WEBVTT - Surveillance: Flight to Quality with Singh 0:00:00.080 --> 0:00:02.840 We bring you news and analysis every day on the 0:00:02.840 --> 0:00:06.840 Bloomberg Surveillance Podcast, but now you can get the latest 0:00:06.880 --> 0:00:11.600 news on demand whenever you want. Subscribe to Bloomberg News 0:00:11.640 --> 0:00:14.400 Now to get the latest headlines at the click of 0:00:14.440 --> 0:00:18.880 a button. Get informed on your schedule. You can listen 0:00:18.960 --> 0:00:22.720 and subscribe to Bloomberg Newsnow on the Bloomberg Business App, 0:00:22.760 --> 0:00:27.720 Bloomberg dot com plus Apple, Spotify, and anywhere else you 0:00:27.800 --> 0:00:36.120 get your podcasts. Search Bloomberg News Now and subscribe today. 0:00:38.360 --> 0:00:41.519 This is the Bloomberg Surveillance Podcast. I'm Lisa A. 0:00:41.600 --> 0:00:44.919 Bramwoids, along with Tom Keane and Jonathan Ferrow. Join us 0:00:44.960 --> 0:00:48.560 each day for insight from the best in economics, geopolitics, 0:00:48.600 --> 0:00:49.680 finance and investment. 0:00:50.040 --> 0:00:52.480 Subscribe to Bloomberg Surveillance on demand on. 0:00:52.440 --> 0:00:56.000 Apple, Spotify and anywhere you get your podcasts, and always 0:00:56.040 --> 0:00:59.000 on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg 0:00:59.040 --> 0:00:59.720 Business App. 0:01:00.160 --> 0:01:03.680 National security experts debating whether the US has sufficient throughput 0:01:03.720 --> 0:01:07.320 capacity to bank Ukraine, Israel, and possibly Taiwan in a 0:01:07.360 --> 0:01:11.680 simultaneous and extended conflict scenario. The unanimous and emphatic answer 0:01:11.720 --> 0:01:14.800 from experts is no, which underscores the likelihood of a 0:01:14.880 --> 0:01:18.920 period of fiscal dominance in which deficits are mostly disregarded 0:01:19.120 --> 0:01:22.480 and interest rates must adjust to a higher equilibrium. 0:01:22.600 --> 0:01:23.200 The leaf Sinc. 0:01:23.360 --> 0:01:26.000 The chief global economist and Peach and fixed Income joins 0:01:26.040 --> 0:01:28.720 us right now wander for to catch up with you, sir, 0:01:28.760 --> 0:01:31.040 What a difficult time. Going to lean a little bit 0:01:31.080 --> 0:01:33.200 on your experience in the administration along the way In 0:01:33.240 --> 0:01:36.039 this conversation as well, Paul Tudor Jones caught up with 0:01:36.080 --> 0:01:39.160 a regional business news network called CNBC in the last 0:01:39.200 --> 0:01:40.840 twenty four hours. You might have heard of Paul. I'm 0:01:40.880 --> 0:01:43.480 not sure about the network deal. This is what he 0:01:43.560 --> 0:01:45.800 had to say. He said, he's never seen this kind 0:01:45.840 --> 0:01:49.160 of geopolitical tension in the last something like fifty years, 0:01:49.600 --> 0:01:52.600 with the deficit position, the budget position of the United 0:01:52.640 --> 0:01:56.040 States this week, deleep, How important is that. 0:01:58.040 --> 0:02:01.520 He's right? The backdrop is returned to the most intense 0:02:01.560 --> 0:02:04.200 period of great power competition in at least three decades. 0:02:05.160 --> 0:02:08.360 That's going to mean more demand on physcal spending to 0:02:08.480 --> 0:02:12.280 shore up our sources of competitive advantage. And you know, 0:02:12.320 --> 0:02:15.160 it's also it's also the reality that we're seeing a 0:02:15.280 --> 0:02:18.800 surge of yields driven by term premium because bond investors 0:02:19.320 --> 0:02:21.480 they don't know whether we're going to grow fast enough, 0:02:21.520 --> 0:02:24.320 whether tax revenues will be high enough to service a 0:02:24.400 --> 0:02:26.680 rise in cost of capital. They don't know whether other 0:02:26.680 --> 0:02:28.480 buyers are going to show up at auction, and they 0:02:28.480 --> 0:02:31.760 don't know whether Washington, DC can exert enough fiscal restraint 0:02:31.840 --> 0:02:34.960 if growth falters. And that's why you're seeing this repricing. 0:02:35.000 --> 0:02:36.320 It's a very challenging. 