WEBVTT - Surveillance: Fed's Relaxed Approach With Darda 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.080 Bloomberg dot Com, and of course on the Bloomberg Christopher 0:00:28.160 --> 0:00:30.880 Harvey with US and the problem with Christopher Harvey is 0:00:30.920 --> 0:00:33.480 when you get his research note, you go damn because 0:00:33.520 --> 0:00:36.080 there's always one or two sentences in it that you 0:00:36.159 --> 0:00:41.440 gotta find that are absolutely brilliant. Christopher Harvey with Wells Fargo, 0:00:41.600 --> 0:00:48.040 You absolutely nail the under ownership of Apple computer explained 0:00:48.080 --> 0:00:50.919 to our audience on radio and TV. How is it 0:00:51.000 --> 0:00:55.840 possible Apple is under owned? That's a great question. It's 0:00:55.920 --> 0:00:58.440 something we've been monitoring for about two years now and 0:00:58.640 --> 0:01:01.840 we've been scratched our head. Y pms really have been 0:01:01.920 --> 0:01:05.160 underweight Apple, or institutional pms have been underweight Apple. We'd 0:01:05.160 --> 0:01:08.240 walk into an office, we talked about the underweight a PM, 0:01:08.360 --> 0:01:10.560 whether it was a growth or CORPIM would say I 0:01:10.600 --> 0:01:13.640 don't care, and we'd say, but you should, and they 0:01:13.640 --> 0:01:16.199 would just say, I don't care. Apples not a grocer stock, 0:01:16.440 --> 0:01:20.119 not my portfolio. Let's move on. And now a lot 0:01:20.160 --> 0:01:22.479 of people are scratching their heads saying, how did Apple 0:01:22.520 --> 0:01:24.160 get to where it is at this point in time? 0:01:24.520 --> 0:01:26.080 And that's one of the reasons why we think it 0:01:26.120 --> 0:01:28.880 continues to grind higher. What is the behavior of active 0:01:28.920 --> 0:01:31.800 managers as they end a quarter end, whether it's September 0:01:31.840 --> 0:01:35.400 thirty or twelve thirty one twenty, are they is this 0:01:35.560 --> 0:01:38.759 the correct word? Are they forced to buy these high 0:01:38.800 --> 0:01:42.400 flying texts? Well, I don't know if they're forced, but 0:01:42.480 --> 0:01:44.520 you do see what where you do hear a lot 0:01:44.600 --> 0:01:47.120 of the risk pms. It's not risk pms, but risk 0:01:47.160 --> 0:01:49.640 managers knock getting on the door and saying, he told 0:01:49.640 --> 0:01:51.520 me two months ago, you told me three months ago 0:01:51.760 --> 0:01:53.440 you were going to tighten this up. You told me 0:01:53.480 --> 0:01:56.240 that Apple was gonna pull back. It hasn't. We need 0:01:56.280 --> 0:01:58.840 to do something now. And the other thing is you 0:01:58.960 --> 0:02:01.960 have cash laying on balance sheet, Well, you have castling 0:02:02.000 --> 0:02:05.200 around in the portfolio. You have to start equitizing that 0:02:05.440 --> 0:02:08.520 because what's happening is relative performance is beginning to decay 0:02:08.720 --> 0:02:10.160 and has been a pretty good year for a lot 0:02:10.200 --> 0:02:12.680 of the managers, so they want to keep that from happening. 0:02:12.800 --> 0:02:16.520 There's a conflation going on between under ownership of Apple 0:02:16.680 --> 0:02:20.200 and undershown ownership more broadly of US stocks. Can we 0:02:20.320 --> 0:02:23.920 make that conflation. Can we say that the reluctance to 0:02:23.960 --> 0:02:27.000 own more Apple shows the reluctance to have a heavier 0:02:27.080 --> 0:02:30.920 overweight in U S stocks. Well, there's a couple of 0:02:30.919 --> 0:02:33.480 things going on right now. So I think what's one 0:02:33.520 --> 0:02:35.600 of the things that's happening is we're seeing this move 0:02:35.680 --> 0:02:38.679 to passive right so, people are starting to get more 0:02:38.720 --> 0:02:41.280 Apple into their portfolio. They're just doing it in a 0:02:41.360 --> 0:02:44.480 different way. The PMS two to be or forced, but 0:02:44.480 --> 0:02:46.560 but the asset owners aren't waiting around for them to 0:02:46.600 --> 0:02:48.560 make that move. The other thing to you, to your 0:02:48.560 --> 0:02:51.160 point is we've seen this rally. We've talked about a 0:02:51.200 --> 0:02:54.080 summertime melted up of ten ten percent plus. We're there 0:02:54.600 --> 0:02:57.040 and people have been brought kicking and screaming to this thing. 