 1: demanding of Chuck Schumer and of Nancy Pelosi. So I
Speaker 1: think it's premature to say, well, what does the final
Speaker 1: package look like? Does this sort of two route approach
Speaker 1: is that the way to be going well normally, No
Speaker 1: I thought, what job my Joe Mansion thought he was
Speaker 1: doing with Susan Collins and others was coming up with
Speaker 1: a way to get a bipartisan infrastructure package which with
Speaker 1: as much paying pay for from previously appropriated funding as possible,
Speaker 1: and get that passed in a clean way on a
Speaker 1: bipartisan basis in both Houses of Congress. And clearly yesterday
Speaker 1: uh Nan to Pelosi and Chuck Schumer through a wrench
Speaker 1: in that plan. Senator or Congressman, I should say, you're
Speaker 1: also ranking member as we see here on the National Security,
Speaker 1: International Development, and Monetary Policy Subcommittee. When we think about
Speaker 1: the grid as being a national security issue, are we
Speaker 1: doing enough to really meet both requirements making the grid reliable,
Speaker 1: transitioning perhaps two more of a green energy friendly but
Speaker 1: it has to be protected as well from a national
Speaker 1: security perspective. Is there enough in this bill to do
Speaker 1: all of those well, that's been an ongoing priority on
Speaker 1: a Bick Parson basis in Congress. And we have two
Speaker 1: of the power control powering sharing a company's headquartered in
Speaker 1: Little Rock, Arkansas and mad District Southwest Power Pool and MISO,
Speaker 1: and in both instances they have a Reliability Transfer Authority
Speaker 1: for power across this country that includes a strong cyber
Speaker 1: protection and grid resiliency initiative, and I've met with those
Speaker 1: companies and many utilities on it. So the private sector
Speaker 1: works on this every single day, and where the government
Speaker 1: can make strategic investments, I think you'd find bipartisan support.
Speaker 1: As to the amount, that's not something I can comment
Speaker 1: on today because I haven't studied their proposal, and we
Speaker 1: will make sure to ask you as well. Another question,
Speaker 1: because we're coming off of a bank conversation that we
Speaker 1: just had. Of course, the bank's coming out and passing,
Speaker 1: of course all of those stress tests, can you confirm
Speaker 1: that you don't see systemic risk, that the banks passing
Speaker 1: those stress tests are indeed a positive thing, returning that
Speaker 1: capital to shareholders. I think the bank's financial strength through
Speaker 1: the pandemic has been one of the bright spots that
Speaker 1: gives us the strength for the economy to know that
Speaker 1: we can get people back to work and have GDP
Speaker 1: grow between six and eight percent this year. So I
Speaker 1: think that Flying Colors pass of the stress tests indicates
Speaker 1: our economy is open and ready for business, and I
Speaker 1: look forward to the results of that by moral more
Speaker 1: Americans getting back to a full time job. Congressman, just
Speaker 1: before I let you go, I just want to finish
Speaker 1: on that the usefulness of stress test if we never
Speaker 1: allow the banks to face stress again, and the Federal
Speaker 1: Reserve is cleaning seemingly pretty intent on never allowing that
Speaker 1: to happen. Last year fantastic example of that. The banks
Speaker 1: didn't get into the stress and maybe that's a good thing.
Speaker 1: I don't know, but I want you to tell me
Speaker 1: what's the value of a stress test if this Federal
Speaker 1: Reserve is how bent on these banks never facing stress again. Well,
Speaker 1: I don't agree with zero interest rates that the Fed
Speaker 1: has proposed, and I don't think they should continue at
Speaker 1: the rate of a twenty billion dollars a month. Those
Speaker 1: benefit uh the economy and the short run during the pandemic,
Speaker 1: but it's time, with an eight percent projected growth rate
Speaker 1: to move away from that. But they have a primary
Speaker 1: obligation to regulate our banks and make sure they have
Speaker 1: the capital to operate a safe and sound environment. And
Speaker 1: that's what's been done, and it's been a big change
Speaker 1: from the O eight oh nine crisis, and that's why
Speaker 1: you saw so many street firms convert to a commercial
Speaker 1: bank charter so it could build the capital and the
Speaker 1: resiliency necessary if there was an economic downturn. Congressman, always smile,
Speaker 1: always shop, and it's going to catch up, sir, come
Speaker 1: back soon, Republican Congressman French Hill of Arkansas, Thank you, sir.
Speaker 1: Perfect guests, the man himself might mayor wilst Fargo Securities
Speaker 1: US Large Camp Bank Research Managing director Joy just now
Speaker 1: to discuss Michael. Let's start here. After the closed Monday,
Speaker 1: we could get some big capital return plans. What are
Speaker 1: the numbers that you're looking for, sir? Well, wow, this
Speaker 1: was the FED stress test, and it used to be
Speaker 1: the Super Bowl banking and now it's like a preseason game.
Speaker 1: It was. It was boring, but you know what, boring
Speaker 1: is beautiful for banks. The FED through the kitchen sink
Speaker 1: at the banks with the stress test. The banks passed
Speaker 1: with blind colors. As you mentioned, Monday at four thirty pm,
Speaker 1: we expect a flurry of press releases that announces increases
Speaker 1: and divid it ends and buy backs, and we ultimately
Speaker 1: expect capital return to double versus the prior year and
Speaker 1: that should lead to a and all in yields. That
Speaker 1: the dividend yield plus buy backs, that's better than what
Speaker 1: it is for even junk bots. So there's a lot
Speaker 1: of value with banks and we think that will draw
Speaker 1: in new investors, quants, dived in funds, given in growth
Speaker 1: funds to Ultimately, what this means is redemption for the banks.
Speaker 1: Remember during the pandemic, banks were going to fail, they
Speaker 1: were going to cut the dividends. Now you have dividend
Speaker 1: increases and a bevy of banks with buy back increases
Speaker 1: after Monday. So this is very good news for banks
Speaker 1: and I would say thank you regulators after the global
Speaker 1: pral work and now banks and their investors should be
Speaker 1: able to reap the benefits. So, Mike, why are we
Speaker 1: not saying more of a reaction in markets. You know,
Speaker 1: people have been skeptical about banks the past year. As
Speaker 1: you know, we upgraded a few of the large banks
Speaker 1: in the middle of the crisis. They didn't trust the
Speaker 1: resiliency of the banks, right they It was kind of
Speaker 1: the memories from the global financial crisis. It was still
Speaker 1: front and center and it's like, okay, if something goes wrong,
Speaker 1: banks are going to get hurt, and that was the
Speaker 1: farthest from the truth. If anything, you know, the more
Speaker 1: of the risk that's been outside of the banking industry.
Speaker 1: So just like there's been skepticism too much over the
Speaker 1: past year, there's still skepticism. But connect the dots. I mean,
Speaker 1: banks past the FED stress test Monday at four thirty pm,
Speaker 1: you get the announcements, then you get the increases. Hold
Speaker 1: on a second, I'm sorry. I don't think I hear
Speaker 1: from a lot of people that they're worried about some
Speaker 1: sort of systemic risk from the banks. I hear the
Speaker 1: fact that the field curve is flattening if this has
Speaker 1: been priced in. I mean, are you saying that it's
Speaker 1: not that the people are still worried about systemic risk. No,
Speaker 1: I think that's past. That's what happened in the last
Speaker 1: six to twelve months. But now people are like, oh,
Speaker 1: we don't really we know the dividends are coming, but
Speaker 1: we don't really care that much. But I think they
Speaker 1: should care because if you look at the the dividend
Speaker 1: yield adjusted for buybacks should be about eight percent compared
Speaker 1: to the tenure yield of under two percent. That gap
Speaker 1: is one of the widest in history. Where can you
Speaker 1: get an eight percent yield globally? And in fact that's
Speaker 1: three bases points above the junk bond yield. So I
Speaker 1: think people are just cynical and skeptical about the sustainability
Speaker 1: of banks cap returns, the sustainability of earnings. At least
Speaker 1: you raise a great point. The flatter yield curve is
Speaker 1: on people's minds. But look what just happened last week.
Speaker 1: The Fed said now it's likely to have two increases
Speaker 1: in the Fed funds rate in three and banks benefit
Speaker 1: twice as much from increases in short term rates as
Speaker 1: they do from increases in long term rates. Mike, you're
Speaker 1: famous for your calls coming on the program and saying
Speaker 1: banks aren't financials, Banks are just tech companies. Despite all
Speaker 1: of the buy backs and dividends, are they investing enough
Speaker 1: to keep up with big tech? Well, the largest banks
Speaker 1: certainly are. I mean, some of the best fintech players
Speaker 1: on the planet are Bank of America and JP Morgan.
