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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa A. Brawnwitz. Daily we bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg

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Speaker 1: dot Com, and of course, on the Bloomberg terminal. Lindsay

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Speaker 1: Pegs that joins us right now chief economist as Stephile.

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Speaker 1: Here she digests what Mike McKee was talking about out

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Speaker 1: in Victor, Idaho. Lindsay, your immediate reaction to this stunning report, Well,

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Speaker 1: it certainly reinforces the upward, relentless upward trend that we've

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Speaker 1: seen in prices, undermining optimism that we would see some

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Speaker 1: sort of near term relief now. To be fair, as

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Speaker 1: you discussed earlier, the vast majority of the price pressures

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Speaker 1: do seem to be centered in food and energy, and

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Speaker 1: we did see some brief at least on the annual

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Speaker 1: basis of the core. But for the average American household,

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Speaker 1: food and energy are two of the key categories of

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Speaker 1: non discretionary spending, and so when we see slightly less

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Speaker 1: pressure in terms of airline fares, that offers very little

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Speaker 1: reprieve for the average household struggling to fill up their

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Speaker 1: car or put groceries on the table. So this is

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Speaker 1: going to amp up pressure on policy makers, both in

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Speaker 1: the White House and monetary policy makers to make a

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Speaker 1: stronger move to provide near term relief. And lindsay this

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Speaker 1: goes to a point that was highlighted in a Wall

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Speaker 1: Street Journal article today talking about how that headline number,

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Speaker 1: that headline CPI figure of now nine point one is

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Speaker 1: going to matter a lot more than the core number

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Speaker 1: just because of inflation expectations and what the consumer is feeling,

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Speaker 1: and that the FETE is expressed much more concern about this.

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Speaker 1: So what are you gaming out based on this number?

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Speaker 1: How that could change the sequence the sequence of rate

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Speaker 1: heights not necessarily a seventy five basis points this month,

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Speaker 1: but the follow ones September and thereafter well, absolutely Typically

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Speaker 1: we exclude food and energy because they tend to be

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Speaker 1: the most volatile components. So from a monetary policy standpoint,

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Speaker 1: we often see the FED focused on the core, but

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Speaker 1: you're right, the average American is focused on the headline

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Speaker 1: number because we pay for food and energy. So how

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Speaker 1: does this translate into the pathway for FED policy. The

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Speaker 1: Fed already has that seventy five basis points on the table,

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Speaker 1: and this morning's report seems to solidify that seventy basis

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Speaker 1: points in just less than two weeks time. But going forward,

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Speaker 1: if we continue to see these elevated levels of prices,

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Speaker 1: given the Fed has told us that the prerequisite for

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Speaker 1: a more benign pathway is a market decline in headline inflation,

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Speaker 1: it's hard to imagine that they take a softer stance

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Speaker 1: or begin to back away from additional seventy five basis

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Speaker 1: point increases as we move closer to the fourth quarterer.

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Speaker 1: See let's go through the estimates for this FED for

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Speaker 1: year end. They've got kill p c A of four

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Speaker 1: point two. Can you just run me through how far

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Speaker 1: off the mark you think that estimate already is. That's

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Speaker 1: that's pretty optimistic. But to be fair, historically, the Fed

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Speaker 1: does appear to be overly optimistic in terms of its

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Speaker 1: growth and inflation forecast sending a more positive signal to

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Speaker 1: the market and market expectations. But when we talk about

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Speaker 1: the PC, it's six percent right now, getting down to

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Speaker 1: four percent, which is five months and the year left,

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Speaker 1: it's going to require markedly different conditions in the international market.

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Speaker 1: We're going to have to see balance restored to global

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Speaker 1: marketplaces and or resolution reached overseas, neither of which the

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Speaker 1: FED has control over. The FED can only raise rates

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Speaker 1: and tap down the demand side in terms of price pressures,

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Speaker 1: but it cannot control the supply side. And I fear

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Speaker 1: that in order to get that optimistic level of four

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Speaker 1: percent by the end of the year, or nearer two percent,

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Speaker 1: as the FED projects by the end of next year,

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Speaker 1: we will have to see vast improvement in international factors.

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Speaker 1: Lindsay domestically, I just want to understand how father Fed's

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Speaker 1: going to push it. They can't say everything you've just said,

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Speaker 1: because then they rise a credibility issue, and you know

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Speaker 1: if they said that, what would happen with this market?

