Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Christopher
Speaker 1: Harvey with US and the problem with Christopher Harvey is
Speaker 1: when you get his research note, you go damn because
Speaker 1: there's always one or two sentences in it that you
Speaker 1: gotta find that are absolutely brilliant. Christopher Harvey with Wells Fargo,
Speaker 1: You absolutely nail the under ownership of Apple computer explained
Speaker 1: to our audience on radio and TV. How is it
Speaker 1: possible Apple is under owned? That's a great question. It's
Speaker 1: something we've been monitoring for about two years now and
Speaker 1: we've been scratched our head. Y pms really have been
Speaker 1: underweight Apple, or institutional pms have been underweight Apple. We'd
Speaker 1: walk into an office, we talked about the underweight a PM,
Speaker 1: whether it was a growth or CORPIM would say I
Speaker 1: don't care, and we'd say, but you should, and they
Speaker 1: would just say, I don't care. Apples not a grocer stock,
Speaker 1: not my portfolio. Let's move on. And now a lot
Speaker 1: of people are scratching their heads saying, how did Apple
Speaker 1: get to where it is at this point in time?
Speaker 1: And that's one of the reasons why we think it
Speaker 1: continues to grind higher. What is the behavior of active
Speaker 1: managers as they end a quarter end, whether it's September
Speaker 1: thirty or twelve thirty one twenty, are they is this
Speaker 1: the correct word? Are they forced to buy these high
Speaker 1: flying texts? Well, I don't know if they're forced, but
Speaker 1: you do see what where you do hear a lot
Speaker 1: of the risk pms. It's not risk pms, but risk
Speaker 1: managers knock getting on the door and saying, he told
Speaker 1: me two months ago, you told me three months ago
Speaker 1: you were going to tighten this up. You told me
Speaker 1: that Apple was gonna pull back. It hasn't. We need
Speaker 1: to do something now. And the other thing is you
Speaker 1: have cash laying on balance sheet, Well, you have castling
Speaker 1: around in the portfolio. You have to start equitizing that
Speaker 1: because what's happening is relative performance is beginning to decay
Speaker 1: and has been a pretty good year for a lot
Speaker 1: of the managers, so they want to keep that from happening.
Speaker 1: There's a conflation going on between under ownership of Apple
Speaker 1: and undershown ownership more broadly of US stocks. Can we
Speaker 1: make that conflation. Can we say that the reluctance to
Speaker 1: own more Apple shows the reluctance to have a heavier
Speaker 1: overweight in U S stocks. Well, there's a couple of
Speaker 1: things going on right now. So I think what's one
Speaker 1: of the things that's happening is we're seeing this move
Speaker 1: to passive right so, people are starting to get more
Speaker 1: Apple into their portfolio. They're just doing it in a
Speaker 1: different way. The PMS two to be or forced, but
Speaker 1: but the asset owners aren't waiting around for them to
Speaker 1: make that move. The other thing to you, to your
Speaker 1: point is we've seen this rally. We've talked about a
Speaker 1: summertime melted up of ten ten percent plus. We're there
Speaker 1: and people have been brought kicking and screaming to this thing.
Speaker 1: And now as we look at this thing, we're not saying, Okay,
Speaker 1: it's time to get off, it's time to leave the
Speaker 1: party just yet. We think a lot of the good
Speaker 1: news is priced in. But this is a time where
Speaker 1: people get squeezed in. This is time where funny things
Speaker 1: do happen. I'm really confused, Chris, we were talking three
Speaker 1: weeks ago, four weeks ago with economist after economist after
Speaker 1: stock trader who said, if we don't get a second
Speaker 1: round of fiscal support, we will see stock prices go down.
