WEBVTT - Surveillance: US Payrolls Crush Estimates 0:00:05.160 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.000 I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best an economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.439 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.520 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg. 0:00:29.160 --> 0:00:31.600 Business App with us Randy Krasner. 0:00:31.320 --> 0:00:34.280 Both school Randy, there's a trend of the smooth three 0:00:34.320 --> 0:00:39.040 months moving average. I'm acting very PhDe at the Eccles building. 0:00:39.520 --> 0:00:44.599 This is a very gradual trend to where Chairman Powell 0:00:44.760 --> 0:00:47.120 wants to get to. Does he have the time to 0:00:47.200 --> 0:00:50.680 wait for that trend to play out to something that's 0:00:50.720 --> 0:00:51.880 a lower statistic. 0:00:53.440 --> 0:00:57.240 You really nailed it. That's the challenge. Now it's moving 0:00:57.240 --> 0:01:00.560 in the direction that they wanted to move. Finally, it's 0:01:00.600 --> 0:01:04.280 taken a long time to get there. Now, as I've 0:01:04.520 --> 0:01:07.920 mentioned before, what they're hoping for is this immaculatus inflation 0:01:08.000 --> 0:01:13.039 where you just slowly weaken the labor market. Unemployment rate 0:01:13.120 --> 0:01:15.160 only goes up to about four and a half percent, 0:01:15.480 --> 0:01:17.479 which is not far from what they think of as 0:01:17.480 --> 0:01:22.000 the long run average and the inflation rate comes down. Now, 0:01:22.040 --> 0:01:27.520 the hot number on wages is really not consistent with that. 0:01:27.959 --> 0:01:30.400 We're going to be getting another labor market report before 0:01:30.440 --> 0:01:32.240 the FED makes its next decision. We'll be getting a 0:01:32.280 --> 0:01:36.640 lot more inflation data that's coming in. But as I 0:01:36.680 --> 0:01:39.080 said on this program before, the Fed's not going to 0:01:39.160 --> 0:01:41.640 quit until the labor market quits, and this is not 0:01:41.840 --> 0:01:42.919 a quitting labor market. 0:01:43.319 --> 0:01:47.080 In these data, how do you understand the average hourly 0:01:47.120 --> 0:01:49.120 earnings and how much they've gone up. I mean, given 0:01:49.160 --> 0:01:51.240 the fact that people were saying that we're sorry to 0:01:51.280 --> 0:01:54.680 see this process where suddenly workers are losing some of 0:01:54.680 --> 0:01:56.600 the power that they gained in the media aftermath of 0:01:56.640 --> 0:01:58.960 the pandemic, does this fly in the face of that 0:01:59.000 --> 0:02:01.720 and really confirm that perhaps we're in a different environment 0:02:01.760 --> 0:02:05.400 with a smaller workforce and perhaps a greater sort of 0:02:05.440 --> 0:02:07.279 thrust to labor's power. 0:02:07.680 --> 0:02:10.960 Sure, so labor force participation is really key to that, 0:02:11.360 --> 0:02:13.639 and Mike had had had mentioned that that's one of 0:02:13.680 --> 0:02:16.600 the challenges that the FED has had. You've got this 0:02:17.120 --> 0:02:20.960 lower labor force participation, You've got demand being continued to 0:02:20.960 --> 0:02:23.799 be very strong. Some of that had been from fiscal 0:02:23.840 --> 0:02:28.560 stimulus from before, but continuing on with fairly strong, strong 0:02:28.600 --> 0:02:32.800 demand and tight labor market means really one thing, which 0:02:32.840 --> 0:02:35.639 is we just are going to go up. Fortunately, the 0:02:35.919 --> 0:02:38.000 hope is that they won't go up quite as fast 0:02:38.080 --> 0:02:43.120 going forward, but that's really so far that the data 0:02:43.120 --> 0:02:43.880 are not telling us that. 0:02:44.560 --> 0:02:47.960 Randy Krassner, thank you so much, particularly, professor, thank you 0:02:48.000 --> 0:02:50.560 so much for your comments on our troubled banks. Here 0:02:50.800 --> 0:02:58.720 he is at the Boot School, Chicago. Jeffrey Rosenberg of 0:02:58.760 --> 0:03:02.400 Black Rock of course foil manager, Systematic Multi Strategy. 