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Speaker 1: It's the FED back in a way equities with rallied

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Speaker 1: credit spreads with titan, that dollar might weaken. How far

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Speaker 1: do you think this feed is going to push this? Well,

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Speaker 1: according to Federal Reserve Chairman Jerome Powell, he is willing

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Speaker 1: to push this as far as needed, even if that

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Speaker 1: means a market decline in domestic activity in order to

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Speaker 1: get inflation under control. Right now. They are hyper focused,

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Speaker 1: solely focused on inflation and that is their key objective,

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Speaker 1: getting that price stability. So if they need another seventy

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Speaker 1: in July and three more seventy five rate hikes by

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Speaker 1: the end of the year, I think they'd be willing

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Speaker 1: to do it. Do I think that's the appropriate pathway?

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Speaker 1: Absolutely not, But I think in order to maintain credibility

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Speaker 1: and try at least and get some sort of of

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Speaker 1: relief from prices, that their hands are tied. That's all

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Speaker 1: they have, just the mice and thank you scp X

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Speaker 1: of the st Michael O'Rourke, chief market strategist at Jones

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Speaker 1: Trading Today, Michael, how does your world change with the

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Speaker 1: nine point one print? Well, I mean it's very consistent

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Speaker 1: with where we've been. Obviously, we've seen this inflation rising

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Speaker 1: for over a year now. Markets have been concerned about

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Speaker 1: it and the main concern is that the Fed's been

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Speaker 1: behind the curve and that was proven true once again today.

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Speaker 1: So I expect investors to continue to be defensive and

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Speaker 1: I think it's gonna be a rough road the second

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Speaker 1: half of twenty two. Does this inflation read Michael, change

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Speaker 1: anything in your view? In your trading strategy today. Uh,

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Speaker 1: it doesn't. Obviously, there was a lot of hype around

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Speaker 1: this number, a lot of high expectations that the number

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Speaker 1: would be um hotter than expected, and it was. I

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Speaker 1: will say the one I guess the bright spot in

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Speaker 1: there is the fact that the course cp I continued

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Speaker 1: it's slight down trend, and that you know that peak

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Speaker 1: was still at six six point five, your your growth

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Speaker 1: back in March um and then when you look at

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Speaker 1: w TY crew being around a hundred dollars and starting

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Speaker 1: to come back in, if energy continues to come back in,

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Speaker 1: that would be a hopeful sign. But the problem is

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Speaker 1: is we're still looking at asset valuations that are still

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Speaker 1: pretty expensive relative to where the economy is, and the

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Speaker 1: fact that we have significant rate rate hikes ahead of us.

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Speaker 1: How much does core CPI matter going forward? And how

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Speaker 1: much is this purely going to be a headline figure

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Speaker 1: for a FED trained on consumer expectations. Well, you know,

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Speaker 1: as you noted, the FED is focused on the headline

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Speaker 1: right now. But as long as the crew keeps coming down,

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Speaker 1: as long as energy prices come down, or at least

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Speaker 1: they've put their peak into for this cycle or this move,

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Speaker 1: then core becomes a more meaningful number, and you can

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Speaker 1: see expectations shift towards the focus on core. Obviously, if

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Speaker 1: if we continue to have an energy crisis, that if

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Speaker 1: there's another flare up or we see w T, I

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Speaker 1: make a run back towards the headline number becomes the

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Speaker 1: focus again. But I think in the seecond half of

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Speaker 1: the year, I think um people will start to shift

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Speaker 1: a focus towards cores. Again, it's still not a pretty situation,

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Speaker 1: but obviously it's not as terrible as as a nine

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Speaker 1: point one percent year of the year growth reading looks.

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Speaker 1: C IBC reporting in from Toronto, Catherine Judge, as we

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Speaker 1: noted earlier, she says Shelter a major contributor in Katherine

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Speaker 1: Judge really quite importantly on the deceleration of Michael Rourke

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Speaker 1: just discussed really saying this is so much base effects,

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Speaker 1: which is some mumbo jumble for looking back twelve months

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Speaker 1: if you will. We won't go into that right now, Michael.

