WEBVTT - Surveillance: Traders Weigh A Fed Pause 0:00:00.120 --> 0:00:03.800 If you enjoy the Bloomberg Surveillance podcast, check out our 0:00:03.880 --> 0:00:08.959 new daily news program, the Bloomberg Daybreak Podcast. It gives 0:00:09.039 --> 0:00:12.840 you the day's top stories with context in just fifteen minutes. 0:00:13.240 --> 0:00:15.960 Look for it in your podcast feed by six a m. 0:00:16.160 --> 0:00:20.280 Eastern every morning. Subscribe on Apple, Spotify and anywhere else 0:00:20.400 --> 0:00:23.799 you get your podcasts, and stay tuned for a sample 0:00:23.880 --> 0:00:27.400 of today's edition of Bloomberg Daybreak at the very end 0:00:27.600 --> 0:00:36.040 of this podcast. This is the Bloomberg Surveillance Podcast. I'm 0:00:36.080 --> 0:00:40.120 Tom Keene, along with Jonathan Ferroll and Lisa Abramowitz. Join 0:00:40.240 --> 0:00:44.400 us each day for insight from the best and economics, geopolitics, 0:00:44.400 --> 0:00:49.360 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:49.600 --> 0:00:54.080 Spotify and anywhere you get your podcasts, and always on 0:00:54.200 --> 0:00:58.520 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:58.760 --> 0:01:01.959 At what point does it either lean into banking crisis, 0:01:02.000 --> 0:01:06.040 credit contraction, some sort of significant lag versus this feeling, 0:01:06.200 --> 0:01:09.039 Perhaps we need to revisit the belief in that dreaded 0:01:09.080 --> 0:01:12.000 six handle are potentially much more restrictive rates something to 0:01:12.000 --> 0:01:12.800 worry about. 0:01:12.760 --> 0:01:14.559 And if you want to worry, you can look at 0:01:14.600 --> 0:01:17.800 a bull market effort. Right now, we're seeing many houses 0:01:18.080 --> 0:01:21.000 just higher at the Morgan Stanley shop. 0:01:21.360 --> 0:01:22.039 They are not. 0:01:22.360 --> 0:01:27.000 Michael Wilson's CIO, chief US equity strategist at Morgan Stanley. 0:01:27.040 --> 0:01:30.240 And one of your themes, Mike Wilson is there's a 0:01:30.360 --> 0:01:34.360 complete misguess on the interstate game. As addressed by the 0:01:34.400 --> 0:01:37.720 Fed today and followed by your Ellen Zettner Wayley, there 0:01:37.760 --> 0:01:39.800 are black Rock says persistent inflation. 0:01:40.240 --> 0:01:43.240 Is that a core reason for your caution in the 0:01:43.240 --> 0:01:45.160 equity market, No, it's actually not. 0:01:45.240 --> 0:01:45.440 Tom. 0:01:45.600 --> 0:01:47.760 In fact, our views and inflation is going to come down, 0:01:47.920 --> 0:01:50.240 and while that potentially is very good for bonds, it's 0:01:50.280 --> 0:01:52.120 not going to be it for stocks because that's where 0:01:52.160 --> 0:01:54.360 the earnings power has been coming from. Right This is 0:01:54.360 --> 0:01:57.120 really our Boombus thesis. The reason we were so bullish 0:01:57.160 --> 0:01:59.120 in twenty twenty and twenty twenty one is because we 0:01:59.160 --> 0:02:02.560 expected inflation to drive a profits boom, and now when 0:02:02.600 --> 0:02:05.240 inflation comes down, you're going to have a profits recession. 0:02:05.520 --> 0:02:08.160 So that's really where we're differentiated from an equity standpoint. 0:02:08.160 --> 0:02:09.520 You know, Ellen, as you know, he's looking for a 0:02:09.520 --> 0:02:11.760 pause today too. She's not looking for you know, any 0:02:11.760 --> 0:02:14.080 more hikes really the rest of this year, but a 0:02:14.200 --> 0:02:16.400 very slow path in terms of cutting next year. 0:02:16.880 --> 0:02:19.400 We look we already looking at going forward in terms 0:02:19.480 --> 0:02:24.080 of client responses, how they push back against the parishness 0:02:24.080 --> 0:02:25.040 that you've been expressing. 