Speaker 1: They are at new record highs. Why is this happening? Well,
Speaker 1: I think that's whether economists and not profolio managers are
Speaker 1: a Greek strategies. The second thing that we're seeing, what
Speaker 1: we've been saying is the reason for the run up
Speaker 1: is things are getting less bad and they continue to
Speaker 1: get less bad. Anecdote, When I drive around, there are
Speaker 1: more people on the road, When I walk around, there
Speaker 1: are more people in restaurants. So the economy is slowly
Speaker 1: grinding higher. You still have basically zero percent interest rates,
Speaker 1: you have credit spreasident tightened dramatically, you have funding widely available,
Speaker 1: and you're saying it still having pretty good reports from
Speaker 1: many many companies. So I think that's really what's what's
Speaker 1: going on, and the leaf is that ultimately something will
Speaker 1: get done. Chris, I want to pin you down on
Speaker 1: a percent move up in SPX. Michael Purvis is modeling
Speaker 1: under seven percent lift in sp X. How do you
Speaker 1: feel wells fargo. Can you quantify single digit or dare
Speaker 1: I say double digit up for the market. So our
Speaker 1: price target, so we've been one of the more aggressive
Speaker 1: people off the bottom. We've had one of the higher
Speaker 1: price targets, but we're actually through our price target at
Speaker 1: this point in time. Our price target is um. But
Speaker 1: when we got there, we didn't say, Okay, okay, we're right,
Speaker 1: the markets wrong, the market is gonna fall apart. What
Speaker 1: we said is there's plenty of reasons for this market
Speaker 1: market to continue. Now, what we're saying is we're looking
Speaker 1: less about market direction and more about constituents in the portfolio.
Speaker 1: What you want to own that you want to rotate,
Speaker 1: and our thought is you want to move down smaller
Speaker 1: cab You want to look for companies that have COVID beta,
Speaker 1: that have better comps in fourth quarter of next year,
Speaker 1: excuse me, the first quarter of next year and second
Speaker 1: quarter of next year. In addition to that, you want
Speaker 1: more economic sensitivity, because we do think economy will continue
Speaker 1: to grind hire Well, we welcome all of you this
Speaker 1: morning on Bloomberg Radio, on Bloomberg Television, particularly across serious
Speaker 1: x M. In the path of Hurricane Laura Right now
Speaker 1: Benee Shreveport, Louisiana will go up into the right if
Speaker 1: you will, and we said good morning to all of
Speaker 1: you preparing for Hurricane Laura, Lisa. What I find so
Speaker 1: interesting about the Thursday is the event structure is so
Speaker 1: predictable to the President's speech tonight, and yet we really
Speaker 1: don't know what the various outcomes of the various events
Speaker 1: of Thursday will be. Yeah, and you're not going to
Speaker 1: be chased by a bear in Jackson Hole. We do
Speaker 1: know that, which I think probably is somewhat of relief
Speaker 1: for you, But very much the focus is going to
Speaker 1: be on J. Powell and Chris. I'm wondering, from an
Speaker 1: equity perspective, is there out perhaps outsized risk that we
Speaker 1: could see equity response that is more than any response
Speaker 1: we can see in bonds to something that J Powell says.
Speaker 1: There's always that possibility that there's always that opportunity where
Speaker 1: things when when we got the minutes a couple of
Speaker 1: weeks ago, it wasn't wasn't as uber dubbish as a
Speaker 1: lot of people thought, and for a hot minute we
Speaker 1: pulled back. I don't know Jeal is going to talk
Speaker 1: about inflation, but we've been talking about inflation for the
Speaker 1: last ten years. An issue that I have is we
Speaker 1: fled in the market with liquidity in the United States globally,
Speaker 1: It's real. It was really hard to go belly up
Speaker 1: or to go bankrupt. Too much capacity, and that's one
Speaker 1: of the reasons why we're talking about the lack of
Speaker 1: inflation is a creative, destructive process never reaches a natural head.