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Speaker 1: The thing that devolves down to is the earning season

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Speaker 1: which begins, I believe Lisa it's tomorrow as well. How

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Speaker 1: does inflation devolved down to the revenue view forward for corporations. Well,

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Speaker 1: it's tricky here, right. I agree. Here you're seeing these

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Speaker 1: these good revenue numbers because people have been raising prices.

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Speaker 1: But Delta Airlines might be a great example today. Obviously

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Speaker 1: they're they're talking about how strong businesses, how much demand

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Speaker 1: there is, right, but they missed on the bottom line.

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Speaker 1: And you know, if you look at their earnings, I

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Speaker 1: think X energy there, their costs were up versus H versus.

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Speaker 1: So I think that that's that's the squeeze. See. I

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Speaker 1: don't think you can trust the revenue number. I guess

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Speaker 1: per se, and you really have to watch and see

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Speaker 1: where the margins are being squeezed for profits. Michael Rourke,

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Speaker 1: thank you so much. With Jones trity that they right now.

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Speaker 1: This is something we rarely do but because a water

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Speaker 1: hazard on Bluemberg radio. But when you can get someone

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Speaker 1: standing in the South Fork of the Snake River in

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Speaker 1: a drift boat U fishing away and speak to them

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Speaker 1: at radio, it's always constructive joining us. The fisher person

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Speaker 1: David Kotak joins us this morning with Cumberland Advisers. David,

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Speaker 1: of course you're out in Idaho talking economics, but is

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Speaker 1: there a little bit of fishing going on for the

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Speaker 1: acclaimed Yellowstone cutthroat trout. Absolutely, Tom, thank you so much

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Speaker 1: for having me. And it's nice to be with you

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Speaker 1: and pretty and pretty and you can come fishing with

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Speaker 1: me anytime. I can't find waiters long enough to fit. Tom.

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Speaker 1: You got that right. I've turned this down for years.

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Speaker 1: I don't you know. I'd have to have Critty put

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Speaker 1: the worm on the hook for me right now, David,

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Speaker 1: you and I are the only two in the planet

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Speaker 1: that remember inflation like this. But you and I also

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Speaker 1: know this is different out of pandemic and massive fiscal stimulus.

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Speaker 1: Explain to our audience coast to coast, shell shocked at

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Speaker 1: nine point, why this is a different inflation. Yeah, this

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Speaker 1: is a different inflation. And and thank you Tom. The

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Speaker 1: you have to back the way. This is not a

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Speaker 1: business cycle. So we have a shooting war widening in Europe,

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Speaker 1: we have a worldwide financial sanctions payments war. We still

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Speaker 1: have a pandemic, and still have COVID shocks. One of

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Speaker 1: the pannels that I'm doing and tomorrow in the Victor

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Speaker 1: Idaho is on long COVID. Millions of people with disability

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Speaker 1: and the labor force, and we have massive political turmoil,

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Speaker 1: including a country which is having a war between the states.

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Speaker 1: This is not a normal shock, it's huge, and so

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Speaker 1: shock response is what financial markets are dealing with. You've

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Speaker 1: been talking about it this morning, and I really appreciate

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Speaker 1: a forty year old the story you told about Detroit.

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Speaker 1: It makes those of us who have a perspective of

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Speaker 1: history enable us to respect the history. Thank you for that. Well,

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Speaker 1: I have to let's talk about the history. Tom has

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Speaker 1: reminds me over and over and over again this morning

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Speaker 1: that a negative sixteen yield curve in version that we're

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Speaker 1: seeing on the two tens curve will put that into

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Speaker 1: perspective of the vulgar area. And you saw an inversion

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Speaker 1: of negative two hundred, right, so this is something that

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Speaker 1: you actually haven't seen going back to two thousand. Can

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Speaker 1: you occurrent versions way rarer cretty than you think? Well,

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Speaker 1: it's funny because I feel like it's all we've been

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Speaker 1: talking about for the last couple of months, David, how

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Speaker 1: much faith? How much stock should we put in this

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Speaker 1: curve and version that keeps getting more and more negative? Well,

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Speaker 1: I just I just published and not long ago, a

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Speaker 1: pencil and eighty pages of data. But it compared two

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Speaker 1: metrics and Neil Kers the took ten which everybody's talking

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Speaker 1: about looking at, and the old Bobbler rent comparison of

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Speaker 1: the very short term rate and the long term saying

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Speaker 1: treasury bills is this thirty year treasury bond? You must,

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Speaker 1: in my opinion, look at both curves. When all of

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Speaker 1: them are flat, we really encounter trouble. And right now

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Speaker 1: the long short curve is not inverted. The middle is inverted.

