1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,800 --> 00:00:23,759 Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:30,440 Speaker 1: and of course on the Bloomberg Terminal. Are Michael McKee 6 00:00:30,440 --> 00:00:35,560 Speaker 1: now in conversation with Charles Evans. I have had many 7 00:00:35,600 --> 00:00:38,800 Speaker 1: a guide, a long, long discussion with him years ago 8 00:00:38,840 --> 00:00:41,360 Speaker 1: at the Council on Foreign Relations, and this is you 9 00:00:41,360 --> 00:00:44,320 Speaker 1: know that all the FED presidents are hugely qualified, and 10 00:00:44,320 --> 00:00:48,480 Speaker 1: they're all very, very different. This is a bulletproof freshwater 11 00:00:48,680 --> 00:00:53,760 Speaker 1: academic on monetary policy and how it dovetails in to 12 00:00:53,920 --> 00:00:57,840 Speaker 1: social policy. Let's listen. Hello, I'm Bloomberg's Michael McKee live 13 00:00:57,880 --> 00:01:01,080 Speaker 1: on TV and Bloomberg Radio World with a special guest, 14 00:01:01,200 --> 00:01:05,560 Speaker 1: Chicago FED President Charles Evans is joining us now and Charlie, 15 00:01:05,560 --> 00:01:08,280 Speaker 1: thanks for coming in. It's nice to see somebody in 16 00:01:08,319 --> 00:01:10,959 Speaker 1: person for a change. More. Mike is going to be here. 17 00:01:12,000 --> 00:01:16,280 Speaker 1: A lot of people questioning now whether the FED is 18 00:01:16,440 --> 00:01:20,440 Speaker 1: going to be debating monetary policy or whether we're kind 19 00:01:20,440 --> 00:01:23,360 Speaker 1: of locked in for the rest of the year. The 20 00:01:23,360 --> 00:01:25,880 Speaker 1: Fed has said, and j Pal has said fifty basis 21 00:01:25,920 --> 00:01:28,600 Speaker 1: points at the next couple of meetings. Would you anticipate 22 00:01:29,160 --> 00:01:33,280 Speaker 1: something like that running through December? Well, um, you know, 23 00:01:33,319 --> 00:01:36,199 Speaker 1: we've been discussing the state of the economy and inflationary 24 00:01:36,240 --> 00:01:39,280 Speaker 1: pressures for quite some time, and the Committee is definitely 25 00:01:39,319 --> 00:01:42,840 Speaker 1: coalesced around um, you know, moving off the effect of 26 00:01:42,920 --> 00:01:45,840 Speaker 1: lower bound We've already you know, begun doing that, and 27 00:01:45,880 --> 00:01:49,200 Speaker 1: as Chapel said, we're going to be moving expeditiously towards 28 00:01:49,240 --> 00:01:52,760 Speaker 1: something much more like a neutral Fed funds rate. My 29 00:01:52,800 --> 00:01:54,880 Speaker 1: own assessment of neutral is in the two and a 30 00:01:54,960 --> 00:01:58,040 Speaker 1: quarter to two and a half percent range for the 31 00:01:58,040 --> 00:02:01,160 Speaker 1: federal funds, right. Uh. Um, you know, as the chair 32 00:02:01,160 --> 00:02:04,040 Speaker 1: has said, Um, you know, we just did fifty and 33 00:02:04,160 --> 00:02:06,960 Speaker 1: you know, fifties are on the table for uh some 34 00:02:07,080 --> 00:02:09,520 Speaker 1: period of time. I would expect by the end of 35 00:02:09,520 --> 00:02:11,680 Speaker 1: this year it could be quite likely that we were 36 00:02:11,720 --> 00:02:13,600 Speaker 1: at a neutral setting, and I think we would be 37 00:02:13,680 --> 00:02:17,919 Speaker 1: very well positioned to address them, you know, future inflationary 38 00:02:17,919 --> 00:02:21,920 Speaker 1: pressures of three. I'm expecting things to improve from the 39 00:02:22,000 --> 00:02:24,000 Speaker 1: very high inflation that we're having, but I do think 40 00:02:24,040 --> 00:02:26,359 Speaker 1: that it's going to take us some time to take 41 00:02:26,400 --> 00:02:29,720 Speaker 1: care of this. Do you see any probability or possibility 42 00:02:29,880 --> 00:02:32,959 Speaker 1: or reason to that seventy mess point move would come 43 00:02:33,000 --> 00:02:35,480 Speaker 1: to the table? Well, I think it's very useful to 44 00:02:35,600 --> 00:02:38,840 Speaker 1: frontload our policy settings at the moment. We did fifty 45 00:02:38,880 --> 00:02:41,959 Speaker 1: at our last meeting, and it's extremely likely that fifty 46 00:02:41,960 --> 00:02:44,639 Speaker 1: at the next meeting, and you know, probably there after. 