WEBVTT - Surveillance: Russia Sanctions with Singh (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.200 --> 0:00:13.080 with Jonathan Ferroll and Lisa Brown Witz Jailey. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.240 dot Com, and of course on the Bloomberg Terminal. Jean 0:00:29.280 --> 0:00:32.360 Pavan join. Just now they had av blank Rock Investment Institute. John, 0:00:32.400 --> 0:00:35.479 to make it simple, you still like ankuties why? I 0:00:35.479 --> 0:00:38.120 think you know, we've covered a bit of the central 0:00:38.200 --> 0:00:40.800 land landscape here and uh, I agree with a lot 0:00:40.840 --> 0:00:43.120 of what has been said. Um, I think we end 0:00:43.240 --> 0:00:47.800 up living with more inflation uh than the rhetoric is suggesting. Um. 0:00:47.840 --> 0:00:50.080 You know, at the end of the day, we're only 0:00:50.120 --> 0:00:52.800 talking about normalization of policy the FED. I don't think 0:00:53.080 --> 0:00:56.400 despite the talk, the hard talk, the tough talk, I 0:00:56.400 --> 0:00:58.960 don't think they will really go beyond neutral, at least 0:00:58.960 --> 0:01:01.520 for now. They're not intending to it really. I mean, 0:01:01.560 --> 0:01:04.360 if they were, they would show unemployment rising from the 0:01:04.840 --> 0:01:08.240 unelty level that it currently is at. And so given 0:01:08.280 --> 0:01:12.120 all this, I think we see a bit of excessive hawkishness, um, 0:01:12.160 --> 0:01:14.720 you know, being uh being driving markets at this at 0:01:14.720 --> 0:01:17.720 this juncture, and so we think we're gonna be uh 0:01:17.840 --> 0:01:19.680 at the end of the day. Uh, I see a 0:01:19.760 --> 0:01:22.320 rate background that's gonna be a somewhat more conducive or 0:01:22.360 --> 0:01:25.840 supportive of of equities. And it's a relative call, right, 0:01:25.880 --> 0:01:27.800 I mean, its environment. The place you don't want to 0:01:27.840 --> 0:01:30.679 be is in fixed incomes. So I think on the 0:01:30.720 --> 0:01:32.760 right of the basis, equity do look a lot more 0:01:32.800 --> 0:01:38.319 attractive than chicks incoming and enclachery environment. John, we're looking 0:01:38.360 --> 0:01:41.480 on the Bloomberg terminal. A little bit of unraveling and 0:01:41.560 --> 0:01:45.039 emerging markets is indicated by currencies. There's other tea leaves 0:01:45.080 --> 0:01:48.400 as well. You grew up with a PhD at the 0:01:48.400 --> 0:01:52.480 House of Bernanke at Princeton, where he believes financial stability 0:01:52.560 --> 0:01:56.680 is everything. From your view at black Rock, how financially 0:01:56.880 --> 0:02:02.800 stable is e M right now? So e M is 0:02:02.840 --> 0:02:04.840 a is a big space, right. I Mean, I'm sorry 0:02:04.880 --> 0:02:07.800 to to state the obvious at the outset, but it's 0:02:07.800 --> 0:02:10.400 partically important this juncture because we have a very complex 0:02:10.400 --> 0:02:12.000 story playing out in the m over the course of 0:02:12.040 --> 0:02:15.880 twenty two Uh. There's a commodity story that is playing out. 0:02:15.919 --> 0:02:18.519 So we've seen that in America been performing fairly well. 0:02:18.720 --> 0:02:22.840 Uh during appeard we have a China story, which we think, 0:02:23.080 --> 0:02:25.320 you know, it's not necessarily e M anymore, but as 0:02:25.360 --> 0:02:26.919 part of the D index. And then you have the 0:02:27.440 --> 0:02:30.240 fallout from Russia and it has been that has been 0:02:30.240 --> 0:02:34.840 affecting especially in European emerging markets. So these are very 0:02:34.880 --> 0:02:40.359 distinct forces. I think overall, we it turns out where 0:02:40.360 --> 0:02:42.800 in an environment where rates are still pretty low, and 0:02:42.800 --> 0:02:46.360 and e M world has been earlier on in trying 0:02:46.360 --> 0:02:48.880 to normalize policy. I mean they've started earlier. I think 0:02:48.880 --> 0:02:51.200 they were ahead of this, uh, and I think that 0:02:51.280 --> 0:02:53.960 provides a bit more resilience. And so that's why we 0:02:54.120 --> 0:02:56.919 we continue to be overweight, you know em local dead 