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

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Speaker 1: we bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Christopher

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Speaker 1: Harvey with US and the problem with Christopher Harvey is

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Speaker 1: when you get his research note, you go damn because

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Speaker 1: there's always one or two sentences in it that you

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Speaker 1: gotta find that are absolutely brilliant. Christopher Harvey with Wells Fargo,

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Speaker 1: You absolutely nail the under ownership of Apple computer explained

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Speaker 1: to our audience on radio and TV. How is it

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Speaker 1: possible Apple is under owned? That's a great question. It's

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Speaker 1: something we've been monitoring for about two years now and

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Speaker 1: we've been scratched our head. Y pms really have been

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Speaker 1: underweight Apple, or institutional pms have been underweight Apple. We'd

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Speaker 1: walk into an office, we talked about the underweight a PM,

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Speaker 1: whether it was a growth or CORPIM would say I

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Speaker 1: don't care, and we'd say, but you should, and they

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Speaker 1: would just say, I don't care. Apples not a grocer stock,

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Speaker 1: not my portfolio. Let's move on. And now a lot

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Speaker 1: of people are scratching their heads saying, how did Apple

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Speaker 1: get to where it is at this point in time?

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Speaker 1: And that's one of the reasons why we think it

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Speaker 1: continues to grind higher. What is the behavior of active

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Speaker 1: managers as they end a quarter end, whether it's September

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Speaker 1: thirty or twelve thirty one twenty, are they is this

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Speaker 1: the correct word? Are they forced to buy these high

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Speaker 1: flying texts? Well, I don't know if they're forced, but

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Speaker 1: you do see what where you do hear a lot

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Speaker 1: of the risk pms. It's not risk pms, but risk

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Speaker 1: managers knock getting on the door and saying, he told

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Speaker 1: me two months ago, you told me three months ago

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Speaker 1: you were going to tighten this up. You told me

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Speaker 1: that Apple was gonna pull back. It hasn't. We need

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Speaker 1: to do something now. And the other thing is you

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Speaker 1: have cash laying on balance sheet, Well, you have castling

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Speaker 1: around in the portfolio. You have to start equitizing that

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Speaker 1: because what's happening is relative performance is beginning to decay

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Speaker 1: and has been a pretty good year for a lot

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Speaker 1: of the managers, so they want to keep that from happening.

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Speaker 1: There's a conflation going on between under ownership of Apple

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Speaker 1: and undershown ownership more broadly of US stocks. Can we

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Speaker 1: make that conflation. Can we say that the reluctance to

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Speaker 1: own more Apple shows the reluctance to have a heavier

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Speaker 1: overweight in U S stocks. Well, there's a couple of

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Speaker 1: things going on right now. So I think what's one

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Speaker 1: of the things that's happening is we're seeing this move

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Speaker 1: to passive right so, people are starting to get more

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Speaker 1: Apple into their portfolio. They're just doing it in a

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Speaker 1: different way. The PMS two to be or forced, but

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Speaker 1: but the asset owners aren't waiting around for them to

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Speaker 1: make that move. The other thing to you, to your

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Speaker 1: point is we've seen this rally. We've talked about a

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Speaker 1: summertime melted up of ten ten percent plus. We're there

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Speaker 1: and people have been brought kicking and screaming to this thing.

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Speaker 1: And now as we look at this thing, we're not saying, Okay,

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Speaker 1: it's time to get off, it's time to leave the

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Speaker 1: party just yet. We think a lot of the good

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Speaker 1: news is priced in. But this is a time where

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Speaker 1: people get squeezed in. This is time where funny things

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Speaker 1: do happen. I'm really confused, Chris, we were talking three

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Speaker 1: weeks ago, four weeks ago with economist after economist after

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Speaker 1: stock trader who said, if we don't get a second

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Speaker 1: round of fiscal support, we will see stock prices go down.