Speaker 1: We're doing it again. But I just I hear a
Speaker 1: lot of things about inflation. I'll believe it when I
Speaker 1: see it. Christopher Harvey, thank you so much. With Wells Fargo,
Speaker 1: Salesforce dot Com entering the down, Alicia Levin joined. She's
Speaker 1: the b n y mel and we're thrilled she could
Speaker 1: be with us today. Alicia, the last time we spoke,
Speaker 1: I believe you had a more conservative tax, a more
Speaker 1: caution to the equity markets. Do you sustain that? So,
Speaker 1: Hi didn't morning. Nice to see you guys again. I mean, look,
Speaker 1: I think that the pace at which we're rising is
Speaker 1: a little bit concerning for future games from here, But overall,
Speaker 1: there's so much support in the market, not just from
Speaker 1: the FED but also the flows yer today where five
Speaker 1: to one flows have been going into the bond market
Speaker 1: and not equities. And also the fact that's nearly five
Speaker 1: trillion dollars on the sidelines sitting in cash, and so
Speaker 1: all this suggests they're still dried outer even even with
Speaker 1: the pace at which we've moved higher. So yes, I'm cautious.
Speaker 1: We're just going into that season, that seasonal sort of weakness,
Speaker 1: that September October where you know, gains tend to be consolidated.
Speaker 1: There'll be some election anks, I'm sure, and and there'll
Speaker 1: be some COVID anks on the vaccino treatment front. It's
Speaker 1: never a straight line. But yeah, it feels like, you know,
Speaker 1: we could pause, but ultimately I'm still positive the direction
Speaker 1: of travel is upward. Which ratio is your key valuation
Speaker 1: metric right now? Is it priced to sales? Are we
Speaker 1: rationalizing like Amazon? Or is it price to cash flow?
Speaker 1: Is it something like across to the balance sheet total
Speaker 1: enterprise value to IBADA, which is the ratio that matters
Speaker 1: to Alicia Levine. So I say, that's a great, great question.
Speaker 1: You know, I've been talking to people, been in the
Speaker 1: market for forty fifty years. In the last few days,
Speaker 1: no one's actually seen anything like this. Um it's kind
Speaker 1: of extraordinary, I'd say, right now, it's really cash um.
Speaker 1: Cash is king, and you know, the ability to plow
Speaker 1: back into the business, and you know clearly. I mean,
Speaker 1: I'll just give you a metric. Every night, we calculate
Speaker 1: the out performance of the five large caps tech Sock
Speaker 1: versus the rest of the SMP. We started this in April.
Speaker 1: The out performance was twenty eight percent in the middle
Speaker 1: of April. Do you know as at the market closed yesterday,
Speaker 1: the out performance of those five stocks is now sixty
Speaker 1: six so percent over the rest of the S and P.
Speaker 1: And the reason is the cash generation, the earning power,
Speaker 1: the cash generation. They all need debt and they keep
Speaker 1: on growing and it's not entirely irrational. It's not irrational.
Speaker 1: They are growing and I are growing faster well, and
Speaker 1: they are growing and it isn't irrational. So if you
Speaker 1: want to get cautious, what do you sell? That's great. Look,
Speaker 1: I think that for the most part, given how how
Speaker 1: levered the market is to the to the to the
Speaker 1: tech sector and the communication sector right now, you have
Speaker 1: to have some exposure here. I think I think the
Speaker 1: general idea of trimming some of your winners and rebalancing
Speaker 1: is a great idea. We do believe that there will
Speaker 1: be a credible vaccine out there somewhere in the next
Speaker 1: four to six months, which will blunt some of the
Speaker 1: macro concerns that you've talked about in the previous segment.
Speaker 1: There will be something available, I'll pretty sure by the
Speaker 1: first quarter of one and so therefore your industrial after
Speaker 1: housing stocks and even your epicenter stock could look appealing
Speaker 1: in that scenario. Alicia, I'm struggling though, with the idea
Speaker 1: of the Robin Hood narrative, the idea that yes, you've
Speaker 1: got the fanmag stocks that have some understandability behind their rise,
Speaker 1: Tesla gaining four hundred and fifteen percent, are their pockets
Speaker 1: of froth here? Well? For sure? For sure. I mean
Speaker 1: there are certain names you can't explain and um, and
Speaker 1: I think that's that's one of them. Um, you know,
Speaker 1: there is a momentum going. I mean, let's for Tesla
Speaker 1: just for one second was the largest short in the market,
Speaker 1: and it was the largest short nut on me. Not
Speaker 1: only on the institutional side, you're also on the retail side.
