WEBVTT - Bloomberg Surveillance: Bumpy Path Down for Inflation 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.880 for insight from the best an economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.119 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.880 the Bloomberg Terminal, and the Bloomberg Business App. Dana Peterson 0:00:30.920 --> 0:00:33.879 knows a bullmarket when she sees a chief economist at 0:00:33.880 --> 0:00:38.479 the conference board with wonderful perception on the American consumer. Dana, 0:00:38.560 --> 0:00:43.680 how do you link a quiescent inflation report like this 0:00:44.400 --> 0:00:46.599 over to retail sales on Thursday? 0:00:47.880 --> 0:00:49.800 Well, I think the key thing is that we are 0:00:49.840 --> 0:00:53.240 seeing inflation slowing, and it's consistent with what the fat 0:00:53.280 --> 0:00:57.600 IT expects. But as was mentioned earlier, real wages are 0:00:57.720 --> 0:01:01.200 rising and certainly it's supporting consumers or spending. But when 0:01:01.200 --> 0:01:04.480 we ask consumers how they feel, they're still complaining about inflation. 0:01:04.600 --> 0:01:08.560 They're still saying that everything's too expensive. Interest rates are rising, 0:01:08.640 --> 0:01:10.479 so that means if you want to buy that car, 0:01:10.680 --> 0:01:13.959 refrigerator is going to cost more. So I would expect 0:01:14.040 --> 0:01:17.760 that even though real wages are rising, inflation is still 0:01:17.760 --> 0:01:20.560 there and consumers are probably going to start pulling back 0:01:20.560 --> 0:01:21.160 on spending. 0:01:21.560 --> 0:01:25.039 How are real wages doing and within that are they part? 0:01:25.080 --> 0:01:27.600 I mean, is it almost circuitous where they're actually part 0:01:27.600 --> 0:01:31.280 of the inflation report as we adjust for inflation with wages? 0:01:32.400 --> 0:01:35.440 Well, I think wages are a part of the inflation story. 0:01:35.800 --> 0:01:36.119 Certainly. 0:01:36.200 --> 0:01:39.000 You have a number of industries that are experiencing labor shortages, 0:01:39.000 --> 0:01:41.880 and when you look at their wages nominal and real, 0:01:42.200 --> 0:01:44.839 they're still rising pretty quickly, and I think that's showing 0:01:44.920 --> 0:01:47.720 up in the services aspect. Let's also not forget that 0:01:47.800 --> 0:01:51.000 insurance costs are rising because many of these insurance companies 0:01:51.040 --> 0:01:55.480 are suffering losses and they're raising premium. So between insurance 0:01:55.600 --> 0:01:59.280 and wages, we still have these sticky inflation measures and 0:01:59.720 --> 0:02:01.559 I don't think that's going to go away right away. 0:02:01.880 --> 0:02:03.400 So, Dana, do you think that people are a little 0:02:03.400 --> 0:02:05.280 bit overzealous about this idea that the Fed is going 0:02:05.280 --> 0:02:06.760 to come right significantly next year. 0:02:07.920 --> 0:02:11.400 I think they are. Indeed, the Fed tomorrow is probably 0:02:11.400 --> 0:02:14.639 going to signal yes, it's done, But don't expect rate 0:02:14.680 --> 0:02:18.000 cuts anytime soon, and don't expect that many next year. 0:02:18.040 --> 0:02:20.600 We think anywhere from fifty to one hundred basis points 0:02:20.960 --> 0:02:24.840 probably makes sense, especially if inflation, according to the SEP, 0:02:25.440 --> 0:02:29.560 doesn't get beyond two percent before the end of next year. 0:02:29.919 --> 0:02:32.080 So I still think that, yes, we can get to 0:02:32.120 --> 0:02:34.640 two percent by the end of next year. But that's 0:02:34.840 --> 0:02:38.320 really going to suggest that not many interest rate cuts 0:02:38.320 --> 0:02:38.920 are priced in. 0:02:39.680 --> 0:02:42.960 Was transitory, right, Dana? Are we just basically seeing the 0:02:43.040 --> 0:02:46.160 right sizing of the supply side after the pandemic and 0:02:46.200 --> 0:02:50.640 that's entirely what we're seeing now? Or is this disinflation transitory? 0:02:50.720 --> 0:02:53.560 Is this basically a period of a headfake before some 0:02:53.600 --> 0:02:56.440 of the stickier elements take place in a more significant way. 0:02:57.520 --> 0:02:59.680 Well, I don't know why people are surprised that inflation 0:02:59.760 --> 0:03:02.399 gave are slowing. The FED did raise rates by five 0:03:02.480 --> 0:03:04.960 hundred and twenty five basis points. This is part of 0:03:05.000 --> 0:03:08.320 the program. Certainly, we saw the housing markets slow first, 0:03:08.360 --> 0:03:11.480 and that's showing up with a significant lag in the 0:03:11.520 --> 0:03:14.960 rental components of the CPI and the PCE deflator, so 0:03:15.080 --> 0:03:19.200 that's slowing things down. Certainly, food and energy prices are 0:03:19.240 --> 0:03:23.079 determined by things external, and you know, we don't have 0:03:23.280 --> 0:03:29.560 the massive disruptions from OPEC or even wars affecting energy prices. 0:03:29.600 --> 0:03:32.639 So they're coming off, but you still have the influence 0:03:32.760 --> 0:03:36.800 of insurance costs and wages because labor shortages are here, 0:03:37.360 --> 0:03:39.720 and I think that's gonna be Those two things are 0:03:39.720 --> 0:03:41.600 going to be the challenge to getting inflation back to 0:03:41.640 --> 0:03:43.400 two percent. But we can still get there. 0:03:43.880 --> 0:03:46.119 Dana Peterson, Well, this is the conference where data. Please 0:03:46.120 --> 0:03:47.600 stay with us. We're going to come right back on 0:03:47.680 --> 0:03:50.520 market check here, because you saw a spike whichever way 0:03:50.560 --> 0:03:53.920 your series going, and we've sort of given it back 0:03:54.080 --> 0:03:56.360 S ANDB futures had a nice, nice pop. They've given 0:03:56.400 --> 0:03:58.640 it back up six right now. Same thing in the 0:03:58.720 --> 0:04:01.880 yield space. A tenure you'ld four point two one percent. 0:04:01.920 --> 0:04:04.240 I noticed a real yield was one ninety seven. It's 0:04:04.280 --> 0:04:07.760 come back nicely two point zero one. Perhaps we're already 0:04:07.800 --> 0:04:11.520 on the way to adjusting for the FED meeting tomorrow. 0:04:12.040 --> 0:04:15.520 Dana Peterson, what is nominal GDP? How about Chairman Poul 0:04:15.640 --> 0:04:18.880 You watch us every morning. What's your estimate here of 0:04:18.920 --> 0:04:22.520 the animal spirit of Chairman Powell's America? 0:04:23.880 --> 0:04:27.600 Well, I think you know nominal GDP is certainly if 0:04:27.800 --> 0:04:29.880 well nominal and real GDP, you're probably not going to 0:04:29.880 --> 0:04:31.560 be as strong as what we saw in the third quarter. 0:04:31.560 --> 0:04:34.239 We're probably looking at growth around you know, one percent 0:04:34.720 --> 0:04:38.880 in real terms and roughly four percent in nominal terms. 0:04:38.960 --> 0:04:42.080 Right adding in you know, roughly three percent headline inflation. 0:04:42.760 --> 0:04:45.840 So that's a slowing economy, and I think again that's 0:04:45.880 --> 0:04:47.760 part of the program. The FED wants to see the 0:04:47.800 --> 0:04:51.560 economy slow to help bring down inflation. Now, when we 0:04:51.600 --> 0:04:55.480 look at business investment, that's already slowing outside of manufacturing, 0:04:55.520 --> 0:04:59.760 where companies are bringing back product and production and they're building. 0:04:59.760 --> 0:05:02.520 Fact away from that, there's really not that much investment. 0:05:02.600 --> 0:05:04.799 The last year to drop has to be the consumer. 0:05:05.160 --> 0:05:07.880 And we know consumers are more indebted now, their interest 0:05:07.960 --> 0:05:11.320 rates on their credit cards are higher, student loan payments 0:05:11.320 --> 0:05:15.240 are coming back, and you know, consumers are quitting less 0:05:15.279 --> 0:05:17.839 and they're thinking, well, maybe the labor market's going to slow, 0:05:17.920 --> 0:05:20.120 so maybe I should also slow my spending as well. 0:05:20.560 --> 0:05:23.200 Dana, I'm just curious. We're saying that shelter prices pretty 0:05:23.240 --> 0:05:27.000 much offset the decline from oil prices. Is that sustainable 0:05:27.040 --> 0:05:29.120 or do you think that this is just sort of 0:05:29.160 --> 0:05:33.200 a lag before we start see housing costs inflect downward. 0:05:34.400 --> 0:05:36.920 Well, I don't really look at the month on month 0:05:36.960 --> 0:05:38.760 for housing. I look at the year on year and 0:05:38.880 --> 0:05:41.960 year on year, the rental components are slowing, and it's 0:05:42.040 --> 0:05:44.920 consistent with an eighteen month lag of the Case Shiller 0:05:44.960 --> 0:05:48.960 Home Price Index. So we're seeing this happen month to month. 0:05:49.000 --> 0:05:50.919 You're going to have bumpiness, but it's a year on 0:05:51.040 --> 0:05:54.560 year growth rate or rate of inflation that we should 0:05:54.600 --> 0:05:57.880 be paying attention to in terms of what's driving headlining 0:05:57.920 --> 0:06:00.000 core inflation in the PCEE deflator. 0:06:00.360 --> 0:06:02.839 Dana Peterson, thank you for the brief with the conference 0:06:02.839 --> 0:06:06.320 board and under the Fed tomorrow and retail sales always 0:06:06.360 --> 0:06:19.560 important at the conference board on Thursday. I'm joining us 0:06:19.600 --> 0:06:24.560 now with terrific, rigorous mathematical analysis. Alicia Levin, head of 0:06:24.640 --> 0:06:29.560 Investment Strategy Advisory Solutions BNY Mellan. I want to talk 0:06:29.600 --> 0:06:33.120 about Jeffrey Hu's eurocall, but we'll say that for another time. 0:06:33.480 --> 0:06:37.440 You have a beautiful sentence in your report. Cash will 0:06:37.560 --> 0:06:41.200 underperform the known worlds in cash. 0:06:41.279 --> 0:06:47.040 Discuss discuss almost six trillion in cash. If you step 0:06:47.080 --> 0:06:50.359 back and say what were the trades this year, it 0:06:50.520 --> 0:06:56.960 was aijlp ones and cash and T bills. So the 0:06:57.040 --> 0:06:59.360 question you say is if I look into twenty twenty 0:06:59.400 --> 0:07:02.960 four with an expectation that we're going into a healthy 0:07:03.000 --> 0:07:06.440 slowdown for the economy, the Fed's going to cut we 0:07:06.520 --> 0:07:09.320 think the second half of the year, not the first half, 0:07:09.360 --> 0:07:13.320 we can discuss and we have the inflation moving in 0:07:13.360 --> 0:07:16.960 the right direction. Where does cash lead you? And it 0:07:17.000 --> 0:07:19.720 doesn't lead you to the same return you had this year, 0:07:19.800 --> 0:07:23.800 and this is the time to start reallocating into other assets? 0:07:24.240 --> 0:07:27.280 Where does cash go? Individual stocks? Is going to ETFs? 0:07:27.280 --> 0:07:30.960 I mean, I am fascinated within the equity space. Where 0:07:31.040 --> 0:07:33.160 does B and Y? Melon see that the cash will 0:07:33.200 --> 0:07:33.760 migrate too. 0:07:34.000 --> 0:07:36.720 So we think the cash goes to equities, it should 0:07:36.720 --> 0:07:39.640 be going to bonds, Okay, should be going to bonds. 0:07:39.680 --> 0:07:42.160 And we're actually calling for a twenty percent allocation to 0:07:42.200 --> 0:07:45.640 alternatives as well because we think this is one of those. 0:07:45.640 --> 0:07:46.960 Really it's an alternative. 0:07:47.080 --> 0:07:49.960 So distressed at privates, right, it's a great time for 0:07:50.040 --> 0:07:53.040 privates actually, because you're getting the repricing this year into 0:07:53.120 --> 0:07:55.960 next year and there's going to be distressed opportunities out 0:07:56.000 --> 0:07:59.200 there because of the rate piking cycle, and so that 0:07:59.280 --> 0:08:01.400 is just a nice set up in real estate as well. 0:08:01.520 --> 0:08:04.200 Nice setup for an entry of new capital into this 0:08:04.240 --> 0:08:04.920 ASSI class. 0:08:05.000 --> 0:08:06.680 Before we get stuck into that, just talk to me 0:08:06.720 --> 0:08:09.240 about cash, how sticky that is a money market funds. 0:08:09.280 --> 0:08:11.360 When you're making these recommendations to clients, they jump in 0:08:11.400 --> 0:08:13.160 on boards or hesitant. What's the time like? 0:08:13.760 --> 0:08:17.440 So clients are receptive to this because with the understanding 0:08:17.520 --> 0:08:20.320 that what's worked over the last twelve months is likely 0:08:20.360 --> 0:08:23.000 not to work over the next twelve to eighteen months. 0:08:23.080 --> 0:08:25.000 If you've been in markets long enough, you know that 0:08:25.040 --> 0:08:28.960 the same trade doesn't take you far every single year. 0:08:29.200 --> 0:08:31.640 And on top of that, we've hit peak rates, we've 0:08:31.680 --> 0:08:36.360 hit peak fed, inflation is slowing, cash will underperform the 0:08:36.400 --> 0:08:37.720 bond market and equities. 0:08:37.920 --> 0:08:39.040 Have we seen the distress. 0:08:40.840 --> 0:08:44.920 So we haven't seen distress in large cap America. We're 0:08:44.920 --> 0:08:48.440 going to see it in small cap America and other 0:08:48.559 --> 0:08:53.280 areas that don't that are relying on refunding and funding growth. 0:08:53.559 --> 0:08:56.720 So that means so, for instance, a small cap world 0:08:56.800 --> 0:08:59.720 that the Russell twenty and forty percent or non earners 0:09:00.080 --> 0:09:03.640 need to borrow to grow that debt that they're using 0:09:03.880 --> 0:09:07.360 is floating rate and comes due a lot sooner than 0:09:07.400 --> 0:09:09.640 the fixed rate debt from the large cap companies that 0:09:09.679 --> 0:09:11.959 took out loans in twenty twenty and twenty twenty one. 0:09:12.160 --> 0:09:14.240 So you're setting up a situation where you have some 0:09:14.800 --> 0:09:18.720 parts of the economy that are relatively insulated termed out 0:09:18.720 --> 0:09:21.720 their debt at low rates, like households did with mortgages, 0:09:21.960 --> 0:09:23.600 and other parts that are more exposed. 0:09:23.960 --> 0:09:27.120 Is there any inconsistency in being bullish on risk and 0:09:27.200 --> 0:09:30.800 also expecting a tick up in distress and bankruptcies. 0:09:31.040 --> 0:09:34.080 So there's not an inconsistency because this is not a 0:09:34.120 --> 0:09:36.319 blanket call. Right the way we've sort of had a 0:09:36.400 --> 0:09:39.400 rolling recession over the last twelve to eighteen months, you're 0:09:39.440 --> 0:09:41.480 going to get a little bit of that going forward. 0:09:41.760 --> 0:09:43.880 We do think there's some consolidation in the first half 0:09:43.880 --> 0:09:45.640 of the year, and actually in an election year when 0:09:45.640 --> 0:09:49.200 there's an incumbent, there's just a lot of creakiness in 0:09:49.240 --> 0:09:51.800 the market in the first part of the years. Policies 0:09:51.800 --> 0:09:54.880 get to discuss different sectors or targets. Right, just you 0:09:55.160 --> 0:09:56.599 tend to have a bit of a slow debt and 0:09:56.640 --> 0:09:59.000 probably a digestion. We're going to have a year that's 0:09:59.080 --> 0:10:01.400 up twenty two to twenty three percent by the time 0:10:01.400 --> 0:10:04.199 we finish the year here, so you know unlikely that 0:10:04.240 --> 0:10:07.640 continues in the next few months. It coincides also with 0:10:08.000 --> 0:10:10.120 if there's a slow down, it's the first half of 0:10:10.120 --> 0:10:13.240 the year, right, because incumbents tend not to like recessions 0:10:13.280 --> 0:10:14.480 when they're running for reelection. 0:10:14.760 --> 0:10:17.080 Is there anything that we could see in less than 0:10:17.120 --> 0:10:19.560 a half hour time that could shake your view on 0:10:19.600 --> 0:10:21.959 this sort of disinflation that allows this next leg of 0:10:22.000 --> 0:10:22.400 the cycle. 0:10:22.520 --> 0:10:25.240 So it's the core, right, So energy prices look to 0:10:25.240 --> 0:10:28.320 be well tamed to the discussion earlier that you all 0:10:28.360 --> 0:10:31.679 had here about the record pumping of oil and gas 0:10:31.800 --> 0:10:34.640 in the US and also the warm winters everywhere, so 0:10:34.720 --> 0:10:37.240 oil prices seem to be well contained. If that's the case, 0:10:37.480 --> 0:10:40.200 the low oil prices will filter into every other sector. 0:10:40.520 --> 0:10:43.440 So the core prices today at four percent, we'll see 0:10:43.480 --> 0:10:46.360 what we get in a few minutes time. That's where 0:10:46.440 --> 0:10:49.800 you could get a different narrative if it doesn't come 0:10:49.840 --> 0:10:52.680 down further. But to the point about whether the FED 0:10:52.720 --> 0:10:55.640 cuts or not in March, it's just not realistic. And 0:10:55.679 --> 0:10:58.120 I'll point out in the last eighteen months the market 0:10:58.120 --> 0:11:00.880 has been overly up to miss on when the FED 0:11:00.920 --> 0:11:02.800 has cutting. If you remember we were talking about the 0:11:02.840 --> 0:11:05.400 FED cutting in August of twenty two. 0:11:06.520 --> 0:11:07.720 You know, the market has. 0:11:07.600 --> 0:11:10.560 Wanted that FED cut for eighteen months now. It's always 0:11:10.600 --> 0:11:12.920 been too optimistic for where the Fed's going, and a 0:11:13.000 --> 0:11:15.920 reality is going and if the mare and if our 0:11:16.000 --> 0:11:18.720 call is right, more likely to have a soft landing 0:11:18.800 --> 0:11:21.760 than a recession. Clearly not cutting in March of twenty 0:11:21.760 --> 0:11:22.240 twenty four. 0:11:22.320 --> 0:11:24.200 I want to go to your mass abilities here. There's 0:11:24.200 --> 0:11:27.320 a lot of Greek letters getting thrown around right now. Gamma, Gamma, 0:11:27.360 --> 0:11:29.960 Gamma and the rest of it. Alpha, beta, gamma, apps on, 0:11:30.000 --> 0:11:35.240 blah blah blah. The skew is silent out there. Explain 0:11:35.320 --> 0:11:39.800 to our audience the silence. It's some of these volatility measures. 0:11:39.440 --> 0:11:43.440 Show right, boy twelve a VIX of twelve. It's just shocking. 0:11:43.520 --> 0:11:46.520 But again, the VIX was about. The VIX number is 0:11:46.600 --> 0:11:50.360 really about the volatility in the bond market, and the 0:11:50.400 --> 0:11:53.200 bond market right now is just well behaved since that 0:11:53.280 --> 0:11:58.400 CPI report back in early November. So the whole market 0:11:58.440 --> 0:12:01.360 for the last eighteen months has been driven by the 0:12:01.400 --> 0:12:03.800 bond market every other asset class, and as long as 0:12:03.800 --> 0:12:05.720 that is tamed, the VIX as well will be tamed, 0:12:05.760 --> 0:12:07.560 but look, it's a risk. It means at twelve it's 0:12:07.760 --> 0:12:08.840 historically very low. 0:12:08.960 --> 0:12:10.600 What would you expect from cham and Pound tomorrow. 0:12:11.160 --> 0:12:13.480 I think it's his one chance to push back? 0:12:14.080 --> 0:12:14.840 This is it right? 0:12:14.920 --> 0:12:17.440 This is it is one chance, So I would expect 0:12:17.480 --> 0:12:20.280 something like that was the easing of financial conditions can't 0:12:20.280 --> 0:12:24.520 be too pleasing for the Fed in their fight, and 0:12:24.520 --> 0:12:27.199 they will definitely fight back, I think against that first 0:12:27.200 --> 0:12:30.080 half rate cut that we're seeing here. I mean, so 0:12:30.280 --> 0:12:33.240 you know, you don't want to say, you know, calling 0:12:33.320 --> 0:12:36.320 victory too early, but he will definitely fight back here. 0:12:36.440 --> 0:12:38.720 It's crystal ball type stuff. So I forgive me, But 0:12:38.800 --> 0:12:41.120 you think the market listens to him anymore? Is that 0:12:41.160 --> 0:12:43.600 a credible threat? Given what we're all seeing in the data? 0:12:43.760 --> 0:12:47.280 You know, the data has been very kind to risk assets. 0:12:47.400 --> 0:12:51.280 So A thirty today is really the key, more so 0:12:51.520 --> 0:12:54.920 CPI than Powell. But I expect Powell to push back 0:12:54.960 --> 0:12:57.520 against all this excitement. And look, the risk in the 0:12:57.520 --> 0:13:00.400 market is that everybody's expecting a soft landing, right, that's 0:13:00.440 --> 0:13:03.160 the risk. Where were we all a year ago recession? 0:13:03.320 --> 0:13:06.920 A year ago, two months agot, two months ago? Take cay? 0:13:07.040 --> 0:13:09.280 Did she just say we're going to cash. Is that 0:13:09.320 --> 0:13:11.640 what I heard? Even of inflation? 0:13:12.080 --> 0:13:14.440 You you asked me that every time. So we are 0:13:14.559 --> 0:13:16.479 never in cash because. 0:13:16.240 --> 0:13:19.280 Here we go, as she tells, a domestic to my 0:13:19.360 --> 0:13:20.520 right and domestic to my own. 0:13:20.720 --> 0:13:22.559 But let me let me just say this. A year 0:13:22.600 --> 0:13:24.600 ago you said to how do you avoid going five 0:13:24.640 --> 0:13:27.360 percent in cash? And I say, well, we do relative allocations. 0:13:27.400 --> 0:13:28.400 We never go to cash. 0:13:28.440 --> 0:13:31.520 And we were over allocated to US large cap because 0:13:31.600 --> 0:13:33.960 if I'm worried about recession, where do I want to 0:13:34.000 --> 0:13:35.839 be and that's US large cap. So that was a 0:13:35.880 --> 0:13:37.360 great allocation for our clients. 0:13:37.360 --> 0:13:38.640 This year. You wanted to be in the nast night 0:13:38.720 --> 0:13:41.520 one hundred forty eight percent yet today, which is just 0:13:41.640 --> 0:13:43.200 absolutely bunkers. 0:13:43.280 --> 0:13:50.080 That is nuts. Timely is a key idea there, maybe 0:13:50.080 --> 0:13:54.359 the inertial force of disinflation back to wherever anybody chooses 0:13:55.040 --> 0:13:58.600 that we should have had very sophisticated in this analysis. 0:13:58.679 --> 0:14:03.679 Is Lindsay joins us this morning. Lindsey, thank you so much. 0:14:03.720 --> 0:14:08.120 And on this moment of inflation, if you will, what 0:14:08.200 --> 0:14:11.439 I find fascinating is getting the last mile. Let's say 0:14:11.480 --> 0:14:14.440 we're three point eight, getting to two point eight is 0:14:14.480 --> 0:14:16.880 a whole different story than what we've seen the last months. 0:14:17.000 --> 0:14:19.480 Absolutely, the last one hundred two hundred basis points is 0:14:19.520 --> 0:14:21.920 always the most difficult. And to your point, it's not 0:14:22.080 --> 0:14:25.440 just the nominal level of inflation, but it's the underlying 0:14:25.560 --> 0:14:28.560 momentum of disinflation that the market is really looking for. 0:14:28.640 --> 0:14:31.680 We want to be convinced that we're on that sustainable 0:14:31.760 --> 0:14:34.520 downward trajectory, and if we look at the third quarter 0:14:34.840 --> 0:14:38.360 with that recent backup and then sideways movement, that's not 0:14:38.520 --> 0:14:42.680 convincing that we are on this sustainable timely trajectory back 0:14:42.720 --> 0:14:45.960 to two percent. So my concern is the longer the 0:14:45.960 --> 0:14:49.440 Fed remains on the sideline and slow plays inflation, the 0:14:49.480 --> 0:14:51.600 bigger the risk the Fed will have to come back 0:14:51.640 --> 0:14:54.840 in and take further action and maybe slow the economy 0:14:54.840 --> 0:14:57.200 more than they would have otherwise needed to if they'd 0:14:57.200 --> 0:14:59.160 simply dealt with inflation the first time around. 0:14:59.280 --> 0:15:01.920 Let's get into it. Where are the improvement's coming from 0:15:01.960 --> 0:15:03.680 over the last twelve months. Where have they come from? 0:15:03.760 --> 0:15:06.440 We've seen some widespread improvements in terms of inflation, it's 0:15:06.480 --> 0:15:10.200 moved over from the good side into the service sector widespread, 0:15:10.280 --> 0:15:14.760 but again, a lot of that downward momentum a welcomed 0:15:14.760 --> 0:15:17.000 gauge as we move into the key holiday spending season 0:15:17.080 --> 0:15:19.520 is from energy prices, and so when we talk about 0:15:19.560 --> 0:15:24.000 the reversal there, that's probably not a long term sustainable trend. 0:15:24.640 --> 0:15:26.920 We could see bounce back up in the first quarter, 0:15:27.000 --> 0:15:29.920 again forcing the Fed's hand maybe to take further policy action. 0:15:30.200 --> 0:15:33.240 One thing we've asked regarding the FED is how much 0:15:33.240 --> 0:15:35.720 of the improvement in inflation is down to the FED 0:15:35.760 --> 0:15:37.360 reserve and how much of that is just a natural 0:15:37.360 --> 0:15:39.480 rebanacing of the economy. It's come from the supply side. 0:15:39.480 --> 0:15:41.640 I know it's tremendously difficult to gauge, but if we're 0:15:41.640 --> 0:15:43.640 going to talk about the prospect of higher interest rates 0:15:43.880 --> 0:15:46.120 from here, we also have to have to understand what 0:15:46.200 --> 0:15:48.800 higher interest rates have done so far over the last 0:15:48.840 --> 0:15:50.000 twelve months. What have they done. 0:15:50.120 --> 0:15:52.440 I think the FED can take responsibility for the improvement 0:15:52.480 --> 0:15:54.640 that we've seen on the demand side. It's certainly not 0:15:54.680 --> 0:15:56.680 the supply side, not the good side of things, as 0:15:56.680 --> 0:15:59.600 you talk about the recalibration in the aftermath of reopening 0:15:59.640 --> 0:16:02.360 the globele economy. But on the demand side, we have 0:16:02.480 --> 0:16:05.600 seen the consumer pull back. Momentum has slowed from double 0:16:05.600 --> 0:16:07.600 digit growth down to eight, down to six. We're now 0:16:07.640 --> 0:16:11.040 at low single digits. Consumers are still spending, but at 0:16:11.040 --> 0:16:14.480 a remarkably lower pace, So that loss of momentum I 0:16:14.480 --> 0:16:17.160 think we can attribute to the Fed. But clearly they 0:16:17.160 --> 0:16:20.200 haven't done enough to see below trend job growth, to 0:16:20.240 --> 0:16:24.040 see below trend spending activity, and certainly not enough to 0:16:24.080 --> 0:16:27.560 get that prolonged period of below trend top line activity 0:16:27.840 --> 0:16:30.640 to ensure a return back to stable prices. 0:16:30.880 --> 0:16:31.160 Just wait. 0:16:31.200 --> 0:16:34.160 That's Mike Wilson's message, and what we hear from certain executives, 0:16:34.320 --> 0:16:36.760 like that of Hasbro, seems to be something similar. They 0:16:36.760 --> 0:16:40.200 are seeing a deceleration in consumer appetite. We heard the 0:16:40.200 --> 0:16:43.560 same from Walmart. How do you pair that idea with 0:16:43.640 --> 0:16:45.960 some of the recovery that you're seeing in services and 0:16:46.080 --> 0:16:49.680 other areas that you think could fuel inflation again next year? 0:16:49.800 --> 0:16:51.400 Well, this is the big concern. Do we wait on 0:16:51.400 --> 0:16:54.200 the sideline and hope that inflation slows or do we 0:16:54.240 --> 0:16:57.760 take further action to ensure that price is slow. And 0:16:57.800 --> 0:17:00.160 from my point of view, I don't think the risk 0:17:00.200 --> 0:17:02.600 is that the FED tightens too much, but that the 0:17:02.640 --> 0:17:07.400 FED doesn't tighten enough and allows inflation to become further entrenched, 0:17:07.640 --> 0:17:09.639 and this is really the mistake that they made on 0:17:09.680 --> 0:17:11.560 the front end. If we go back to the initial 0:17:11.640 --> 0:17:14.720 start of the tightening cycle, they held onto that transitory 0:17:14.800 --> 0:17:18.480 language too long. They allowed inflation to become too ingrained, 0:17:18.720 --> 0:17:21.159 and we're now trying to deal with it, particularly on 0:17:21.200 --> 0:17:24.600 the wage side. These ingrained levels of price pressures that 0:17:24.680 --> 0:17:27.480 are complicating this process to get us back to two 0:17:27.480 --> 0:17:28.280 percent inflation. 0:17:28.359 --> 0:17:30.399 What should they look for to be confident that they 0:17:30.440 --> 0:17:31.440 can start using. 0:17:31.280 --> 0:17:34.720 Well, One, a downward sustainable trend. This back and forth, 0:17:34.800 --> 0:17:38.760 sideways movement doesn't instill confidence. But second, we need to 0:17:38.800 --> 0:17:42.120 see broad based improvement in some of the most sticky components, 0:17:42.359 --> 0:17:46.560 particularly wages, and last Friday's employment report didn't give us 0:17:46.600 --> 0:17:50.480 that confidence. We're still talking about four percent annual wage growth. 0:17:50.640 --> 0:17:53.040 We have come down from peak levels, but that's not 0:17:53.320 --> 0:17:56.360 enough to suggest that we've done enough in terms of tightening. 0:17:56.560 --> 0:17:58.960 On behalf of three hundred and thirty one point nine 0:17:58.960 --> 0:18:04.359 million Americans, Can you explain the USDA, The Department of 0:18:04.400 --> 0:18:07.560 Agriculture tells us in October we had three point three 0:18:07.600 --> 0:18:13.120 percent food inflation. No one is experiencing that food inflation 0:18:13.320 --> 0:18:16.800 is just shocking at the grocery store, it restaurants, Johnny, 0:18:16.800 --> 0:18:19.479 had you had a sixty eight dollars stake the other night? Whatever. 0:18:19.960 --> 0:18:23.359 But the answer is the reality. This is what I 0:18:23.400 --> 0:18:27.280 get twenty four to seven. The reality of inflation's totally 0:18:27.359 --> 0:18:30.000 different than the verbiage of people like you. What's a 0:18:30.040 --> 0:18:30.520 divide there? 0:18:30.560 --> 0:18:30.679 Want? 0:18:30.720 --> 0:18:32.240 Well, I take a lot of the differential is the 0:18:32.280 --> 0:18:35.920 wholesale prices versus what we're experiencing as the end consumer. 0:18:36.160 --> 0:18:38.680 Because we're not going down. We're not buying the fish 0:18:38.720 --> 0:18:40.960 at the market. We're buying the fish at the restaurant 0:18:41.040 --> 0:18:44.320 or at the grocery store, and that is the pipeline 0:18:44.320 --> 0:18:47.439 of price increase that the consumer is feeling. And so 0:18:47.480 --> 0:18:49.880 three percent food inflation, no, we're not feeling that. We're 0:18:49.920 --> 0:18:53.800 feeling more like fifteen twenty percent food inflation. But from 0:18:54.040 --> 0:18:57.439 the Fed's perspective, again, they're looking at the broad based 0:18:57.480 --> 0:19:01.720 components of inflation that regardless of where in the pipeline 0:19:01.760 --> 0:19:04.520 they want to look, we're still above two percent. We 0:19:04.600 --> 0:19:07.320 haven't gotten back to price stability. There's more work to 0:19:07.359 --> 0:19:11.920 be done. Despite the market's consistent overreaction and constant calling 0:19:12.000 --> 0:19:15.680 for rate cuts, FED officials are still talking about reaching 0:19:15.720 --> 0:19:17.280 that sufficiently restrictive level. 0:19:17.320 --> 0:19:20.320 The Bloomberg Financial Conditions Index, a Gold and Sachs Index 0:19:20.400 --> 0:19:24.600 somewhat the same, all show accommodative structures right down part 0:19:24.600 --> 0:19:27.160 of that as a buoyant stock market as well. Into 0:19:27.160 --> 0:19:30.440 this meeting and with this report in ninety minutes, are 0:19:30.440 --> 0:19:32.640 we restrictive or accommodative? 0:19:32.640 --> 0:19:35.520 Now, well, that's the question. Are we really as restrictive 0:19:35.600 --> 0:19:39.080 as the Fed things? Have we reached that sufficiently restrictive level? 0:19:39.359 --> 0:19:41.680 And some of these indices say no, we have not 0:19:41.840 --> 0:19:42.399 done enough. 0:19:42.720 --> 0:19:45.600 And when you are you talking about a rate increase. 0:19:45.520 --> 0:19:48.680 I think it's not out of the reabilities that we 0:19:48.800 --> 0:19:52.200 see a further rate increase if we see stability and inflation. 0:19:52.680 --> 0:19:55.000 And then as we move the calendar page into twenty 0:19:55.040 --> 0:19:56.919 twenty four, we see a little bit of an uptick. 0:19:57.560 --> 0:19:59.360 I think that could force the Fed's hand to take 0:19:59.440 --> 0:20:03.640 one final rate increase to convince the market that three 0:20:03.760 --> 0:20:06.240 is not the new two, Orange is not the new black. 0:20:06.359 --> 0:20:08.879 We have to get back to two percent inflation, and 0:20:08.920 --> 0:20:11.000 they will not tolerate an above trend level. 0:20:11.040 --> 0:20:13.240 Why is two so important because that's. 0:20:13.119 --> 0:20:15.879 The balancing level of inflation that allows the economy to 0:20:15.880 --> 0:20:20.240