0:02:25.280 --> 0:02:27.040 Yeah, look, I mean it's we're in a weird situation 0:02:27.120 --> 0:02:29.480 now because I feel like on the fundamental side, our 0:02:29.639 --> 0:02:31.720 earnings call has been spot on. So a year ago, 0:02:31.960 --> 0:02:34.080 just to kind of remind listeners, you know, we were 0:02:34.120 --> 0:02:36.760 calling for an earnings recession and we were somewhat dismissed, 0:02:36.800 --> 0:02:38.959 but of course now we're in one. And the only 0:02:39.000 --> 0:02:41.239 difference now is that we're just saying it's going to persist, 0:02:41.400 --> 0:02:43.560 whereas I think most people the pushback is, no, the 0:02:43.600 --> 0:02:46.040 earnings recession is over and we're going to see a 0:02:46.080 --> 0:02:48.240 reacceleration and growth in the second half of the year, 0:02:48.240 --> 0:02:49.760 and that's what the consensus is forecasting. 0:02:49.760 --> 0:02:50.720 So that's what the pushback is. 0:02:50.840 --> 0:02:52.680 So in other words, you're saying that you got it 0:02:52.760 --> 0:02:54.959 right if you strip out some of the big tech names, 0:02:55.040 --> 0:02:57.400 and that there was an earnings recession that played out 0:02:57.440 --> 0:02:59.760 in lower valuations of some of these shares, and you're 0:02:59.760 --> 0:03:02.480 saying it's going to continue. Not necessarily talking about the 0:03:02.520 --> 0:03:04.520 headline level of the S and P as much as 0:03:04.720 --> 0:03:07.800 these particular stocks fighting against the idea of a broadening 0:03:07.840 --> 0:03:09.160 out of the AI rally. 0:03:09.200 --> 0:03:09.760 Is that correct? 0:03:09.880 --> 0:03:12.880 Well, actually, the technology stacks had the biggest earnings recession. 0:03:12.880 --> 0:03:14.840 I mean, you know, you look at the communication services 0:03:14.840 --> 0:03:16.720 and some of the technology stocks they had, they were 0:03:16.720 --> 0:03:19.359 their earnings were down significantly in the fourth quarter. That's 0:03:19.400 --> 0:03:21.160 why they sold off so sharply in the fourth quarter. 0:03:21.280 --> 0:03:23.720 So they had an earning's recession last year. And the 0:03:23.760 --> 0:03:27.079 presumption is is that's over and now that's going to reaccelerate. 0:03:27.120 --> 0:03:29.839 And that's where we disagree. We think that including tech, 0:03:29.919 --> 0:03:32.240 not just tech, but overall, the earnings recession is going 0:03:32.280 --> 0:03:34.440 to persist into the second half of year. It's going 0:03:34.520 --> 0:03:37.440 to get worse before it actually improved next year. 0:03:37.600 --> 0:03:40.360 If we get a center economy or ed Heiman moving 0:03:40.400 --> 0:03:43.120 down to three percent dare I say under three percent inflation? 0:03:43.240 --> 0:03:46.680 David Rosenberg up in Toronto clearly in that camp as well. 0:03:47.120 --> 0:03:50.040 I'm thinking of the partial differentials on the income statement 0:03:50.080 --> 0:03:52.720 to get to the Wilson earnings call, to get the 0:03:52.720 --> 0:03:55.520 thirty nine hundred or whatever on SPX, and to me, 0:03:55.600 --> 0:03:58.480 it's all at the revenue line, and that is the 0:03:58.480 --> 0:04:02.280 core of your call with your security analysts, that revenue 0:04:02.360 --> 0:04:03.560 growth will disappoint. 0:04:03.800 --> 0:04:04.560 That's exactly right. 0:04:04.640 --> 0:04:06.840 So last year, the earnings recession I just referred to 0:04:07.040 --> 0:04:09.680 was all a cost issue, right, These big tech companies 0:04:09.760 --> 0:04:13.000 over invested thinking the pandemic boom was going to continue 0:04:13.040 --> 0:04:15.080 at the same pace. Of course it did not, and 0:04:15.120 --> 0:04:19.680 that was a problem for discretionary consumer discretionary as well 0:04:19.680 --> 0:04:22.599 as some of the financial companies, et cetera. Companies that overinvested. 0:04:22.680 --> 0:04:25.799 Now what we're going to see is the top line disappointment. Okay, 0:04:25.920 --> 0:04:28.440 maybe it's not a recession, but like Ellen's forecast is 0:04:28.520 --> 0:04:31.280 zero percent GDP growth. Effectively, that's going to feel like 0:04:31.320 --> 0:04:34.200 a recession because you're pricing is going to evaporate and 0:04:34.240 --> 0:04:35.800 we're seeing that now and good So there's this big 0:04:35.839 --> 0:04:39.960 economy between goods inflation and services inflation. I mean, goods 0:04:39.960 --> 0:04:42.039 inflation is back to the two percent level. In fact, 0:04:42.040 --> 0:04:44.480 it's probably going to go deflationary for a lot of businesses. 0:04:44.600 --> 0:04:46.160 That's your revenue growth disappointing. 0:04:46.640 --> 0:04:49.800 How do you allocate your do you participate in the 0:04:49.839 --> 0:04:51.520 market or is cash very. 0:04:51.400 --> 0:04:54.280 Comfortable place to be both. So you know, and let's 0:04:54.520 --> 0:04:55.760 see that's strategy. 0:04:56.680 --> 0:04:58.520 Yeah, on one hand. On the other hand, right, so 0:04:58.880 --> 0:05:01.159 I take my economist, but I mean, in all seriousness, 0:05:01.200 --> 0:05:03.520 I mean cash offers you a great risk adjusted return. 0:05:03.880 --> 0:05:06.160 We're overweight cash, Okay, it's nothing wrong with that. But 0:05:06.160 --> 0:05:08.159 we still are fully invested in equities too. We're just 0:05:08.279 --> 0:05:10.919 underweight our normal allocation and we've been that way for 0:05:10.960 --> 0:05:12.240 the last eighteen twenty four months. 0:05:12.279 --> 0:05:14.960 I think this is misunderstood, Lisa. I think people look 0:05:14.960 --> 0:05:17.120 at will something go get out of the market, and 0:05:17.160 --> 0:05:18.320 this is hugely important. 0:05:18.360 --> 0:05:20.360 Yeah, every time it comes on, he says, I'm fully invested. 0:05:20.400 --> 0:05:23.640 It's not a matter of just simply hiding under a mattress. 0:05:24.080 --> 0:05:26.039 My question is what happens if there's a recession and 0:05:26.080 --> 0:05:28.839 nobody cares. What happens if there's an earnings decline and 0:05:28.880 --> 0:05:30.560 people shrug it off and say, well, look to the 0:05:30.600 --> 0:05:33.240 future and there's going to be this incredible American exceptionalism 0:05:33.320 --> 0:05:34.719 and where else are you going to put your money? 0:05:34.839 --> 0:05:37.080 Well, this is our story for twenty four and twenty five, right. 0:05:37.080 --> 0:05:39.440 This is why we're in a different difficult situation right now, 0:05:39.440 --> 0:05:41.680 where we see the near term risk reward as lousy. 0:05:42.160 --> 0:05:44.000 But if we look out twenty four to twenty five, 0:05:44.240 --> 0:05:47.320 and this is what people are getting excited about, capital 0:05:47.360 --> 0:05:51.560 expenditure boom for things like reshoring, green energy, traditional energy, 0:05:52.360 --> 0:05:55.680 retrofitting buildings, etc. And now of course AI, so this 0:05:55.800 --> 0:05:58.200 is exciting. The problem is is it's a cost first 0:05:58.320 --> 0:05:59.960 and then it's a productivity benefit. 0:06:00.120 --> 0:06:01.720 What people are looking past it. I mean, this is 0:06:01.720 --> 0:06:03.479 sort of the frustration when people say that there's a 0:06:03.520 --> 0:06:06.120 divergence between bond markets and stock markets. They say, well, 0:06:06.120 --> 0:06:07.960 the bond market's looking at the now it says, look 0:06:08.040 --> 0:06:10.320 very good, and stock markets are looking to twenty four 0:06:10.320 --> 0:06:12.480 to twenty five. What's to make them look at now right? 0:06:12.560 --> 0:06:15.000 What's the catalyst to bring them down at a time 0:06:15.040 --> 0:06:17.080 when people can look past near term pain and see 0:06:17.120 --> 0:06:17.719 what you're seeing? 0:06:17.760 --> 0:06:20.400 Well, typically it's price. Okay, So we were very disciplined 0:06:20.480 --> 0:06:22.440 on price, you know. You know, we always get kind 0:06:22.480 --> 0:06:24.440 of categorized as a perma bear. But I remember, you know, 0:06:24.480 --> 0:06:26.279 calling the low in October, we call the low in 0:06:26.279 --> 0:06:28.800 March of twenty twenty because of price, you know, so 0:06:28.839 --> 0:06:31.440 we're very disciplined. Most people are not disciplined because of 0:06:31.440 --> 0:06:33.880 FOMO and that's just the nature of markets. Markets are 0:06:33.880 --> 0:06:36.680 momentum driven. It feels better when they're going up. It 0:06:36.720 --> 0:06:38.960 feels better to buy things when they're going up, and 0:06:39.000 --> 0:06:40.760 that's where we are now. So the risk reward in 0:06:40.800 --> 0:06:42.240 the short term is lousy. So I think it's going 0:06:42.279 --> 0:06:45.000 to be price Lisa, which will change people's minds. Now, 0:06:45.080 --> 0:06:47.400 we could be wrong, maybe we don't get a fatter 0:06:47.480 --> 0:06:49.720 pitch that we're hoping for, but we're also not worried 0:06:49.720 --> 0:06:51.400 it's going to run away from us, and we can 0:06:51.440 --> 0:06:53.240 buy the stock market kind of right here, probably twelve 0:06:53.240 --> 0:06:53.760 months from now. 0:06:53.760 --> 0:06:54.960 What's the market bet right now? 0:06:55.000 --> 0:06:57.279 Because I see a lot of indicators that say people 0:06:57.320 --> 0:07:00.200 are comfortable with Mike Wilson's calls. They're really a fight 0:07:00.279 --> 0:07:03.960 of this bull market and they're cautious. What is the 0:07:04.000 --> 0:07:07.479 bet that Morgan Stanley sees by the investment in public 0:07:07.520 --> 0:07:10.720 by the hedge funds, by long only by side institutions. 0:07:10.880 --> 0:07:12.600 Well, I mean, I think our once again our view 0:07:12.640 --> 0:07:14.360 is that we're we're I'm in. 0:07:14.360 --> 0:07:15.080 A position of luxury. 0:07:15.120 --> 0:07:16.920 I don't have to put capital to work every day 0:07:17.200 --> 0:07:20.160 for MUNTHI performance. We have asset allocation, which is kind 0:07:20.200 --> 0:07:22.000 of measured on a longer term basis. So I have 0:07:22.160 --> 0:07:24.880 the luxury of time, right, So our asset owner clients 0:07:24.880 --> 0:07:27.040 had that advantage, and that's what we try to take 0:07:27.040 --> 0:07:29.520 advantage of. Folks who don't have the advantage of time 0:07:29.640 --> 0:07:32.480 have to kind of participate at the worst possible moment, 0:07:32.800 --> 0:07:34.800 and that, by the way, it also includes at the lows. 0:07:35.280 --> 0:07:35.440 Right. 0:07:35.480 --> 0:07:37.360 So the opportunity that was created in March of twenty 0:07:37.400 --> 0:07:40.520 twenty is because people were being forced to divest and 0:07:40.520 --> 0:07:42.760 we were happy to pick up those shares at cheap prices. 0:07:42.920 --> 0:07:45.200 What do you think is the most overpriced aspect of 0:07:45.240 --> 0:07:46.200 the S ANDP right now? 0:07:46.800 --> 0:07:49.440 Well, I think this is an interesting question because most 0:07:49.440 --> 0:07:52.080 people assume it's only ten stocks. That's actually not true. 0:07:52.120 --> 0:07:53.920 The media in multiple for the S and P five 0:07:53.960 --> 0:07:56.760 hundred today is the same as the market capvoid in multiple. 0:07:56.800 --> 0:07:59.400 It's close to nineteen times eighteen and a half nineteen times, 0:07:59.720 --> 0:08:02.800 so it's a very broad over evaluation. Now we say 0:08:02.800 --> 0:08:05.040 the sectors that are cheap, okay, the only ones that 0:08:05.040 --> 0:08:08.400 are pearing cheap now are energy and financials. The question there, 0:08:08.400 --> 0:08:10.000 of course is what are the orangin going to do? 0:08:10.120 --> 0:08:12.080 You know, because there are cyclical businesses well. 0:08:11.920 --> 0:08:14.640 Focus on energy. There you got twenty seconds of energy. 0:08:14.640 --> 0:08:15.600 There is that the place to. 0:08:15.560 --> 0:08:17.880 Be well, I think energy at the stock level, there's 0:08:17.960 --> 0:08:20.800 there's definitely opportunities and in financials too, right so like 0:08:20.840 --> 0:08:24.920 the regional banking crisis created opportunity and individual financial services stocks. 0:08:25.120 --> 0:08:26.520 And I think that's what we're trying to do now, 0:08:26.520 --> 0:08:28.680 We're trying to find these one off opportunities as opposed 0:08:28.720 --> 0:08:30.160 to worry about the stock market overall. 0:08:30.480 --> 0:08:31.800 Mike Wilson, thank you so much. 0:08:31.880 --> 0:08:34.240 With Morgan Stanley here, what they called thirty nine hundred 0:08:34.280 --> 0:08:35.360 is where you are, not you want to make. 0:08:35.280 --> 0:08:38.440 Some news here hundred year and yes, sir, we're still there. Okay, 0:08:38.880 --> 0:08:40.640 I'm gonna let us know if we'll change in the 0:08:40.960 --> 0:08:42.680 first car. That's Michae Wilson. 0:08:43.160 --> 0:08:56.160 I'm Morgan Stanley here. Now we take a bigger, broader 0:08:56.200 --> 0:08:58.839 picture with Bruce Kasman of Chiefs of Economists and a 0:08:58.920 --> 0:09:02.000 head of Global economic research at JP Morgan and we 0:09:02.040 --> 0:09:05.199 do this with Columbia heritage of in the modern day, 0:09:05.280 --> 0:09:09.640 Jeffrey Sachs, Richard Clarita, and of course the foundational efforts 0:09:09.679 --> 0:09:13.240 of Robert Mundel Doctor Casman. I want to cut to 0:09:13.320 --> 0:09:17.040 the Chase here and talk of Jerome Powell, central Banker 0:09:17.080 --> 0:09:20.239 to the world. Your focus is on continental Europe. 0:09:20.480 --> 0:09:23.200 What is drama for Europe. 0:09:22.679 --> 0:09:26.400 Today and the decision making of Jerome Powell and the FED. 0:09:27.000 --> 0:09:29.960 So, as you've already mentioned, it looks like the FED 0:09:30.120 --> 0:09:32.520 is going to pause. The ECB is also meeting this 0:09:32.559 --> 0:09:35.480 week and is likely to tighten and also single that 0:09:35.520 --> 0:09:38.000 they have more work to do. I think one of 0:09:38.040 --> 0:09:40.199 the big issues as we look at transmission here is 0:09:40.240 --> 0:09:43.400 about synchronization. There's obviously a lot of concern about a 0:09:43.480 --> 0:09:45.480 US recession. We don't think the US is falling into 0:09:45.480 --> 0:09:50.439 recession right now, but Europe is showing very strong divergence 0:09:50.520 --> 0:09:53.200 in performance. The service sector is doing well, the manufacturing 0:09:53.200 --> 0:09:55.959 sector is doing poorly. It has the same issues around 0:09:56.000 --> 0:09:59.000 bank credit tightening is the US. How the European economy 0:09:59.000 --> 0:10:01.400 plays out here is going to be a very important 0:10:01.760 --> 0:10:05.640 factor in determining both the overall global picture and certainly 0:10:05.640 --> 0:10:07.480 have some impact on the US as we go through 0:10:07.480 --> 0:10:08.160 the rest of the year. 0:10:08.360 --> 0:10:12.080 You and I Bruce have read Duley Garber, folkerts Landau 0:10:12.200 --> 0:10:15.360 and all the different macroeconomics coming out of David fulkerts 0:10:15.440 --> 0:10:18.640 Lando's work, and one of his great comments is there 0:10:18.679 --> 0:10:22.160 will be fiscal stimulus in Europe that will come to 0:10:22.240 --> 0:10:26.840 the rescue of Europe. It's a different fiscal calculation than 0:10:26.920 --> 0:10:30.760 Jerome Powell has. How does that play into what Europe 0:10:30.840 --> 0:10:33.160 will do off of this meeting today? 0:10:34.600 --> 0:10:37.400 So, I mean, the simple point here is I think 0:10:37.400 --> 0:10:39.760 there's more work to do for the ECB. Personally, I 0:10:39.800 --> 0:10:42.280 think the FED will ultimately have more work to do here. 0:10:42.440 --> 0:10:44.160 It's taking a pause, but I don't think it's going 0:10:44.160 --> 0:10:46.840 to get inflation under control. And I think one of 0:10:46.840 --> 0:10:49.559 the things that people who are looking for an immediate 0:10:49.600 --> 0:10:53.520 recession are missing is that while Monte policy is tightened, 0:10:53.559 --> 0:10:55.680 a lot of fiscal policies moving in the other direction. 0:10:56.240 --> 0:10:58.560 That's there in Europe, the Recovery Fund, as well as 0:10:58.559 --> 0:11:02.559 some of the emergency measures around last year's crisis as 0:11:02.559 --> 0:11:04.680 a factor. In the US, look at what's happening on 0:11:04.720 --> 0:11:07.800 defense spending, look at what's happening in government hiring, state 0:11:07.880 --> 0:11:10.439 local spending is high. This is a very different picture 0:11:10.480 --> 0:11:13.520 than we've seen over the last two cycles. Were early 0:11:13.559 --> 0:11:16.480 in the cycle, fiscal policy in the and Western Europe. 0:11:16.520 --> 0:11:20.640 Titan materially Bruce, this is really interesting the idea that 0:11:20.760 --> 0:11:24.360 fiscal stimulus, on one hand, will force central bankers around 0:11:24.360 --> 0:11:27.400 the world to tighten much more than people currently expect. 0:11:27.440 --> 0:11:29.000 Is that what's going on? Do you think that people 0:11:29.040 --> 0:11:32.040 are misguided and thinking that the FED is done pretty 0:11:32.080 --> 0:11:34.040 much around here and is going to hold rates where 0:11:34.080 --> 0:11:36.240 they are because of the fiscal impulse. 0:11:37.760 --> 0:11:41.000 I don't want to put too much weight on the stimulus. 0:11:41.040 --> 0:11:43.720 I think it's one factor among two or three which 0:11:43.760 --> 0:11:47.080 is promoting resiliency here. And I do think the most 0:11:47.080 --> 0:11:49.560 important factor in terms of what's going to drive more 0:11:49.559 --> 0:11:52.040 central bank tightening as we get it is the persistence 0:11:52.040 --> 0:11:54.960 of inflation, the underlying shift that's taken place in the 0:11:54.960 --> 0:11:57.880 inflation process, how that's plagued through in a world in 0:11:57.880 --> 0:12:00.960 which we still have damage done to labor supply and 0:12:01.000 --> 0:12:04.120 tight labor markets. That's the ultimate problem. And just from 0:12:04.120 --> 0:12:06.800 the point of view of the FED today, it's reasonable 0:12:06.840 --> 0:12:09.080 to take a pause. But what a pause is doing here. 0:12:09.160 --> 0:12:12.800 It's promoting risk, appetite and financial markets, which is undermining 0:12:13.080 --> 0:12:16.560 monetary transmission. And it is I think signaling to the 0:12:16.600 --> 0:12:19.720 market that the FED is gradualist on lowering inflation. And 0:12:19.760 --> 0:12:23.000 that works against the idea that there's some inflation that's 0:12:23.040 --> 0:12:27.240 becoming embedded in expectations and wage and price setting. This 0:12:27.320 --> 0:12:29.080 is the problem the FED has today, and that's one 0:12:29.080 --> 0:12:31.200 of the reasons why they're going to signal to us 0:12:31.200 --> 0:12:33.200 that they're not done. But it's going to be hard 0:12:33.240 --> 0:12:34.280 to find that balance. 0:12:34.320 --> 0:12:34.600 Here. 0:12:34.920 --> 0:12:37.319 I'm going to say something kind of sacrilegious. Let's say 0:12:37.320 --> 0:12:40.000 it's actually worse for risk markets right now if the 0:12:40.000 --> 0:12:42.560 FED doesn't hike further and keeps rates where they are 0:12:42.800 --> 0:12:45.880 for a very long time. Isn't that worse than potentially 0:12:45.920 --> 0:12:47.880 breaking something and then having to come in with rate 0:12:47.920 --> 0:12:50.679 cuts and sort of doing a full reversal, the sort 0:12:50.720 --> 0:12:53.640 of slow bleed, this sort of boiling of the frog 0:12:53.720 --> 0:12:55.239 that a lot of people are anticipating. 0:12:56.880 --> 0:12:59.400 Ultimately it might be, but right now, I think if 0:12:59.400 --> 0:13:03.400 there's anything we should appreciate as economists and more generally, 0:13:03.800 --> 0:13:06.400 is that it's a lot it's very difficult to actually 0:13:06.520 --> 0:13:08.599 forecast exactly where we're going to be in six to 0:13:08.720 --> 0:13:10.760 nine months. There is a risk the economy is going 0:13:10.800 --> 0:13:12.960 to slide into the session. The fact that the FED 0:13:13.040 --> 0:13:15.360 is pausing, the fact that the FED is telling us 0:13:15.559 --> 0:13:18.280 it's going to be gradualist on inflation in terms of 0:13:18.280 --> 0:13:21.880 bringing it down is a constructive signal that promotes resiliency. 0:13:22.360 --> 0:13:25.400 I think there is, on my mind, a likely scenario 0:13:25.440 --> 0:13:27.320 where inflation doesn't come all the way down and the 0:13:27.320 --> 0:13:29.760 bed has to come back, But there is still some 0:13:30.000 --> 0:13:32.200 possibility that we have a soft landing. So I think 0:13:32.360 --> 0:13:34.960 for the near term it is certainly a reasonable thing 0:13:35.000 --> 0:13:36.960 for the FED to do, and it is certainly going 0:13:37.000 --> 0:13:39.880 to promote resilience in the economy. I do think more 0:13:40.000 --> 0:13:42.199 likely than not, it's not going to prove successful, and 0:13:42.240 --> 0:13:43.800 I think, as you say, we're going to pay a 0:13:43.840 --> 0:13:44.440 price for that. 0:13:44.800 --> 0:13:47.719 When you talk about the potential for inflation to come 0:13:47.760 --> 0:13:49.719 back or not come down all the way to where 0:13:49.760 --> 0:13:52.120 they'd like, is that driven by wages and some sort 0:13:52.160 --> 0:13:54.559 of wage price spiral that people are underappreciating. 0:13:55.800 --> 0:13:57.680 I think it's a bit of a mistake to put 0:13:57.679 --> 0:14:00.760 it on tight labor markets, to focus particularly on what 0:14:00.800 --> 0:14:03.560 we call a Phillips curve relationship. I think what you've 0:14:03.559 --> 0:14:05.920 had happen here is two things. One is we've damaged 0:14:05.920 --> 0:14:08.600 supply in a way that it's not fully recovering, and 0:14:08.640 --> 0:14:11.720 particularly in the US and Western Europe, it's about labor 0:14:11.880 --> 0:14:14.120 markets in that regard. But I think the bigger issue 0:14:14.120 --> 0:14:17.160 here right now is that we've started to embed psychology 0:14:17.200 --> 0:14:20.000 in which wage and price gains are linked, which wasn't 0:14:20.000 --> 0:14:22.160 the case over the last thirty years. Interesting, and I 0:14:22.160 --> 0:14:24.640 think in order to bring down inflation you need to 0:14:24.640 --> 0:14:28.240 compress pricing power on the corporate sector side. Unfortunately, when 0:14:28.280 --> 0:14:30.680 you do that, that does hit labor markets. But it's 0:14:30.680 --> 0:14:34.000 a pricing power story. It's changing the behavior of businesses, 0:14:34.360 --> 0:14:37.920 removing that price pressure that's coming through the system, which 0:14:37.920 --> 0:14:39.680 is something which is a break from what we've seen 0:14:39.880 --> 0:14:41.120 over the last three decades. 0:14:41.280 --> 0:14:42.960 Bruce, it's JP Morgan's fault. 0:14:43.040 --> 0:14:45.600 I'm going to go to Richard Clara, the former vice chair, 0:14:45.600 --> 0:14:48.040 and of course all his work in Columbia and in 0:14:48.080 --> 0:14:50.280 an essay and the Economist. I'm going to say a 0:14:50.360 --> 0:14:52.480 month and a half ago, he really made a case 0:14:52.800 --> 0:14:54.960 that we're not going back to two percent, and this 0:14:55.040 --> 0:14:57.640 is a fad that has to find two point x percent. 0:14:57.680 --> 0:15:00.960 Whatever the number is going to be your Michael, change 0:15:00.960 --> 0:15:04.960 the debate single handedly. We're gonna blame Feroli by coming 0:15:05.040 --> 0:15:09.000 up with a potential GDP statistic that was well under 0:15:09.080 --> 0:15:10.640 two percent as well. 0:15:11.160 --> 0:15:12.480 Do we have to adjust that. 0:15:12.680 --> 0:15:17.000 Now, after all of this this imputed inflation into the system, 0:15:17.040 --> 0:15:19.720 what the Biden stimulus is wrought? Do you have to 0:15:19.760 --> 0:15:23.800 adjust the Ferole potential GDP up which makes it more 0:15:23.840 --> 0:15:26.000 comfortable to get to a clarity statistic. 0:15:27.200 --> 0:15:29.680 So we've been running with a potential growth rate for 0:15:29.720 --> 0:15:31.520 the US of about one and a half really, as 0:15:31.560 --> 0:15:34.560 you as you're mentioning for almost a decade now, and 0:15:34.600 --> 0:15:37.320 I think you're raising a very important point, which is 0:15:37.600 --> 0:15:39.600 there's a lot of stuff going on here that could 0:15:39.680 --> 0:15:43.200 have an influence on potential growth going forward, and specifically 0:15:43.200 --> 0:15:45.840 productivity growth, which is a key to the to the 0:15:45.880 --> 0:15:49.560 inflation outlook. I'm agnostic here. There's a lot of cross currents. 0:15:49.640 --> 0:15:52.720 I haven't seen anything that convinces me we're either materially 0:15:52.800 --> 0:15:55.880 raising or materially depressing a potential growth. I think we've 0:15:55.920 --> 0:15:58.440 done damage to supply and that we now have probably 0:15:58.720 --> 0:16:01.280 two and a half percentage points less of people in 0:16:01.320 --> 0:16:05.000 the workforce than we had on the pre pandemic path 0:16:05.000 --> 0:16:07.520 we were on. That's the immediate problem and how that 0:16:07.640 --> 0:16:11.720 is interacting with underlying inflation psychology. If we get better 0:16:11.760 --> 0:16:14.240 for the potential, that'll help us. If we get worse. 0:16:14.320 --> 0:16:18.840 That'll make the trade off worse. I'm agnostic on how 0:16:18.880 --> 0:16:20.480 that's going to play out, at least at this moment. 0:16:22.080 --> 0:16:25.080 I look, Verus, you know, let's bring it back to 0:16:25.120 --> 0:16:28.760 the festivities today at two pm. I hate the skip 0:16:28.760 --> 0:16:31.360 in the pause chat John bust My chops on it 0:16:31.800 --> 0:16:35.680 non stop, Bruce Chasmin. Are we just debating an asymmetric 0:16:35.760 --> 0:16:38.960 or symmetric outcome here? I'm clearly in the camp that 0:16:39.040 --> 0:16:42.480 it can be an asymmetric decision, are you well? 0:16:42.520 --> 0:16:44.720 First of all, it's a divided decision. Keep in mind 0:16:44.760 --> 0:16:47.960 that probably close to half of this committee would vote 0:16:47.960 --> 0:16:50.480 for a rate hike, so it's going to be a 0:16:50.520 --> 0:16:54.080 pretty contentious debate. I also think it's hard to talk 0:16:54.080 --> 0:16:57.240 about a skip. It's possible, but it's not our view. 0:16:57.360 --> 0:16:59.800 I think the FED has six weeks to the next meeting. 0:17:00.000 --> 0:17:02.880 It is actually trying to take stock of what actually 0:17:02.880 --> 0:17:06.159 is happening in terms of banking sector stress, monetary transmission. 0:17:06.160 --> 0:17:08.320 It's going to take more time to see that. But 0:17:08.359 --> 0:17:10.040 at the same time, I think they have to tell 0:17:10.119 --> 0:17:14.120 us that they have not declared victory on getting inflation down, 0:17:14.720 --> 0:17:16.840 that there is pressure for them to move more, and 0:17:16.840 --> 0:17:19.320 that the likely scenario, and I think it'll be in 0:17:19.359 --> 0:17:21.240 the statement, It'll be in the dots where we'll see 0:17:21.240 --> 0:17:23.800 an extra rate hike being pushed in, and it'll certainly 0:17:23.800 --> 0:17:26.600 be in more detail and more color in Pala's press 0:17:26.600 --> 0:17:29.320 conference that they're more likely than not to continue raising 0:17:29.400 --> 0:17:30.680 raids sometime later this year. 0:17:31.200 --> 0:17:33.159 Bruce, do you think no cava equities of rallying. 0:17:35.240 --> 0:17:37.600 I don't think the FED is very sensitive to equities rallying, 0:17:37.600 --> 0:17:40.480 But I do think the broadest picture here is that 0:17:40.640 --> 0:17:45.040 financial markets are showing very little stress. They've improved, risk 0:17:45.080 --> 0:17:48.320 appetite has increased, credit conditions have improved in the last 0:17:48.440 --> 0:17:51.639 two or three months, and is a significant offset to 0:17:51.720 --> 0:17:55.439 the tightening that's going on in bank credit. And I 0:17:55.440 --> 0:17:57.679 think that does matter to the FED, and they're trying 0:17:57.720 --> 0:17:59.920 to manage that in a way that they don't unl 0:18:00.080 --> 0:18:03.199 leash unwanted exuberant here that they're going to have to 0:18:03.359 --> 0:18:04.800 deal with later on down the road. 0:18:05.200 --> 0:18:07.560 Interesting, Bruce wanted for to get your perspectives looking for 0:18:07.600 --> 0:18:10.680 a divided pause. A little bit later on this afternoon, 0:18:10.680 --> 0:18:16.840