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Speaker 1: They are at new record highs. Why is this happening? Well,

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Speaker 1: I think that's whether economists and not profolio managers are

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Speaker 1: a Greek strategies. The second thing that we're seeing, what

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Speaker 1: we've been saying is the reason for the run up

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Speaker 1: is things are getting less bad and they continue to

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Speaker 1: get less bad. Anecdote, When I drive around, there are

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Speaker 1: more people on the road, When I walk around, there

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Speaker 1: are more people in restaurants. So the economy is slowly

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Speaker 1: grinding higher. You still have basically zero percent interest rates,

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Speaker 1: you have credit spreasident tightened dramatically, you have funding widely available,

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Speaker 1: and you're saying it still having pretty good reports from

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Speaker 1: many many companies. So I think that's really what's what's

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Speaker 1: going on, and the leaf is that ultimately something will

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Speaker 1: get done. Chris, I want to pin you down on

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Speaker 1: a percent move up in SPX. Michael Purvis is modeling

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Speaker 1: under seven percent lift in sp X. How do you

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Speaker 1: feel wells fargo. Can you quantify single digit or dare

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Speaker 1: I say double digit up for the market. So our

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Speaker 1: price target, so we've been one of the more aggressive

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Speaker 1: people off the bottom. We've had one of the higher

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Speaker 1: price targets, but we're actually through our price target at

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Speaker 1: this point in time. Our price target is um. But

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Speaker 1: when we got there, we didn't say, Okay, okay, we're right,

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Speaker 1: the markets wrong, the market is gonna fall apart. What

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Speaker 1: we said is there's plenty of reasons for this market

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Speaker 1: market to continue. Now, what we're saying is we're looking

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Speaker 1: less about market direction and more about constituents in the portfolio.

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Speaker 1: What you want to own that you want to rotate,

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Speaker 1: and our thought is you want to move down smaller

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Speaker 1: cab You want to look for companies that have COVID beta,

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Speaker 1: that have better comps in fourth quarter of next year,

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Speaker 1: excuse me, the first quarter of next year and second

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Speaker 1: quarter of next year. In addition to that, you want

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Speaker 1: more economic sensitivity, because we do think economy will continue

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Speaker 1: to grind hire Well, we welcome all of you this

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Speaker 1: morning on Bloomberg Radio, on Bloomberg Television, particularly across serious

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Speaker 1: x M. In the path of Hurricane Laura Right now

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Speaker 1: Benee Shreveport, Louisiana will go up into the right if

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Speaker 1: you will, and we said good morning to all of

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Speaker 1: you preparing for Hurricane Laura, Lisa. What I find so

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Speaker 1: interesting about the Thursday is the event structure is so

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Speaker 1: predictable to the President's speech tonight, and yet we really

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Speaker 1: don't know what the various outcomes of the various events

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Speaker 1: of Thursday will be. Yeah, and you're not going to

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Speaker 1: be chased by a bear in Jackson Hole. We do

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Speaker 1: know that, which I think probably is somewhat of relief

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Speaker 1: for you, But very much the focus is going to

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Speaker 1: be on J. Powell and Chris. I'm wondering, from an

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Speaker 1: equity perspective, is there out perhaps outsized risk that we

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Speaker 1: could see equity response that is more than any response

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Speaker 1: we can see in bonds to something that J Powell says.

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Speaker 1: There's always that possibility that there's always that opportunity where

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Speaker 1: things when when we got the minutes a couple of

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Speaker 1: weeks ago, it wasn't wasn't as uber dubbish as a

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Speaker 1: lot of people thought, and for a hot minute we

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Speaker 1: pulled back. I don't know Jeal is going to talk

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Speaker 1: about inflation, but we've been talking about inflation for the

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Speaker 1: last ten years. An issue that I have is we

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Speaker 1: fled in the market with liquidity in the United States globally,

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Speaker 1: It's real. It was really hard to go belly up

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Speaker 1: or to go bankrupt. Too much capacity, and that's one

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Speaker 1: of the reasons why we're talking about the lack of

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Speaker 1: inflation is a creative, destructive process never reaches a natural head.