Speaker 1: The part of that price action it was that technical there,
Speaker 1: but clearly, you know, we joked about this last time.
Speaker 1: Do not make great technical charts, and there'll be a day,
Speaker 1: but it can go on longer. Okay, folks, what you
Speaker 1: gotta understand here's Alicia Levina is prodigious in math. So
Speaker 1: we're gonna do math Thursday here in this long hour.
Speaker 1: What do I mean by a long hour? We start
Speaker 1: out at eight am Wall Street time, and we're really
Speaker 1: going to which is a speech of Chairman Pal. We've
Speaker 1: got some special coverage on that will tell you about
Speaker 1: here in a moment, Alicia, Come on, Alicia, you're going
Speaker 1: all squared on me here with the parabola. And that
Speaker 1: comes back to Gamma or convexity, the best that's on there.
Speaker 1: Is there a market overweight right now? I mean, everybody's
Speaker 1: telling me there's money on the sidelines, but is there
Speaker 1: room there for Gamma for acceleration. There's there's room for
Speaker 1: other sectors to move and not have text destroyed because
Speaker 1: you don't have to sell tet to buy the other sector,
Speaker 1: right because there's cash. You've got five trillion dollars of
Speaker 1: cash on the sidelines, and so much money has gone
Speaker 1: into the bond market and it'll be very Let's bring
Speaker 1: in J. Powell. You know this is a big story
Speaker 1: for the morning. You know, what are we going to
Speaker 1: here today? And they're going to sit on race even
Speaker 1: as we see inflation moving upwards. Alicia, You've done a
Speaker 1: great job answering at Tom's gratuitous way of getting gamma
Speaker 1: in there. Really, Tom, seriously, she's not even focusing on
Speaker 1: the technical Come on, Alicia Rudder Shelton Nateenberg. I mentioned
Speaker 1: Sheldon Nateberg Folk yesterday. I got a huge response to
Speaker 1: that from geeks on Wall Street. Mr Nadenberg came out
Speaker 1: of Chicago years ago with the definitive one volume on
Speaker 1: the Greek letters. It's read like the Old Testament Wall
Speaker 1: Street as well. Alicia, where where's the Greek letters here
Speaker 1: right now? I mean, there's a whole bunch of Greek letters.
Speaker 1: Which of those matters to a Lalisha? Alicia Levine. So
Speaker 1: what matters to me right now is is the positive
Speaker 1: rate of change? Right so the second derivative, That's what
Speaker 1: matters to me right now, and that's what matters to markets,
Speaker 1: and we forget that at our peril. It's never the
Speaker 1: absolute level. It is the rate of change. And every
Speaker 1: time investors forget that they're on the wrong side of
Speaker 1: the trade. And the reason the markets moving upward it
Speaker 1: is because the rate of change continues to be positive.
Speaker 1: Here in the US. The data has been getting better
Speaker 1: in the last few weeks. It is coinciding with COVID
Speaker 1: cases essentially rolling over on that bell curve, very similar
Speaker 1: to what we saw in April. Will they say, they're
Speaker 1: hard to say, but the data have gotten better and
Speaker 1: the positive surprises have been there, and that is why
Speaker 1: the market can continue to move higher. It's the rate
Speaker 1: of change Newtonian mechanics with Alicia Levina doesn't get better
Speaker 1: than that with b n Y Melon. They're back at
Speaker 1: the n Y MEL and the General Council is going
Speaker 1: what did she say, Alicia Levine? Where this is moarting?
Speaker 1: Thank you right now we're stut to bring you Megan Green.
Speaker 1: She's at Harvard Kennedy School and Senior Fellow, and it's
Speaker 1: just done brilliant work folding market economics and acute analysis
Speaker 1: into the broader theory of what we're doing in economics
Speaker 1: and of course how it links into finance and investment
Speaker 1: as well. Megan Green, thank you so much for joining
Speaker 1: us today. Megan, I really want to go to the
Speaker 1: arch issue which has been the battle of our textbooks,
Speaker 1: rules and discretion and this new, more surgical idea of targeting.