0:03:02.639 --> 0:03:05.200 Fun. Great to see you, to see you here. 0:03:05.280 --> 0:03:07.560 This is like this is our work from office. Okay, 0:03:07.600 --> 0:03:09.600 it's great to have you here as well. 0:03:10.040 --> 0:03:11.240 Your being here. 0:03:11.160 --> 0:03:14.920 Is it a symbol of this job economy and maybe 0:03:15.000 --> 0:03:18.480 even of this troubled banking crisis that we're somehow getting 0:03:18.520 --> 0:03:19.200 back to normal. 0:03:19.560 --> 0:03:21.679 Well, we are getting back to normal in terms of 0:03:22.080 --> 0:03:24.880 the COVID part. I think when you look at today's report, 0:03:25.160 --> 0:03:28.320 as you guys have already covered, this is not getting 0:03:28.400 --> 0:03:31.560 back to the slowing that the bond market is expecting 0:03:31.639 --> 0:03:34.240 that the FED is hoping for. That's going to really 0:03:34.280 --> 0:03:37.000 bring down. Mike McKee said something at the beginning which 0:03:37.000 --> 0:03:40.000 I want to echo, which is we're very far away 0:03:40.040 --> 0:03:43.080 from what these job market reports need to start to 0:03:43.160 --> 0:03:45.920 look like to begin to even get close to what 0:03:45.960 --> 0:03:46.400 the FED is. 0:03:46.400 --> 0:03:48.080 For and the pros and know that we need to 0:03:48.080 --> 0:03:50.720 get down to one twenty one hundred and even eighty 0:03:50.760 --> 0:03:53.360 five whatever, maybe a couple of negative statistics as some 0:03:53.440 --> 0:03:57.080 have called for in a presumed slow down. But what's 0:03:57.120 --> 0:04:00.720 the unemployment rate that makes Chairman Pole's sit up straight? 0:04:01.360 --> 0:04:03.720 Well, it's one that starts to rise, he said it in. 0:04:03.800 --> 0:04:06.720 It's a vector. It's not so much the level, it's. 0:04:06.560 --> 0:04:09.480 The change that has to start showing the tightness in 0:04:09.520 --> 0:04:12.680 the labor market or the tightness of the labor market 0:04:12.760 --> 0:04:17.960 beginning to ease and getting some increases in the uneployment rate. 0:04:17.960 --> 0:04:20.279 He said it in the press conference that you know, 0:04:20.560 --> 0:04:24.520 part of what is the price to pay for achieving 0:04:24.520 --> 0:04:27.479 success on inflation is a rate of growth that is 0:04:28.080 --> 0:04:30.400 for a small period of time or a temporary period 0:04:30.440 --> 0:04:34.119 of time below trend. Well, that's what you know it'll 0:04:34.160 --> 0:04:37.640 start to look like in the labor report in rising 0:04:37.720 --> 0:04:40.400 and unemployment rate, And nothing in this report really points 0:04:40.440 --> 0:04:41.320 to any of that. 0:04:41.560 --> 0:04:43.479 So do you think that the market is overpricing the 0:04:43.480 --> 0:04:46.359 boogeyman of some sort of crisis or cracks or something 0:04:46.440 --> 0:04:50.200 to sort of cause this to halt in its tracks 0:04:50.480 --> 0:04:52.520 and reverse in some sort of meaningful way. 0:04:52.839 --> 0:04:57.840 So let's separate the market pricing of you know, what 0:04:57.960 --> 0:04:59.000 is a boogeyman? I think. 0:04:59.080 --> 0:04:59.600 I think the. 0:04:59.520 --> 0:05:05.039 Market worries about tail risk shock events, crises. And look, 0:05:05.080 --> 0:05:07.560 the banking sector crisis that we saw in March in 0:05:07.600 --> 0:05:10.120 a little bit of a echo rebound that we've seen 0:05:10.160 --> 0:05:12.640 this week is that kind of thing. But that's very 0:05:12.640 --> 0:05:17.280 different than kind of fundamental economic performance, and that's not 0:05:17.440 --> 0:05:19.480 so much a tail risk. That's really much more about 0:05:19.480 --> 0:05:21.920 the trajectory. Now, the two can be linked, obviously, because 0:05:21.920 --> 0:05:23.960 if you have a crisis that feeds back into confidence 0:05:24.000 --> 0:05:24.960 and that it's the economy. 