Speaker 1: You have tens of millions of customers, and this is
Speaker 1: going from digital interactions to digital relationships. They're not just
Speaker 1: touching customers through one point, but through multiple points, and
Speaker 1: they continue to invest and they continue to gain customers.
Speaker 1: And both Bank America, which is our number one pick,
Speaker 1: and JP Morgan grew deposits over the past year equal
Speaker 1: to the sixth largest bank, and that was organic growth
Speaker 1: and a lot of that is aided through digital banking.
Speaker 1: And Mike gotta run apologize for my colleague Lisa Brownwitz
Speaker 1: joking Lisa las Fagger Securities US Large Camp Bank Research, Moneatil. Right,
Speaker 1: let's hit this stanks and right now we're torsting. Slock Cobler,
Speaker 1: Global Management, Chief Economy is tosting, just pouring through the
Speaker 1: days of this morning the recent economy dactors. Well, what's
Speaker 1: your take, sir? So there are two very important components here.
Speaker 1: Of course, the first thing to watch this inflation core
Speaker 1: PC inflation was exactly as the consensus expected three point four.
Speaker 1: So that means, of course that we do see inflation
Speaker 1: higher and that is just confirming what we saw. Remember,
Speaker 1: we've got the CPI numbers already, so that means that
Speaker 1: we already knowing that this month was indeed a very
Speaker 1: elevated level of inflation. The second thing is what Lesa
Speaker 1: just mentioned, this shift away from goods to services to
Speaker 1: what extent that we're seeing people go back on airplanes,
Speaker 1: they at hotels, go to restaurants. The service part of
Speaker 1: the economy needs to come back, and that is exactly
Speaker 1: what we're seeing in the data and what we've been
Speaker 1: seeing a lot of the high frequency indicators. More people
Speaker 1: are flying on airplanes, more people are going to restaurants,
Speaker 1: more people are staying at hotels. So the trend is
Speaker 1: shifting from goods being a key driver to now moving
Speaker 1: towards services being a key driver. So those are the
Speaker 1: two main components of the board here. Let's talk about
Speaker 1: how we capture some of those trends. Just run a
Speaker 1: clinic for us, a short one if you can, for
Speaker 1: people who tune in every now and again to a
Speaker 1: show like this and here terms like c p I,
Speaker 1: p P A p p I rather p C, A
Speaker 1: core deflator, deflator, what are all these things to usten?
Speaker 1: So what the key is you're really here is to
Speaker 1: monitor what the FED is watching. And the FAITH has
Speaker 1: very clearly said that they monitor core inflation and specifically
Speaker 1: the core PC inflation indicator, which just came out. And
Speaker 1: why do they monitor core inflation and what does core
Speaker 1: inflation mean? Well, normally we measure inflation including everything, also
Speaker 1: including very volatile components such as food and energy. But
Speaker 1: the FED has the logic which makes a lot of
Speaker 1: sense to say, well, we don't want to monitor and
Speaker 1: good monitor positive according to very volatile indicators. So let's
Speaker 1: just then look at those parts of inflation that are
Speaker 1: reatively stable. That's also something about where the economy is going.
Speaker 1: And core inflation, meaning excluding the most volatile components mean
Speaker 1: food and energy, does represent a very good picture of
Speaker 1: where is the economy at the moment. And that indicator
Speaker 1: at the moment is significantly above the FENS inflation target
Speaker 1: of two. And that's why this debate about now that
Speaker 1: we are so much higher than defeats inflation target of two.
Speaker 1: Is that something that temporary? Is that something that's permanent?
Speaker 1: And that is the discussion that we're having in markets, mainly,
Speaker 1: what are the reasons that one could believe why this
Speaker 1: could be a more permanent problem And towarden, a lot
Speaker 1: of people have dismissed some of these traditional metrics of
Speaker 1: inflation just simply because the composition has changed so much
Speaker 1: during the pandemic. Services such a big component of some
Speaker 1: of these inflation metrics completely fell out of bed simply
Speaker 1: because people were not allowed to go out and do stuff.