47 00:02:45,840 --> 00:02:49,080 Speaker 1: You know, it's once we get to a good setting 48 00:02:49,200 --> 00:02:52,480 Speaker 1: for the funds rate, when we can sort of after that, 49 00:02:52,560 --> 00:02:55,200 Speaker 1: do a more measured pace of increases, say twenty five 50 00:02:55,240 --> 00:02:58,359 Speaker 1: basis points at each meeting after that. I think that 51 00:02:58,400 --> 00:03:00,760 Speaker 1: would be a nice shallow path that we give us 52 00:03:00,760 --> 00:03:04,320 Speaker 1: time to assess the incoming data and know exactly what 53 00:03:04,360 --> 00:03:06,799 Speaker 1: we're facing. So, um, if we do a little bit 54 00:03:06,800 --> 00:03:09,280 Speaker 1: more sooner than we can get to that point where 55 00:03:09,280 --> 00:03:11,480 Speaker 1: we can do the shallow path, or you know, maybe 56 00:03:11,520 --> 00:03:13,920 Speaker 1: we take fifties a little bit longer. But you know, 57 00:03:14,000 --> 00:03:16,520 Speaker 1: like I say, I think something like neutral by the 58 00:03:16,639 --> 00:03:18,480 Speaker 1: end of the year. Whether or not, you you know, 59 00:03:18,680 --> 00:03:21,959 Speaker 1: get there sooner or you know, earlier, is not that 60 00:03:21,760 --> 00:03:24,920 Speaker 1: that that critical. It's being well positioned to address the 61 00:03:24,960 --> 00:03:27,919 Speaker 1: problems that we expect to face. In three. That's first 62 00:03:28,240 --> 00:03:30,799 Speaker 1: my first concern, how far above neutral do you think 63 00:03:30,840 --> 00:03:32,880 Speaker 1: you may have to go to get the results you want. 64 00:03:33,600 --> 00:03:37,560 Speaker 1: It's a hard question, um, you know, it's nobody reports 65 00:03:37,600 --> 00:03:40,080 Speaker 1: what the neutral setting of the FED funds rate is. 66 00:03:40,120 --> 00:03:42,480 Speaker 1: It moves around over time. It depends on whether or 67 00:03:42,520 --> 00:03:45,000 Speaker 1: not we've got tail winds or at our back or 68 00:03:45,080 --> 00:03:48,000 Speaker 1: headwinds that we're facing. And so I think we're gonna 69 00:03:48,040 --> 00:03:50,880 Speaker 1: be feeling our way around that. Like I say, I've 70 00:03:50,920 --> 00:03:53,160 Speaker 1: got a benchmark of what I think, and so if 71 00:03:53,160 --> 00:03:56,120 Speaker 1: we go beyond that, we go fifty basis points beyond that, 72 00:03:56,200 --> 00:03:59,920 Speaker 1: seventy basis points beyond that, then that restrictive setting a 73 00:04:00,120 --> 00:04:04,360 Speaker 1: policy should be working to bring inflation down. We don't 74 00:04:04,520 --> 00:04:08,400 Speaker 1: have to constantly increase the funds rate to be restrictive. 