0:05:25.040 --> 0:05:27.600 But this creates a real issue, and I'm wondering why 0:05:27.600 --> 0:05:29.880 we're not seeing it, frankly, and longer term treasure yields 0:05:29.880 --> 0:05:31.440 a little bit more, and whether this is something you're 0:05:31.480 --> 0:05:34.400 thinking about, because if you have this push pull and 0:05:34.400 --> 0:05:36.800 perhaps the FED not being as aggressive as people thought 0:05:36.800 --> 0:05:39.720 that they would be just based on the economic projection, 0:05:39.839 --> 0:05:42.640 then isn't the risk of inflation remaining high for a 0:05:42.680 --> 0:05:45.200 longer period of time that much greater and not being 0:05:45.240 --> 0:05:45.760 priced in. 0:05:46.080 --> 0:05:49.039 Yeah, and it's the pricing in of that should be 0:05:49.080 --> 0:05:51.680 the term premium, right, There should be a premium for 0:05:51.800 --> 0:05:55.000 holding longer dated maturities because you have more inflation risk 0:05:55.040 --> 0:05:58.800 and inflation uncertainty. And that's the disconnect here. The market 0:05:58.839 --> 0:06:02.240 is really wetted to this view that we go very 0:06:02.360 --> 0:06:05.719 rapidly back down to a pre COVID two percent inflation rate, 0:06:06.040 --> 0:06:08.760 and today's data is just kind of another piece of 0:06:08.760 --> 0:06:12.279 evidence that says that's not what we're really seeing in 0:06:12.320 --> 0:06:15.320 the economy yet. So the disconnect between what the Fed 0:06:15.360 --> 0:06:17.440 has been saying, what Powell said earlier this week in 0:06:17.520 --> 0:06:20.840 terms of a lot more cautionary tale relative to what 0:06:20.880 --> 0:06:23.039 you see in the yield curve, the inversion, the lack 0:06:23.040 --> 0:06:25.320 of a term premium that your question was just asking about, 0:06:25.440 --> 0:06:28.360 that's very much still the tension that we're dealing with it. 0:06:28.480 --> 0:06:31.680 Toper, Carnegie, Mellon, you had Allan Meltzer, Marvin Goodfriend, and 0:06:31.760 --> 0:06:36.440 the ginormous Bennett McCollum, who we lost late last year 0:06:36.440 --> 0:06:39.720 at eighty seven years old, and they harken to what 0:06:39.839 --> 0:06:42.560 some people are looking at now, which is M two 0:06:42.600 --> 0:06:46.640 exploding with the Biden stimulus and M two coming out 0:06:46.680 --> 0:06:52.479 for Blackrock. How disruptive is this huge variability of M 0:06:52.520 --> 0:06:57.120 two and now signaling a real almost like thick oil 0:06:57.240 --> 0:06:59.839 within the system. The engine oil is getting thicker and thicker. 0:07:00.600 --> 0:07:05.200 Yeah, it's a huge deal in terms of the structure 0:07:05.440 --> 0:07:09.760 of interest rates of monetary policy. We went from a 0:07:10.160 --> 0:07:14.760 restrictive reserve system to a excess reserve system to a 0:07:14.760 --> 0:07:20.120 plentiful reserve system. And you've seen that in the banking statistics, 0:07:20.160 --> 0:07:23.200 for example, in terms of loans to deposit ratios. Part 0:07:23.200 --> 0:07:26.680 of the increase in uninsured deposits that is kind of 0:07:26.760 --> 0:07:30.400 part of the source of what we saw is because 0:07:30.440 --> 0:07:34.120 you flooded the system with so much liquidity and that 0:07:34.320 --> 0:07:36.400 M two and so we're seeing that there are some 0:07:36.600 --> 0:07:42.360 unintended consequences. The role of RRP and creating competitiveness to deposits. 0:07:42.360 --> 0:07:45.640 That's all part of the newness of what does it 0:07:45.760 --> 0:07:49.200 mean to operate with a balance sheet that went from 0:07:49.240 --> 0:07:52.000 six percent of GDP to thirty five percent of GDP 0:07:52.240 --> 0:07:54.200 and a lot of things that we just don't know 0:07:54.240 --> 0:07:54.960 how it works when. 0:07:55.320 --> 0:07:58.560 Real world folks, I mean what Jeff Rosenberg is really doing. 0:07:58.600 --> 0:08:02.720 Here is the bondboard folio from sixty thousand feet. What's 0:08:02.760 --> 0:08:07.600 your conviction three years out looking at a holistic blackrock 0:08:07.880 --> 0:08:08.560 bond world. 