0:02:35.960 --> 0:02:39.280 Time, Delli. If you wrote this column that we found 0:02:39.320 --> 0:02:42.160 fascinating and we've cited quite a bit about the lack 0:02:42.200 --> 0:02:45.880 of price in sensitive buyers really questioning the ability for 0:02:45.919 --> 0:02:47.600 the US to borrow at some of the rates that 0:02:47.600 --> 0:02:49.840 they were accustomed to in the past. Can you just 0:02:50.040 --> 0:02:53.480 bring that forward to today's moment, with increasing calls for 0:02:53.520 --> 0:02:56.200 military aid. How much does that actually make you double 0:02:56.280 --> 0:03:00.320 down on this idea of borrowing regardless of where we are, 0:03:00.639 --> 0:03:03.560 in order to finance national security and other concerns. 0:03:04.560 --> 0:03:07.040 Well, Lisa, here's how I synthesize what's going on. There 0:03:07.040 --> 0:03:11.280 are three fundamental dynamics. What's the fed's near term reaction function, 0:03:11.639 --> 0:03:14.640 what's long run neutral, and what's the term premium? And 0:03:14.720 --> 0:03:16.919 then you have to overlay the impact of the attack 0:03:16.960 --> 0:03:19.839 on Israel on the Fed's reaction function. I think Lori 0:03:19.960 --> 0:03:22.440 Logan said it best, and we have a higher term premium. 0:03:22.680 --> 0:03:25.760 A higher term premium, all things equal, implies a softer 0:03:25.840 --> 0:03:30.440 economic outlook and greater likelihood that the policy rate has peaked. Okay, 0:03:30.560 --> 0:03:33.720 on long run neutral rates, I think what we're seeing 0:03:34.000 --> 0:03:37.320 with payrolls and lots of other evidence is it something 0:03:37.400 --> 0:03:40.280 really positive is happening on the supply side of the economy. 0:03:40.760 --> 0:03:43.680 That's how you can get above trend growth alongside disinflation. 0:03:43.840 --> 0:03:46.440 So long run neutral rates are going higher, then you 0:03:46.520 --> 0:03:49.120 have term premium. We just spoke about that. The balance 0:03:49.160 --> 0:03:51.840 of risks are still moving higher. If the house is 0:03:51.880 --> 0:03:55.640 in disarray, that means no durable physical consolidation is on 0:03:55.680 --> 0:03:58.320 the horizon, and therefore you have a durable risk of 0:03:58.360 --> 0:04:01.080 a supply demand in balance that is no longer showing 0:04:01.120 --> 0:04:04.720 up at every Treasury auction. Neither are large overseas buyers 0:04:04.720 --> 0:04:07.800 to the same degree, either because they're savings balances have 0:04:07.880 --> 0:04:11.360 fallen or because they want to diversify their holdings and 0:04:11.480 --> 0:04:14.840 now overlay the impulse of the attack on Israel. It's 0:04:14.880 --> 0:04:18.799 another injection of uncertainty. It's another potential supply side shock 0:04:18.800 --> 0:04:21.040 on energy prices. And the net of it for me 0:04:21.120 --> 0:04:23.200 is you do get a higher drift in long term 0:04:23.240 --> 0:04:25.200 yields with an anchored front end. 0:04:26.120 --> 0:04:28.560 So, based on what you're saying, Tahalif, do you think 0:04:28.760 --> 0:04:31.039 that the move that we've seen, barring the past couple 0:04:31.040 --> 0:04:34.440 of days in longer term yields makes sense or that 0:04:34.480 --> 0:04:36.760 it's not high enough, or that it's gone a little 0:04:36.760 --> 0:04:37.479 bit over the board. 0:04:38.560 --> 0:04:40.760 Well, I mean in the I mean Emory said it 0:04:40.839 --> 0:04:44.719 right right now. We're in the thickest fog of a 0:04:44.800 --> 0:04:48.160 hideous and tragic war, and so we're seeing a flight 0:04:48.200 --> 0:04:50.000 to quality on the back end of the curve. But 0:04:50.040 --> 0:04:53.599 I think over time, as market participants think through the 0:04:53.640 --> 0:04:57.400 second and third order effects, the forces that I mentioned 0:04:57.440 --> 0:04:59.760 going to cause a drift higher and the front end. 0:04:59.760 --> 0:05:01.960 I think think that's where I have the most conviction 0:05:02.080 --> 0:05:03.760 at this point. I think the FED has said now 0:05:03.800 --> 0:05:07.080 with a chorus of officials, we're going to let markets 0:05:07.080 --> 0:05:09.960 do the work for us, and if the data continue 0:05:10.279 --> 0:05:13.400 to moderate both on growth and inflation, we can watch 0:05:13.400 --> 0:05:13.720 and wait. 0:05:14.200 --> 0:05:15.760 Dealey, But I just want to finish on the potential 0:05:15.800 --> 0:05:18.960 policy response, and this I think involves your experience in 0:05:19.000 --> 0:05:22.400 the administration. What kind of sanctions response should we be 0:05:22.440 --> 0:05:25.000 looking out for as a team. For the investors listening 0:05:25.000 --> 0:05:26.680 to this program right now, what would you expect to 0:05:26.680 --> 0:05:29.040 see from the administration the White House in a coming 0:05:29.080 --> 0:05:29.760 weeks and months. 0:05:31.200 --> 0:05:34.680 Well, I mean, the leading edge of any response from 0:05:34.720 --> 0:05:37.560 the administration, if it proves necessary, will be in the 0:05:37.600 --> 0:05:41.279 military route. That's why you see two aircraft carriers moving 0:05:41.320 --> 0:05:43.520 to the Eastern med That's why you see all of 0:05:43.520 --> 0:05:47.120 these efforts to shore up Israel's Iron Dome. There will 0:05:47.160 --> 0:05:50.240 be a sanctions component because money is fungible to the 0:05:50.279 --> 0:05:53.400 extent that Iran is seen as directly directly involved in 0:05:53.440 --> 0:05:55.960 the planning and execution of the attack. I think you'd 0:05:56.000 --> 0:05:59.600 see the screws of screws of sanctions Titan. There'll be 0:05:59.600 --> 0:06:02.480 a global effort, but that's that's second order to the 0:06:02.520 --> 0:06:03.400 military response. 0:06:03.800 --> 0:06:06.680 Delim's just been said about the sanctions response and the 0:06:06.720 --> 0:06:09.400 fact that perhaps this administration turned a blind eye to 0:06:09.480 --> 0:06:12.960 Iranian crude production and perhaps Chinese's buying off that crude. 0:06:13.320 --> 0:06:14.400 What's your view on that. 0:06:16.000 --> 0:06:18.640 I disagree with the prebis. I mean, I know there's 0:06:18.680 --> 0:06:20.839 a lot of a lot of hype about the six 0:06:20.920 --> 0:06:25.960 billion dollars. The administration spoken pretty clearly not a dollar 0:06:26.000 --> 0:06:28.640 has been has been sent to Tehran. I would be 0:06:28.680 --> 0:06:31.520 shocked if a dollar ever moves to Tehran in the 0:06:31.520 --> 0:06:35.920 aftermath of this attack. And so you know that there 0:06:36.000 --> 0:06:38.920 is going to be I think less and less Iranian 0:06:39.000 --> 0:06:41.760 crudeill on the market. The question for the administration is 0:06:41.760 --> 0:06:45.040 can they get an offset from Saudi from other sources, 0:06:45.040 --> 0:06:47.960 from domestic producers. That's going to be the challenge. 0:06:48.200 --> 0:06:51.039 So dully, you just said that you think that refreezing 0:06:51.080 --> 0:06:54.080 that six billion dollars is pretty much a certainty at 0:06:54.080 --> 0:06:58.120 this point. Is there a potential ramification? Does this have 0:06:58.279 --> 0:07:02.960 any kind of play in to some of the accusations 0:07:03.120 --> 0:07:05.680 of using a dollar as a weapon or any of 0:07:05.720 --> 0:07:08.560 these talks that have really flared up a couple of 0:07:08.640 --> 0:07:09.080 years ago. 0:07:10.360 --> 0:07:12.200 I don't. I don't think so, Lisa. I mean, if 0:07:12.200 --> 0:07:15.920 we're talking about the barbaric invasion of Ukraine or this 0:07:16.000 --> 0:07:19.280 hideous attack on Israel, Uh, there have to be there 0:07:19.320 --> 0:07:21.960 have to be consequences. And when you stop short of 0:07:22.040 --> 0:07:25.640 deploying your military, economic tools are the are the second 0:07:25.720 --> 0:07:28.360 best resort. So that's that's what we're seeing I don't 0:07:28.400 --> 0:07:31.400 think it's a threat to dollarization. We're going to move 0:07:31.400 --> 0:07:34.080 with our allies, and we're doing so to uphold the 0:07:34.120 --> 0:07:37.119 principles that underpin peace and security across the world. That's 0:07:37.880 --> 0:07:40.560 that's good for the world, that's good for for financial markets, 0:07:40.560 --> 0:07:42.840 that's good for the economy. That's what these sanctions do. 0:07:43.080 --> 0:07:45.080 Deleeve, don't be a stranger. It's trite to catch up 0:07:45.120 --> 0:07:47.239 with you, SA. Hopefully we can do that again soon, Deleep. 