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Speaker 1: And so that's a mixed message. So I'm not all

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Speaker 1: up in arms over to ten if the short rate,

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Speaker 1: which it looks like it's coming, because I agree with

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Speaker 1: ira and and your conversation earlier, We're gonna get seventy five.

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Speaker 1: We're gonna get seventy five again. We're going to take

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Speaker 1: a Fed funds rate somewhere between three and four ten

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Speaker 1: year treasury where's it go maybe close to four um.

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Speaker 1: That's an expectation, and that will cramp down the US

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Speaker 1: economy hard. We're already seen some of that in the

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Speaker 1: data flow today. David, are you seeing this in Florida?

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Speaker 1: Come on, Florida is a massive book critty, Who do

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Speaker 1: we know that's not moving to Florida? Florida or Austin, Texas. Right, yeah,

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Speaker 1: I mean, what what is the state in your Florida

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Speaker 1: David Kotak, Well, if Florida have two things going on.

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Speaker 1: When we have a public health policy which is ignoring

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Speaker 1: public health that isn't causing outward movement in some businesses

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Speaker 1: and service sectors and events, and we have an influx

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Speaker 1: of people, and the influx of people look at no

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Speaker 1: taxes and they want to move from someplace else. So

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Speaker 1: it's a mixed picture in Florida. I am not so

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Speaker 1: sanguine about Florida. Now we need a good hurricane. Watch

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Speaker 1: what the shock will be. You talked about heat in Texas.

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Speaker 1: Come to Florida. It's ninety degrees and ninety humidity all

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Speaker 1: the time. David, we got to talk about investment because

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Speaker 1: you've always been a Cumberland adviser is very clear about

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Speaker 1: your investment exposure. Now what are you exposed to? And

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Speaker 1: may I guess it's municipal bonds? Well, Muni's on the

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Speaker 1: on the eyeside. We have been very heavy on the

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Speaker 1: by side, long muties above four, high grade tax free.

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Speaker 1: So that's one side. On the stock market, US stock market, right,

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Speaker 1: U S C tf strategy portfolio is in cash, it

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Speaker 1: is in the quantitative work, and the other remaining fifty

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Speaker 1: is in defense, health care, and some selected smaller sectors.

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Speaker 1: We are very negative on the outlook near term for

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Speaker 1: the stock mark. When can you buy big tech? Joe

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Speaker 1: Feldman marked down Amazon today, left it outperformed, but took

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Speaker 1: it down just on any but dot tweak? What do

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Speaker 1: you do with big tuch? I'm underweight, Tom, and I

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Speaker 1: don't think this blood bleading is over. David, Thank you

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Speaker 1: so much. Get back to fishing on the south fork

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Speaker 1: of the Snake River. Critty, I just live vicariously through

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Speaker 1: these guys. There's a lot of nature involved. Clearly, it's

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Speaker 1: just you know McKees either, you know buying based at

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Speaker 1: the Red Sox at Fenway. Parker is off some trout

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Speaker 1: fishing farm with Ellen Zentner, and they're not They're like

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Speaker 1: real trout. You know, these are like wild I think,

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Speaker 1: like wild trout? Can I make it even worse? They

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Speaker 1: get paid to do that? How exciting is that? It's

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Speaker 1: very cool? Right now? We wanted to do this, which

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Speaker 1: is get a snapshot of the German people and how

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Speaker 1: they will react to the tumult that is on the

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Speaker 1: Bloomberg screen. Leanna Fix is expert at this to say,

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Speaker 1: she's programmed director where the work at London School of

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Speaker 1: Economic She's at the Corporate Foundation UH in Germany and

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Speaker 1: truly an expert on what the German people do. Leanna,

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Speaker 1: thank you so much for joining us in Hamburg. In

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Speaker 1: January the lowest thirty one degrees fahrenheit. In February thirty

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Speaker 1: two degrees fahrenheit, in March thirty six degrees fahrenheit. What

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Speaker 1: will the people of Hamburg do this coming cold winter? Well,