0:02:57.600 --> 0:03:01.440 And now as we look at this thing, we're not saying, Okay, 0:03:01.480 --> 0:03:03.160 it's time to get off, it's time to leave the 0:03:03.160 --> 0:03:04.919 party just yet. We think a lot of the good 0:03:04.919 --> 0:03:06.880 news is priced in. But this is a time where 0:03:06.880 --> 0:03:09.239 people get squeezed in. This is time where funny things 0:03:09.280 --> 0:03:12.720 do happen. I'm really confused, Chris, we were talking three 0:03:12.760 --> 0:03:16.200 weeks ago, four weeks ago with economist after economist after 0:03:16.240 --> 0:03:18.840 stock trader who said, if we don't get a second 0:03:18.919 --> 0:03:22.120 round of fiscal support, we will see stock prices go down. 0:03:22.320 --> 0:03:26.400 They are at new record highs. Why is this happening? Well, 0:03:26.400 --> 0:03:29.880 I think that's whether economists and not profolio managers are 0:03:29.880 --> 0:03:33.119 a Greek strategies. The second thing that we're seeing, what 0:03:33.160 --> 0:03:35.520 we've been saying is the reason for the run up 0:03:35.560 --> 0:03:37.880 is things are getting less bad and they continue to 0:03:37.920 --> 0:03:40.520 get less bad. Anecdote, When I drive around, there are 0:03:40.520 --> 0:03:42.520 more people on the road, When I walk around, there 0:03:42.520 --> 0:03:45.520 are more people in restaurants. So the economy is slowly 0:03:45.560 --> 0:03:49.160 grinding higher. You still have basically zero percent interest rates, 0:03:49.320 --> 0:03:53.520 you have credit spreasident tightened dramatically, you have funding widely available, 0:03:53.760 --> 0:03:56.200 and you're saying it still having pretty good reports from 0:03:56.240 --> 0:03:58.920 many many companies. So I think that's really what's what's 0:03:58.960 --> 0:04:01.560 going on, and the leaf is that ultimately something will 0:04:01.600 --> 0:04:04.480 get done. Chris, I want to pin you down on 0:04:04.600 --> 0:04:08.520 a percent move up in SPX. Michael Purvis is modeling 0:04:08.640 --> 0:04:12.280 under seven percent lift in sp X. How do you 0:04:12.320 --> 0:04:15.839 feel wells fargo. Can you quantify single digit or dare 0:04:15.880 --> 0:04:19.600 I say double digit up for the market. So our 0:04:19.640 --> 0:04:21.840 price target, so we've been one of the more aggressive 0:04:21.839 --> 0:04:23.520 people off the bottom. We've had one of the higher 0:04:23.560 --> 0:04:26.080 price targets, but we're actually through our price target at 0:04:26.080 --> 0:04:29.080 this point in time. Our price target is um. But 0:04:29.120 --> 0:04:32.000 when we got there, we didn't say, Okay, okay, we're right, 0:04:32.120 --> 0:04:34.200 the markets wrong, the market is gonna fall apart. What 0:04:34.200 --> 0:04:36.279 we said is there's plenty of reasons for this market 0:04:36.279 --> 0:04:38.760 market to continue. Now, what we're saying is we're looking 0:04:38.920 --> 0:04:42.279 less about market direction and more about constituents in the portfolio. 0:04:42.320 --> 0:04:44.960 What you want to own that you want to rotate, 0:04:45.080 --> 0:04:47.080 and our thought is you want to move down smaller 0:04:47.120 --> 0:04:49.760 cab You want to look for companies that have COVID beta, 0:04:50.120 --> 0:04:52.560 that have better comps in fourth quarter of next year, 0:04:52.600 --> 0:04:55.160 excuse me, the first quarter of next year and second 0:04:55.240 --> 0:04:57.159 quarter of next year. In addition to that, you want 0:04:57.200 --> 0:05:01.280 more economic sensitivity, because we do think economy will continue 0:05:01.279 --> 0:05:03.320 to grind hire Well, we welcome all of you this 0:05:03.360 --> 0:05:06.880 morning on Bloomberg Radio, on Bloomberg Television, particularly across serious 0:05:07.120 --> 0:05:09.960 x M. In the path of Hurricane Laura Right now 0:05:10.000 --> 0:05:14.080 Benee Shreveport, Louisiana will go up into the right if 0:05:14.080 --> 0:05:15.800 you will, and we said good morning to all of 0:05:15.839 --> 0:05:19.440 you preparing for Hurricane Laura, Lisa. What I find so 0:05:19.520 --> 0:05:23.000 interesting about the Thursday is the event structure is so 0:05:23.120 --> 0:05:26.440 predictable to the President's speech tonight, and yet we really 0:05:26.480 --> 0:05:30.560 don't know what the various outcomes of the various events 0:05:30.600 --> 0:05:32.919 of Thursday will be. Yeah, and you're not going to 0:05:32.960 --> 0:05:35.000 be chased by a bear in Jackson Hole. We do 0:05:35.080 --> 0:05:38.320 know that, which I think probably is somewhat of relief 0:05:38.360 --> 0:05:40.600 for you, But very much the focus is going to 0:05:40.680 --> 0:05:42.880 be on J. Powell and Chris. I'm wondering, from an 0:05:42.880 --> 0:05:47.880 equity perspective, is there out perhaps outsized risk that we 0:05:47.960 --> 0:05:51.800 could see equity response that is more than any response 0:05:51.839 --> 0:05:54.200 we can see in bonds to something that J Powell says. 0:05:55.440 --> 0:05:58.880 There's always that possibility that there's always that opportunity where 0:05:58.920 --> 0:06:01.000 things when when we got the minutes a couple of 0:06:01.040 --> 0:06:03.960 weeks ago, it wasn't wasn't as uber dubbish as a 0:06:03.960 --> 0:06:06.080 lot of people thought, and for a hot minute we 0:06:06.240 --> 0:06:09.640 pulled back. I don't know Jeal is going to talk 0:06:09.680 --> 0:06:11.760 about inflation, but we've been talking about inflation for the 0:06:11.839 --> 0:06:14.520 last ten years. An issue that I have is we 0:06:14.640 --> 0:06:17.920 fled in the market with liquidity in the United States globally, 0:06:18.240 --> 0:06:20.719 It's real. It was really hard to go belly up 0:06:20.800 --> 0:06:23.560 or to go bankrupt. Too much capacity, and that's one 0:06:23.560 --> 0:06:25.680 of the reasons why we're talking about the lack of 0:06:25.760 --> 0:06:29.400 inflation is a creative, destructive process never reaches a natural head. 0:06:29.560 --> 0:06:32.600 We're doing it again. But I just I hear a 0:06:32.640 --> 0:06:35.080 lot of things about inflation. I'll believe it when I 0:06:35.120 --> 0:06:38.480 see it. Christopher Harvey, thank you so much. With Wells Fargo, 0:06:42.640 --> 0:06:47.240 Salesforce dot Com entering the down, Alicia Levin joined. She's 0:06:47.279 --> 0:06:49.279 the b n y mel and we're thrilled she could 0:06:49.279 --> 0:06:51.800 be with us today. Alicia, the last time we spoke, 0:06:51.839 --> 0:06:54.440 I believe you had a more conservative tax, a more 0:06:54.560 --> 0:06:59.000 caution to the equity markets. Do you sustain that? So, 0:06:59.480 --> 0:07:02.479 Hi didn't morning. Nice to see you guys again. I mean, look, 0:07:02.600 --> 0:07:06.400 I think that the pace at which we're rising is 0:07:06.440 --> 0:07:11.160 a little bit concerning for future games from here, But overall, 0:07:11.200 --> 0:07:13.480 there's so much support in the market, not just from 0:07:13.480 --> 0:07:17.120 the FED but also the flows yer today where five 0:07:17.200 --> 0:07:19.600 to one flows have been going into the bond market 0:07:19.640 --> 0:07:22.840 and not equities. And also the fact that's nearly five 0:07:22.920 --> 0:07:26.120 trillion dollars on the sidelines sitting in cash, and so 0:07:26.240 --> 0:07:30.320 all this suggests they're still dried outer even even with 0:07:30.480 --> 0:07:33.680 the pace at which we've moved higher. So yes, I'm cautious. 0:07:33.680 --> 0:07:37.200 We're just going into that season, that seasonal sort of weakness, 0:07:37.240 --> 0:07:43.120 that September October where you know, gains tend to be consolidated. 0:07:43.200 --> 0:07:46.920 There'll be some election anks, I'm sure, and and there'll 0:07:46.960 --> 0:07:49.920 be some COVID anks on the vaccino treatment front. It's 0:07:49.920 --> 0:07:53.200 never a straight line. But yeah, it feels like, you know, 0:07:53.440 --> 0:07:57.000 we could pause, but ultimately I'm still positive the direction 0:07:57.040 --> 0:08:01.480 of travel is upward. Which ratio is your key valuation 0:08:01.600 --> 0:08:04.040 metric right now? Is it priced to sales? Are we 0:08:04.160 --> 0:08:07.720 rationalizing like Amazon? Or is it price to cash flow? 0:08:08.160 --> 0:08:11.160 Is it something like across to the balance sheet total 0:08:11.280 --> 0:08:14.480 enterprise value to IBADA, which is the ratio that matters 0:08:14.520 --> 0:08:18.560 to Alicia Levine. So I say, that's a great, great question. 0:08:19.040 --> 0:08:20.560 You know, I've been talking to people, been in the 0:08:20.600 --> 0:08:24.080 market for forty fifty years. In the last few days, 0:08:24.080 --> 0:08:27.040 no one's actually seen anything like this. Um it's kind 0:08:27.080 --> 0:08:30.800 of extraordinary, I'd say, right now, it's really cash um. 0:08:30.880 --> 0:08:33.960 Cash is king, and you know, the ability to plow 0:08:34.080 --> 0:08:37.000 back into the business, and you know clearly. I mean, 0:08:37.040 --> 0:08:41.079 I'll just give you a metric. Every night, we calculate 0:08:41.520 --> 0:08:44.360 the out performance of the five large caps tech Sock 0:08:44.600 --> 0:08:48.800 versus the rest of the SMP. We started this in April. 0:08:49.080 --> 0:08:52.240 The out performance was twenty eight percent in the middle 0:08:52.280 --> 0:08:55.480 of April. Do you know as at the market closed yesterday, 0:08:55.480 --> 0:08:58.480 the out performance of those five stocks is now sixty 0:08:59.320 --> 0:09:02.040 six so percent over the rest of the S and P. 0:09:02.800 --> 0:09:05.360 And the reason is the cash generation, the earning power, 0:09:05.520 --> 0:09:09.040 the cash generation. They all need debt and they keep 0:09:09.080 --> 0:09:13.840 on growing and it's not entirely irrational. It's not irrational. 0:09:14.040 --> 0:09:16.679 They are growing and I are growing faster well, and 0:09:16.679 --> 0:09:19.040 they are growing and it isn't irrational. So if you 0:09:19.040 --> 0:09:24.040 want to get cautious, what do you sell? That's great. Look, 0:09:24.120 --> 0:09:27.400 I think that for the most part, given how how 0:09:27.559 --> 0:09:30.400 levered the market is to the to the to the 0:09:30.400 --> 0:09:34.160 tech sector and the communication sector right now, you have 0:09:34.240 --> 0:09:36.520 to have some exposure here. I think I think the 0:09:36.559 --> 0:09:40.280 general idea of trimming some of your winners and rebalancing 0:09:40.360 --> 0:09:43.880 is a great idea. We do believe that there will 0:09:43.920 --> 0:09:47.000 be a credible vaccine out there somewhere in the next 0:09:47.120 --> 0:09:49.840 four to six months, which will blunt some of the 0:09:49.920 --> 0:09:52.920 macro concerns that you've talked about in the previous segment. 0:09:53.200 --> 0:09:55.280 There will be something available, I'll pretty sure by the 0:09:55.320 --> 0:10:00.240 first quarter of one and so therefore your industrial after 0:10:00.440 --> 0:10:04.440 housing stocks and even your epicenter stock could look appealing 0:10:04.840 --> 0:10:08.640 in that scenario. Alicia, I'm struggling though, with the idea 0:10:08.640 --> 0:10:10.839 of the Robin Hood narrative, the idea that yes, you've 0:10:10.880 --> 0:10:16.160 got the fanmag stocks that have some understandability behind their rise, 0:10:16.440 --> 0:10:20.240 Tesla gaining four hundred and fifteen percent, are their pockets 0:10:20.240 --> 0:10:23.320 of froth here? Well? For sure? For sure. I mean 0:10:23.320 --> 0:10:27.439 there are certain names you can't explain and um, and 0:10:27.559 --> 0:10:29.880 I think that's that's one of them. Um, you know, 0:10:29.960 --> 0:10:32.480 there is a momentum going. I mean, let's for Tesla 0:10:32.559 --> 0:10:35.720 just for one second was the largest short in the market, 0:10:36.400 --> 0:10:38.320 and it was the largest short nut on me. Not 0:10:38.360 --> 0:10:41.040 only on the institutional side, you're also on the retail side. 0:10:41.120 --> 0:10:45.079 The part of that price action it was that technical there, 0:10:45.480 --> 0:10:49.800 but clearly, you know, we joked about this last time. 0:10:50.480 --> 0:10:54.560 Do not make great technical charts, and there'll be a day, 0:10:54.720 --> 0:10:56.800 but it can go on longer. Okay, folks, what you 0:10:56.880 --> 0:10:59.800 gotta understand here's Alicia Levina is prodigious in math. So 0:10:59.800 --> 0:11:02.760 we're gonna do math Thursday here in this long hour. 0:11:02.880 --> 0:11:04.679 What do I mean by a long hour? We start 0:11:04.679 --> 0:11:07.200 out at eight am Wall Street time, and we're really 0:11:07.200 --> 0:11:11.360 going to which is a speech of Chairman Pal. We've 0:11:11.360 --> 0:11:13.559 got some special coverage on that will tell you about 0:11:13.600 --> 0:11:16.559 here in a moment, Alicia, Come on, Alicia, you're going 0:11:16.640 --> 0:11:19.400 all squared on me here with the parabola. And that 0:11:19.440 --> 0:11:22.760 comes back to Gamma or convexity, the best that's on there. 0:11:23.120 --> 0:11:25.760 Is there a market overweight right now? I mean, everybody's 0:11:25.760 --> 0:11:28.360 telling me there's money on the sidelines, but is there 0:11:28.480 --> 0:11:33.720 room there for Gamma for acceleration. There's there's room for 0:11:33.800 --> 0:11:37.240 other sectors to move and not have text destroyed because 0:11:37.240 --> 0:11:39.960 you don't have to sell tet to buy the other sector, 0:11:40.200 --> 0:11:43.040 right because there's cash. You've got five trillion dollars of 0:11:43.080 --> 0:11:45.920 cash on the sidelines, and so much money has gone 0:11:45.920 --> 0:11:48.079 into the bond market and it'll be very Let's bring 0:11:48.080 --> 0:11:49.959 in J. Powell. You know this is a big story 0:11:50.040 --> 0:11:52.240 for the morning. You know, what are we going to 0:11:52.360 --> 0:11:56.920 here today? And they're going to sit on race even 0:11:57.200 --> 0:12:00.880 as we see inflation moving upwards. Alicia, You've done a 0:12:00.880 --> 0:12:04.640 great job answering at Tom's gratuitous way of getting gamma 0:12:04.720 --> 0:12:08.199 in there. Really, Tom, seriously, she's not even focusing on 0:12:08.280 --> 0:12:12.760 the technical Come on, Alicia Rudder Shelton Nateenberg. I mentioned 0:12:12.800 --> 0:12:15.880 Sheldon Nateberg Folk yesterday. I got a huge response to 0:12:15.960 --> 0:12:19.040 that from geeks on Wall Street. Mr Nadenberg came out 0:12:19.040 --> 0:12:22.240 of Chicago years ago with the definitive one volume on 0:12:22.320 --> 0:12:26.000 the Greek letters. It's read like the Old Testament Wall 0:12:26.080 --> 0:12:30.880 Street as well. Alicia, where where's the Greek letters here 0:12:31.000 --> 0:12:33.400 right now? I mean, there's a whole bunch of Greek letters. 0:12:33.679 --> 0:12:37.880 Which of those matters to a Lalisha? Alicia Levine. So 0:12:38.520 --> 0:12:41.560 what matters to me right now is is the positive 0:12:41.640 --> 0:12:44.959 rate of change? Right so the second derivative, That's what 0:12:45.120 --> 0:12:47.280 matters to me right now, and that's what matters to markets, 0:12:47.600 --> 0:12:50.559 and we forget that at our peril. It's never the 0:12:50.720 --> 0:12:54.559 absolute level. It is the rate of change. And every 0:12:54.640 --> 0:12:57.199 time investors forget that they're on the wrong side of 0:12:57.280 --> 0:13:00.040 the trade. And the reason the markets moving upward it 0:13:00.080 --> 0:13:02.959 is because the rate of change continues to be positive. 0:13:03.360 --> 0:13:06.200 Here in the US. The data has been getting better 0:13:06.360 --> 0:13:09.840 in the last few weeks. It is coinciding with COVID 0:13:09.920 --> 0:13:14.320 cases essentially rolling over on that bell curve, very similar 0:13:14.360 --> 0:13:16.720 to what we saw in April. Will they say, they're 0:13:16.840 --> 0:13:19.480 hard to say, but the data have gotten better and 0:13:19.559 --> 0:13:22.760 the positive surprises have been there, and that is why 0:13:22.800 --> 0:13:24.960 the market can continue to move higher. It's the rate 0:13:25.040 --> 0:13:28.240 of change Newtonian mechanics with Alicia Levina doesn't get better 0:13:28.320 --> 0:13:30.240 than that with b n Y Melon. They're back at 0:13:30.280 --> 0:13:32.360 the n Y MEL and the General Council is going 0:13:32.720 --> 0:13:36.319 what did she say, Alicia Levine? Where this is moarting? 0:13:36.400 --> 0:13:44.920 Thank you right now we're stut to bring you Megan Green. 0:13:45.200 --> 0:13:48.120 She's at Harvard Kennedy School and Senior Fellow, and it's 0:13:48.160 --> 0:13:52.360 just done brilliant work folding market economics and acute analysis 0:13:52.880 --> 0:13:56.199 into the broader theory of what we're doing in economics 0:13:56.480 --> 0:13:59.000 and of course how it links into finance and investment 0:13:59.360 --> 0:14:01.760 as well. Megan Green, thank you so much for joining 0:14:01.880 --> 0:14:05.000 us today. Megan, I really want to go to the 0:14:05.240 --> 0:14:08.360 arch issue which has been the battle of our textbooks, 0:14:08.520 --> 0:14:14.199 rules and discretion and this new, more surgical idea of targeting. 0:14:14.760 --> 0:14:20.640 Is there any proof that a central bank can target anything? Well, 0:14:20.720 --> 0:14:22.880 there's there's more and more proof that a central bank 0:14:22.960 --> 0:14:25.360 can't target much of anything. They can target the rate 0:14:25.400 --> 0:14:28.120 that they're setting UM. But the feds dual mandate is 0:14:28.280 --> 0:14:32.320 full employment and stable of inflation of two and on 0:14:32.920 --> 0:14:36.000 the latter inflation, you know, the FEDS missed the mark 0:14:36.200 --> 0:14:39.080 for the entire past recovery. In fact, since the FED 0:14:39.160 --> 0:14:43.520 adopted a two inflation target in twelve, inflation is average 0:14:43.680 --> 0:14:46.440 just under one and a half percent UM. So when J. 0:14:46.600 --> 0:14:49.240 Powell does get up, and it's widely expected that he'll 0:14:49.920 --> 0:14:52.720 provide the broad breast strokes of change in the Fed's 0:14:52.760 --> 0:14:56.200 target towards average inflation, so that there's a catch up factor, 0:14:56.680 --> 0:14:59.800 meaning that the FED will overshoot on inflation that offset 0:15:00.040 --> 0:15:03.200 undershooting for so long. I do think investors might ask, 0:15:03.360 --> 0:15:06.360 you know, can the FED overshoot inflation? It's been so 0:15:06.520 --> 0:15:08.720 far under its target for so long. There's a real 0:15:08.760 --> 0:15:11.600 credibility issue, and the FED has to promise that it 0:15:11.680 --> 0:15:15.680 will overshoot on inflation in the future, which requires upfront 0:15:15.720 --> 0:15:18.280 credibility when it hasn't really built any How do you 0:15:18.560 --> 0:15:23.120 mechanically or what is the reaction process that gets you 0:15:23.360 --> 0:15:28.360 to overshoot inflation. I mean, it's a FED really wanted 0:15:28.440 --> 0:15:31.640 to overshoot on inflation. It could provide helicopter money and 0:15:32.040 --> 0:15:35.360 achieve it, I think, but within kind of the political 0:15:35.600 --> 0:15:38.000 feasibility of what the FED can do these days, I 0:15:38.040 --> 0:15:39.720 don't think there's a whole lot that the FED can 0:15:39.840 --> 0:15:42.760 do to even hit its target, particularly now when we're 0:15:42.800 --> 0:15:46.440 facing a huge and persistent drop and demand. So I 0:15:46.520 --> 0:15:48.800 don't think the FED can generate inflation of over two 0:15:48.840 --> 0:15:51.720 percent right now. There are concerns though, that the supply 0:15:51.880 --> 0:15:54.880 side aspect of this crisis will come through and generate 0:15:55.000 --> 0:15:57.240 some inflation, So the FED might get lucky for a 0:15:57.320 --> 0:16:00.640 little while and have inflation overshoot it's tuper sent target, 0:16:00.760 --> 0:16:03.600 but I doubt that will be sustained. Megan, we can't 0:16:03.640 --> 0:16:06.720 get good inflation unless we get more jobs back, and 0:16:06.800 --> 0:16:10.080 not all job losses are equal. Initially people were saying 0:16:10.120 --> 0:16:13.360 that they were temporary job losses. Now they're increasingly permanent. 0:16:13.520 --> 0:16:16.640 They're increasingly high paid, and I am unclear on what 0:16:16.800 --> 0:16:19.600 the FED can do to improve this picture. Are FED 0:16:19.720 --> 0:16:23.040 actions at this point actually hurting more that they're helping 0:16:23.160 --> 0:16:27.280 because they take the pressure off Washington. Yeah, so I 0:16:27.760 --> 0:16:29.600 think you're right. The FED can't do much about the 0:16:29.680 --> 0:16:32.280 job market right now other than keep rates really low, 0:16:32.480 --> 0:16:35.160 try to run the economy hot to bring in workers, 0:16:35.640 --> 0:16:37.760 which by the way, the FED was already trying to 0:16:37.840 --> 0:16:40.400 do during the last recovery. Um. I think it's really 0:16:40.520 --> 0:16:43.320 up to fiscal authorities to do something to try to 0:16:43.400 --> 0:16:46.240 address the labor market. So it's not up to the FED. Though. 0:16:46.280 --> 0:16:48.880 I do think that when Jay speaks later today, he 0:16:49.000 --> 0:16:52.400 will probably provide a slightly barish view on the economy 0:16:52.520 --> 0:16:54.560 so that he can keep the pressure on Congress, and 0:16:54.600 --> 0:16:57.680 I suspect he'll mention that fiscal policy is the most 0:16:57.760 --> 0:17:00.360 important thing right now, as he has been doing. When 0:17:00.400 --> 0:17:03.120 we talk about inflation, Megan, We're getting plenty of inflation 0:17:03.200 --> 0:17:06.200 and asset prices, and I do wonder whether at a 0:17:06.280 --> 0:17:10.320 certain point it becomes harmful without some sort of fiscal backdrop, 0:17:10.400 --> 0:17:12.879 without some sort of help that actually can help the 0:17:13.000 --> 0:17:16.760 actually economy. Do you see the asset inflation is being 0:17:16.840 --> 0:17:19.200 pernicious at this point or does it have more room 0:17:19.240 --> 0:17:22.520 to run before it reaches at I think it probably 0:17:22.600 --> 0:17:24.600 has more room to run. It depends on what markets 0:17:24.640 --> 0:17:28.320 you're talking about. Right, We've seen incredible leverage taken on 0:17:28.920 --> 0:17:31.720 during this crisis, and that will be a problem one day, 0:17:31.840 --> 0:17:33.600 But it won't be a problem as long as debt 0:17:33.680 --> 0:17:36.760 servicing costs are so incredibly low. Because raids are so low, 0:17:37.160 --> 0:17:39.680 the stock market looks frothy. I don't think anyone would 0:17:39.680 --> 0:17:41.359 doubt that. But I think that as long as the 0:17:41.400 --> 0:17:45.040 feed is stuck in, even without an average inflation target, 0:17:45.119 --> 0:17:46.440 we all know that the FED is not going to 0:17:46.800 --> 0:17:49.560 higrate anytime soon. Um. I think that that has a 0:17:49.600 --> 0:17:51.880 bit for the run. Megan, I want to play off 0:17:51.960 --> 0:17:54.280 yard cushion or now over at the desk, start talking 0:17:54.640 --> 0:17:57.960 about the President's speech tonight, and you know, Megan, I 0:17:58.040 --> 0:18:01.360 want to talk about a hopeful AMA. Mr Kristener says 0:18:01.400 --> 0:18:05.639 the President will speak of a quote hopeful unquote America. 0:18:06.080 --> 0:18:09.240 How does J Powell do that? How does he generate 0:18:09.760 --> 0:18:12.840 a hopeful message today when I've got a number of 0:18:12.960 --> 0:18:19.000 leading economists looking at double digit unemployment coming down slowly? Yeah, 0:18:19.000 --> 0:18:20.440 I think it will be hard to do and It's 0:18:20.480 --> 0:18:23.320 probably not really in Jay's best interests, since, as I said, 0:18:23.400 --> 0:18:25.800 he'll want to keep the pressure on Congress to come 0:18:25.880 --> 0:18:28.760 up with a fiscal stimulus, which probably won't happen until 0:18:28.800 --> 0:18:31.520 September at best at this point. Um, But you know, 0:18:31.600 --> 0:18:34.119 I think you could look to some data points like 0:18:34.240 --> 0:18:37.800 retail sales durable goods which improved. Um. The problem is 0:18:37.880 --> 0:18:41.280 that all the kind of high frequency alternative data sources 0:18:41.359 --> 0:18:44.520 suggest that this recovery is already petering out, and I 0:18:44.640 --> 0:18:47.280 think it could could turn into a downturn if we 0:18:47.359 --> 0:18:50.600 don't end up reacting some of the fiscal stimulus. Megan Green, 0:18:50.680 --> 0:18:52.800 thank you so much, greatly appreciate it. With the County 0:18:52.880 --> 0:18:59.879 School at however, we're so fortunate here to have like Darted, 0:19:00.040 --> 0:19:03.200 jointess of Mike Darta's m CAM Partner's chief economists and 0:19:03.200 --> 0:19:06.000 market strategist. Mike, thanks so much for joining us here. 0:19:06.200 --> 0:19:10.119 I love to get your thoughts on the comments we 0:19:10.280 --> 0:19:14.080 just heard from FED Chairman Powell. Absolutely so thanks for 0:19:14.160 --> 0:19:15.920 having me on. I think, you know, going through the 0:19:15.960 --> 0:19:19.320 whole speech, the key phraseology here and and a lot 0:19:19.400 --> 0:19:24.840 of this was widely anticipated, but Poull basically stated specifically 0:19:24.880 --> 0:19:27.720 in the speech that they're moving to a flexible form 0:19:27.920 --> 0:19:32.399 of average inflation targeting. So basically what that means is 0:19:32.480 --> 0:19:35.040 the FED wants to shoot for a two percent inflation goal. 0:19:35.119 --> 0:19:38.080 The problem in the last cycle was that they undershot it, 0:19:38.800 --> 0:19:42.920 and there was no makeup strategy for that undershooting. So 0:19:43.160 --> 0:19:46.000 this time around, the FED wants to be focused on 0:19:46.720 --> 0:19:49.240 if they're undershooting, to you know, to make up for 0:19:49.320 --> 0:19:54.239 that with some overshooting, to you know, to a limited extent. Right. 0:19:54.320 --> 0:19:56.920 He also said in the in his formal remarks that 0:19:57.560 --> 0:20:00.960 if inflation were to start to get going too much, 0:20:01.040 --> 0:20:03.800 that they would not hesitate to act tighten policy and 0:20:03.880 --> 0:20:07.200 to bring inforflation back down. But the basic point here 0:20:07.320 --> 0:20:11.879 is to average to an average two percent inflation over time. 0:20:12.320 --> 0:20:15.000 Uh and so two percent will not be a ceiling 0:20:15.400 --> 0:20:19.640 but really a flexible average inflation goal. Michael Darter thrilled 0:20:19.680 --> 0:20:21.280 to have you on. You're just the right guy to 0:20:21.359 --> 0:20:25.240 have on here at this moment in FED history. What 0:20:25.400 --> 0:20:29.680 I find fascinating is the ex anti feel here to this. 0:20:30.560 --> 0:20:35.080 If they're gonna inflation target and overshoot, are they going 0:20:35.160 --> 0:20:39.920 to be reactive to the overshoot or is it implied 0:20:40.000 --> 0:20:43.720 in the speech that they will be proactive and get 0:20:43.840 --> 0:20:48.960 out front to push inflation higher. Well, I think Tom, 0:20:49.040 --> 0:20:52.280 the idea is to be you know, to be proactive here. 0:20:52.400 --> 0:20:55.080 So one of the things that happened towards the tail 0:20:55.200 --> 0:20:58.240 end of the last business cycle is that the FED 0:20:58.480 --> 0:21:01.199 was tested. Right, had a lot of people saying, well, 0:21:01.240 --> 0:21:04.240 the Fed's going to run it hot. And we had 0:21:04.280 --> 0:21:06.280 a test in the last two years of the last 0:21:06.440 --> 0:21:10.560 icle where fiscal policy eased, inflation was mostly below the 0:21:10.640 --> 0:21:14.399 Fed's target um, and the labor market was tight. What 0:21:14.520 --> 0:21:18.080 did the Fed do? They actually tightened policy for two 0:21:18.359 --> 0:21:22.119 years even though inflation was below their target most of 0:21:22.160 --> 0:21:25.720 the time, and so the FED was basically acting the 0:21:25.800 --> 0:21:28.359 way that prior Feds acted, moving in a way to 0:21:28.480 --> 0:21:32.400 head off any inflation above two percent. Well, it turned 0:21:32.440 --> 0:21:35.760 out that the tight labor market really didn't put any 0:21:35.880 --> 0:21:40.200 significant upward pressure on inflation, that growth was slowing, and 0:21:40.320 --> 0:21:43.240 that you know, recession risks were actually starting amount which 0:21:43.280 --> 0:21:45.200 is why the FED had to reverse course and start 0:21:45.240 --> 0:21:49.119 cutting rates that inverted yield curve. Tom told us something, 0:21:49.560 --> 0:21:51.680 you know, we discussed this many times. A lot of 0:21:51.760 --> 0:21:55.400 economists ignored it, said it was irrelevant, but it both 0:21:56.000 --> 0:22:00.359