0:08:09.320 --> 0:08:13.120 Well, the first conviction three years out, the big change 0:08:13.520 --> 0:08:17.360 is we've reset the level, the starting level of yield. Right, 0:08:17.400 --> 0:08:20.360 so when you think about bonds, bonds are about income, 0:08:20.680 --> 0:08:23.280 and when there was no income, it was very hard 0:08:23.320 --> 0:08:25.800 to kind of really hold on to bonds. So that 0:08:26.040 --> 0:08:29.920 restoration and the FED getting off of zero interest rates 0:08:29.960 --> 0:08:32.960 and really this focus on inflation. Well the starting point 0:08:32.960 --> 0:08:34.600 of that is now five to five and a quarter 0:08:34.920 --> 0:08:38.240 interest rate yields, and so that resets the bond market. 0:08:38.280 --> 0:08:40.400 And that's why you've seen a lot of flows and 0:08:40.440 --> 0:08:42.400 a lot of interest come back to bonds. And that's 0:08:42.760 --> 0:08:46.000 remember we had a ten year or longer period of 0:08:46.080 --> 0:08:49.720 several episodes of negative interest rates, zero interest rates. We 0:08:49.760 --> 0:08:53.320 talked about that word out lack of yield. So you're 0:08:53.440 --> 0:08:57.960 seeing a restoration of bonds in the portfolio. Because there 0:08:58.040 --> 0:08:58.959 I'm going to steal that word. 0:08:59.400 --> 0:09:02.800 I'm gonna be saying restoration one got it. I got 0:09:02.840 --> 0:09:03.840 it from Jeff Rosenberg. 0:09:04.000 --> 0:09:05.920 This is the this is the issue is that we're 0:09:05.960 --> 0:09:08.320 looking at the practicality of it, which is you are 0:09:08.320 --> 0:09:11.040 getting yield and you're looking at the practicality of the data, 0:09:11.200 --> 0:09:13.840 which is that the economy is still strong. And the 0:09:13.880 --> 0:09:16.920 two ideas are kind of getting to be in conflict 0:09:16.920 --> 0:09:19.040 with one another a little bit, where we're having to 0:09:19.080 --> 0:09:21.160 either see the Fed step in a little bit more 0:09:21.160 --> 0:09:23.960 aggressively to bring things back to where they want, or 0:09:24.000 --> 0:09:27.760 you have to see something change in terms of people's 0:09:27.760 --> 0:09:31.480 assumption of the longer term inflation rate. What data are 0:09:31.480 --> 0:09:33.920 you looking at. If it's not the labor market report, 0:09:34.000 --> 0:09:36.760 If it's not what the Fed said this week, this 0:09:36.840 --> 0:09:39.240 all doesn't seem to matter anymore as people to sort 0:09:39.280 --> 0:09:41.480 of hunker down with their narratives. 0:09:41.920 --> 0:09:44.640 So a couple of data points. So let's come back 0:09:44.679 --> 0:09:47.080 to your favorite data point, average hourly earnings in this 0:09:47.160 --> 0:09:50.400 report and zero point five. And you know why that 0:09:50.440 --> 0:09:53.440 one is a hard one to anchor on is because 0:09:53.480 --> 0:09:59.240 it's so subjective, it's so sensitive to the mix shift. 0:09:59.360 --> 0:10:02.240 So part of what you saw in the internals of 0:10:02.240 --> 0:10:05.120 today's labor report is a little bit less boost from 0:10:05.160 --> 0:10:08.520 leisure and hospitality, a little bit more spread. Those tend 0:10:08.520 --> 0:10:11.920 to be small, lower income changes. So when that mixed 0:10:11.960 --> 0:10:16.000 shifts that helps to boost That's not giving us a 0:10:16.000 --> 0:10:19.040 good picture of inflation and wage inflation. That's just changing 0:10:19.360 --> 0:10:22.360 the mixture of what is in that component. Last week's 0:10:22.360 --> 0:10:25.680 ECI a much better measure at LANTA FED Wage tracker, 0:10:26.040 --> 0:10:29.559 much better measure, And next week we'll look at core 0:10:29.640 --> 0:10:34.240 services X housing as the kind of mapping to the 0:10:34.440 --> 0:10:38.720 labor market and the more stable long run indicator of 0:10:38.800 --> 0:10:41.720 where is inflation going to settle down. No one doubts 0:10:41.760 --> 0:10:45.320 that peak inflation has occurred. Inflation is declining, the shelter 0:10:45.480 --> 0:10:48.560 piece is gonna decline and help push everything down. It's 0:10:48.559 --> 0:10:50.720 about do we get to two percent the way the 0:10:50.760 --> 0:10:53.360 bond market expects, or do we maybe get to three? 