0:07:47.240 --> 0:07:53.680 Think of page and fixed income. If you want to 0:07:53.680 --> 0:07:56.520 guess now, is Judy Norman the Center on US Politics 0:07:56.520 --> 0:07:59.120 Code Director Judy wonderful to hear from you, and let 0:07:59.120 --> 0:08:00.920 me do you offer you the challenge to answer that question? 0:08:01.400 --> 0:08:03.640 Is that a distinction without a difference? 0:08:04.920 --> 0:08:07.760 You know, I do think it's important to differentiate on this, 0:08:07.880 --> 0:08:10.600 and it's interesting to me that Israel in particular is 0:08:10.680 --> 0:08:15.239 being very cautious to pin blame directly on Iran. Again, 0:08:15.440 --> 0:08:18.680 Israel and the US have long known that Iran has 0:08:18.880 --> 0:08:21.800 funded Hamas, has provided much of their weaponry, et cetera. 0:08:22.080 --> 0:08:24.640 But this operation does look to be different. 0:08:24.800 --> 0:08:29.240 And again importantly, I think a direct pin on Iran 0:08:29.600 --> 0:08:33.320 would escalate the region very quickly. This wouldn't just be 0:08:33.880 --> 0:08:37.040 Israel and Iran as to states, it would also include 0:08:37.080 --> 0:08:40.360 all of Iran's proxy groups has Blah proxy groups in 0:08:40.360 --> 0:08:41.840 Iraq and elsewhere, and. 0:08:41.760 --> 0:08:44.000 So it could just blow up very quickly. 0:08:44.080 --> 0:08:47.000 And I think both the US and Israel are aware 0:08:47.040 --> 0:08:49.240 of that, and one of their goals in these coming 0:08:49.320 --> 0:08:52.440 days is going to be containment along with you know, 0:08:52.559 --> 0:08:55.880 retribution and deterrent. So that's on everyone's mind right now. 0:08:55.920 --> 0:08:59.520 It doesn't mean that Iran is not going to play 0:08:59.520 --> 0:09:03.079 into this, but I think for the short immediate future, 0:09:03.640 --> 0:09:05.880 coour heads are trying to figure out where exactly a 0:09:05.880 --> 0:09:07.280 place to blame and act accordingly. 0:09:07.480 --> 0:09:09.920 Did Judy walk us through the tension in that statement? 0:09:09.920 --> 0:09:13.000 The words that you just used almost a contradiction between 0:09:13.200 --> 0:09:16.719 retribution and containment. Are those two things compatible? 0:09:17.679 --> 0:09:19.520 Well, I think this is going to be a real 0:09:19.600 --> 0:09:22.800 challenge over the next few days, the next few weeks. 0:09:22.960 --> 0:09:26.679 On the one hand, of course, Israel wants retribution for 0:09:26.920 --> 0:09:31.200 these attacks. They want to deter a broader conflict, as 0:09:31.240 --> 0:09:33.800 does the US. But at the same time you're trying 0:09:33.840 --> 0:09:36.800 to contain again the conflict as we just spoke about, 0:09:36.840 --> 0:09:39.400 from spelling out whether it's in the West Bank and 0:09:39.480 --> 0:09:40.800 has Bolah or throughout the. 0:09:40.760 --> 0:09:42.960 Region or just over the long term. 0:09:43.040 --> 0:09:45.120 And you know, John, Israel is going to be if 0:09:45.160 --> 0:09:47.400 they do launch a ground offensive, it's going to be 0:09:47.880 --> 0:09:51.760 very difficult. Gaza is a very highly populated urban area. 0:09:51.920 --> 0:09:56.680 You would face mass casualties for Israeli military personnel, for 0:09:56.880 --> 0:09:59.719 Palestinian civilians, which we're already seeing, and of course that 0:09:59.720 --> 0:10:03.120 does of hostages that are being held in Gaza, So 0:10:03.400 --> 0:10:05.840 this would be very tricky. It's also very tricky to 0:10:05.920 --> 0:10:08.720 just OUs to mass as a group, and it's very 0:10:08.920 --> 0:10:09.880 tricky to know what would be. 0:10:09.840 --> 0:10:11.079 Next for Gaza. 0:10:11.200 --> 0:10:13.439 So I think the road ahead is going to be 0:10:13.640 --> 0:10:17.920 challenging for Israel. We've seen these, you know, I would 0:10:17.920 --> 0:10:20.719 say Israel Palestein has become almost emblematic of the term 0:10:20.760 --> 0:10:24.079 cycles of violence, with different kinds of acts of retribution 0:10:24.160 --> 0:10:27.840 that then lead to more acts and unfortunatably and casualties 0:10:27.840 --> 0:10:30.480 on both sides. So that's the reality of the situation, 0:10:30.600 --> 0:10:32.000 and it's a very tough needle to thread. 