Speaker 1: Is there any proof that a central bank can target anything? Well,
Speaker 1: there's there's more and more proof that a central bank
Speaker 1: can't target much of anything. They can target the rate
Speaker 1: that they're setting UM. But the feds dual mandate is
Speaker 1: full employment and stable of inflation of two and on
Speaker 1: the latter inflation, you know, the FEDS missed the mark
Speaker 1: for the entire past recovery. In fact, since the FED
Speaker 1: adopted a two inflation target in twelve, inflation is average
Speaker 1: just under one and a half percent UM. So when J.
Speaker 1: Powell does get up, and it's widely expected that he'll
Speaker 1: provide the broad breast strokes of change in the Fed's
Speaker 1: target towards average inflation, so that there's a catch up factor,
Speaker 1: meaning that the FED will overshoot on inflation that offset
Speaker 1: undershooting for so long. I do think investors might ask,
Speaker 1: you know, can the FED overshoot inflation? It's been so
Speaker 1: far under its target for so long. There's a real
Speaker 1: credibility issue, and the FED has to promise that it
Speaker 1: will overshoot on inflation in the future, which requires upfront
Speaker 1: credibility when it hasn't really built any How do you
Speaker 1: mechanically or what is the reaction process that gets you
Speaker 1: to overshoot inflation. I mean, it's a FED really wanted
Speaker 1: to overshoot on inflation. It could provide helicopter money and
Speaker 1: achieve it, I think, but within kind of the political
Speaker 1: feasibility of what the FED can do these days, I
Speaker 1: don't think there's a whole lot that the FED can
Speaker 1: do to even hit its target, particularly now when we're
Speaker 1: facing a huge and persistent drop and demand. So I
Speaker 1: don't think the FED can generate inflation of over two
Speaker 1: percent right now. There are concerns though, that the supply
Speaker 1: side aspect of this crisis will come through and generate
Speaker 1: some inflation, So the FED might get lucky for a
Speaker 1: little while and have inflation overshoot it's tuper sent target,
Speaker 1: but I doubt that will be sustained. Megan, we can't
Speaker 1: get good inflation unless we get more jobs back, and
Speaker 1: not all job losses are equal. Initially people were saying
Speaker 1: that they were temporary job losses. Now they're increasingly permanent.
Speaker 1: They're increasingly high paid, and I am unclear on what
Speaker 1: the FED can do to improve this picture. Are FED
Speaker 1: actions at this point actually hurting more that they're helping
Speaker 1: because they take the pressure off Washington. Yeah, so I
Speaker 1: think you're right. The FED can't do much about the
Speaker 1: job market right now other than keep rates really low,
Speaker 1: try to run the economy hot to bring in workers,
Speaker 1: which by the way, the FED was already trying to
Speaker 1: do during the last recovery. Um. I think it's really
Speaker 1: up to fiscal authorities to do something to try to
Speaker 1: address the labor market. So it's not up to the FED. Though.
Speaker 1: I do think that when Jay speaks later today, he
Speaker 1: will probably provide a slightly barish view on the economy
Speaker 1: so that he can keep the pressure on Congress, and
Speaker 1: I suspect he'll mention that fiscal policy is the most
Speaker 1: important thing right now, as he has been doing. When
Speaker 1: we talk about inflation, Megan, We're getting plenty of inflation
Speaker 1: and asset prices, and I do wonder whether at a
Speaker 1: certain point it becomes harmful without some sort of fiscal backdrop,
Speaker 1: without some sort of help that actually can help the
Speaker 1: actually economy. Do you see the asset inflation is being
Speaker 1: pernicious at this point or does it have more room
Speaker 1: to run before it reaches at I think it probably
Speaker 1: has more room to run. It depends on what markets
Speaker 1: you're talking about. Right, We've seen incredible leverage taken on
Speaker 1: during this crisis, and that will be a problem one day,
Speaker 1: But it won't be a problem as long as debt
Speaker 1: servicing costs are so incredibly low. Because raids are so low,
Speaker 1: the stock market looks frothy. I don't think anyone would
Speaker 1: doubt that. But I think that as long as the
Speaker 1: feed is stuck in, even without an average inflation target,
Speaker 1: we all know that the FED is not going to
Speaker 1: higrate anytime soon. Um. I think that that has a
Speaker 1: bit for the run. Megan, I want to play off
Speaker 1: yard cushion or now over at the desk, start talking
Speaker 1: about the President's speech tonight, and you know, Megan, I
Speaker 1: want to talk about a hopeful AMA. Mr Kristener says
Speaker 1: the President will speak of a quote hopeful unquote America.