0:02:56.919 --> 0:03:00.160 for instance, We think that continues to be attractive in 0:03:00.160 --> 0:03:02.680 this environment. So how can you look at sectors at 0:03:02.680 --> 0:03:05.240 a time when so many people are talking about specific 0:03:05.320 --> 0:03:09.160 idiosyncratic stories within emerging markets or within the equity markets 0:03:09.200 --> 0:03:12.680 if you're looking for example oil versus financials or versus 0:03:12.680 --> 0:03:16.119 consumer discretionary, And how are you surgical as a very 0:03:16.160 --> 0:03:18.280 big firm at a time when so many people are 0:03:18.320 --> 0:03:24.320 talking about security selection. So this, you know, this environment 0:03:24.400 --> 0:03:27.080 is one where beta is uh, is not gonna be 0:03:27.120 --> 0:03:29.960 your your friend. Uh. I guess you know. There's uh, 0:03:30.280 --> 0:03:32.959 there's gonna be quite a bit of challenges, which we've 0:03:32.960 --> 0:03:35.800 already talked about, and so I think that makes security 0:03:35.840 --> 0:03:40.960 selection potentially, um environment more conducive for security selection. UM 0:03:41.160 --> 0:03:43.880 my team is responsible for broad asset allocation. So I'm 0:03:43.920 --> 0:03:46.600 not I'm not the one that's going to be very 0:03:46.600 --> 0:03:49.800 surgical on this, but certainly we have, you know, a 0:03:49.880 --> 0:03:52.400 large set of teams here that are, you know, seeking 0:03:52.400 --> 0:03:55.880 opportunities into this environment. I think at the broad micro level, 0:03:55.920 --> 0:03:59.720 I mean things like I mean the comedity story I 0:03:59.760 --> 0:04:01.960 think has a lot of as a lot of security 0:04:01.960 --> 0:04:05.360 selection implications. The climate transition high it's playing because that's 0:04:05.360 --> 0:04:07.240 not a straight line, and that's another big team I 0:04:07.280 --> 0:04:09.680 think on security selection. And I think a third big 0:04:09.720 --> 0:04:13.000 one is making sure that the read true from the 0:04:13.080 --> 0:04:15.600 rate adjustment the scount rate now that are going up 0:04:16.200 --> 0:04:19.719 into the earnings potential of companies that connection is not misread. 0:04:19.720 --> 0:04:21.240 And I think there's a bit too much of a 0:04:21.720 --> 0:04:24.960 mechanical read through that higher rate is back for protect 0:04:25.000 --> 0:04:26.880 for instance, we think it's it's a lot more nuance 0:04:26.880 --> 0:04:29.240 than that, and that's where the opportunities will will arise 0:04:30.320 --> 0:04:33.039 of blank Rock the investment Institution. Great to catch up 0:04:33.080 --> 0:04:42.240 with you, sir, as always, Kelsey Barrow with us right 0:04:42.279 --> 0:04:45.000 now with Bob Michael, JP Morgan on yield with an 0:04:45.000 --> 0:04:50.240 exceptionally smart note that pushes against step in the bonds. Now, Kelsey, 0:04:50.279 --> 0:04:52.719 thank you for joining this morning. You use this phrase 0:04:52.760 --> 0:04:56.359 over soul. Let's be clear, yield that's price price down, 0:04:56.440 --> 0:04:58.920 yield up, and you say price can stay down and 0:04:59.000 --> 0:05:03.760 discuss that. Yeah, so oversold markets can stay oversold. We've 0:05:03.800 --> 0:05:07.400 seen a massive rise in yields. It's been globally oriented. 0:05:07.440 --> 0:05:10.719 You have the two year German booned above zero for 0:05:10.760 --> 0:05:14.800 the first time since UM and we think that this 0:05:14.880 --> 0:05:17.560 hawk ish rhetoric from central banks around the world is 0:05:17.600 --> 0:05:20.680 not going to stop anytime soon. I heard you guys 0:05:20.680 --> 0:05:25.160 discussing inflation and inflation expectations rising. Well, the flip side 0:05:25.160 --> 0:05:28.799 of inflation expectations rising is that front end real yields 0:05:28.839 --> 0:05:31.520 are still falling. So right now you have the two 0:05:31.560 --> 0:05:34.560 year reel ye old debt minus one point eight percent. 