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Speaker 1: We're doing it again. But I just I hear a

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Speaker 1: lot of things about inflation. I'll believe it when I

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Speaker 1: see it. Christopher Harvey, thank you so much. With Wells Fargo,

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Speaker 1: Salesforce dot Com entering the down, Alicia Levin joined. She's

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Speaker 1: the b n y mel and we're thrilled she could

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Speaker 1: be with us today. Alicia, the last time we spoke,

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Speaker 1: I believe you had a more conservative tax, a more

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Speaker 1: caution to the equity markets. Do you sustain that? So,

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Speaker 1: Hi didn't morning. Nice to see you guys again. I mean, look,

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Speaker 1: I think that the pace at which we're rising is

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Speaker 1: a little bit concerning for future games from here, But overall,

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Speaker 1: there's so much support in the market, not just from

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Speaker 1: the FED but also the flows yer today where five

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Speaker 1: to one flows have been going into the bond market

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Speaker 1: and not equities. And also the fact that's nearly five

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Speaker 1: trillion dollars on the sidelines sitting in cash, and so

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Speaker 1: all this suggests they're still dried outer even even with

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Speaker 1: the pace at which we've moved higher. So yes, I'm cautious.

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Speaker 1: We're just going into that season, that seasonal sort of weakness,

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Speaker 1: that September October where you know, gains tend to be consolidated.

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Speaker 1: There'll be some election anks, I'm sure, and and there'll

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Speaker 1: be some COVID anks on the vaccino treatment front. It's

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Speaker 1: never a straight line. But yeah, it feels like, you know,

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Speaker 1: we could pause, but ultimately I'm still positive the direction

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Speaker 1: of travel is upward. Which ratio is your key valuation

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Speaker 1: metric right now? Is it priced to sales? Are we

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Speaker 1: rationalizing like Amazon? Or is it price to cash flow?

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Speaker 1: Is it something like across to the balance sheet total

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Speaker 1: enterprise value to IBADA, which is the ratio that matters

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Speaker 1: to Alicia Levine. So I say, that's a great, great question.

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Speaker 1: You know, I've been talking to people, been in the

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Speaker 1: market for forty fifty years. In the last few days,

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Speaker 1: no one's actually seen anything like this. Um it's kind

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Speaker 1: of extraordinary, I'd say, right now, it's really cash um.

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Speaker 1: Cash is king, and you know, the ability to plow

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Speaker 1: back into the business, and you know clearly. I mean,

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Speaker 1: I'll just give you a metric. Every night, we calculate

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Speaker 1: the out performance of the five large caps tech Sock

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Speaker 1: versus the rest of the SMP. We started this in April.

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Speaker 1: The out performance was twenty eight percent in the middle

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Speaker 1: of April. Do you know as at the market closed yesterday,

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Speaker 1: the out performance of those five stocks is now sixty

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Speaker 1: six so percent over the rest of the S and P.

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Speaker 1: And the reason is the cash generation, the earning power,

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Speaker 1: the cash generation. They all need debt and they keep

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Speaker 1: on growing and it's not entirely irrational. It's not irrational.

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Speaker 1: They are growing and I are growing faster well, and

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Speaker 1: they are growing and it isn't irrational. So if you

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Speaker 1: want to get cautious, what do you sell? That's great. Look,

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Speaker 1: I think that for the most part, given how how

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Speaker 1: levered the market is to the to the to the

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Speaker 1: tech sector and the communication sector right now, you have

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Speaker 1: to have some exposure here. I think I think the

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Speaker 1: general idea of trimming some of your winners and rebalancing

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Speaker 1: is a great idea. We do believe that there will

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Speaker 1: be a credible vaccine out there somewhere in the next

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Speaker 1: four to six months, which will blunt some of the

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Speaker 1: macro concerns that you've talked about in the previous segment.

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Speaker 1: There will be something available, I'll pretty sure by the

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Speaker 1: first quarter of one and so therefore your industrial after

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Speaker 1: housing stocks and even your epicenter stock could look appealing

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Speaker 1: in that scenario. Alicia, I'm struggling though, with the idea

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Speaker 1: of the Robin Hood narrative, the idea that yes, you've

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Speaker 1: got the fanmag stocks that have some understandability behind their rise,

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Speaker 1: Tesla gaining four hundred and fifteen percent, are their pockets

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Speaker 1: of froth here? Well? For sure? For sure. I mean

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Speaker 1: there are certain names you can't explain and um, and

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Speaker 1: I think that's that's one of them. Um, you know,

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Speaker 1: there is a momentum going. I mean, let's for Tesla

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Speaker 1: just for one second was the largest short in the market,

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Speaker 1: and it was the largest short nut on me. Not

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Speaker 1: only on the institutional side, you're also on the retail side.