Speaker 1: How does J Powell do that? How does he generate
Speaker 1: a hopeful message today when I've got a number of
Speaker 1: leading economists looking at double digit unemployment coming down slowly? Yeah,
Speaker 1: I think it will be hard to do and It's
Speaker 1: probably not really in Jay's best interests, since, as I said,
Speaker 1: he'll want to keep the pressure on Congress to come
Speaker 1: up with a fiscal stimulus, which probably won't happen until
Speaker 1: September at best at this point. Um, But you know,
Speaker 1: I think you could look to some data points like
Speaker 1: retail sales durable goods which improved. Um. The problem is
Speaker 1: that all the kind of high frequency alternative data sources
Speaker 1: suggest that this recovery is already petering out, and I
Speaker 1: think it could could turn into a downturn if we
Speaker 1: don't end up reacting some of the fiscal stimulus. Megan Green,
Speaker 1: thank you so much, greatly appreciate it. With the County
Speaker 1: School at however, we're so fortunate here to have like Darted,
Speaker 1: jointess of Mike Darta's m CAM Partner's chief economists and
Speaker 1: market strategist. Mike, thanks so much for joining us here.
Speaker 1: I love to get your thoughts on the comments we
Speaker 1: just heard from FED Chairman Powell. Absolutely so thanks for
Speaker 1: having me on. I think, you know, going through the
Speaker 1: whole speech, the key phraseology here and and a lot
Speaker 1: of this was widely anticipated, but Poull basically stated specifically
Speaker 1: in the speech that they're moving to a flexible form
Speaker 1: of average inflation targeting. So basically what that means is
Speaker 1: the FED wants to shoot for a two percent inflation goal.
Speaker 1: The problem in the last cycle was that they undershot it,
Speaker 1: and there was no makeup strategy for that undershooting. So
Speaker 1: this time around, the FED wants to be focused on
Speaker 1: if they're undershooting, to you know, to make up for
Speaker 1: that with some overshooting, to you know, to a limited extent. Right.
Speaker 1: He also said in the in his formal remarks that
Speaker 1: if inflation were to start to get going too much,
Speaker 1: that they would not hesitate to act tighten policy and
Speaker 1: to bring inforflation back down. But the basic point here
Speaker 1: is to average to an average two percent inflation over time.
Speaker 1: Uh and so two percent will not be a ceiling
Speaker 1: but really a flexible average inflation goal. Michael Darter thrilled
Speaker 1: to have you on. You're just the right guy to
Speaker 1: have on here at this moment in FED history. What
Speaker 1: I find fascinating is the ex anti feel here to this.
Speaker 1: If they're gonna inflation target and overshoot, are they going
Speaker 1: to be reactive to the overshoot or is it implied
Speaker 1: in the speech that they will be proactive and get
Speaker 1: out front to push inflation higher. Well, I think Tom,
Speaker 1: the idea is to be you know, to be proactive here.