Speaker 1: Now we're seeing it come back online. How significant is
Speaker 1: it for you that in this most recent data we
Speaker 1: saw a disappointment in terms of services spending that that
Speaker 1: isn't coming back perhaps as quickly as some people have
Speaker 1: previously expected. Yeah, this is very important I think about it.
Speaker 1: CPI or inflation is measured as the basket of consumption
Speaker 1: that we all have every month. So if my consumption
Speaker 1: changes during the pandemic, I don't fly a dolost that
Speaker 1: hopes us, I don't go to restaurants, of course, I
Speaker 1: will spend less money on those components. And those components
Speaker 1: are mainly services. So that's why during the pandemic people
Speaker 1: spend a lot more money on goods and much less
Speaker 1: on services. That's changing now, So that's why I'm from
Speaker 1: a basket perspective, And exactly as you're pointing out, it
Speaker 1: becomes relevant to monitor whether are we seeing prices go
Speaker 1: up of airline tickets, of hotels, of restaurants, which is
Speaker 1: exactly what we've seen in the inflation data, and that's
Speaker 1: what has been lifting the level of inflation to this
Speaker 1: much higher level. Relative to where the FATS target is.
Speaker 1: So that's why over the next sevel months we need
Speaker 1: to monitor very carefully whether the services component, in other words,
Speaker 1: the reopening parts of the economy continue to see high inflation,
Speaker 1: which is what J. Paul earlier this week also was
Speaker 1: pointing to. So he's saying this is all temporary, but
Speaker 1: there are some reasons to worry that this might be
Speaker 1: more permanent. Commodity prices if I type CRP go on
Speaker 1: my Bloomberg screen, as the commodity price is still very elevated.
Speaker 1: I also look at the label market being still very tight,
Speaker 1: and of course also the supply chain problems. If you
Speaker 1: look at the regional FAT surveys also show a lot
Speaker 1: of consistent problems with supply chain. So there are some
Speaker 1: reasons to believe that this is not just going to
Speaker 1: be a few months and then inflation comes down. So
Speaker 1: that's why the discussion in particular rates is all about
Speaker 1: this issue a long time. Is this inflation problem going
Speaker 1: to persist? We're speaking with towards and Slack Apollo Global Management,
Speaker 1: chief economist. You came to this by side firm from
Speaker 1: the south side firm of Deutsche Bank, where you rule
Speaker 1: over the economics team for a long time, and now
Speaker 1: you actually have to put this into implementation and help
Speaker 1: them direct their strategy. And I'm wondering, given the details
Speaker 1: that we're getting out here, is your view that the
Speaker 1: market is right, that it is risk on low rates
Speaker 1: in perpetuity because the signs of longer term inflation. I
Speaker 1: hear what you're saying on commodity standpoint, but when it
Speaker 1: comes to the deployment of some of the cash that
Speaker 1: people have in savings account, there hasn't been a sign
Speaker 1: of some some sort of massive rush that can outweigh
Speaker 1: some of the higher prices that might keep people from
Speaker 1: spending too much for too long. Yeah. From an investor perspective,
Speaker 1: I mean, it's very clear at the moment. The level
Speaker 1: of long rates is very low, the level of short
Speaker 1: rates is very low. The credit spreads across the board
Speaker 1: i g. High yield loans are very very tight. Stocks
Speaker 1: are basically at all time highs. So with that backgroup,
Speaker 1: it does become very important to think about if there
Speaker 1: is an inflation risk, if there's a higher likelihood that
Speaker 1: this cloud that we're seeing on the horizon, if it
Speaker 1: does start raining over the next several months, then investors
Speaker 1: should be more prepared for that event. In other words,
Speaker 1: I would think about the investment outlook at the moment
Speaker 1: as is there a chance that the FEN might begin
Speaker 1: to turn even more hawk is that just turned slightly
Speaker 1: more hawkis last week. But if they begin to send
Speaker 1: small HAWKUS signals that we do see more upside risk
Speaker 1: to inflation, if we do see more upside risk in
Speaker 1: markets to the feed adjusting their message, then that would
Speaker 1: have some negative applications for credit spreads for equities, and
Speaker 1: they might also have negative inplications for the dollar. So
Speaker 1: the short answer to your question leaves that turning this
Speaker 1: into investment advice and thinking about what implications are. There
Speaker 1: are good reasons to be very cautious here in terms
Speaker 1: of the artook, at least as long as this cloud
Speaker 1: is hanging out there and the fear of inflation still
Speaker 1: is so pronounced. In a few months time, we will
Speaker 1: know if it did start to rain, if we did
Speaker 1: see inflation. But for now, there's still good reasons to
Speaker 1: be worried about the inflation potentiity being a bigger problem
Speaker 1: than they would to fit is appreciating at the moment,
Speaker 1: Can you square from more then towards in given that
Speaker 1: there's a labor problem, not a skills problem, why we
Speaker 1: have record nine point three million job openings and no
Speaker 1: one wants to fill them. Yeah, this is of course
Speaker 1: a very important discussion in terms of the labor market.