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Speaker 1: The part of that price action it was that technical there,

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Speaker 1: but clearly, you know, we joked about this last time.

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Speaker 1: Do not make great technical charts, and there'll be a day,

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Speaker 1: but it can go on longer. Okay, folks, what you

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Speaker 1: gotta understand here's Alicia Levina is prodigious in math. So

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Speaker 1: we're gonna do math Thursday here in this long hour.

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Speaker 1: What do I mean by a long hour? We start

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Speaker 1: out at eight am Wall Street time, and we're really

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Speaker 1: going to which is a speech of Chairman Pal. We've

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Speaker 1: got some special coverage on that will tell you about

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Speaker 1: here in a moment, Alicia, Come on, Alicia, you're going

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Speaker 1: all squared on me here with the parabola. And that

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Speaker 1: comes back to Gamma or convexity, the best that's on there.

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Speaker 1: Is there a market overweight right now? I mean, everybody's

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Speaker 1: telling me there's money on the sidelines, but is there

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Speaker 1: room there for Gamma for acceleration. There's there's room for

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Speaker 1: other sectors to move and not have text destroyed because

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Speaker 1: you don't have to sell tet to buy the other sector,

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Speaker 1: right because there's cash. You've got five trillion dollars of

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Speaker 1: cash on the sidelines, and so much money has gone

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Speaker 1: into the bond market and it'll be very Let's bring

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Speaker 1: in J. Powell. You know this is a big story

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Speaker 1: for the morning. You know, what are we going to

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Speaker 1: here today? And they're going to sit on race even

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Speaker 1: as we see inflation moving upwards. Alicia, You've done a

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Speaker 1: great job answering at Tom's gratuitous way of getting gamma

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Speaker 1: in there. Really, Tom, seriously, she's not even focusing on

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Speaker 1: the technical Come on, Alicia Rudder Shelton Nateenberg. I mentioned

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Speaker 1: Sheldon Nateberg Folk yesterday. I got a huge response to

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Speaker 1: that from geeks on Wall Street. Mr Nadenberg came out

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Speaker 1: of Chicago years ago with the definitive one volume on

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Speaker 1: the Greek letters. It's read like the Old Testament Wall

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Speaker 1: Street as well. Alicia, where where's the Greek letters here

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Speaker 1: right now? I mean, there's a whole bunch of Greek letters.

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Speaker 1: Which of those matters to a Lalisha? Alicia Levine. So

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Speaker 1: what matters to me right now is is the positive

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Speaker 1: rate of change? Right so the second derivative, That's what

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Speaker 1: matters to me right now, and that's what matters to markets,

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Speaker 1: and we forget that at our peril. It's never the

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Speaker 1: absolute level. It is the rate of change. And every

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Speaker 1: time investors forget that they're on the wrong side of

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Speaker 1: the trade. And the reason the markets moving upward it

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Speaker 1: is because the rate of change continues to be positive.

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Speaker 1: Here in the US. The data has been getting better

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Speaker 1: in the last few weeks. It is coinciding with COVID

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Speaker 1: cases essentially rolling over on that bell curve, very similar

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Speaker 1: to what we saw in April. Will they say, they're

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Speaker 1: hard to say, but the data have gotten better and

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Speaker 1: the positive surprises have been there, and that is why

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Speaker 1: the market can continue to move higher. It's the rate

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Speaker 1: of change Newtonian mechanics with Alicia Levina doesn't get better

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Speaker 1: than that with b n Y Melon. They're back at

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Speaker 1: the n Y MEL and the General Council is going

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Speaker 1: what did she say, Alicia Levine? Where this is moarting?

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Speaker 1: Thank you right now we're stut to bring you Megan Green.

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Speaker 1: She's at Harvard Kennedy School and Senior Fellow, and it's

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Speaker 1: just done brilliant work folding market economics and acute analysis

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Speaker 1: into the broader theory of what we're doing in economics

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Speaker 1: and of course how it links into finance and investment

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Speaker 1: as well. Megan Green, thank you so much for joining

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Speaker 1: us today. Megan, I really want to go to the

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Speaker 1: arch issue which has been the battle of our textbooks,

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Speaker 1: rules and discretion and this new, more surgical idea of targeting.