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Speaker 1: I think you're very well to say that there's a

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Speaker 1: lot of uncertainty and a lot of fear among the

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Speaker 1: German public, not only about the prices, about the energy

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Speaker 1: prices that will um that are rising, about payments that

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Speaker 1: they will have to make at the end of the

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Speaker 1: year that might be twofold, threefold, fourfold as much as

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Speaker 1: they've paid in the past. But there's also a concern

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Speaker 1: whether there will actually be parts of the population that

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Speaker 1: will not be able to warm the households. Especially the

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Speaker 1: news that some communities are preparing centers where you can

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Speaker 1: need to keep yourself warm has sent some quite some

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Speaker 1: shock waves through Germany. So it's something which is observed

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Speaker 1: very closely for Moscow obviously, and we see how Moscow

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Speaker 1: tries to play this game and to create even more

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Speaker 1: fear among the German but also among some of the

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Speaker 1: European publicists. In your research note you say that Mr

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Speaker 1: Putin works from fear? Can he bluff here? I mean,

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Speaker 1: what is the level of bluff? What is the level

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Speaker 1: of the input of fear that Mr Putin will do well?

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Speaker 1: He has a short term advantage because the increase in

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Speaker 1: gas poises leads to the surprising effect that Russia gets

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Speaker 1: as it gets revenues from gas as much as it

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Speaker 1: needs and even more than before. Although we do have

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Speaker 1: an oil oil sanctions from the europe Union that will

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Speaker 1: kick in at the end of the year, but at

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Speaker 1: the moment, Russia can afford to reduce the supplies for

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Speaker 1: Europe and at the same time it gets enough we

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Speaker 1: venues to sustain its own state budget. Um. This will

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Speaker 1: change in the medium to long term, but at the

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Speaker 1: moment this really gives Russia the opportunity to put pressure

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Speaker 1: on Germany and on Europe, and we will probably see

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Speaker 1: that the nod Stream one pipeline will not on to

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Speaker 1: its previous supplies and capacities, but will probably be slowly

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Speaker 1: would use by by Moscow. You know, one of the

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Speaker 1: parlor games right now on Wall Street is trying to

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Speaker 1: figure out what the implications would be should the pipeline

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Speaker 1: get shut off an entirety versus fifty percent capacity resumed, etcetera.

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Speaker 1: And all of these potential outcomes from your perspective, how

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Speaker 1: quickly is Germany moving to really replace those gas supplies?

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Speaker 1: How quickly could they be independent of Russia gas in

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Speaker 1: the face of some of these huge economic concerns that

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Speaker 1: people are projecting in We've seen that Germany has moved

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Speaker 1: quite quickly when it came to Washington oil, surprisingly to everyone,

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Speaker 1: Germany agreed to oil sanctions that will come at the

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Speaker 1: end of the year. But gas it is more difficult.

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Speaker 1: So there are a lot of attempts to get allergy

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Speaker 1: gas to construct allergy terminals because Germany didn't have any

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Speaker 1: before it was so dependent on cheap washing gask coming

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Speaker 1: through the pipelines their travels to cut time and to

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Speaker 1: other countries. But this will not be enough. So in

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Speaker 1: case the nord Stream one pipeline will be shut down entirely,

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Speaker 1: which is probably not as likely as a slow decrease

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Speaker 1: from the Washington side, because then they will still get

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Speaker 1: wevenues from the nord Stream one pipeline. But if that continuous,

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Speaker 1: Germany will have to reduce its DAS consumption quite significantly,

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Speaker 1: the estimates of between twenty and thirty of reductions, and

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Speaker 1: this will obviously be a challenge, and it needs to

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Speaker 1: start now in the summer, not in the winter, because

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Speaker 1: we need already now in the sum of those efforts

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Speaker 1: to fill the storage. And we've heard that a lot

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Speaker 1: over the last few weeks, and I was grit to

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Speaker 1: catch Emily unaffixed that and they call the foundation. This

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Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us

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Speaker 1: live weekdays from seven to ten am Eastern on Bloomberg

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Speaker 1: Radio and on Bloomberg Television each day from six to

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Speaker 1: nine am for insight from the best in economics, finance, investment,

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Speaker 1: and international relations. And subscribe to the Surveillance podcast on

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Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

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Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg m