Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawnwitz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. Lindsay
Speaker 1: Pegs that joins us right now chief economist as Stephile.
Speaker 1: Here she digests what Mike McKee was talking about out
Speaker 1: in Victor, Idaho. Lindsay, your immediate reaction to this stunning report, Well,
Speaker 1: it certainly reinforces the upward, relentless upward trend that we've
Speaker 1: seen in prices, undermining optimism that we would see some
Speaker 1: sort of near term relief now. To be fair, as
Speaker 1: you discussed earlier, the vast majority of the price pressures
Speaker 1: do seem to be centered in food and energy, and
Speaker 1: we did see some brief at least on the annual
Speaker 1: basis of the core. But for the average American household,
Speaker 1: food and energy are two of the key categories of
Speaker 1: non discretionary spending, and so when we see slightly less
Speaker 1: pressure in terms of airline fares, that offers very little
Speaker 1: reprieve for the average household struggling to fill up their
Speaker 1: car or put groceries on the table. So this is
Speaker 1: going to amp up pressure on policy makers, both in
Speaker 1: the White House and monetary policy makers to make a
Speaker 1: stronger move to provide near term relief. And lindsay this
Speaker 1: goes to a point that was highlighted in a Wall
Speaker 1: Street Journal article today talking about how that headline number,
Speaker 1: that headline CPI figure of now nine point one is
Speaker 1: going to matter a lot more than the core number
Speaker 1: just because of inflation expectations and what the consumer is feeling,
Speaker 1: and that the FETE is expressed much more concern about this.
Speaker 1: So what are you gaming out based on this number?
Speaker 1: How that could change the sequence the sequence of rate
Speaker 1: heights not necessarily a seventy five basis points this month,
Speaker 1: but the follow ones September and thereafter well, absolutely Typically
Speaker 1: we exclude food and energy because they tend to be
Speaker 1: the most volatile components. So from a monetary policy standpoint,
Speaker 1: we often see the FED focused on the core, but
Speaker 1: you're right, the average American is focused on the headline
Speaker 1: number because we pay for food and energy. So how
Speaker 1: does this translate into the pathway for FED policy. The
Speaker 1: Fed already has that seventy five basis points on the table,
Speaker 1: and this morning's report seems to solidify that seventy basis
Speaker 1: points in just less than two weeks time. But going forward,
Speaker 1: if we continue to see these elevated levels of prices,
Speaker 1: given the Fed has told us that the prerequisite for
Speaker 1: a more benign pathway is a market decline in headline inflation,
Speaker 1: it's hard to imagine that they take a softer stance
Speaker 1: or begin to back away from additional seventy five basis
Speaker 1: point increases as we move closer to the fourth quarterer.
Speaker 1: See let's go through the estimates for this FED for
Speaker 1: year end. They've got kill p c A of four
Speaker 1: point two. Can you just run me through how far
Speaker 1: off the mark you think that estimate already is. That's
Speaker 1: that's pretty optimistic. But to be fair, historically, the Fed
Speaker 1: does appear to be overly optimistic in terms of its
Speaker 1: growth and inflation forecast sending a more positive signal to
Speaker 1: the market and market expectations. But when we talk about
Speaker 1: the PC, it's six percent right now, getting down to
Speaker 1: four percent, which is five months and the year left,
Speaker 1: it's going to require markedly different conditions in the international market.
Speaker 1: We're going to have to see balance restored to global
Speaker 1: marketplaces and or resolution reached overseas, neither of which the
Speaker 1: FED has control over. The FED can only raise rates
Speaker 1: and tap down the demand side in terms of price pressures,
Speaker 1: but it cannot control the supply side. And I fear
Speaker 1: that in order to get that optimistic level of four
Speaker 1: percent by the end of the year, or nearer two percent,
Speaker 1: as the FED projects by the end of next year,
Speaker 1: we will have to see vast improvement in international factors.
Speaker 1: Lindsay domestically, I just want to understand how father Fed's
Speaker 1: going to push it. They can't say everything you've just said,
Speaker 1: because then they rise a credibility issue, and you know
Speaker 1: if they said that, what would happen with this market?
Speaker 1: It's the FED back in a way equities with rallied
Speaker 1: credit spreads with titan, that dollar might weaken. How far
Speaker 1: do you think this feed is going to push this? Well,
Speaker 1: according to Federal Reserve Chairman Jerome Powell, he is willing
Speaker 1: to push this as far as needed, even if that
Speaker 1: means a market decline in domestic activity in order to
Speaker 1: get inflation under control. Right now. They are hyper focused,
Speaker 1: solely focused on inflation and that is their key objective,
Speaker 1: getting that price stability. So if they need another seventy
Speaker 1: in July and three more seventy five rate hikes by
Speaker 1: the end of the year, I think they'd be willing
Speaker 1: to do it. Do I think that's the appropriate pathway?
Speaker 1: Absolutely not, But I think in order to maintain credibility
Speaker 1: and try at least and get some sort of of
Speaker 1: relief from prices, that their hands are tied. That's all
Speaker 1: they have, just the mice and thank you scp X
Speaker 1: of the st Michael O'Rourke, chief market strategist at Jones
Speaker 1: Trading Today, Michael, how does your world change with the
Speaker 1: nine point one print? Well, I mean it's very consistent
Speaker 1: with where we've been. Obviously, we've seen this inflation rising
Speaker 1: for over a year now. Markets have been concerned about
Speaker 1: it and the main concern is that the Fed's been
Speaker 1: behind the curve and that was proven true once again today.
Speaker 1: So I expect investors to continue to be defensive and
Speaker 1: I think it's gonna be a rough road the second
Speaker 1: half of twenty two. Does this inflation read Michael, change
Speaker 1: anything in your view? In your trading strategy today. Uh,
Speaker 1: it doesn't. Obviously, there was a lot of hype around
Speaker 1: this number, a lot of high expectations that the number
Speaker 1: would be um hotter than expected, and it was. I
Speaker 1: will say the one I guess the bright spot in
Speaker 1: there is the fact that the course cp I continued
Speaker 1: it's slight down trend, and that you know that peak
Speaker 1: was still at six six point five, your your growth
Speaker 1: back in March um and then when you look at
Speaker 1: w TY crew being around a hundred dollars and starting
Speaker 1: to come back in, if energy continues to come back in,
Speaker 1: that would be a hopeful sign. But the problem is
Speaker 1: is we're still looking at asset valuations that are still
Speaker 1: pretty expensive relative to where the economy is, and the
Speaker 1: fact that we have significant rate rate hikes ahead of us.
Speaker 1: How much does core CPI matter going forward? And how
Speaker 1: much is this purely going to be a headline figure
Speaker 1: for a FED trained on consumer expectations. Well, you know,
Speaker 1: as you noted, the FED is focused on the headline
Speaker 1: right now. But as long as the crew keeps coming down,
Speaker 1: as long as energy prices come down, or at least
Speaker 1: they've put their peak into for this cycle or this move,
Speaker 1: then core becomes a more meaningful number, and you can
Speaker 1: see expectations shift towards the focus on core. Obviously, if
Speaker 1: if we continue to have an energy crisis, that if
Speaker 1: there's another flare up or we see w T, I
Speaker 1: make a run back towards the headline number becomes the
Speaker 1: focus again. But I think in the seecond half of
Speaker 1: the year, I think um people will start to shift
Speaker 1: a focus towards cores. Again, it's still not a pretty situation,
Speaker 1: but obviously it's not as terrible as as a nine
Speaker 1: point one percent year of the year growth reading looks.
Speaker 1: C IBC reporting in from Toronto, Catherine Judge, as we
Speaker 1: noted earlier, she says Shelter a major contributor in Katherine
Speaker 1: Judge really quite importantly on the deceleration of Michael Rourke
Speaker 1: just discussed really saying this is so much base effects,
Speaker 1: which is some mumbo jumble for looking back twelve months
Speaker 1: if you will. We won't go into that right now, Michael.
Speaker 1: The thing that devolves down to is the earning season
Speaker 1: which begins, I believe Lisa it's tomorrow as well. How
Speaker 1: does inflation devolved down to the revenue view forward for corporations. Well,
Speaker 1: it's tricky here, right. I agree. Here you're seeing these
Speaker 1: these good revenue numbers because people have been raising prices.
Speaker 1: But Delta Airlines might be a great example today. Obviously
Speaker 1: they're they're talking about how strong businesses, how much demand
Speaker 1: there is, right, but they missed on the bottom line.
Speaker 1: And you know, if you look at their earnings, I
Speaker 1: think X energy there, their costs were up versus H versus.
Speaker 1: So I think that that's that's the squeeze. See. I
Speaker 1: don't think you can trust the revenue number. I guess
Speaker 1: per se, and you really have to watch and see
Speaker 1: where the margins are being squeezed for profits. Michael Rourke,
Speaker 1: thank you so much. With Jones trity that they right now.
Speaker 1: This is something we rarely do but because a water
Speaker 1: hazard on Bluemberg radio. But when you can get someone
Speaker 1: standing in the South Fork of the Snake River in
Speaker 1: a drift boat U fishing away and speak to them
Speaker 1: at radio, it's always constructive joining us. The fisher person
Speaker 1: David Kotak joins us this morning with Cumberland Advisers. David,
Speaker 1: of course you're out in Idaho talking economics, but is
Speaker 1: there a little bit of fishing going on for the
Speaker 1: acclaimed Yellowstone cutthroat trout. Absolutely, Tom, thank you so much
Speaker 1: for having me. And it's nice to be with you
Speaker 1: and pretty and pretty and you can come fishing with
Speaker 1: me anytime. I can't find waiters long enough to fit. Tom.
Speaker 1: You got that right. I've turned this down for years.
Speaker 1: I don't you know. I'd have to have Critty put
Speaker 1: the worm on the hook for me right now, David,
Speaker 1: you and I are the only two in the planet
Speaker 1: that remember inflation like this. But you and I also
Speaker 1: know this is different out of pandemic and massive fiscal stimulus.
Speaker 1: Explain to our audience coast to coast, shell shocked at
Speaker 1: nine point, why this is a different inflation. Yeah, this
Speaker 1: is a different inflation. And and thank you Tom. The
Speaker 1: you have to back the way. This is not a
Speaker 1: business cycle. So we have a shooting war widening in Europe,
Speaker 1: we have a worldwide financial sanctions payments war. We still
Speaker 1: have a pandemic, and still have COVID shocks. One of
Speaker 1: the pannels that I'm doing and tomorrow in the Victor
Speaker 1: Idaho is on long COVID. Millions of people with disability
Speaker 1: and the labor force, and we have massive political turmoil,
Speaker 1: including a country which is having a war between the states.
Speaker 1: This is not a normal shock, it's huge, and so
Speaker 1: shock response is what financial markets are dealing with. You've
Speaker 1: been talking about it this morning, and I really appreciate
Speaker 1: a forty year old the story you told about Detroit.
Speaker 1: It makes those of us who have a perspective of
Speaker 1: history enable us to respect the history. Thank you for that. Well,
Speaker 1: I have to let's talk about the history. Tom has
Speaker 1: reminds me over and over and over again this morning
Speaker 1: that a negative sixteen yield curve in version that we're
Speaker 1: seeing on the two tens curve will put that into
Speaker 1: perspective of the vulgar area. And you saw an inversion
Speaker 1: of negative two hundred, right, so this is something that
Speaker 1: you actually haven't seen going back to two thousand. Can
Speaker 1: you occurrent versions way rarer cretty than you think? Well,
Speaker 1: it's funny because I feel like it's all we've been
Speaker 1: talking about for the last couple of months, David, how
Speaker 1: much faith? How much stock should we put in this
Speaker 1: curve and version that keeps getting more and more negative? Well,
Speaker 1: I just I just published and not long ago, a
Speaker 1: pencil and eighty pages of data. But it compared two
Speaker 1: metrics and Neil Kers the took ten which everybody's talking
Speaker 1: about looking at, and the old Bobbler rent comparison of
Speaker 1: the very short term rate and the long term saying
Speaker 1: treasury bills is this thirty year treasury bond? You must,
Speaker 1: in my opinion, look at both curves. When all of
Speaker 1: them are flat, we really encounter trouble. And right now
Speaker 1: the long short curve is not inverted. The middle is inverted.
Speaker 1: And so that's a mixed message. So I'm not all
Speaker 1: up in arms over to ten if the short rate,
Speaker 1: which it looks like it's coming, because I agree with
Speaker 1: ira and and your conversation earlier, We're gonna get seventy five.
Speaker 1: We're gonna get seventy five again. We're going to take
Speaker 1: a Fed funds rate somewhere between three and four ten
Speaker 1: year treasury where's it go maybe close to four um.
Speaker 1: That's an expectation, and that will cramp down the US
Speaker 1: economy hard. We're already seen some of that in the
Speaker 1: data flow today. David, are you seeing this in Florida?
Speaker 1: Come on, Florida is a massive book critty, Who do
Speaker 1: we know that's not moving to Florida? Florida or Austin, Texas. Right, yeah,
Speaker 1: I mean, what what is the state in your Florida
Speaker 1: David Kotak, Well, if Florida have two things going on.
Speaker 1: When we have a public health policy which is ignoring
Speaker 1: public health that isn't causing outward movement in some businesses
Speaker 1: and service sectors and events, and we have an influx
Speaker 1: of people, and the influx of people look at no
Speaker 1: taxes and they want to move from someplace else. So
Speaker 1: it's a mixed picture in Florida. I am not so
Speaker 1: sanguine about Florida. Now we need a good hurricane. Watch
Speaker 1: what the shock will be. You talked about heat in Texas.
Speaker 1: Come to Florida. It's ninety degrees and ninety humidity all
Speaker 1: the time. David, we got to talk about investment because
Speaker 1: you've always been a Cumberland adviser is very clear about
Speaker 1: your investment exposure. Now what are you exposed to? And
Speaker 1: may I guess it's municipal bonds? Well, Muni's on the
Speaker 1: on the eyeside. We have been very heavy on the
Speaker 1: by side, long muties above four, high grade tax free.
Speaker 1: So that's one side. On the stock market, US stock market, right,
Speaker 1: U S C tf strategy portfolio is in cash, it
Speaker 1: is in the quantitative work, and the other remaining fifty
Speaker 1: is in defense, health care, and some selected smaller sectors.
Speaker 1: We are very negative on the outlook near term for
Speaker 1: the stock mark. When can you buy big tech? Joe
Speaker 1: Feldman marked down Amazon today, left it outperformed, but took
Speaker 1: it down just on any but dot tweak? What do
Speaker 1: you do with big tuch? I'm underweight, Tom, and I
Speaker 1: don't think this blood bleading is over. David, Thank you
Speaker 1: so much. Get back to fishing on the south fork
Speaker 1: of the Snake River. Critty, I just live vicariously through
Speaker 1: these guys. There's a lot of nature involved. Clearly, it's
Speaker 1: just you know McKees either, you know buying based at
Speaker 1: the Red Sox at Fenway. Parker is off some trout
Speaker 1: fishing farm with Ellen Zentner, and they're not They're like
Speaker 1: real trout. You know, these are like wild I think,
Speaker 1: like wild trout? Can I make it even worse? They
Speaker 1: get paid to do that? How exciting is that? It's
Speaker 1: very cool? Right now? We wanted to do this, which
Speaker 1: is get a snapshot of the German people and how
Speaker 1: they will react to the tumult that is on the
Speaker 1: Bloomberg screen. Leanna Fix is expert at this to say,
Speaker 1: she's programmed director where the work at London School of
Speaker 1: Economic She's at the Corporate Foundation UH in Germany and
Speaker 1: truly an expert on what the German people do. Leanna,
Speaker 1: thank you so much for joining us in Hamburg. In
Speaker 1: January the lowest thirty one degrees fahrenheit. In February thirty
Speaker 1: two degrees fahrenheit, in March thirty six degrees fahrenheit. What
Speaker 1: will the people of Hamburg do this coming cold winter? Well,
Speaker 1: I think you're very well to say that there's a
Speaker 1: lot of uncertainty and a lot of fear among the
Speaker 1: German public, not only about the prices, about the energy
Speaker 1: prices that will um that are rising, about payments that
Speaker 1: they will have to make at the end of the
Speaker 1: year that might be twofold, threefold, fourfold as much as
Speaker 1: they've paid in the past. But there's also a concern
Speaker 1: whether there will actually be parts of the population that
Speaker 1: will not be able to warm the households. Especially the
Speaker 1: news that some communities are preparing centers where you can
Speaker 1: need to keep yourself warm has sent some quite some
Speaker 1: shock waves through Germany. So it's something which is observed
Speaker 1: very closely for Moscow obviously, and we see how Moscow
Speaker 1: tries to play this game and to create even more
Speaker 1: fear among the German but also among some of the
Speaker 1: European publicists. In your research note you say that Mr
Speaker 1: Putin works from fear? Can he bluff here? I mean,
Speaker 1: what is the level of bluff? What is the level
Speaker 1: of the input of fear that Mr Putin will do well?
Speaker 1: He has a short term advantage because the increase in
Speaker 1: gas poises leads to the surprising effect that Russia gets
Speaker 1: as it gets revenues from gas as much as it
Speaker 1: needs and even more than before. Although we do have
Speaker 1: an oil oil sanctions from the europe Union that will
Speaker 1: kick in at the end of the year, but at
Speaker 1: the moment, Russia can afford to reduce the supplies for
Speaker 1: Europe and at the same time it gets enough we
Speaker 1: venues to sustain its own state budget. Um. This will
Speaker 1: change in the medium to long term, but at the
Speaker 1: moment this really gives Russia the opportunity to put pressure
Speaker 1: on Germany and on Europe, and we will probably see
Speaker 1: that the nod Stream one pipeline will not on to
Speaker 1: its previous supplies and capacities, but will probably be slowly
Speaker 1: would use by by Moscow. You know, one of the
Speaker 1: parlor games right now on Wall Street is trying to
Speaker 1: figure out what the implications would be should the pipeline
Speaker 1: get shut off an entirety versus fifty percent capacity resumed, etcetera.
Speaker 1: And all of these potential outcomes from your perspective, how
Speaker 1: quickly is Germany moving to really replace those gas supplies?
Speaker 1: How quickly could they be independent of Russia gas in
Speaker 1: the face of some of these huge economic concerns that
Speaker 1: people are projecting in We've seen that Germany has moved
Speaker 1: quite quickly when it came to Washington oil, surprisingly to everyone,
Speaker 1: Germany agreed to oil sanctions that will come at the
Speaker 1: end of the year. But gas it is more difficult.
Speaker 1: So there are a lot of attempts to get allergy
Speaker 1: gas to construct allergy terminals because Germany didn't have any
Speaker 1: before it was so dependent on cheap washing gask coming
Speaker 1: through the pipelines their travels to cut time and to
Speaker 1: other countries. But this will not be enough. So in
Speaker 1: case the nord Stream one pipeline will be shut down entirely,
Speaker 1: which is probably not as likely as a slow decrease
Speaker 1: from the Washington side, because then they will still get
Speaker 1: wevenues from the nord Stream one pipeline. But if that continuous,
Speaker 1: Germany will have to reduce its DAS consumption quite significantly,
Speaker 1: the estimates of between twenty and thirty of reductions, and
Speaker 1: this will obviously be a challenge, and it needs to
Speaker 1: start now in the summer, not in the winter, because
Speaker 1: we need already now in the sum of those efforts
Speaker 1: to fill the storage. And we've heard that a lot
Speaker 1: over the last few weeks, and I was grit to
Speaker 1: catch Emily unaffixed that and they call the foundation. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg m