Speaker 1: Welcome to the bloombergs surveillance podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz, daily we bring you
Speaker 1: insight from the best and economics, finance, investment and international relations.
Speaker 1: Find Bloomberg surveillance on Apple podcast, soundcloud, Bloomberg Dot Com and,
Speaker 1: of course, on the Bloomberg terminal. It is a morning
Speaker 1: of fear. It is also a morning of revision, and
Speaker 1: it has been a week of revision for Wall Street
Speaker 1: strategists across the board, with Goldvin ZAC slashing as year
Speaker 1: end target for the SMP. Five hundred thirty six hundred
Speaker 1: previously had been dred of pretty big revision. Julian Manuel, equity,
Speaker 1: derivatives and quantitative strategistic. Ever, core I, S I, has
Speaker 1: been out ahead of some of what we have been seeing. Julian,
Speaker 1: have you reset some of your expectations based on the
Speaker 1: Fed meeting this week? Oh, we certainly have. Looking we're
Speaker 1: calling for earnings next year, UH, basically to be flat
Speaker 1: year on year. Uh with this year and frankly we
Speaker 1: were a below consensus and continue to be below consensus
Speaker 1: for two as well. And obviously, uh, we slashed our
Speaker 1: price target and it's one of these years. That now,
Speaker 1: actually Wednesday, has ushered in the emotional phase of this
Speaker 1: bear market, which, frankly, every bear market does tend to
Speaker 1: have an emotional phase. UH, simply because when you look
Speaker 1: at what the Fed Chair said and the projections, and
Speaker 1: importantly it's that unemployment number projected to be four point
Speaker 1: four percent next year. Uh, where the rate of change?
Speaker 1: There's never not been a recession following hard upon that
Speaker 1: kind of change, and all of that has caused the
Speaker 1: emotion to come into the markets and subsequently, of course,
Speaker 1: these types of revisions. You know, Julian, I mean rising
Speaker 1: Boun yield's, higher commodity prices. These have been the two
Speaker 1: dominant factors that are impacting US equity earnings. I'm wondering
Speaker 1: the piece of equity earning downward revisions are are we
Speaker 1: comfortable with that? I mean is it going to accelerate
Speaker 1: over the next few months? Well, it's actually less about
Speaker 1: the pace than the band of uncertainty. So if you
Speaker 1: look at estimates for next year, they range from a
Speaker 1: hundred and eighty five on the low end to two
Speaker 1: fifty five on the high end. That's absolutely unprecedented and
Speaker 1: it speaks to the uncertainty in all asset markets. And again, frankly,
Speaker 1: when you think about and you see the screen, uh,
Speaker 1: you know, everything is read today, and that tells you
Speaker 1: that uncertainty really is approaching those critical levels. Well, Julian,
Speaker 1: on the earning side, we have been having the conversation
Speaker 1: for some time now that there is inflationary pressure, higher
Speaker 1: input costs, it's going to weigh on corporate margins. They
Speaker 1: aren't going to be able to pass it on. And
Speaker 1: yet it's been actually okay to this point. Why would
Speaker 1: things change now, as we're seeing some of those inflationary
Speaker 1: pressures winding down a bit? Why is it now, timately
Speaker 1: that those margin pressures are really going to come through?
Speaker 1: Is it just an inability on the demand side to
Speaker 1: be passing those costs, costs onto the end customer? So, Kayleef,
Speaker 1: if you think about this year, it's been very unusual
Speaker 1: in that the sentiment data on the consumer side has been,
Speaker 1: you know, subdued, you know, worse than subdued, the entire
Speaker 1: year because of the consumers sort of internalizing, uh, the
Speaker 1: idea of inflation. But yet the spend has been, you know,
Speaker 1: really quite reasonable. When you think about it, that in
Speaker 1: our view is about to change because, frankly, conditions are
Speaker 1: really warranting, uh, a little bit more of a button
Speaker 1: down type of attitude. And to that point, that's where
Speaker 1: the attack on margins, the attack on, you know, volumes
Speaker 1: comes in and again, the risk in markets. But the
Speaker 1: story is that this is part of the feds calculus.
Speaker 1: The question being, though, are we in the process of
Speaker 1: potentially breaking something? Well, Julian, to that point, let's begin
Speaker 1: where we started. Let's end where we started, rather where
Speaker 1: you said. This marks the emotional phase of this bear market.
Speaker 1: What are we currently pricing in? How long will the
Speaker 1: recession be? How deep? The idea of a soft landing
Speaker 1: or LISA's shallow recession? Is that kind of off the table?
Speaker 1: It's not entirely off the table. What we think the
Speaker 1: Fed may have been missing, uh, and, and it's our
Speaker 1: view that inflation is actually starting to come in, whether
Speaker 1: you measure it by break evens, you know, there's a
Speaker 1: disconnect between the fact that embedded inflation expelications simply aren't there.
Speaker 1: And in this respect, this is not the nineties seventies, uh,
Speaker 1: and in our view, we think the data over the
Speaker 1: next couple of months will reflect that is that going
Speaker 1: to happen quick enough for the Fed not to do
Speaker 1: fifty or seventy five on November two? Possibly not, but frankly, uh,
Speaker 1: we think that that type of reckoning is out there
Speaker 1: in the future and that's the kind of psychology that
Speaker 1: could forestall or make any recession in a more shallow event.
Speaker 1: Julian Emmanuel of ever core I s I adrivatives and
Speaker 1: quantitative strategist. At what point does the rest of the
Speaker 1: world's problem become the US is problem, as a dollar
Speaker 1: strengthens and the rest of the world grapples with not
Speaker 1: only the same backdrop but also the imported inflation of
Speaker 1: a weaker currency? It already is. Okay, look, we know
Speaker 1: what the inflation numbers are here and, frankly, we heard
Speaker 1: from corporate America last week there was one very key,
Speaker 1: uh pre announcement that basically the recession is being imported
Speaker 1: into the US. And so, from that perspective, we are
Speaker 1: at that point. The thing that is different about the
Speaker 1: last several days is that clearly the Fed has been
Speaker 1: guiding the markets in terms of what it expects, what
Speaker 1: it wants, how it wants this to unfold. But the
Speaker 1: last couple of days again, as I said earlier, entering
Speaker 1: the emotional phase. We're now likely at the point where
Speaker 1: the markets are going to start guiding the central banks
Speaker 1: and that flips the script and that, frankly, is sort
Speaker 1: of the danger that you get into in September and October,
Speaker 1: but ultimately for us will provide at some point the
Speaker 1: buying opportunity. Julian, everyone is just so barrassed this morning.
Speaker 1: It's just unbelievable. I mean my question for you is,
Speaker 1: what is the upside risk to global growth? You know,
Speaker 1: what are the markets not seeing here? Is it China reopening?
Speaker 1: Is it rushing Ukraine, the escalation? I mean, how should
Speaker 1: investors even try to position for some of that? So
Speaker 1: that's the challenge, because the tail outcomes on both sides
Speaker 1: or potentially large. The expectation is that zero covid will
Speaker 1: end sometime early in the spring next year. Um obviously
Speaker 1: the new is coming out of Russia and Ukraine has
Speaker 1: been more favorable. We don't know what that outcome could be,
Speaker 1: but certainly the pressures are beginning to build there. As
Speaker 1: an investor, whether you do or you don't use options,
Speaker 1: you have to have an optionality mindset, realizing that without notice.
Speaker 1: You could get that kind of upside and frankly, that
Speaker 1: plays against the fact that sentiment, however you measure it,
Speaker 1: is about as pessimistic as it gets at a time
Speaker 1: of year, September and October, where you do tend to
Speaker 1: see tradeable bottoms. Well, to that point, Julian Bank of
Speaker 1: America publishing this morning saying investor sentiment is unquestionably the
Speaker 1: worst it has been since the crisis of two thousand
Speaker 1: and eight, noting that we'd SAI inflows into cash in
Speaker 1: the week through Wednesday, a thirty point three billion dollars,
Speaker 1: people fleeing equities running into the safety of a cash haven.
Speaker 1: Is Are we at the point where bearish is no
Speaker 1: longer actually bullish, it is just straight up bearish? UH,
Speaker 1: for a time, for a time, and and look, well,
Speaker 1: let's be frank about it. Think about it this way.
Speaker 1: There has only been one bull market in two and
Speaker 1: that's the bull market for cash. Uh So, so, from
Speaker 1: that perspective, we need to see that moderate and we
Speaker 1: would say that the initial signal. Look, think about it.
Speaker 1: The Fed Chair has told you that the base case
Speaker 1: is a recession, inflation break evens. Are telling you that
Speaker 1: the market doesn't actually believe in the persistence of inflation
Speaker 1: in the long run. So in that environment you could
Speaker 1: make the argument that for us, after three years, uh,
Speaker 1: long dated yields in the US start to offer value.
Speaker 1: That's what we're gonna want to see at some point. Okay.
Speaker 1: So what is that trigger point, Julia, just to sort
Speaker 1: of put a bow on all of this, when you
Speaker 1: talk about at some point there will be a buying opportunity,
Speaker 1: what is that trigger? Uh, it's the typical we're gonna
Speaker 1: need to see higher volume, like a move in the
Speaker 1: in the vix towards forty, and then again, and you've
Speaker 1: spoken about this on and off of the morning, the
Speaker 1: credit markets starting to internalize a bit more stress, consistent
Speaker 1: with the kind of moves that we're seeing in the dollar.
Speaker 1: Julian Emmanuel of ever Crys, I thank you so much
Speaker 1: for all the time this morning. How much will the
Speaker 1: reduction in activity reduce the demand for commodities? Right now
Speaker 1: we're looking at someone who has reset their expectations, along
Speaker 1: with the rest of Wall Street this week, although it's
Speaker 1: not perhaps because of the feds. So clearly, Stephen England,
Speaker 1: or global head of G ten fx research at Santard
Speaker 1: chartered bank, joining myself, Kaylee lines and Damian Sassaur this morning.
Speaker 1: I am wondering, Steve, what caused you to reset and
Speaker 1: raise up your expectations of a fed funds rate. Well, luckily,
Speaker 1: we still expect the Fed to moderate the pace of
Speaker 1: hikes once it becomes clear that the labor market is
Speaker 1: beginning to topple over and that the economy is clearly
Speaker 1: under pressure. We expected that to happen Um, around this
Speaker 1: time by now, and it hasn't happened Um, so we're
Speaker 1: stepping back. We think it's possible that one of the
Speaker 1: side effects of lower oil prices is, paradoxically, that by
Speaker 1: putting more money in people's wallets, it's supporting non oil
Speaker 1: consumption and and kind of boosting demand for, you know,
Speaker 1: core CBI type of products and preventing those from coming down.
Speaker 1: So there's kind of looks to be kind of a
Speaker 1: trade off between headline inflation and core inflation, with one,
Speaker 1: you know, going close to zero but the other one's
Speaker 1: staying elevated. And in that world that the Fed is
Speaker 1: just going to keep on hiking, you know, and then
Speaker 1: we just had to get out to that reality. Well,
Speaker 1: it seems like we're all on board now with how
Speaker 1: much the Fed is going to hike and we have
Speaker 1: an idea, maybe a better one, of what term and
Speaker 1: was ultimately going to be. You're at four and a
Speaker 1: half percent, like many others. Yet you still think they're
Speaker 1: going to start cutting by the end of next year
Speaker 1: by twenty five basis points. That's not the message we
Speaker 1: got from the dot plot or the chairman. Why do
Speaker 1: you think that? I think once the unemployment rate starts
Speaker 1: going up, the idea that, you know, you control the
Speaker 1: unemployment rate like you control the you know, the flame
Speaker 1: underneath your omelet while you're cooking it, I think is uh, hopeful,
Speaker 1: to say is the least. and Um, we think that,
Speaker 1: given the pace of hikes, that once it becomes clear
Speaker 1: that they've hiped enough to get unemployment going Um, they'll
Speaker 1: say look, we we we don't have to go that
Speaker 1: much further. So we're you know. And then at some
Speaker 1: point they started say, well, we're clearly well above neutral.
Speaker 1: We don't have to be that far above neutral. We
Speaker 1: you know, we can be a little bit you know
Speaker 1: less about you know, above neutral. But you know it
Speaker 1: doesn't mean dovish, because it's still, you know, basically our
Speaker 1: que or two, you know, queue four forecasts. It doesn't
Speaker 1: change all that much. It just means that they Um,
Speaker 1: you know, they're hawkish and they're modulating their hawkishness according
Speaker 1: to the circumstances. Steve, my colleagues at Bloomberg economics place
Speaker 1: the probability of a recession over the next twelve months
Speaker 1: of roughly. Do you think the Fed can actually engineer
Speaker 1: a soft landing or is that ship sailed? You know,
Speaker 1: I I think a soft lending is um it's something
Speaker 1: that you want, it's you know, it's not something that
Speaker 1: you would ever count on as a central banker. I
Speaker 1: think that Um, you know, it's a way of making
Speaker 1: the the hawkishness and the tightness more palatable. But, you know,
Speaker 1: it's like discussions we had about escape velocity a couple
Speaker 1: of years ago and so on. It's just like so
Speaker 1: hard to grasp that. I think that the risk is
Speaker 1: that if you get you know, you have to slow
Speaker 1: the economy enough to get inflation down. The odds are
Speaker 1: heavily if you're doing that, you think, to have a recession.
Speaker 1: You know, a few months back, Steve, if you recall,
Speaker 1: we were speaking at the hub to a bunch of
Speaker 1: China watchers. And so my question. What was that, Damien?
Speaker 1: Can you just do that? I'm sorry, sorry here. And Yeah,
Speaker 1: so we're talking a bunch of China watchers. We were
Speaker 1: talking about China US yield divergence, we were talking about
Speaker 1: dollar U on and we were talking about the P
Speaker 1: B o c s reluctance to cut rates because of
Speaker 1: capital outflows. I wonder can you just share your thoughts
Speaker 1: on that? I mean, do you see the PBOC continuing
Speaker 1: to cut rates in the face of what's going on here?
Speaker 1: You know, look, when you make the case for sort
Speaker 1: of having some restrictions on capital mobility, I think being
Speaker 1: able to run your domestic economy somewhat independently the rest
Speaker 1: of the world is the most powerful element of this,
Speaker 1: assuming you're you're running, you know, the correct policy. So
Speaker 1: I think that the Um you know, given that the
Speaker 1: economy is soft and has surprised on the downside, it
Speaker 1: looks like they're good to continue to maintain Um, you know,
Speaker 1: kind of easy money. I don't think that they're going
Speaker 1: to Um, you know, be super soft. I think the
Speaker 1: eyes still is towards easy money. There Um you know,
Speaker 1: and and yeah, Stephen, before we let you go, I
Speaker 1: just have really a simple question for you. Would you
Speaker 1: buy the pound today? Um, no, okay, why not? I
Speaker 1: mean basically, how much further does it have to go? Well,
Speaker 1: you know, they're really rolling the dice on this. I
Speaker 1: mean this this will be the greatest experiment ever run
Speaker 1: if it succeeds in stimulating the UK economy. But I
Speaker 1: think there's a real question mark about applying a lot
Speaker 1: of fiscal to an economy which is facing a lot
Speaker 1: of supply constraints. We, you know us, tried that in
Speaker 1: one and we saw what happened. And you know, I
Speaker 1: think the market is, you know, watching the budget and
Speaker 1: just kind of digesting this. Um The most I'd say
Speaker 1: that the range of views is dire to you know,
Speaker 1: cross your fingers and light some candles and, you know,
Speaker 1: if it work, it's great, but I don't think anyone
Speaker 1: really has confidence that this is a policy that's going
Speaker 1: to really get growth going again. It up as a
Speaker 1: weak pound. We just have about thirty seconds. But if
Speaker 1: lighting candles doesn't work and saying a prayer, where we
Speaker 1: headed for the pound dollar cross? We'll have to see.
Speaker 1: I mean you know the look, the Um, there's the
Speaker 1: Bank of England and you know the markets marking up
Speaker 1: what the B O e is doing. I think it's
Speaker 1: gonna be very delicate because raising rates Um harshly in
Speaker 1: this environment could lead to even more pressure on the currency.
Speaker 1: It's a market just sees these things are incompatible. It's
Speaker 1: it's a very tough situation. Stephen, leader of Standard Chartered Bank,
Speaker 1: thank you so much joining us now, Dan Suzuki, always
Speaker 1: a brilliant mind. Wd C I O at Richard Burnstead Advisors,
Speaker 1: who has been ahead of the game for a long time,
Speaker 1: being highly barished, seeing really no upside. Right now the
Speaker 1: world is coming to your view. Are you starting to
Speaker 1: be a little bit more positive, or do you feel
Speaker 1: even worse? Uh, well, good morning, Lisa. You know I don't.
Speaker 1: I don't think there's any real reason to sort of
Speaker 1: change the view. I mean, we're happy to be cautious here,
Speaker 1: I think right now. I mean what we've been saying
Speaker 1: is there's only two certainties for the foreseeable future. It's
Speaker 1: that profits growth is going to continue slow and probably surprised.
Speaker 1: The downside relative to people still pretty you know, elevated
Speaker 1: expectations and liquid is going to continue to tighten and
Speaker 1: that's the worst possible combination for market. So unless you
Speaker 1: see signs that either of those things is reversing course
Speaker 1: or at least stabilizing, it's hard to get really bullish here.
Speaker 1: Do you think, Dan, that the market has now properly,
Speaker 1: properly appropriately priced the Fed? And if we have done that,
Speaker 1: is the next thing going to be properly approached pricing
Speaker 1: in the corporate profit downturn? You think we'll see, and
Speaker 1: what does that look like? Yeah, Kelly, I think that's
Speaker 1: a that's a very good summation of my view. I
Speaker 1: think Um, right now, Um, you know, the market for
Speaker 1: for most of this year people were very skeptical, skeptical
Speaker 1: about inflation initially, and then there are skeptical about the
Speaker 1: Fed's reaction to inflation. Now people have come around to
Speaker 1: believing the feds. So I do believe a lot of
Speaker 1: that's priced in. So as you price in the next
Speaker 1: stage of this cycle, which is that slowing growth environment
Speaker 1: you mentioned, I think that's gonna have a very different
Speaker 1: impact on on rates, particularly the longer end of rates.
Speaker 1: So I think, you know, this one of the big
Speaker 1: transitions we're probably gonna be you know, faced within the
Speaker 1: next month or so or in the next coming months?
Speaker 1: Is that shift of, you know, a tighter fed? Up
Speaker 1: until now I meant higher longer term rates. You know,
Speaker 1: perhaps you know a tighter fed going forward is going
Speaker 1: to actually mean lower rates because it means lower long
Speaker 1: term growth, lower long term inflation. Dan, you've often highlighted
Speaker 1: the difference between an economic recession and a profit recession.
Speaker 1: I'm wondering you know what sectors offer protection from a
Speaker 1: profit recession? Are we talking consumer staples, Health Care, utilities?
Speaker 1: Where are your thoughts there? Yeah, I mean, at the
Speaker 1: end of the day, what we tell people is that
Speaker 1: the cycle is driven by cyclicles, and so, you know,
Speaker 1: the stuff that's going to hold up better when, when
Speaker 1: growth is slowing is are those stable earnings growth sectors
Speaker 1: such as everything you mentioned. You know, staples, utilities, healthcare.
Speaker 1: They're just less economic sensive. You'RE gonna still go out
Speaker 1: there and buy toothpaste and you're still gonna go out
Speaker 1: there and buy your meds, and that's why their earnings
Speaker 1: are going to hold up on a relative basis much better. Now,
Speaker 1: depending on how bad the slowdown gets, you can still see,
Speaker 1: you know, negative growth rates for a negative. You know,
Speaker 1: price performance, you know, but it's a relative game. In
Speaker 1: that type of environment, I love it. Invest in toothpaste
Speaker 1: and toil of paper. That seems to be the trade.
Speaker 1: The other trade is exactly perhaps people will continue with that. Hopefully. Uh.
Speaker 1: There are the other issue, as ever, core I s
Speaker 1: I is Juliana Emmanuel was saying there has been only
Speaker 1: one bull market in two and that's the bull market
Speaker 1: for cash. How much are you invested still in cash
Speaker 1: or cash like instruments as real yields continue to climb? Yeah,
Speaker 1: I think this a great point. I mean right now
Speaker 1: we have probably one of the highest, you know, exposures
Speaker 1: to cash and cash like investments that we've had in
Speaker 1: the history of the firm. So I think that, you know,
Speaker 1: there's a there's a lot to be said for the
Speaker 1: safety the income and being able to capitalize on this
Speaker 1: you know, higher rising short rate of environment that we're
Speaker 1: in the midst of Um but where right now, as
Speaker 1: I mentioned, we're kind of a barbelled between you know,
Speaker 1: that cash position, which is very high, and, you know,
Speaker 1: exposure to long term treasuries, which is if if we're
Speaker 1: right about the growth outlook and we're right about how
Speaker 1: the market's going to have to interpret that growth outlook.
Speaker 1: You know you could actually see meaningful upside uh in
Speaker 1: these areas that have gotten crushed this year, particularly the
Speaker 1: long end of the curve. Can you give us a
Speaker 1: sense down of what that means in terms of the
Speaker 1: biggest cash allocation in the history of your fund and
Speaker 1: sort of the progression over two in terms of how
Speaker 1: you've built that holding? Yeah, you know, we've held a
Speaker 1: decent cast cash position for a while in terms of
Speaker 1: cash like investments, but it's certainly in increased over the last,
Speaker 1: you know, three to six months. You know right now
Speaker 1: you know of our multi asset flagship portfolio. You know
Speaker 1: it's approaching and it's probably about so the portfolio is
Speaker 1: in cash and cash like investments and I think you
Speaker 1: know it's a lot, but it gives you a lot
Speaker 1: of dry powder, it gives you a lot of safety
Speaker 1: and again, you also get to capitalize on these higher
Speaker 1: rates that the Fed is providing. Most Dancey Zuki of
Speaker 1: Richard birdsteed advisors. Thank you. People are concerned that the market,
Speaker 1: that the economy, or not the market. The economy is
Speaker 1: not deteriorating quickly enough. It is highly uncomfortable for economists
Speaker 1: to be looking at that, including Janice Everley, who has
Speaker 1: incredible and extensive experience in administrations as the chief economist
Speaker 1: to the White House from two thousand and Leve two
Speaker 1: thousand thirteen. She is currently senior Associate Dean and professor
Speaker 1: of finance at the Kellogg School of Management and she
Speaker 1: joins us now. Jenn Everley, thank you so much for
Speaker 1: being here. When you take a look at this backdrop
Speaker 1: in markets, what is your fear for how this translates
Speaker 1: to the economy? Good morning, Lisa. It's great to be
Speaker 1: with you. Um. You're right that there's a lot of
Speaker 1: market turmoil. The feds initial announcement of the seventy five
Speaker 1: basis points, of course, wasn't the surprise. It was the
Speaker 1: surrounding messaging that included, you know, the feds not only
Speaker 1: willingness but their expectation that rates would be above four
Speaker 1: percent by the end of the year going into and
Speaker 1: stay higher for a longer period of time than they
Speaker 1: had previously conveyed. So that clearly increases the likelihood of
Speaker 1: a downturn uh and potentially the severity of any subsequent recession.
Speaker 1: So that's what's really created the volatility in the markets
Speaker 1: because it puts much more pressure on the supply side
Speaker 1: of the economy and what we might be looking for
Speaker 1: for on the on on that side, on the real
Speaker 1: side of the economy. Jan The message from the Federal
Speaker 1: Reserve is we're not going to blink, we are going
Speaker 1: to look at the unemployment weight rising and we are
Speaker 1: going to tolerate and keep doing the job until the
Speaker 1: job is done. Do you buy that narrative or do
Speaker 1: you think unemployment may reach a level in which the
Speaker 1: Fed has no choice but to turn the other way?
Speaker 1: They've been abundantly clear that. The chairman said in Jackson Hole,
Speaker 1: and he reiterated this uh in in his news conference
Speaker 1: this week, that the message hasn't changed. What changed was
Speaker 1: the quantitative message that came out. So it gives much
Speaker 1: less room for interpretation and the quantitative message reflects that.
Speaker 1: The message to the economy that the Fed and and
Speaker 1: markets had had some optimism that the supply side might
Speaker 1: soften and make a dramatic, aggressive move on the Fed
Speaker 1: side less necessary, but that hasn't happened so far and
Speaker 1: so the Fed message is clear that they cannot and
Speaker 1: will not wait for the supply side to move favorably,
Speaker 1: that they are acting aggressively now, and you know that
Speaker 1: that gives us this exposure. If the Fed is not
Speaker 1: going to be a shock absorber, what's going to happen
Speaker 1: on the real side, in commodities, in energy and in housing,
Speaker 1: for example? We'll get to housing in just a minute,
Speaker 1: but if I could just ask about the inflation target first,
Speaker 1: when the chairman says it will be enough, we are
Speaker 1: going to get inflation down to target, is a two
Speaker 1: percent inflation target still realistic in this new world, or
Speaker 1: is the Fed going to have to change its definition
Speaker 1: of success? Well, bringing inflation down is a long process, right.
Speaker 1: So they're focused on that two percent target because that's
Speaker 1: what they committed to announce, what's in their mandate. Um,
Speaker 1: but the inflation process, which and and the transmission of
Speaker 1: monetary policy through to inflation, relies on a much slower
Speaker 1: cadence of households pulling back on auto purchases, on housing purchases,
Speaker 1: firms pulling back on investments because they're more expensive. Um,
Speaker 1: that moves in a much slower way. So you know
Speaker 1: they're not thinking we're going to get to two percent immediately,
Speaker 1: that that will take time. Inflation moves out of slower
Speaker 1: cadence than market reactions. Dr I believe the thirty year
Speaker 1: fixed mortgage rate is now at six point five. That's
Speaker 1: the high since March of two thousand two. I mean
Speaker 1: housing starts picked up slightly in August, but I mean
Speaker 1: building permits are down. You know, new pending, everything, you
Speaker 1: know decelerating. Just how bad can things get in US
Speaker 1: housing market? That the housing market is acting in in
Speaker 1: in some ways, in a counterintuitive and and counterproductive way
Speaker 1: to the inflation story. Um Rents and and housing costs
Speaker 1: are both an important part of the inflation indicries that
Speaker 1: we use UM and they're also the biggest part of
Speaker 1: households budgets. So people really feel those increases in costs.
Speaker 1: The way to bring those costs down durably is to
Speaker 1: increase the supply of available housing, so to have more construction,
Speaker 1: more building of homes and apartments, uh, for for people
Speaker 1: to to rent and and and to buy. But the
Speaker 1: increase in costs, as you know, to the higher mortgage costs.
Speaker 1: That increases the carrying costs of real estate and it
Speaker 1: also increases the cost of building and construction. So the
Speaker 1: higher interest rates in this market can actually be counterproductive
Speaker 1: because they're reducing supply and that puts upward pressure on praises,
Speaker 1: not downward pressure on praises, which is what we'd like
Speaker 1: to see. So it's a reminder that, you know, it's
Speaker 1: not an argument for lowering rates, but it's a reminder
Speaker 1: that bringing inflation down in a market like housing Um
Speaker 1: takes a lot of time for the market to to
Speaker 1: cool off and and normalize. And it's not just about
Speaker 1: monetary policy, which we should also remember. Monetary policy is
Speaker 1: really powerful, but it's not a Swiss army knife, you know,
Speaker 1: it's not a multipurpose tool and we still have to
Speaker 1: do the hard work on the real side of building homes,
Speaker 1: continuing to innovate, investing in our productive capacity so that
Speaker 1: we have a strong economy that's set for growth going forward.
Speaker 1: We just have about a minute left. But given that,
Speaker 1: how much bond prices have gone down, how much yields
Speaker 1: have risen, how much can the United States and, frankly,
Speaker 1: other nations around the world really invest in the way
Speaker 1: that they maybe, perhaps need to in the upcoming years
Speaker 1: given the punitive borrowing costs? So there there's two parts
Speaker 1: to um the building. There's having productive projects, good ideas
Speaker 1: going forward, and and I think we have those. The
Speaker 1: other part is the financing, which can be from borrowing,
Speaker 1: but it can also be from other sources, UM, including
Speaker 1: cash on hand. So so firms are pretty well finounced now,
Speaker 1: especially in the US, the rising costs around the world
Speaker 1: you see. You saw central banks move in concert yesterday
Speaker 1: to raise rates. Some of that is that they're facing
Speaker 1: the same inflationary pressures that we're facing in the US,
Speaker 1: but some of it also is the relative value of
Speaker 1: the dollar Um it's got, as you mentioned, the movements
Speaker 1: in in currency markets. That's very difficult for many economies
Speaker 1: to Um to to manage and to deal with, because
Speaker 1: the higher value of the dollar increases the costs of
Speaker 1: their imported goods as their currency falls, also increases the
Speaker 1: cost of their debt payments if they have dollar denominated
Speaker 1: debt themselves. So that puts extra pressure on them to
Speaker 1: raise rates and and not let the US get too
Speaker 1: far ahead of them. Jan Everley of the Kellogg school,
Speaker 1: thank you so much. Also, formerly of the White House,
Speaker 1: from two thousand and eleven two thirteen, as the chief
Speaker 1: economist at the Treasury Department. This is the Bloomberg surveillance podcast.
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