0:10:32.480 --> 0:10:34.880 Julie, Given all of that, what do you make of 0:10:34.920 --> 0:10:38.240 the discussion of John Kirby of the US talking yesterday 0:10:38.559 --> 0:10:42.160 about Cutter actively trying to negotiate some sort of hostage release, 0:10:42.559 --> 0:10:46.000 something that could maybe de escalate the way that you're 0:10:46.040 --> 0:10:46.600 talking about. 0:10:47.480 --> 0:10:50.320 Yeah, it'll be really interesting to see Cutter's role in this. 0:10:50.440 --> 0:10:53.280 We have heard these reports of some kind of negotiations 0:10:53.280 --> 0:10:56.559 around hostages, at least around women and children and elderly, 0:10:56.679 --> 0:10:59.440 some kind of a negotiation that might happen there. You know, 0:10:59.480 --> 0:11:02.960 Cutter has has been an important intermediary, I would say, 0:11:03.240 --> 0:11:05.800 between the US and Israel and groups that they can't 0:11:05.920 --> 0:11:08.160 or won't negotiate directly with. And I think we're going 0:11:08.240 --> 0:11:10.880 to see that playing an important role here. Again, this 0:11:11.000 --> 0:11:14.319 question of the hostages is very much in the forefront 0:11:14.360 --> 0:11:17.560 for Israel and how they coordinate any kind of operation. 0:11:17.679 --> 0:11:19.800 It's also very much, obviously in the minds of the 0:11:19.880 --> 0:11:22.960 US and other countries that have their citizens being held there. 0:11:23.040 --> 0:11:25.280 Right now, What are the red lines, Julie, do we 0:11:25.320 --> 0:11:29.120 have a sense of as Israel plans the incursion, the 0:11:29.160 --> 0:11:32.680 potential ground operation in Gaza, is there a sense of 0:11:32.760 --> 0:11:35.679 pressure being placed on Israel to show restraint in certain 0:11:35.679 --> 0:11:38.920 areas from the US, from other allies as well as 0:11:38.920 --> 0:11:41.920 from Middle Eastern partners like Saudi Arabia that had previously 0:11:41.920 --> 0:11:43.040 been discussing with Israel. 0:11:43.920 --> 0:11:44.840 Sure, absolutely. 0:11:44.880 --> 0:11:48.120 You know, I think we heard from Biden yesterday a 0:11:48.280 --> 0:11:52.360 very committed US response to Israel. You know, we're with 0:11:52.480 --> 0:11:55.839 Israel and really not setting any red lines at this point. 0:11:55.880 --> 0:11:57.680 We're hearing different messaging. 0:11:57.280 --> 0:12:00.560 From the EU, from European partners in AWA, and of 0:12:00.600 --> 0:12:03.000 course from within the region, you know, calling on Israel 0:12:03.040 --> 0:12:06.040 to stay within the bounds of international law, within the 0:12:06.080 --> 0:12:08.000 bounds of kind of rules of war and these kinds 0:12:08.000 --> 0:12:11.000 of things in terms of proportionality and targeting of civilians. 0:12:11.040 --> 0:12:14.439 So I think this will be an ongoing conversation. I 0:12:14.440 --> 0:12:16.800 think it's it's a very difficult one. I think many 0:12:16.880 --> 0:12:19.440 feel a lot of aversion to talking about both sides, 0:12:19.480 --> 0:12:23.679 whereas others feel it very necessary degree for the civilian 0:12:23.679 --> 0:12:25.840 loss of life on both sides of this border. 0:12:26.040 --> 0:12:29.719 Judy, when you hear numbers like more than one thousand civilians, 0:12:30.280 --> 0:12:32.280 and then we have conversations where we talk about a 0:12:32.320 --> 0:12:36.080 proportional response. What on earth is a proportional response to 0:12:36.120 --> 0:12:37.480 what took place over the weekend. 