0:05:35.040 --> 0:05:38.680 That's almost four hundred basis points away from where we 0:05:38.760 --> 0:05:41.680 got at the end of the last cycle. So this 0:05:41.800 --> 0:05:45.159 tells me that the Fed still needs to push on 0:05:45.240 --> 0:05:47.760 this hawk is rhetoric. They're going to need to tighten 0:05:47.800 --> 0:05:51.880 policy a fair bit in order to pull back on 0:05:51.920 --> 0:05:57.200 the economy is John Farrell, is Kelsey, Barrow, Moura, Hawkerston Summers. 0:05:57.400 --> 0:06:00.240 Perhaps perhaps they're on the same page, but counts, see, 0:06:00.320 --> 0:06:01.880 what you think they should do and what you think 0:06:01.880 --> 0:06:04.200 they will do can be two different things. Um with 0:06:04.200 --> 0:06:06.200 you when that should given what the market is telling 0:06:06.240 --> 0:06:07.479 us at the moment, what do you think they'll do? 0:06:07.520 --> 0:06:08.839 What kind of numb are you looking for on the 0:06:08.839 --> 0:06:11.880 FED funds? Right? Sure? So I think that they are 0:06:11.960 --> 0:06:14.760 definitely comfortable doing fifty basis points at the at the 0:06:14.839 --> 0:06:17.839 next meeting. I think that they would ideally like to 0:06:17.880 --> 0:06:20.160 be above two percent by the end of the year, 0:06:20.240 --> 0:06:23.000 and I think that the economy will work with them 0:06:23.080 --> 0:06:25.640 on that. We do still see the U S economy 0:06:25.680 --> 0:06:29.120 as fairly resilient. There's a lot of pent up demand 0:06:29.279 --> 0:06:32.800 for spending, particularly on the service side. People do want 0:06:32.800 --> 0:06:35.200 to get out there and they do want to travel. 0:06:35.480 --> 0:06:39.120 So this long awaited move back from the good spending 0:06:39.120 --> 0:06:43.080 the pandemic winners, to the pandemic the reopening winners, that's 0:06:43.120 --> 0:06:46.279 still really happening right now. And given the fact that 0:06:46.320 --> 0:06:48.520 we just are rising in the savings rate is low, 0:06:49.120 --> 0:06:52.520 you know, this is still an economy that's operating above 0:06:52.600 --> 0:06:55.600 trend that can be resilient to some shocks. So Kelseye. 0:06:55.640 --> 0:06:57.760 That's the reason why I know that Bob Michael likes credit. 0:06:57.800 --> 0:06:59.920 And I'm looking right now at how your bonds. You know, 0:07:00.440 --> 0:07:03.640 at six point six percent, they have been climbing dramatically. 0:07:03.680 --> 0:07:08.360 We've also seen investment grade credit yields rise dramatically. How 0:07:08.440 --> 0:07:10.920 much do you parse out the value that you're getting 0:07:11.240 --> 0:07:15.080 by just buying and holding and clipping coupons versus the 0:07:15.080 --> 0:07:18.520 potential rate shock. Should the Fed go much more aggressively 0:07:18.560 --> 0:07:21.760 to gertail inflation. Yeah? Absolutely. I mean we've seen a 0:07:21.840 --> 0:07:25.200 massive repricing in yields. You have the high old index 0:07:25.280 --> 0:07:28.760 above uh six point seven percent in an all in yield. 0:07:28.880 --> 0:07:32.800 You have investment grade credit with yields that are nearly 0:07:32.960 --> 0:07:36.920 double what they were just six or nine months ago um. 0:07:37.000 --> 0:07:40.760 And so there's a lot more value to that credit 0:07:40.840 --> 0:07:43.360 now than we had before. And at the same time, 0:07:43.400 --> 0:07:47.040 the corporate fundamentals remain strong when we look at leverage ratio, 0:07:47.080 --> 0:07:49.760 as we look at the cash that they have on hand. UM. 0:07:49.760 --> 0:07:52.200 When we look at their ability to maintain their margins 0:07:52.240 --> 0:07:56.200 by raising prices. This is not an easy time for corporates, 0:07:56.200 --> 0:07:59.320 but they're coming from a very strong place. So we've 0:07:59.320 --> 0:08:03.040 got a rule framework of bear markets in equity, in 0:08:03.080 --> 0:08:06.480 a bear market in bonds priced down, yield up? Can 0:08:06.520 --> 0:08:10.000 there be a Catharsis selected people on load bonds in 0:08:10.040 --> 0:08:13.360 a panic? Is there a history of that? Well, we 0:08:13.480 --> 0:08:17.320 are seeing a lack of of of buying right now, 0:08:17.360 --> 0:08:20.560 I think, particularly from the foreign base, and I know 0:08:20.640 --> 0:08:24.040 you watch the spread between or the currency pair of 0:08:24.120 --> 0:08:26.640 the US dollar and the yen um. One of the 0:08:27.040 --> 0:08:30.360 ways that we're seeing this translate um into the bond 0:08:30.440 --> 0:08:33.000 market from the currency market is that weakness in yen 0:08:33.600 --> 0:08:37.719 is driving us selling from the Japanese investors selling their 0:08:37.760 --> 0:08:41.920 foreign foreign treasury bonds or their treasury bonds um and 0:08:42.040 --> 0:08:45.800 that is putting further upward pressure on yields when there 0:08:45.800 --> 0:08:48.880 just isn't a lot of people who are comfortable stepping 0:08:48.960 --> 0:08:51.400 into this market right now and trying to catch that 0:08:51.440 --> 0:08:54.160 falling knife. So Cassy, just explain this and let's finish it. 0:08:54.400 --> 0:08:56.600 Why you and the team, along with Bob still so 0:08:56.720 --> 0:09:02.760 constructive on credit, given everything you've said about core government bonds. Yeah, 0:09:02.840 --> 0:09:05.920 so I think right now what we want to have 0:09:06.080 --> 0:09:08.200 is we want to have that credit exposure, but we 0:09:08.280 --> 0:09:11.520 want to get it in structures that are shorter duration, 0:09:12.080 --> 0:09:15.480 um that are floating rate, that protect you from what 0:09:15.559 --> 0:09:18.280 we do believe is still going to be higher yields 0:09:18.320 --> 0:09:30.400 for now. Cassy Barrow awesome. As always, nobody's like Jeffrey you. 0:09:30.720 --> 0:09:32.960 Jeff you is from another planet and I'm lucky that 0:09:33.040 --> 0:09:34.600 he comes down the planet Earth to catch up with 0:09:34.640 --> 0:09:36.800 us this morning, Senior and mea market is trying to 0:09:36.840 --> 0:09:38.400 just a being white man and Jeff great to catch 0:09:38.440 --> 0:09:40.400 up with you. Buddy. Let's get to the heart of 0:09:40.400 --> 0:09:42.839 the city, and that's foreign exchange sterling. A lot of 0:09:42.840 --> 0:09:45.640 weaker off, some really really weak data in the UK. 0:09:46.200 --> 0:09:48.920 Asked this if Jane Foley earlier this morning, Jeff, what's 0:09:48.960 --> 0:09:51.160 the lesson we're learning from the UK's experience with the 0:09:51.240 --> 0:09:54.400 hikey cycle very early, very early on in that hiking 0:09:54.480 --> 0:09:58.080 cycle and a week of data that started to come through. Well, 0:09:58.160 --> 0:10:01.839 the be a lesson here is stagflation has two parts 0:10:01.840 --> 0:10:03.679 of it. You've got to focus on the stag nation 0:10:03.920 --> 0:10:05.800 as well as the inflation. And now as far as 0:10:05.800 --> 0:10:08.280 the UK is concerned, looking at the retail sales numbers, 0:10:08.760 --> 0:10:10.720 are looking at the gas bills, which is what everyone's 0:10:10.720 --> 0:10:13.199 doing probably ten times a day right now. Absolutely, you 0:10:13.240 --> 0:10:16.320 know stagnation is coming for the UK household, Jeff, you 0:10:16.440 --> 0:10:19.240 so importantly. There are leakages within our sort or two. 0:10:19.360 --> 0:10:22.839 There are things that react and change the story. What 0:10:22.880 --> 0:10:25.760 are you watching is the metric that will change the 0:10:25.880 --> 0:10:30.559 story out pairs July. Is it dour dynamics or is 0:10:30.600 --> 0:10:34.400 it something e M developed nation dynamics. I think we're 0:10:34.400 --> 0:10:36.080 going to see quite a bit of chop and change 0:10:36.080 --> 0:10:37.800 in e M right now. What has been the theme 0:10:38.000 --> 0:10:40.440 stagflation again, So how do you play that through e M? 0:10:40.600 --> 0:10:44.240 You want to own commodity block currencies. In our positioning 0:10:44.240 --> 0:10:49.280 indicators in eFlow, every single Latin American currency was overheld, 0:10:49.320 --> 0:10:51.880 was well owned in the first quarter, but now that's 0:10:51.880 --> 0:10:54.480 starting to change. We've seen the Mexican pacer starting to 0:10:54.520 --> 0:10:57.480 fall back, so that inflation protection trade, especially within an 0:10:57.480 --> 0:10:59.800 emerging market. If you look at the rand that's probably 0:11:00.000 --> 0:11:01.760 to come off now. Are people now looking to go 0:11:01.840 --> 0:11:05.280 back to Asia ex China? Exactly? Exactly what do we 0:11:05.320 --> 0:11:08.920 do about Pacific rim X Japan at a one after 0:11:09.000 --> 0:11:12.240 one thirty? What does sing dollar do? Just as one example, 0:11:13.080 --> 0:11:15.640 so you you look at where dollyan is right now, 0:11:15.679 --> 0:11:18.400 people are thinking, okay, are the German car manufacturers telling 0:11:18.400 --> 0:11:20.439 the ECB to call the b O j No, this 0:11:20.520 --> 0:11:25.800 is the wrong continent. Places like you know, Taiwan, like Singapore, Thailand. 0:11:25.840 --> 0:11:29.200 You know, these are areas where every one percent move 0:11:29.400 --> 0:11:32.240 in dollar yen high actually offsets any benefit they get 0:11:32.360 --> 0:11:35.280 from dollar stronger as well, so we and hurts them 0:11:35.520 --> 0:11:38.200 arguably more certainly more than the US and the Eurozone. 0:11:38.360 --> 0:11:40.800 So this is where the intra region dynamics are in play. 0:11:40.880 --> 0:11:44.080 But we like Southeast Asia potentially as Thailand continues them 0:11:44.120 --> 0:11:46.680 to open up, but also in your places life, time, career, 0:11:46.880 --> 0:11:49.520 the tightening places. You know, these two economies really pushing 0:11:49.559 --> 0:11:51.640 forward right now. You want to own them, Jeff, A 0:11:51.640 --> 0:11:53.960 lot of investors have been tying at Japan and some 0:11:54.000 --> 0:11:57.040 of the dynamics. They're into the US bond market saying 0:11:57.080 --> 0:12:00.319 they're the biggest buyers of US treasuries and this is 0:12:00.360 --> 0:12:04.520 because of the currency adjustments over history, this dynamic of 0:12:04.559 --> 0:12:07.880 a weaker yen changes that dynamic dramatically. How much do 0:12:07.920 --> 0:12:10.360 you think that's going to influence the long end and 0:12:10.360 --> 0:12:14.240 send yields higher. I'm actually not too focused on the 0:12:14.280 --> 0:12:17.240 treasury market, but you're absolutely right in saying Japanese and 0:12:17.280 --> 0:12:20.680 also add Taiwanese and Korean investors, you know, those big 0:12:20.720 --> 0:12:23.400 Asian savings pools. It's not the treasury market you should 0:12:23.400 --> 0:12:25.720 look at. It is US high yield. You know, these 0:12:25.720 --> 0:12:28.280 are the areas where Asian investors have been picking up 0:12:28.360 --> 0:12:30.360 cooper but have been picking up coupon over the last 0:12:30.360 --> 0:12:32.800 few years. Now we're seeing spread widening if they begin 0:12:32.880 --> 0:12:36.080 to exit, if they begin to repatriate to stabilizing them 0:12:36.080 --> 0:12:38.720 to some extent, and then the widening that we're seeing 0:12:38.840 --> 0:12:41.280 due to the FED right now in US corporate spreads, 0:12:41.360 --> 0:12:44.280 that's going to accelerate because the Asian bid is gone. Jeff, 0:12:44.400 --> 0:12:45.719 Let's sit on this for a minute, and are you 0:12:45.880 --> 0:12:48.720 saying that basically, the stronger that the dollar gets, and 0:12:48.760 --> 0:12:51.360 the more you see yields continuing to climb and the 0:12:51.400 --> 0:12:54.959 opposite happening elsewhere, you're going to see more and more 0:12:55.040 --> 0:12:58.440 weakness in the credit space that perhaps isn't fundamentally driven 0:12:58.640 --> 0:13:01.839 but simply a supply demand mimic because if you look 0:13:01.880 --> 0:13:03.640 at say career, if I'm a career on a time 0:13:03.679 --> 0:13:06.320 on ease investor, and right now, finally I'm seeing some 0:13:06.360 --> 0:13:09.240 movement in my own yield cup while the dollar is strong, 0:13:09.440 --> 0:13:11.680 while I have good total returns. If I had my coupon, 0:13:11.760 --> 0:13:14.880 my my duration plus my ex it's looking pretty good 0:13:15.000 --> 0:13:16.559 right now. Let me get out, you know, while the 0:13:16.600 --> 0:13:19.000 five FED is still not, you know, really pressing the 0:13:19.000 --> 0:13:21.560 pedalants into tightening and capture some of my own yield 0:13:21.559 --> 0:13:23.200 on shore where I don't have to take into count 0:13:23.200 --> 0:13:26.080 the f X risk. For Japanese and pension investors, maybe 0:13:26.080 --> 0:13:28.120 they can take into account that the higher yields that 0:13:28.160 --> 0:13:30.839 same dynamic. They're not getting tightening in Japan via rates, 0:13:31.040 --> 0:13:32.880 but they can top that up with a higher dollar. 