Speaker 1: There are more job openings than there are unemployed people.
Speaker 1: I mean, think about that. That tells you that, by definition,
Speaker 1: we have a skills mismatch. The job openings uh requiring
Speaker 1: skills that the labor market, the individuals who are unemployed
Speaker 1: in the labor market don't necessarily have. And that can
Speaker 1: not only be a skills match in terms of education
Speaker 1: and background, it could also be a mismatch in terms
Speaker 1: of geographical skills that people live in the different zip
Speaker 1: code ready to where the jobs are. And a very
Speaker 1: important aspect of this is also that it could also
Speaker 1: be that the job openings have been in manufacturing, which
Speaker 1: is the good sector, whereas a lot of the layol
Speaker 1: during the pandemic was in the service sector again airlines, hotels, restaurants.
Speaker 1: So we're seeing nice hiring and also nice job openings
Speaker 1: in the service sector again in the airline, hotels and
Speaker 1: restaurant at Leasian hospitality. More generally, but we're also seeing
Speaker 1: very significant job openings and manufacturing. So is this mismatch
Speaker 1: in the labor market to a question, tell you that
Speaker 1: it's very important that we need to see a lot
Speaker 1: of the job openings be filled, and that's why you're
Speaker 1: seeing wages go up. I mean, think about in the
Speaker 1: full service restaurants have seen wages in the last three
Speaker 1: full months go up by a full dollar for fifteen
Speaker 1: and a half dollars an hour to six and a
Speaker 1: half dollars an hour. That's not coming down again. The
Speaker 1: best estimate here is probably that we will see wages
Speaker 1: stay at a more elevated level, and if you will,
Speaker 1: from a market respective, see wages probably continue to go up.
Speaker 1: So that's why the label market, that's not just the
Speaker 1: temporary issue. It has a very persistent risk to this
Speaker 1: inflation album. Yeah, are we paying attention to the fact
Speaker 1: that once you raise wages, it's hard to cut them,
Speaker 1: so they're not necessarily transitory. It is a ratchet effect.
Speaker 1: Once you have jack wages up, then it is very difficult.
Speaker 1: Almost never see in any country around the world way
Speaker 1: just begin to go down. Even during recessions. It is
Speaker 1: very rare to see wayes begin to move lower. So
Speaker 1: that's why also when you think about the year year
Speaker 1: in fact, it sticks if you will, now that the
Speaker 1: twelve month window moves forward and the level of wages
Speaker 1: is now at this higher level, and it's not going
Speaker 1: to go down. If anything, it might even go further up.
Speaker 1: So that's why the wage inflation issue is a very
Speaker 1: important issue when we think about what might be having
Speaker 1: And that doesn't mean necessarily that that was belower to
Speaker 1: selling prices. It could also be the companies basically begin
Speaker 1: to see squeezed margins. But if that's the case, that's
Speaker 1: also another risk for credit and equities because lower march,
Speaker 1: you think about the PE ratio. If the E and
Speaker 1: the PE ratio starts to go down, that begins to
Speaker 1: also bring some risk to the P And that's why
Speaker 1: valuations in equities and credit as long as you're have
Speaker 1: an inflation problem on inflation risk does look fairly vulnerable.
Speaker 1: They toast them. It's gonna hear from you as always
Speaker 1: always shop Thank you, sir, toasting Slark Apollo Global Management
Speaker 1: Chief Economists. This is the Bloomberg Surveillance Podcast. Thanks for listening.
Speaker 1: Join us live weekdays from seven to ten am Eastern
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