0:12:38.600 --> 0:12:40.679 Yeah, I think many in Israel be asking that. 0:12:40.760 --> 0:12:44.880 And again I think this has been again a situation that, unfortunately, 0:12:45.080 --> 0:12:48.200 time and time again has played out in the Middle East, 0:12:48.200 --> 0:12:51.560 and is this in this Israel Palestine conflict. You know, 0:12:51.920 --> 0:12:55.760 over the decades we have seen different kinds of atrocities 0:12:55.800 --> 0:12:59.400 that again are then met with a response that you 0:12:59.520 --> 0:13:03.600 also read aults and civilian casualties that then just escalate 0:13:03.920 --> 0:13:06.880 for many this kind of long term security challenge of 0:13:06.920 --> 0:13:10.000 then getting more people involved in resistance and whatnot. So 0:13:10.240 --> 0:13:13.160 it's a very challenging path, I would say morally as 0:13:13.160 --> 0:13:16.200 well strategically for Israel as they try and balance what 0:13:16.320 --> 0:13:20.839 might be short term necessities and responses with what might 0:13:20.840 --> 0:13:23.360 be real long term strategic thinking of what does this 0:13:23.440 --> 0:13:25.000 mean for the long run and what kind of future 0:13:25.000 --> 0:13:28.440 are we setting up if we respond in a way 0:13:28.440 --> 0:13:30.840 that just fuels this conflict even further. 0:13:31.200 --> 0:13:33.640 Judy, thank you, Thank you for your insight. Jully Norman. Then, 0:13:33.640 --> 0:13:36.319 if you see our center on US politics. 0:13:46.120 --> 0:13:48.880 Someone who's been tracking the sort of push pull between 0:13:49.040 --> 0:13:52.720 inflation and potential weakness around the edges is Torston Slock, 0:13:52.800 --> 0:13:55.880 chief economist Apollo Global Management, who puts out charts that 0:13:55.920 --> 0:13:58.360 we cite pretty much every single day. And Torston, I 0:13:58.400 --> 0:13:59.840 just want to thank you and your team because we 0:13:59.880 --> 0:14:03.360 always use them as talking points and hot topics. 0:14:03.360 --> 0:14:04.760 So we appreciate that, but I. 0:14:04.720 --> 0:14:08.680 Want to start with your impression of a reacceleration that 0:14:08.720 --> 0:14:11.280 we're starting to see on the margins in goods prices. 0:14:11.440 --> 0:14:13.560 I think what's most important reader here is it shows 0:14:13.600 --> 0:14:15.560 how difficult it is to get the horse back in 0:14:15.600 --> 0:14:18.200 the bond when it comes to inflation. You think about first, 0:14:18.200 --> 0:14:20.360 goods inflation went up when we were sitting at home 0:14:20.480 --> 0:14:23.240 ordering stuff online during the pandemic. Then goods inflation came 0:14:23.320 --> 0:14:25.760 down when the supply Chaine came back on steam. And now, 0:14:25.800 --> 0:14:27.800 as Mike was just pointing out, it looks like goods 0:14:27.800 --> 0:14:30.920 inflation is beginning to re accelerate because manufacturing is beginning 0:14:30.960 --> 0:14:33.600 to show more signs of life. And you have, broadly speaking, therefore, 0:14:33.640 --> 0:14:36.720 as separate cycle in goods inflation relative to the cycle 0:14:36.760 --> 0:14:39.600 in services inflation, where initially when we were sitting at home, 0:14:39.600 --> 0:14:43.240 there was no service inflation. Now we're all going to restaurants, hotels, 0:14:43.640 --> 0:14:47.120 basically flying consumer services, and that's why service inflation has 0:14:47.120 --> 0:14:49.520 been very high. What we that cycle difference has been 0:14:49.520 --> 0:14:51.560 a very important feature, and it shows in the data 0:14:51.600 --> 0:14:52.160 also today. 0:14:52.240 --> 0:14:55.440 What we did see though, during the immediate aftermath of 0:14:55.480 --> 0:14:59.040 the pandemic was that people weren't as sensitive to price 0:14:59.080 --> 0:15:02.120 increases because they accepted that inflation was happening and they 0:15:02.160 --> 0:15:04.440 had huge bundles of savings that were left over from 0:15:04.480 --> 0:15:08.280 the pandemic. Is now different? Are you seeing consumers push back, 0:15:08.600 --> 0:15:09.680 spend less. 0:15:09.680 --> 0:15:11.960 Not actually spent when they see prices going. 