75 00:04:08,480 --> 00:04:10,720 Speaker 1: We can get to a restrictive setting and sit there 76 00:04:11,040 --> 00:04:13,840 Speaker 1: for a while. Maybe we sit there longer at a 77 00:04:13,960 --> 00:04:17,840 Speaker 1: less restrictive, you know setting, and it takes a little 78 00:04:17,839 --> 00:04:19,800 Speaker 1: bit longer for inflation to come down. But there are 79 00:04:19,800 --> 00:04:22,840 Speaker 1: many special factors that have led to the very very 80 00:04:22,920 --> 00:04:25,679 Speaker 1: high inflation rate that we're facing, and so I'm hopeful 81 00:04:25,720 --> 00:04:29,320 Speaker 1: that in we're gonna be facing core PC under three pc. 82 00:04:30,400 --> 00:04:34,200 Speaker 1: Wall Street would like to know whether if the economy slows, 83 00:04:34,800 --> 00:04:38,240 Speaker 1: you're willing to slow the pace of rate increases to 84 00:04:38,279 --> 00:04:42,360 Speaker 1: try to keep the economy from falling down to keep 85 00:04:42,440 --> 00:04:45,000 Speaker 1: us out of recession, or whether you will continue to 86 00:04:45,040 --> 00:04:47,919 Speaker 1: be aggressive if inflation remains high. And I suppose that 87 00:04:47,960 --> 00:04:50,000 Speaker 1: begs the question of whether you see a recession or not. 88 00:04:50,240 --> 00:04:53,320 Speaker 1: So I'll leave those two questions for you. Right well, 89 00:04:53,320 --> 00:04:55,400 Speaker 1: we have a demandate, you know, we you know, we 90 00:04:55,480 --> 00:05:00,440 Speaker 1: are trying to set the monetary and financial condem sans 91 00:05:00,520 --> 00:05:05,080 Speaker 1: to support maximum employment and price stability. At the moment, 92 00:05:05,120 --> 00:05:07,760 Speaker 1: the price stability objective is the one that's most critical 93 00:05:07,839 --> 00:05:10,920 Speaker 1: because you know, at eight point three you know, CPI 94 00:05:11,440 --> 00:05:13,000 Speaker 1: UM that's much too high. I think it's going to 95 00:05:13,080 --> 00:05:16,440 Speaker 1: be coming down. The labor market is doing extremely well. 96 00:05:16,520 --> 00:05:20,239 Speaker 1: There's tremendous demand for workers, and I'm hopeful that labor 97 00:05:20,240 --> 00:05:23,279 Speaker 1: force participation will increase. But basically we have a vibrant 98 00:05:23,520 --> 00:05:26,239 Speaker 1: labor market. So the first order of business is getting 99 00:05:26,279 --> 00:05:29,760 Speaker 1: inflation under control. Now as we, you know, get to 100 00:05:29,800 --> 00:05:33,240 Speaker 1: a restrictive setting of monetary policy, I do expect that 101 00:05:33,279 --> 00:05:36,039 Speaker 1: the economy is going to cool a little bit by cooling. 102 00:05:36,080 --> 00:05:38,359 Speaker 1: I mean, we're still going to be having growth. I 103 00:05:38,400 --> 00:05:41,400 Speaker 1: think the growth at trend levels one in three quarters 104 00:05:41,400 --> 00:05:44,200 Speaker 1: to two UM one trend is one in three quarters, 105 00:05:44,240 --> 00:05:47,120 Speaker 1: but I'm looking for two to point two percent as 106 00:05:47,120 --> 00:05:50,599 Speaker 1: we continue to have a neutral to restrictive setting, and 107 00:05:50,640 --> 00:05:52,920 Speaker 1: so that's consistent with growth. If we see something that's 108 00:05:53,080 --> 00:05:55,239 Speaker 1: weaker than that, we'll have to see what that means 109 00:05:55,240 --> 00:05:58,560 Speaker 1: for inflation. Uh. If inflation the trajectory looks like it's 110 00:05:58,600 --> 00:06:01,440 Speaker 1: confidently coming down and we're you know, going to hit 111 00:06:01,480 --> 00:06:03,640 Speaker 1: our two percent objective or be close enough to it, 112 00:06:03,680 --> 00:06:05,640 Speaker 1: then you know we'd have a little more latitude. But 113 00:06:05,680 --> 00:06:08,040 Speaker 1: at the moment, we really need to be focusing on inflation. 