0:10:53.800 --> 0:10:57.120 And because this way or dynamic, you end up having 0:10:57.160 --> 0:11:00.080 a lot harder time, and the debate shifts to the 0:11:00.200 --> 0:11:04.439 cost of getting to three to two versus three versus the. 0:11:04.360 --> 0:11:05.920 Benefits in the here and now. 0:11:06.240 --> 0:11:08.240 Historically, how hard is it to get to recession with 0:11:08.280 --> 0:11:09.960 a labor market report like what we just got. 0:11:10.160 --> 0:11:14.319 We're that's a three point four percent on employment right now. Yes, 0:11:14.440 --> 0:11:18.320 it's a lagging indicator, and we get that. But again, 0:11:18.400 --> 0:11:20.600 what Powell said earlier this week is a little bit 0:11:20.640 --> 0:11:23.120 of surprise that with five hundred basis points of tightening, 0:11:23.120 --> 0:11:26.320 you haven't really seen that much slowing. And you know, 0:11:26.400 --> 0:11:28.840 you look at earnings and what the companies are saying, 0:11:29.280 --> 0:11:32.040 You look at what credit markets are saying, high yield spreads, 0:11:32.040 --> 0:11:35.080 investment grade spreads away from the banking sector, of course, 0:11:35.320 --> 0:11:37.920 and this is still a very robust economy. So the 0:11:37.920 --> 0:11:40.679 tightening has yet to show up. We expected to show up, 0:11:40.679 --> 0:11:41.760 but it hasn't yet. 0:11:41.840 --> 0:11:43.959 Now you said that eight months ago too as well. 0:11:44.040 --> 0:11:46.640 On the JO shocking thing is that people were talking 0:11:46.679 --> 0:11:49.079 about the lag effects, some people saying it's eighteen months now, 0:11:49.120 --> 0:11:51.199 twelve to eighteen months. But it is a serious thing, 0:11:51.320 --> 0:11:53.600 especially given the fastest pace of tightening. 0:11:53.600 --> 0:11:56.199 Going back to go from Randy Cross under Jeff Rosenberger's 0:11:56.200 --> 0:11:58.720 wonderful Jeff, thank you so much, particularly for those thoughts 0:11:58.720 --> 0:12:12.079 on Ben at McCollum and Carne Mellan, Paul and I 0:12:12.120 --> 0:12:15.280 and John and Lisa have been remiss and that it's 0:12:15.320 --> 0:12:16.280 been distraction. 0:12:16.520 --> 0:12:19.040 May it has been nuts this week. I'm not going 0:12:19.120 --> 0:12:20.199 to mince words on that. 0:12:20.920 --> 0:12:23.240 And what we're going to do right now is slow 0:12:23.320 --> 0:12:28.760 down and actually talk about the American labor economy. Tiffany 0:12:28.760 --> 0:12:31.240 Welding can do this, she joins us right now from PIMCO, 0:12:31.920 --> 0:12:34.920 is there, chief us, I only talk about the jobs 0:12:35.000 --> 0:12:38.080 report economists right as well, Tiffany. 0:12:38.120 --> 0:12:39.360 Are we fully employed? 0:12:41.400 --> 0:12:44.320 Yeah? I think that for the most part, we think 0:12:44.320 --> 0:12:46.600 we're fully employed, you know, But I would say that 0:12:46.679 --> 0:12:50.240 it seems like every labor market report, we're finding more 0:12:50.280 --> 0:12:52.800 and more people who can come back to the labor market, 0:12:53.640 --> 0:12:55.880 or maybe we're unemployed and get jobs, or you know, 0:12:55.880 --> 0:12:58.439 maybe they're switching jobs. So you know, the labor market 0:12:58.440 --> 0:12:59.960 remains pretty strong and resilient. 