0:15:11.800 --> 0:15:12.360 Up that much? 0:15:12.440 --> 0:15:14.520 Well, if you look at what was the distribution of 0:15:14.600 --> 0:15:18.200 consumption on goods and services before the pandemic, we have 0:15:18.320 --> 0:15:21.240 not normalized back, so that level in terms of the 0:15:21.280 --> 0:15:23.520 shares spent on services reads as to the shares spends 0:15:23.520 --> 0:15:26.360 on goods. We still spend quote unquote too much on goods, 0:15:26.440 --> 0:15:28.720 So that means that services still has some more upside. 0:15:28.840 --> 0:15:30.920 So you're right, people have been willing to spend more 0:15:30.960 --> 0:15:33.840 money to go to Taylor, Swift, tickets, US Open and 0:15:33.920 --> 0:15:36.520 Queen's all these things that have been so expensive because 0:15:36.560 --> 0:15:38.400 there has still been savings around. But as we all 0:15:38.440 --> 0:15:40.640 know and as we talk about all the time, we 0:15:40.760 --> 0:15:43.240 of course have this issue that savings are running out, 0:15:43.360 --> 0:15:46.040 combined with student loan payments coming back, all that does 0:15:46.120 --> 0:15:48.480 point to still more weakness on the consumer in the 0:15:48.520 --> 0:15:49.120 coming quarters. 0:15:49.160 --> 0:15:51.600 When you put charts out, especially on that savings rate. 0:15:51.800 --> 0:15:54.960 How much pushback do you get from people because everyone 0:15:55.040 --> 0:15:57.840 is so discerning of the type of data and the 0:15:57.840 --> 0:16:00.960 way that it's being framed. That a story with data 0:16:01.160 --> 0:16:04.120 can be dissected in five different ways by five different people. 0:16:04.240 --> 0:16:05.920 That's right, and I think that's also why it's not 0:16:06.000 --> 0:16:09.280 only about savings running out. It's also about the very 0:16:09.320 --> 0:16:11.840 big picture that the FED is trying still to cool 0:16:11.880 --> 0:16:14.280 the economy down. We hear that also from Merry Daily 0:16:14.360 --> 0:16:16.280 here in the segment you just played, where we are 0:16:16.320 --> 0:16:19.480 seeing already in the data, consumers are seeing higher telanguage 0:16:19.600 --> 0:16:22.640 rates on credit cards and order loans. Corporates are seeing 0:16:22.720 --> 0:16:24.800 default rates go up on high yield and on loans. 0:16:24.800 --> 0:16:27.360 We're also seeing interest covers ratios starting to dip, both 0:16:27.360 --> 0:16:29.240 by investment grade and high yield, and also on the 0:16:29.240 --> 0:16:32.000 banking side, we're also seeing a slowing in loan growth 0:16:32.000 --> 0:16:33.880 in the weekly data from the FED, both for large 0:16:33.920 --> 0:16:36.760 banks and for small banks. So taking consumers, corporates, and 0:16:36.840 --> 0:16:39.640 banks combined, the FED is succeeding. This is exactly what 0:16:39.680 --> 0:16:41.760 the textbook would have predicted, that we are seeing a 0:16:41.800 --> 0:16:45.200 slow down on consumption on corporates and on banks, and 0:16:45.240 --> 0:16:47.960 that's why this also will result in more slowing over 0:16:47.960 --> 0:16:48.600 the coming quarters. 0:16:48.720 --> 0:16:51.720 More slowing and recession. More slowing is not the same, right, 0:16:51.760 --> 0:16:54.160 And there's a question of how much slowing is necessary 0:16:54.200 --> 0:16:56.240 to truly put the horse back in the bar. And 0:16:56.280 --> 0:16:58.440 as you say, to use your analogy, and this has 0:16:58.480 --> 0:17:01.000 been one of the conundrums that's been into the market. 0:17:01.280 --> 0:17:03.160 Do you have a sense of whether. 0:17:02.960 --> 0:17:06.440 It requires a greater slowing to get that horseback in 0:17:06.480 --> 0:17:09.240 the barn? Then people are currently using as a base case. 0:17:09.240 --> 0:17:10.840 And when I say people, I mean FED officials. 