0:13:32.960 --> 0:13:35.280 And at the same time, so that flow moving out 0:13:35.320 --> 0:13:38.199 of US treasuries for sure, but also corporate high you're 0:13:38.320 --> 0:13:41.160 going back to Asia while they're taking profit on a 0:13:41.320 --> 0:13:44.560 very structural multi year total return trade. That is something 0:13:44.600 --> 0:13:47.040 that could exacerbate tensions in the US credit market if 0:13:47.040 --> 0:13:49.240 this is potentially a massive shift. One thing we haven't 0:13:49.280 --> 0:13:51.480 mentioned is what you think this means for the US 0:13:51.480 --> 0:13:54.920 secretary story. M H, Well, the U S security story. 0:13:54.960 --> 0:13:56.320 I think you know that if I look at the 0:13:56.760 --> 0:13:59.920 what what eyebox high yield, it's underperformed their SMP by 0:14:00.040 --> 0:14:03.960 that I think six percent six percentage points this year already. 0:14:04.040 --> 0:14:06.040 So but this wasn't always the case. You know, this 0:14:06.080 --> 0:14:07.839 has been more recent, so the two were working in 0:14:07.920 --> 0:14:10.840 lock lock steps. So from point of view an international investor, 0:14:11.040 --> 0:14:13.960 now you're seeing differentiation. So now that the tightening and 0:14:14.040 --> 0:14:18.600 US financial conditions is finally moving from equities to corporate spreads, 0:14:18.640 --> 0:14:20.680 you know that is the fourth shooter drop. Basically, I 0:14:20.720 --> 0:14:22.360 think they're going to be more attuned to that, So 0:14:22.400 --> 0:14:25.640 I would expect corporate credit to underperform equities much more 0:14:25.720 --> 0:14:27.960 up ahead. Your final question from me, have you got 0:14:27.960 --> 0:14:29.400 a number in mind for the peak of the FED 0:14:29.400 --> 0:14:31.440 funds right in this cycle? Do you have a number 0:14:31.440 --> 0:14:35.680 in mind? So I would actually put you pick a 0:14:35.760 --> 0:14:39.200 number where terminal rates So we're sorry when neutral rators 0:14:39.360 --> 0:14:41.640 say you want of three, then you add potentially a 0:14:41.680 --> 0:14:44.080 hundred hundred fifty basis points above that. That's where it 0:14:44.160 --> 0:14:47.360 is absolute basis absolutely true, but on a relative basis 0:14:47.400 --> 0:14:50.560 relative to neutral, FED will be restrictive to bring down inflation, 0:14:50.760 --> 0:14:52.000 and that number is the one that you need to 0:14:52.000 --> 0:14:54.320 have in mind. Jeff, you if we and White Manager, Jeff, 0:14:54.320 --> 0:15:03.720 thank you, sir. As always, we will stop here with 0:15:03.840 --> 0:15:07.080 the student of this nation. He is without question the 0:15:07.120 --> 0:15:11.400 most articulate conservative economists we have. Glenn Hubbard joins us 0:15:11.640 --> 0:15:15.000 from Colombia. His service there is dean of the Business School, 0:15:15.320 --> 0:15:18.440 former chairman of the Council on Economic Advisors, and I 0:15:18.520 --> 0:15:22.240 really can't say enough about his book The Wall and 0:15:22.320 --> 0:15:25.640 the Bridge, where he leads off, where the walls come 0:15:25.680 --> 0:15:29.400 a tumbling down and Mr Gorbuschev tear down this wall, 0:15:29.520 --> 0:15:32.600 and how we have circled around to the chaos of 0:15:32.640 --> 0:15:34.840 the day. Glen Hubbard, I want to go back to 0:15:34.920 --> 0:15:37.760 your Florida and my western New York, long ago and 0:15:37.840 --> 0:15:42.920 far away of where Milton Friedman just simply said, what 0:15:43.120 --> 0:15:46.760 is the right policy? Now? The policy showed up one 0:15:46.840 --> 0:15:50.320 year later in the form of Paul Voker. Where is 0:15:50.400 --> 0:15:55.640 today's Paul Woker? Well, I think the FED has now 0:15:55.800 --> 0:15:58.880 understood that it's been behind the curve