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Speaker 1: Is there any proof that a central bank can target anything? Well,

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Speaker 1: there's there's more and more proof that a central bank

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Speaker 1: can't target much of anything. They can target the rate

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Speaker 1: that they're setting UM. But the feds dual mandate is

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Speaker 1: full employment and stable of inflation of two and on

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Speaker 1: the latter inflation, you know, the FEDS missed the mark

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Speaker 1: for the entire past recovery. In fact, since the FED

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Speaker 1: adopted a two inflation target in twelve, inflation is average

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Speaker 1: just under one and a half percent UM. So when J.

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Speaker 1: Powell does get up, and it's widely expected that he'll

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Speaker 1: provide the broad breast strokes of change in the Fed's

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Speaker 1: target towards average inflation, so that there's a catch up factor,

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Speaker 1: meaning that the FED will overshoot on inflation that offset

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Speaker 1: undershooting for so long. I do think investors might ask,

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Speaker 1: you know, can the FED overshoot inflation? It's been so

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Speaker 1: far under its target for so long. There's a real

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Speaker 1: credibility issue, and the FED has to promise that it

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Speaker 1: will overshoot on inflation in the future, which requires upfront

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Speaker 1: credibility when it hasn't really built any How do you

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Speaker 1: mechanically or what is the reaction process that gets you

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Speaker 1: to overshoot inflation. I mean, it's a FED really wanted

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Speaker 1: to overshoot on inflation. It could provide helicopter money and

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Speaker 1: achieve it, I think, but within kind of the political

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Speaker 1: feasibility of what the FED can do these days, I

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Speaker 1: don't think there's a whole lot that the FED can

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Speaker 1: do to even hit its target, particularly now when we're

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Speaker 1: facing a huge and persistent drop and demand. So I

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Speaker 1: don't think the FED can generate inflation of over two

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Speaker 1: percent right now. There are concerns though, that the supply

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Speaker 1: side aspect of this crisis will come through and generate

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Speaker 1: some inflation, So the FED might get lucky for a

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Speaker 1: little while and have inflation overshoot it's tuper sent target,

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Speaker 1: but I doubt that will be sustained. Megan, we can't

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Speaker 1: get good inflation unless we get more jobs back, and

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Speaker 1: not all job losses are equal. Initially people were saying

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Speaker 1: that they were temporary job losses. Now they're increasingly permanent.

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Speaker 1: They're increasingly high paid, and I am unclear on what

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Speaker 1: the FED can do to improve this picture. Are FED

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Speaker 1: actions at this point actually hurting more that they're helping

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Speaker 1: because they take the pressure off Washington. Yeah, so I

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Speaker 1: think you're right. The FED can't do much about the

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Speaker 1: job market right now other than keep rates really low,

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Speaker 1: try to run the economy hot to bring in workers,

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Speaker 1: which by the way, the FED was already trying to

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Speaker 1: do during the last recovery. Um. I think it's really

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Speaker 1: up to fiscal authorities to do something to try to

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Speaker 1: address the labor market. So it's not up to the FED. Though.

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Speaker 1: I do think that when Jay speaks later today, he

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Speaker 1: will probably provide a slightly barish view on the economy

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Speaker 1: so that he can keep the pressure on Congress, and

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Speaker 1: I suspect he'll mention that fiscal policy is the most

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Speaker 1: important thing right now, as he has been doing. When

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Speaker 1: we talk about inflation, Megan, We're getting plenty of inflation

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Speaker 1: and asset prices, and I do wonder whether at a

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Speaker 1: certain point it becomes harmful without some sort of fiscal backdrop,

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Speaker 1: without some sort of help that actually can help the

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Speaker 1: actually economy. Do you see the asset inflation is being

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Speaker 1: pernicious at this point or does it have more room

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Speaker 1: to run before it reaches at I think it probably

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Speaker 1: has more room to run. It depends on what markets

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Speaker 1: you're talking about. Right, We've seen incredible leverage taken on

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Speaker 1: during this crisis, and that will be a problem one day,