0:13:00.240 --> 0:13:04.120 Here I quoted with an Marie Hoarded today, folks, Bloomberg 0:13:04.160 --> 0:13:07.200 balance of power. Look for that an re Hoarden, our 0:13:07.280 --> 0:13:11.520 chief Washington correspondent, and Tiffany I was quoting out of 0:13:11.520 --> 0:13:16.400 the Washington Post about how states beleaguered with sub three 0:13:16.480 --> 0:13:21.040 percent unemployment rates are trying to change their child labor laws, 0:13:22.000 --> 0:13:24.679 which which I find just like throwing us back to 0:13:24.760 --> 0:13:28.440 Dickens in the nineteenth century, is an exaggeration. But hey, 0:13:28.600 --> 0:13:31.760 stay with me, folks, It's Friday. Are we in such 0:13:31.920 --> 0:13:36.960 dire straits for labor that we're going to employ kids? 0:13:39.120 --> 0:13:40.800 Well, you know, I don't. I don't know about that 0:13:40.840 --> 0:13:43.600 in particular, but I mean, I think the bottom line is, 0:13:43.600 --> 0:13:46.880 from a longer term perspective, the demographics in the United States, 0:13:47.280 --> 0:13:52.240 you know, would would point to lower labor supply over 0:13:52.280 --> 0:13:56.080 the medium term, you know, And that's regardless of those 0:13:56.160 --> 0:13:58.040 kinds of policies. I think, you know, one of the 0:13:58.080 --> 0:14:02.600 other policies that might make our sense is immigration. You know, 0:14:02.640 --> 0:14:08.120 our neighbor country, Canada has obviously been able to achieve 0:14:08.200 --> 0:14:12.000 much more immigration more recently than in the US, you know, 0:14:12.000 --> 0:14:14.319 and as a result, their labor markets are are looking 0:14:14.360 --> 0:14:16.320 a little bit less tight than ours. So you know, 0:14:16.320 --> 0:14:18.600 I think that, I know, it's really difficult to get 0:14:18.679 --> 0:14:22.280 labor to get immigration reform, but looking towards those policies, 0:14:23.040 --> 0:14:24.800 you know, also, I think would be would be very 0:14:24.800 --> 0:14:25.880 helpful for the labor market. 0:14:26.000 --> 0:14:29.320 Can I have a yeah, Paul that the reason we're 0:14:29.360 --> 0:14:33.560 having this conversation with Tiffany Wilding is over the success 0:14:33.840 --> 0:14:34.640 of America. 0:14:34.840 --> 0:14:35.080 Yep. 0:14:35.160 --> 0:14:38.240 Absolutely, And this is the other names it's that's a 0:14:38.360 --> 0:14:41.080 very good taken and Tiffany, my point to Tomas, we 0:14:41.160 --> 0:14:43.640 were just talking off air before you came on, is 0:14:44.480 --> 0:14:49.080 how can we entertain recession? Recession discussions when we've got 0:14:49.080 --> 0:14:51.320 such a strong labor market, how do you think about that? 0:14:52.080 --> 0:14:54.000 Yeah, No, I mean I think that's a really good question. 0:14:54.160 --> 0:14:56.120 And the way I've been characterizing it, I guess a 0:14:56.120 --> 0:14:57.760 little tongue in cheek is is I think we have 0:14:57.840 --> 0:15:01.560 a two handed economy right now. Obviously, economists are famous for, 0:15:01.640 --> 0:15:03.680 on the one hand, on the other hand statements, But 0:15:03.880 --> 0:15:05.960 you know, I do think that the decline in bank 0:15:06.000 --> 0:15:10.040 stocks is quite concerning, you know, and that's because, you know, 0:15:10.240 --> 0:15:12.920 historically there's been a lot of academic analysis that's been 0:15:12.960 --> 0:15:15.480 done that suggests when you have bank stocks that are 0:15:15.560 --> 0:15:17.960 falling you know, thirty percent forty percent on average, like 0:15:17.960 --> 0:15:21.960 what we've seen more recently, that tends to be indicative 0:15:21.960 --> 0:15:25.040 of higher cost of capital for that industry. Obviously, that 0:15:25.120 --> 0:15:28.240 tends to slow their loan growth, and that's really important 0:15:28.240 --> 0:15:32.800 for the economy for future growth. So statistical analysis suggests 0:15:32.800 --> 0:15:35.640 that when we have stock declines like what we've seen, 0:15:36.040 --> 0:15:38.840 you do tend to see you know, one to two 0:15:38.880 --> 0:15:42.440 percentage point drags on GDP relative to what you otherwise 0:15:42.440 --> 0:15:44.040 would have gotten. So, you know, I think that is 0:15:44.200 --> 0:15:48.240 that is concerning, and that does cloud the outlook you know, 0:15:48.280 --> 0:15:50.520 