and needs to 0:15:58.960 --> 0:16:03.200 step in. I do worry that the period from five 0:16:03.280 --> 0:16:07.680 to three is more instructive than people might think. For today, 0:16:08.040 --> 0:16:09.720 I think it's a little naive to think that the 0:16:09.760 --> 0:16:13.200 FED wants to crush inflation. The two hundred ish faces 0:16:13.280 --> 0:16:15.640 points in the FAD funds rate is going to do that. 0:16:16.160 --> 0:16:17.760 So we'll have to see. But I do think that 0:16:17.800 --> 0:16:20.680 Fed has the courage to act, and I don't think 0:16:20.760 --> 0:16:23.200 the market should take comfort in that. I'm not gonna 0:16:23.280 --> 0:16:25.280 jink you, but I'm not Gonnam mince words or the 0:16:25.360 --> 0:16:29.239 Republican president. You're shortlisted as chairman. There's no other way 0:16:29.280 --> 0:16:32.360 around that, Chairman Hubbard, let me make it clear. Volker 0:16:32.480 --> 0:16:36.280 had twelve percent yields or whatever they were. Powell has 0:16:36.360 --> 0:16:40.080 one percent yields, two percent yields. We can't do what 0:16:40.240 --> 0:16:45.840 Voker did. Canley, Well, it's difficult, and I'll tell you why. 0:16:46.200 --> 0:16:48.560 Not so much about the fence courage, but about other things, 0:16:48.640 --> 0:16:52.400 for example, fiscal policy and the budget. As the FED titans, 0:16:52.800 --> 0:16:55.280 the federal deficit gets a lot words from shorten the 0:16:55.320 --> 0:16:57.840 maturity the debt. We have a very large debt today 0:16:57.960 --> 0:17:01.240 relative to what Paul Volker faced. There are also issues 0:17:01.320 --> 0:17:03.520 of how much of a recession the FED is willing 0:17:03.560 --> 0:17:06.280 to tolerate. If the FED wants to get back to 0:17:06.359 --> 0:17:09.280 two percent inflation, I find it hard to believe that 0:17:09.320 --> 0:17:12.280 the soft landing is possible. Glenn, What does that mean 0:17:12.480 --> 0:17:14.480 you were saying? And I want to pick up on this, 0:17:14.480 --> 0:17:16.960 this idea of the fact that there seems to be 0:17:17.000 --> 0:17:21.320 complacency in certain risk assets. Where is that complacency? How 0:17:21.359 --> 0:17:27.040 disruptive could these tightening cycles be for markets? Well, it 0:17:27.080 --> 0:17:29.840 depends on how far the FED feels it has to go. 0:17:30.480 --> 0:17:34.159 You you mentioned before about the possibility of several fifty 0:17:34.200 --> 0:17:36.439 basis point hikes. I think the FED will take a 0:17:36.480 --> 0:17:38.960 look and see what's happening in the economy. But I 0:17:38.960 --> 0:17:41.280 don't think we're in stagflation right now. I think we're 0:17:41.280 --> 0:17:43.520 in an inflationary boom. I think there's a lot of 0:17:43.560 --> 0:17:46.560 wind at the back still, So I do think the 0:17:46.600 --> 0:17:49.440 FED is going to have to take fairly bold action, 0:17:49.600 --> 0:17:52.320 Not like Paul Volker, but pretty bold. Do you believe 0:17:52.359 --> 0:17:54.040 that Bill Dudley is correct that we're going to see 0:17:54.119 --> 0:17:56.600 four percent FED funds rate over the next two years. 0:17:57.720 --> 0:17:59.840 I don't think you could rule it out. I think 0:17:59.840 --> 0:18:03.000 it depends obviously on geopolitical events that none of us 0:18:03.040 --> 0:18:06.320 can sit here and forecast today. But I do think 0:18:06.400 --> 0:18:09.439 that the FED should be prepared to do what it takes, 0:18:09.480 --> 0:18:11.560 and if the market believe that, it will do what 0:18:11.680 --> 0:18:14.359 it takes to put the inflation genie back the bottle. 