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Speaker 1: But it won't be a problem as long as debt

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Speaker 1: servicing costs are so incredibly low. Because raids are so low,

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Speaker 1: the stock market looks frothy. I don't think anyone would

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Speaker 1: doubt that. But I think that as long as the

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Speaker 1: feed is stuck in, even without an average inflation target,

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Speaker 1: we all know that the FED is not going to

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Speaker 1: higrate anytime soon. Um. I think that that has a

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Speaker 1: bit for the run. Megan, I want to play off

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Speaker 1: yard cushion or now over at the desk, start talking

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Speaker 1: about the President's speech tonight, and you know, Megan, I

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Speaker 1: want to talk about a hopeful AMA. Mr Kristener says

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Speaker 1: the President will speak of a quote hopeful unquote America.

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Speaker 1: How does J Powell do that? How does he generate

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Speaker 1: a hopeful message today when I've got a number of

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Speaker 1: leading economists looking at double digit unemployment coming down slowly? Yeah,

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Speaker 1: I think it will be hard to do and It's

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Speaker 1: probably not really in Jay's best interests, since, as I said,

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Speaker 1: he'll want to keep the pressure on Congress to come

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Speaker 1: up with a fiscal stimulus, which probably won't happen until

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Speaker 1: September at best at this point. Um, But you know,

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Speaker 1: I think you could look to some data points like

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Speaker 1: retail sales durable goods which improved. Um. The problem is

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Speaker 1: that all the kind of high frequency alternative data sources

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Speaker 1: suggest that this recovery is already petering out, and I

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Speaker 1: think it could could turn into a downturn if we

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Speaker 1: don't end up reacting some of the fiscal stimulus. Megan Green,

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Speaker 1: thank you so much, greatly appreciate it. With the County

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Speaker 1: School at however, we're so fortunate here to have like Darted,

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Speaker 1: jointess of Mike Darta's m CAM Partner's chief economists and

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Speaker 1: market strategist. Mike, thanks so much for joining us here.

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Speaker 1: I love to get your thoughts on the comments we

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Speaker 1: just heard from FED Chairman Powell. Absolutely so thanks for

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Speaker 1: having me on. I think, you know, going through the

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Speaker 1: whole speech, the key phraseology here and and a lot

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Speaker 1: of this was widely anticipated, but Poull basically stated specifically

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Speaker 1: in the speech that they're moving to a flexible form

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Speaker 1: of average inflation targeting. So basically what that means is

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Speaker 1: the FED wants to shoot for a two percent inflation goal.

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Speaker 1: The problem in the last cycle was that they undershot it,

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Speaker 1: and there was no makeup strategy for that undershooting. So

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Speaker 1: this time around, the FED wants to be focused on

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Speaker 1: if they're undershooting, to you know, to make up for

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Speaker 1: that with some overshooting, to you know, to a limited extent. Right.

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Speaker 1: He also said in the in his formal remarks that

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Speaker 1: if inflation were to start to get going too much,

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Speaker 1: that they would not hesitate to act tighten policy and

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Speaker 1: to bring inforflation back down. But the basic point here

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Speaker 1: is to average to an average two percent inflation over time.

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Speaker 1: Uh and so two percent will not be a ceiling

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Speaker 1: but really a flexible average inflation goal. Michael Darter thrilled

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Speaker 1: to have you on. You're just the right guy to

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Speaker 1: have on here at this moment in FED history. What

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Speaker 1: I find fascinating is the ex anti feel here to this.

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Speaker 1: If they're gonna inflation target and overshoot, are they going

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Speaker 1: to be reactive to the overshoot or is it implied

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Speaker 1: in the speech that they will be proactive and get

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Speaker 1: out front to push inflation higher. Well, I think Tom,

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Speaker 1: the idea is to be you know, to be proactive here.