Speaker 1: So one of the things that happened towards the tail
Speaker 1: end of the last business cycle is that the FED
Speaker 1: was tested. Right, had a lot of people saying, well,
Speaker 1: the Fed's going to run it hot. And we had
Speaker 1: a test in the last two years of the last
Speaker 1: icle where fiscal policy eased, inflation was mostly below the
Speaker 1: Fed's target um, and the labor market was tight. What
Speaker 1: did the Fed do? They actually tightened policy for two
Speaker 1: years even though inflation was below their target most of
Speaker 1: the time, and so the FED was basically acting the
Speaker 1: way that prior Feds acted, moving in a way to
Speaker 1: head off any inflation above two percent. Well, it turned
Speaker 1: out that the tight labor market really didn't put any
Speaker 1: significant upward pressure on inflation, that growth was slowing, and
Speaker 1: that you know, recession risks were actually starting amount which
Speaker 1: is why the FED had to reverse course and start
Speaker 1: cutting rates that inverted yield curve. Tom told us something,
Speaker 1: you know, we discussed this many times. A lot of
Speaker 1: economists ignored it, said it was irrelevant, but it both
Speaker 1: a slow down and eventual rate cuts. Promised not going
Speaker 1: to turn this into a historical clinic, but I'm going
Speaker 1: to go back. Michael darted to Richard Timberlake and the
Speaker 1: Georgia School. Good morning, Robert McTeer and the great one
Speaker 1: volue monetary policy in the US and intellectual and institutional history.
Speaker 1: That's great, But is all this theory overwhelmed by the
Speaker 1: dynamics of aggregate demand and that you can you can
Speaker 1: use the monetary tool kit until it doesn't respond to
Speaker 1: aggregate demand dynamics. Well, I think that's that's exactly right, Tom.
Speaker 1: I mean, how does inflation move up and move down?
Speaker 1: And and what is the fet actually doing. You know,
Speaker 1: they have to be able to stimulate aggregate demand to
Speaker 1: get inflation to move up. They have to be able
Speaker 1: to retard inflation to move down, right, And so they
Speaker 1: do that essentially with two different policy tools. They can
Speaker 1: buy or sell bonds to easier tighten, or they can
Speaker 1: target an interest rate of short term rate or there's
Speaker 1: some discussion now about moving to a longer term interest rates.
Speaker 1: So that's what the central Bank does, and I think
Speaker 1: that's important to reflect on now that there's a lot
Speaker 1: of discussion and pressure on the FED to add additional mandates.
Speaker 1: But I think we've got to be very careful in
Speaker 1: not asking the FED to do too much. If it's
Speaker 1: one goal was basically not achieved in the last cycle
Speaker 1: two percent inflation. Is it really a good idea to
Speaker 1: be lopping on additional mandates that the FED is not
Speaker 1: the tools for. And I think the answer to that
Speaker 1: is no. We need to be very careful right if
Speaker 1: we're asking, you know, if if we as a society
Speaker 1: are saying we have a pressing need to address climate
Speaker 1: change or disparities between groups, that's going to be a
Speaker 1: policy that fiscal You know that that elected icials with
Speaker 1: a fiscal policy apparatus are going to have to address
Speaker 1: monetary policy. I think, you know, we're really need to
Speaker 1: do too much if we're going to add mandate after
Speaker 1: mandate after mandate, this is little growth in inflations. He
Speaker 1: won't even let me cut in here. Darna just goes
Speaker 1: on like that. Michael and I are just fired up, folks.
Speaker 1: This is like Bloomberg on the economy re Dux as well.
Speaker 1: Paul Sweeney in Time King with Michael Darta, we are thrilled.
Speaker 1: Michael Dartas with us with a Dow up hundred and
Speaker 1: fourteen points. Okay, I have one more geek question, and
Speaker 1: then Sweeney's going to get control of the program. Michael Darda.
Speaker 1: The Dallas FED had that symposium for John B. Taylor
Speaker 1: of Stanford. I'm go in to guess eight years ago
Speaker 1: and it was the rules bay Lipsky spoke. Everybody weighed
Speaker 1: in here on rules. Did Jerome Powell state a new
Speaker 1: form of rule today? He did, But like I said
Speaker 1: in the opening, you know, his phraseology was a flexible
Speaker 1: form of average inflation targeting. You know, so an inflexible
Speaker 1: approach would be to shift to a you know, explicit
Speaker 1: numerical target or something like a price level target target
Speaker 1: with a FED was you know, explicitly committed to to
Speaker 1: make up, um, do you know a precise magnitude of undershoot,
Speaker 1: order reverse and overshoot and that and that's not um
Speaker 1: what happened today with the polic speech. All right, Mike, So,
Speaker 1: from a practical perspective, what do you expect to change
Speaker 1: for the fed as over the next several quarters, if anything,
Speaker 1: in terms of how they're viewing the rate structure and
Speaker 1: the economy Yeah, great question. So I think one change
Speaker 1: is going to be less confidence in these Phillips curve relationships. Right.
Speaker 1: We discussed the FED tightening policy when the labor market
Speaker 1: got quite tight in the last few years of the
Speaker 1: previous expansion, and they did that because these Phillips curve
Speaker 1: models were more or less saying, Okay, labor markets tightening,
Speaker 1: and so there's less capacity out there, less less room
Speaker 1: to run, and so that will put upward pressure on inflation.
Speaker 1: It was not anticipated that we would get to fifty
Speaker 1: year low as in the unemployment rate with inflation still
Speaker 1: below the Fed's target. So when I read the policy speech,
Speaker 1: that's what comes through loud and clear that there's going
Speaker 1: to be less focus on, you know, on on the
Speaker 1: tight labor market necessary sarily generating you know, a lot
Speaker 1: of pressure on inflation or even meaningful pressure on inflation.
Speaker 1: Chairman there variable, Chairman Paul answering questions now as they
Speaker 1: do with the the FED, and that's fine. One of
Speaker 1: the headline questions goes to the heart of the matter.
Speaker 1: It's Walter Heller moment. Any inflation overshoot will be moderate Comma,
Speaker 1: not permanent, says who Michael Dart, Yeah, that's true. I mean, listen, um,
Speaker 1: you know we could end up fighting the last war here,
Speaker 1: and by trying to make up for lost ground on inflation,
Speaker 1: it could be that there's an overheating and arise in
Speaker 1: inflation down the road. Not a near term risk, but
Speaker 1: down the road. Um, you know that's more than Fed
Speaker 1: officials are bargaining for or anticipate aiding, and and so
Speaker 1: that you know that is a risk. And fourth on
Speaker 1: before which would be total aggregate demand. So nominal GDP,
Speaker 1: this is a favorite metric of Tom Keane. Total spending
Speaker 1: in the economy. It was very moderate in the last cycle,
Speaker 1: averaging just four percent per annum. So if real growth
Speaker 1: potential is around two you're not going to get you know,
Speaker 1: inflation much above two um. And so really what the
Speaker 1: Fed would need to do here would be to set
Speaker 1: a path for aggregate demand nominal GDP to to to
Speaker 1: move up in a way to run away relative to
Speaker 1: growth potential. That would get inflation to two percent. Now
Speaker 1: we're you know, we're a depressed economy because we just
Speaker 1: got hit with this shock. So aggregate demand is going
Speaker 1: to have to run much faster than the growth rate
Speaker 1: of potential for a full recovery to take shape. But
Speaker 1: once that happens, then nominal growth will have to be
Speaker 1: adequate enough to generate at least two percent inflation and
Speaker 1: growth potential around two, maybe a little below two. That
Speaker 1: will be at least four nominal. Let's go to the reality.
Speaker 1: Michael Darta. One final question, You've been wonderful. How urgent
Speaker 1: is that the Chairman Powell get a stimulus package from
Speaker 1: the White House, from the Senate, from the House. You know,
Speaker 1: it's a fascinating question, Tom. I mean we've been telling
Speaker 1: clients basically, you've got three variables to account for here,
Speaker 1: an unanticipated fiscal shock and unanticipated monetary shock, and then
Speaker 1: the evolution of the pandemic itself. Mike Darta's and camp
Speaker 1: Partner's cheet economists and market strategist. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
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