0:17:10.880 --> 0:17:13.200 I do think that we need more slowing because coll 0:17:13.359 --> 0:17:16.399 PC today is three point nine and the target for 0:17:16.440 --> 0:17:18.480 the FIT is that it should be two. So we 0:17:18.560 --> 0:17:21.080 are still running around after the horse out there and 0:17:21.080 --> 0:17:23.440 trying to get it back into the two percent range, 0:17:23.440 --> 0:17:25.600 and we're just not there yet. That's what literally every 0:17:25.800 --> 0:17:28.040 from C member is telling us. So with that backdrop, 0:17:28.359 --> 0:17:31.000 given what's happening to the delinquagy rates for consumers, given 0:17:31.000 --> 0:17:32.880 what's I mean, the fault rates for Hiyil are going 0:17:32.920 --> 0:17:35.000 up at the fastest rate in the last six months 0:17:35.080 --> 0:17:37.119 in years. So the result of that is that we 0:17:37.200 --> 0:17:40.119 are seeing the effects of the FED tightening. Every single day. 0:17:40.320 --> 0:17:42.960 There are companies that cannot get financing. There are consumers 0:17:43.000 --> 0:17:44.919 who cannot buy a new car, and at the moment 0:17:45.000 --> 0:17:46.760 who have a hard time buying a new home. So 0:17:46.800 --> 0:17:49.200 in that sense, tight up policy with the Fed funds 0:17:49.280 --> 0:17:51.639 rate at five and a half is way way above 0:17:51.960 --> 0:17:53.680 the two and a half percent where they're fed and 0:17:53.760 --> 0:17:55.600 the dot plot things we should be in the long run. 0:17:55.760 --> 0:17:58.359 So policy is working exactly as the textbook have predicted. 0:17:58.440 --> 0:18:00.600 Is just the savings making it take a little bit 0:18:00.640 --> 0:18:03.360 longer time. But we are moving towards, in my view, 0:18:03.440 --> 0:18:05.359 a faster slow down what the market is considered to 0:18:05.400 --> 0:18:06.720 six expecting we're going to. 0:18:06.720 --> 0:18:08.560 Put the horse back in the pasture and leave that 0:18:08.880 --> 0:18:11.159 alone for the remainder of our time. But I do 0:18:11.240 --> 0:18:15.080 want to know why we are seeing upside surprises to 0:18:15.119 --> 0:18:18.640 the economic data in such a significant way if there 0:18:18.720 --> 0:18:20.439 is this material slowing, I mean, this has been one 0:18:20.440 --> 0:18:23.400 of the conundrums for so many people who are expecting 0:18:23.480 --> 0:18:26.920 and seeing anecdotally all of the slowing and yet each 0:18:27.000 --> 0:18:29.800 economic print coming in stronger, stronger, stronger. 0:18:30.040 --> 0:18:32.000 There are some exceptions to that. I know, the label 0:18:32.040 --> 0:18:34.639 market obviously surprise to the upside on the headline, but 0:18:34.680 --> 0:18:37.119 if you look under the hood. You see that in 0:18:37.160 --> 0:18:40.639 particular in terms of job openings peaked literally in March 0:18:40.680 --> 0:18:43.119 of twenty twenty two when the Fed started raising rates. 0:18:43.200 --> 0:18:45.520 That's been coming down. You're also seeing the work week 0:18:45.560 --> 0:18:48.800 coming down. You're also seeing wages for jobs switches coming down. 0:18:48.960 --> 0:18:53.080 You've also seen an increase in percentage of permanent job losses. 0:18:53.240 --> 0:18:55.399 So a number of the label market indicators under the 0:18:55.440 --> 0:18:57.520 hood are showing more signs of weakness, and we are 0:18:57.520 --> 0:19:00.119 definitely moving towards that. We will also maybe get that 0:19:00.160 --> 0:19:03.040 increase in the unemployment rate that Jay Powell has talked about. 0:19:03.160 --> 0:19:05.040 Given the unrust in the Middle East, there's a lot 0:19:05.040 --> 0:19:07.520 of focus on oil prices and what would happen if 0:19:07.560 --> 0:19:10.919 oil prices do have a sustained rise. How do you 0:19:11.000 --> 0:19:14.280 factor that in to your concept of harder landing than 0:19:14.320 --> 0:19:15.840 people are certainly except. 0:19:15.640 --> 0:19:18.280 I know that is certainly a very important point. I mean, 0:19:18.280 --> 0:19:20.360 oil prices now they first went up and now they've 0:19:20.359 --> 0:19:22.200 gone down a bit. But it's certainly the case that 0:19:22.400 --> 0:19:24.840