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Speaker 1: So one of the things that happened towards the tail

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Speaker 1: end of the last business cycle is that the FED

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Speaker 1: was tested. Right, had a lot of people saying, well,

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Speaker 1: the Fed's going to run it hot. And we had

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Speaker 1: a test in the last two years of the last

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Speaker 1: icle where fiscal policy eased, inflation was mostly below the

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Speaker 1: Fed's target um, and the labor market was tight. What

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Speaker 1: did the Fed do? They actually tightened policy for two

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Speaker 1: years even though inflation was below their target most of

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Speaker 1: the time, and so the FED was basically acting the

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Speaker 1: way that prior Feds acted, moving in a way to

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Speaker 1: head off any inflation above two percent. Well, it turned

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Speaker 1: out that the tight labor market really didn't put any

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Speaker 1: significant upward pressure on inflation, that growth was slowing, and

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Speaker 1: that you know, recession risks were actually starting amount which

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Speaker 1: is why the FED had to reverse course and start

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Speaker 1: cutting rates that inverted yield curve. Tom told us something,

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Speaker 1: you know, we discussed this many times. A lot of

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Speaker 1: economists ignored it, said it was irrelevant, but it both

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Speaker 1: a slow down and eventual rate cuts. Promised not going

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Speaker 1: to turn this into a historical clinic, but I'm going

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Speaker 1: to go back. Michael darted to Richard Timberlake and the

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Speaker 1: Georgia School. Good morning, Robert McTeer and the great one

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Speaker 1: volue monetary policy in the US and intellectual and institutional history.

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Speaker 1: That's great, But is all this theory overwhelmed by the

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Speaker 1: dynamics of aggregate demand and that you can you can

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Speaker 1: use the monetary tool kit until it doesn't respond to

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Speaker 1: aggregate demand dynamics. Well, I think that's that's exactly right, Tom.

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Speaker 1: I mean, how does inflation move up and move down?

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Speaker 1: And and what is the fet actually doing. You know,

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Speaker 1: they have to be able to stimulate aggregate demand to

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Speaker 1: get inflation to move up. They have to be able

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Speaker 1: to retard inflation to move down, right, And so they

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Speaker 1: do that essentially with two different policy tools. They can

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Speaker 1: buy or sell bonds to easier tighten, or they can

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Speaker 1: target an interest rate of short term rate or there's

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Speaker 1: some discussion now about moving to a longer term interest rates.

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Speaker 1: So that's what the central Bank does, and I think

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Speaker 1: that's important to reflect on now that there's a lot

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Speaker 1: of discussion and pressure on the FED to add additional mandates.

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Speaker 1: But I think we've got to be very careful in

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Speaker 1: not asking the FED to do too much. If it's

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Speaker 1: one goal was basically not achieved in the last cycle

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Speaker 1: two percent inflation. Is it really a good idea to

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Speaker 1: be lopping on additional mandates that the FED is not

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Speaker 1: the tools for. And I think the answer to that

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Speaker 1: is no. We need to be very careful right if

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Speaker 1: we're asking, you know, if if we as a society

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Speaker 1: are saying we have a pressing need to address climate

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Speaker 1: change or disparities between groups, that's going to be a

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Speaker 1: policy that fiscal You know that that elected icials with

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Speaker 1: a fiscal policy apparatus are going to have to address

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Speaker 1: monetary policy. I think, you know, we're really need to

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Speaker 1: do too much if we're going to add mandate after

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Speaker 1: mandate after mandate, this is little growth in inflations. He

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Speaker 1: won't even let me cut in here. Darna just goes

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Speaker 1: on like that. Michael and I are just fired up, folks.

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Speaker 1: This is like Bloomberg on the economy re Dux as well.

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Speaker 1: Paul Sweeney in Time King with Michael Darta, we are thrilled.

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Speaker 1: Michael Dartas with us with a Dow up hundred and

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Speaker 1: fourteen points. Okay, I have one more geek question, and

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Speaker 1: then Sweeney's going to get control of the program. Michael Darda.

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Speaker 1: The Dallas FED had that symposium for John B. Taylor

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Speaker 1: of Stanford. I'm go in to guess eight years ago

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Speaker 1: and it was the rules bay Lipsky spoke. Everybody weighed

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Speaker 1: in here on rules. Did Jerome Powell state a new

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Speaker 1: form of rule today? He did, But like I said

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Speaker 1: in the opening, you know, his phraseology was a flexible

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Speaker 1: form of average inflation targeting. You know, so an inflexible

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Speaker 1: approach would be to shift to a you know, explicit

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Speaker 1: numerical target or something like a price level target target

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Speaker 1: with a FED was you know, explicitly committed to to

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Speaker 1: make up, um, do you know a precise magnitude of undershoot,

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Speaker 1: order reverse and overshoot and that and that's not um

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Speaker 1: what happened today with the polic speech. All right, Mike, So,

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Speaker 1: from a practical perspective, what do you expect to change

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Speaker 1: for the fed as over the next several quarters, if anything,

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Speaker 1: in terms of how they're viewing the rate structure and

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Speaker 1: the economy Yeah, great question. So I think one change

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Speaker 1: is going to be less confidence in these Phillips curve relationships. Right.

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Speaker 1: We discussed the FED tightening policy when the labor market

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Speaker 1: got quite tight in the last few years of the

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Speaker 1: previous expansion, and they did that because these Phillips curve

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Speaker 1: models were more or less saying, Okay, labor markets tightening,

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Speaker 1: and so there's less capacity out there, less less room

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Speaker 1: to run, and so that will put upward pressure on inflation.

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Speaker 1: It was not anticipated that we would get to fifty

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Speaker 1: year low as in the unemployment rate with inflation still

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Speaker 1: below the Fed's target. So when I read the policy speech,

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Speaker 1: that's what comes through loud and clear that there's going

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Speaker 1: to be less focus on, you know, on on the

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Speaker 1: tight labor market necessary sarily generating you know, a lot

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Speaker 1: of pressure on inflation or even meaningful pressure on inflation.

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Speaker 1: Chairman there variable, Chairman Paul answering questions now as they

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Speaker 1: do with the the FED, and that's fine. One of

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Speaker 1: the headline questions goes to the heart of the matter.

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Speaker 1: It's Walter Heller moment. Any inflation overshoot will be moderate Comma,

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Speaker 1: not permanent, says who Michael Dart, Yeah, that's true. I mean, listen, um,

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Speaker 1: you know we could end up fighting the last war here,

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Speaker 1: and by trying to make up for lost ground on inflation,

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Speaker 1: it could be that there's an overheating and arise in

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Speaker 1: inflation down the road. Not a near term risk, but

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Speaker 1: down the road. Um, you know that's more than Fed

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Speaker 1: officials are bargaining for or anticipate aiding, and and so

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Speaker 1: that you know that is a risk. And fourth on

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Speaker 1: before which would be total aggregate demand. So nominal GDP,

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Speaker 1: this is a favorite metric of Tom Keane. Total spending

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Speaker 1: in the economy. It was very moderate in the last cycle,

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Speaker 1: averaging just four percent per annum. So if real growth

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Speaker 1: potential is around two you're not going to get you know,

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Speaker 1: inflation much above two um. And so really what the

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Speaker 1: Fed would need to do here would be to set

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Speaker 1: a path for aggregate demand nominal GDP to to to

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Speaker 1: move up in a way to run away relative to

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Speaker 1: growth potential. That would get inflation to two percent. Now

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Speaker 1: we're you know, we're a depressed economy because we just

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Speaker 1: got hit with this shock. So aggregate demand is going

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Speaker 1: to have to run much faster than the growth rate

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Speaker 1: of potential for a full recovery to take shape. But

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Speaker 1: once that happens, then nominal growth will have to be

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Speaker 1: adequate enough to generate at least two percent inflation and

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Speaker 1: growth potential around two, maybe a little below two. That

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Speaker 1: will be at least four nominal. Let's go to the reality.

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Speaker 1: Michael Darta. One final question, You've been wonderful. How urgent

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Speaker 1: is that the Chairman Powell get a stimulus package from

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Speaker 1: the White House, from the Senate, from the House. You know,

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Speaker 1: it's a fascinating question, Tom. I mean we've been telling

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Speaker 1: clients basically, you've got three variables to account for here,

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Speaker 1: an unanticipated fiscal shock and unanticipated monetary shock, and then

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Speaker 1: the evolution of the pandemic itself. Mike Darta's and camp

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Speaker 1: Partner's cheet economists and market strategist. Thanks for listening to

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Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

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Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

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Speaker 1: on Twitter at Tom Keane before the podcast. You can

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Speaker 1: always catch us worldwide. I'm Bloomberg Radio