0:18:15.040 --> 0:18:19.000 Glen Hubbard moments ago a world class economist Nglist of 0:18:19.080 --> 0:18:21.639 Sweden and the Stockholm School just came out with a 0:18:21.720 --> 0:18:26.439 stunning headline which directly addresses this scene. Demon Hubbard uh 0:18:26.720 --> 0:18:30.640 Vis of the Rights Bank says, not a period of normalization, 0:18:31.320 --> 0:18:34.919 but a new policy. Is that really what we're talking 0:18:34.960 --> 0:18:37.000 about here is we need to make up a new 0:18:37.040 --> 0:18:42.960 policy original economics. I don't know that it's a new 0:18:43.040 --> 0:18:47.159 policy as much as going back to being serious about 0:18:47.480 --> 0:18:50.920 the factors that cause inflation. We got this inflation because 0:18:50.960 --> 0:18:53.680 the man was growing too fast relative to supply. It's 0:18:53.720 --> 0:18:57.200 not even that complicated. It's not all Ladimir and it's 0:18:57.240 --> 0:18:59.880 not all supply chains, and so I think it's more 0:19:00.000 --> 0:19:02.399 matter of getting back to bases, to be honest. Okay, 0:19:02.400 --> 0:19:05.040 so we had a big, big fiscal inpust. What is 0:19:05.080 --> 0:19:09.480 the Hubbard prescription, away from the politics of it all, 0:19:10.040 --> 0:19:15.360 to diminish this inflation down to say three or lower. Well, 0:19:15.400 --> 0:19:17.919 we don't. We will already see a winding back of 0:19:18.000 --> 0:19:20.880 some of the fiscal impulse simply because we won't see 0:19:20.880 --> 0:19:24.520 additional stimulus on monetary fault policy. The FED has to 0:19:24.560 --> 0:19:27.439 follow through that. It's very serious and then it's not 0:19:27.560 --> 0:19:30.800 simply underwriting a put for the stock market every time 0:19:30.840 --> 0:19:34.199 financial markets have a hiccup. We're speaking with Glenn Hubbard 0:19:34.359 --> 0:19:38.080 of Columbia University, and we're talking about the new dynamic 0:19:38.160 --> 0:19:40.760 and what the FEED is looking at with respect to inflation. 0:19:40.840 --> 0:19:43.600 What about the labor market? You write about economic bridges 0:19:43.800 --> 0:19:46.760 and the economic bridges at a time when participation rate 0:19:47.000 --> 0:19:50.240 remains well below where we were pre pandemic. How does 0:19:50.280 --> 0:19:54.840 the FED effectively curtail inflation while allowing that participation break 0:19:54.920 --> 0:19:57.560 to get back to something that is more representative of 0:19:57.560 --> 0:20:01.880 a robust economy. What's a good question. Participations are critical 0:20:02.000 --> 0:20:05.520 social issue. I don't think letting the economy run hot 0:20:05.960 --> 0:20:09.280 it's going to fix the participation problem. There are things 0:20:09.359 --> 0:20:13.399 that can training, education, a lot of fiscal interventions, but 0:20:13.440 --> 0:20:16.720 they're really not in the FEDS tool kit. The labor 0:20:16.760 --> 0:20:19.240 market has the FEDS should see it is actually running 0:20:19.320 --> 0:20:22.480 quite hot. It would be better if the administration focused 0:20:22.480 --> 0:20:25.919 more on participation, but so far not. How much has 0:20:25.920 --> 0:20:29.399 the FED lost credibility and trying to address issues that 0:20:29.520 --> 0:20:33.439 really are only addressable on the fiscal side. Well, I 0:20:33.480 --> 0:20:36.560 think the FEDS still has abundant credibility with the public. 0:20:36.600 --> 0:20:39.480 I I really do. I think the feds conversion recently 0:20:39.560 --> 0:20:41.920 has helped that. But I think the FED does itself 0:20:41.920 --> 0:20:44.639 no favors when it tries to widen its role in 0:20:44.880 --> 0:20:47.840 issues that are really more for fiscal policy. If members 0:20:47.880 --> 0:20:50.880 of Congress and the administration won't do the right thing, 0:20:50.960 --> 0:20:52.920 that's not an excuse for the FED to step Onack. 0:20:53.440 --> 0:20:56.040 We had an interesting debate yesterday with Claudius some out 0:20:56.040 --> 0:20:59.159 of the Michigan academic assets and Matt Shapiro, Old Kimball 0:20:59.200 --> 0:21:02.080 and the most of them out there, and and she 0:21:02.240 --> 0:21:07.640 was really quite heated about the policy gloom of stagflation. 0:21:07.760 --> 0:21:10.760 Now is is it precisely Hubbard economics? No, it's not. 0:21:11.280 --> 0:21:17.280 But what does the stagflation gloom get wrong? Well, I 0:21:17.320 --> 0:21:19.439 think if you start up where we are now, I 0:21:19.480 --> 0:21:23.400 think we're in a classic inflationary boom. We've seen fairly 0:21:23.440 --> 0:21:27.639 good numbers for output for jobs, we're running ahead of 0:21:27.680 --> 0:21:31.000