and I think that comes on the heels of just 0:15:50.560 --> 0:15:53.800 the fact that monetary policy is tight. Demand for loans 0:15:53.840 --> 0:15:57.000 should also be declining as you have higher interest rates, So, 0:15:57.360 --> 0:15:59.240 you know, I think all of this would still suggest 0:15:59.280 --> 0:16:02.040 monetary policy works with long and variable lags. That's still 0:16:02.280 --> 0:16:04.880 working its way through the economy, and there is still 0:16:04.920 --> 0:16:07.720 a recession that's that's probably quite likely on the horizon, 0:16:07.840 --> 0:16:11.320 even though labor markets are strong now. Inflation is obviously 0:16:11.440 --> 0:16:14.920 very strong now, you know, and it may may seem 0:16:14.960 --> 0:16:15.600 farther away. 0:16:16.040 --> 0:16:18.400 Tiffany, what was your takeaway from what we heard from 0:16:18.960 --> 0:16:22.920 Fetcherman j Pal this week on raising the rates the 0:16:22.920 --> 0:16:25.120 base rate twenty five basis points. What was your take 0:16:25.200 --> 0:16:25.920 key takeaway if. 0:16:25.880 --> 0:16:29.400 Anything, Well, I mean, I do think that, as I mentioned, 0:16:29.400 --> 0:16:31.680 with this banking sector stress, I think the balance of 0:16:31.800 --> 0:16:35.400 risks are changing. You know, we've been talking about solely 0:16:35.440 --> 0:16:39.040 elevated upside risk for you know, over you know, I 0:16:39.080 --> 0:16:42.920 would say maybe two years now and now that monetary 0:16:42.960 --> 0:16:47.160 policy is solidly and restrictive territory, we do have this 0:16:47.240 --> 0:16:52.240 banking sector stress that can result in a bigger downturn. 0:16:52.520 --> 0:16:53.120 The risks. 0:16:53.160 --> 0:16:55.200 The balance of risks have just changed, and I think 0:16:55.240 --> 0:16:58.320 the Fuberle reserve is responding to that. Monetary policy is 0:16:58.320 --> 0:17:01.840 a risk management exercise. Powell has said that multiple times, 0:17:02.160 --> 0:17:04.000 and so they see I think for the most part, 0:17:04.080 --> 0:17:07.120 the FED officials that feel like we're in restrictive territory. 0:17:07.200 --> 0:17:08.840 Let's just take a little break. We're going to go 0:17:08.840 --> 0:17:11.360 on hold for a little while and just see how 0:17:11.359 --> 0:17:13.359 the data plays out, see how these long and variable 0:17:13.440 --> 0:17:15.520 lags work out, you know. And of course, if things 0:17:15.560 --> 0:17:18.280 continue to be this robust by the end of this year, 0:17:18.480 --> 0:17:21.640 I would expect the FED to hike again or potentially more. 0:17:23.240 --> 0:17:25.640 But if it's not right and you know, then then 0:17:25.680 --> 0:17:27.800 we're we're you know, in the world that the bond 0:17:27.880 --> 0:17:31.240 market is pricing in right now, which is recuse. 0:17:30.760 --> 0:17:34.880 Take the unit labor cost part of a three ratio 0:17:35.080 --> 0:17:40.159 six dynamic parts productivity study and take the unit labor 0:17:40.320 --> 0:17:43.920 costs and pull that over to the worries the angst 0:17:43.960 --> 0:17:47.760 of Chairman Powell and the team. Does that signal a 0:17:47.840 --> 0:17:53.120 persistency to elevated wage increases even if it's not a 0:17:53.160 --> 0:17:54.160 real wage. 0:17:53.840 --> 0:17:58.360 Increase, Yes, no, it absolutely does. The fact that unit 0:17:58.440 --> 0:18:02.280 labor costs are kind of around, you know, it looks 0:18:02.359 --> 0:18:05.760 like maybe five six percent, you know, is very concerning. 0:18:05.840 --> 0:18:09.119 I mean because that you know, that does have a 0:18:09.200 --> 0:18:13.040 leading quality for core inflation. If you have you know, 0:18:13.359 --> 0:18:16.600 wages that you know, whatever your labor costs are there increasing, 0:18:16.920 --> 0:18:19.600 you know that will be passed on for the most 0:18:19.600 --> 0:18:23.400 part usually to consumers into price inflation. If I look 0:18:23.440 --> 0:18:27.120 across a range of a wage statistics, the core PCEE, 0:18:27.720 --> 0:18:29.320 you know, labor costs, as you say, I think the 0:18:29.400 --> 0:18:32.159 underlying trend and inflation right now, you know, it looks 0:18:32.200 --> 0:18:34.840 like four maybe even four and a half percent, and 0:18:34.880 --> 0:18:37.399 that's well above the two percent target. You know, so 0:18:37.440 --> 0:18:40.440 hopefully over time that comes down, you know, but there's 0:18:40.480 --> 0:18:42.720 a little bit of a you know, there's a little 0:18:42.760 --> 0:18:44.879 the other side of that coin is that you know, 0:18:44.920 --> 0:18:48.560 the Fed probably actually needs to engineer a recession. They 0:18:48.640 --> 0:18:50.560 need they've said they need some pain in the labor 0:18:50.560 --> 0:18:53.800 market in order to get that down. But you probably 0:18:53.880 --> 0:18:57.959 need that type of economically unfortunately, to solve that problem. 0:18:58.040 --> 0:19:02.600 Is there any study in your economic history, Tiffany Wilding 0:19:02.960 --> 0:19:07.800 where a central bank quote unquote engineered a recession? 0:19:09.560 --> 0:19:11.399 Yeah, I mean there's a there's a lot of times 0:19:11.480 --> 0:19:14.119 right where you where you see recession, you know, I 0:19:14.119 --> 0:19:15.680 would say over no, you see it. 0:19:15.760 --> 0:19:19.080 But does the central bank wake up and go, let's 0:19:19.160 --> 0:19:20.480 engineer a recession. 0:19:20.800 --> 0:19:24.159 Well, they obviously never say that, you know, but if 0:19:24.200 --> 0:19:26.720 you look, you know, so we've looked over seventy years 0:19:26.720 --> 0:19:30.680 fourteen developed markets. When a central bank starts hiking interest rates, 0:19:31.160 --> 0:19:33.600 usually you get a recession on average about two to 0:19:33.600 --> 0:19:35.560 two and a half years after the start of a 0:19:35.600 --> 0:19:38.560 rate hiking cycle, you know. So there is something certainly 0:19:38.600 --> 0:19:42.199 to when central banks start to tighten policy. You do 0:19:42.359 --> 0:19:45.639 see economies you know, weakend and eventually you know, go 0:19:45.680 --> 0:19:49.080 into recession. Now, these these issues tend to be nonlinear. 0:19:49.160 --> 0:19:50.919 These periods tend to be kind of nonlinear in the 0:19:50.960 --> 0:19:54.159 sense that, like, the central Bank's probably not trying to 0:19:54.200 --> 0:19:56.840 do that, but you have financial market accidents, you know, 0:19:57.000 --> 0:19:59.640 Jeremy Stein, it gets in the you know, higher interest 0:19:59.720 --> 0:20:02.000 rates you know famously get in the cracks, and you 0:20:02.119 --> 0:20:05.400 just don't understand where the pockets of vulnerability are until 0:20:05.400 --> 0:20:08.000 you get to these higher levels, you know, and that 0:20:08.480 --> 0:20:10.560 again results in an economy that weakens in kind of 0:20:10.560 --> 0:20:13.520 a nonlinear way. So that's always a risk here, thank. 0:20:13.320 --> 0:20:16.399 You, Tiffany Wilder. So that wasn't Nicer, We didn't really 0:20:16.640 --> 0:20:19.360 do bank stress. We can talk about it. She's a PIMCO. 0:20:30.160 --> 0:20:32.600 It seems like Monday was two years ago, but I 0:20:32.680 --> 0:20:35.440 believe I tweeted out on Monday about the Fifth Bank 0:20:35.480 --> 0:20:38.359 of the United States, and ultimately that is what the 0:20:38.440 --> 0:20:40.639 liberals and conservatives are arguing about. 0:20:40.760 --> 0:20:43.200 Is this scope and scale John in this banking system. 0:20:43.480 --> 0:20:44.800 Should we talk to somebody as an. 0:20:44.680 --> 0:20:46.720 Expert Plat Yeah's that on the. 0:20:46.680 --> 0:20:48.880 Second Bank of the United States and the Fifth Bank 0:20:48.920 --> 0:20:49.679 of the United States. 0:20:49.720 --> 0:20:51.280 Chris Marrinack is an expert. 0:20:51.320 --> 0:20:54.760 He's director of Research Jenny Montgomery Scott, and has really 0:20:54.800 --> 0:20:58.480