114 00:06:08,960 --> 00:06:13,120 Speaker 1: What's your forecast for inflation over the next quarters and year? 115 00:06:13,520 --> 00:06:15,360 Speaker 1: And I asked that in the context of what you're 116 00:06:15,400 --> 00:06:19,640 Speaker 1: hearing from the CEOs in your district about whether they're 117 00:06:19,640 --> 00:06:22,840 Speaker 1: still feeling price pressures, whether they still feel they have 118 00:06:23,000 --> 00:06:26,280 Speaker 1: pricing power. Right. So I want to talk to UM. 119 00:06:26,440 --> 00:06:30,000 Speaker 1: You know businesses, UM, you know C suite individuals or 120 00:06:30,200 --> 00:06:32,520 Speaker 1: you know small business, and you know they're facing a 121 00:06:32,640 --> 00:06:35,599 Speaker 1: lot of cost pressures and to the extent that they've 122 00:06:35,600 --> 00:06:37,760 Speaker 1: been able to do it they have passed along many 123 00:06:37,839 --> 00:06:41,000 Speaker 1: of those cost pressures. UM. I think the days of 124 00:06:41,160 --> 00:06:42,720 Speaker 1: how long they're going to be able to pass that 125 00:06:42,800 --> 00:06:46,000 Speaker 1: along are probably numbered. I think consumers are you know, 126 00:06:46,240 --> 00:06:48,960 Speaker 1: getting fed up with high prices, and they can respond 127 00:06:49,080 --> 00:06:52,360 Speaker 1: by shifting their expenditures. But but businesses are, you know, 128 00:06:52,520 --> 00:06:56,480 Speaker 1: facing those pressures. They've raised wages and in many cases 129 00:06:56,640 --> 00:07:00,520 Speaker 1: where you know, um, you know, six months nine months ago, 130 00:07:00,640 --> 00:07:03,040 Speaker 1: we heard that there were intense wage pressures. When wages 131 00:07:03,080 --> 00:07:06,280 Speaker 1: have gone up, that is actually satisfied and improved the 132 00:07:06,360 --> 00:07:09,320 Speaker 1: labor setting in those manufacturing plants, and so you know, 133 00:07:09,480 --> 00:07:12,800 Speaker 1: higher wages, UM, it doesn't necessarily mean they have to 134 00:07:12,920 --> 00:07:16,440 Speaker 1: keep going up each quarter, each month. And so i'm i'm, 135 00:07:16,600 --> 00:07:19,400 Speaker 1: I'm you know, I feel confident that businesses are going 136 00:07:19,440 --> 00:07:22,160 Speaker 1: to get on top of their labor costs and pricing 137 00:07:22,240 --> 00:07:25,000 Speaker 1: behavior will be more in line with UM. You know 138 00:07:25,080 --> 00:07:27,520 Speaker 1: what I think price stability is. I can't reel off 139 00:07:28,040 --> 00:07:30,040 Speaker 1: what you know inflation is going to be three months 140 00:07:30,120 --> 00:07:32,080 Speaker 1: from now or six months from now, because there are 141 00:07:32,080 --> 00:07:34,640 Speaker 1: a lot of real factors that could play out in 142 00:07:34,760 --> 00:07:36,840 Speaker 1: different ways. And that's part of what we're gonna be 143 00:07:36,880 --> 00:07:38,800 Speaker 1: looking for. You know, if we get to a neutral 144 00:07:38,840 --> 00:07:41,280 Speaker 1: setting by the end of this year. We're gonna have 145 00:07:41,880 --> 00:07:44,040 Speaker 1: you know, many many more months of data to see 146 00:07:44,080 --> 00:07:46,120 Speaker 1: as a trajectory coming down. Or do we still have 147 00:07:46,200 --> 00:07:48,120 Speaker 1: a real problem on our hands and we need to 148 00:07:48,160 --> 00:07:52,040 Speaker 1: be much more restrictive. Um, we're talking with Chicago FED 149 00:07:52,120 --> 00:07:55,480 Speaker 1: President Charles Evans. Uh. Let me follow that up with 150 00:07:55,760 --> 00:08:01,320 Speaker 1: a question, not from me, the professional economist markets watcher, 151 00:08:01,520 --> 00:08:03,960 Speaker 1: but from the average American. When am I gonna feel 152 00:08:04,040 --> 00:08:09,040 Speaker 1: like my paycheck is keeping up with inflation? Yeah? I 153 00:08:09,080 --> 00:08:12,520 Speaker 1: mean it's been very difficult for households. Obviously. Gas prices 154 00:08:12,560 --> 00:08:15,560 Speaker 1: have been extremely high, food prices are high. I think 155 00:08:15,600 --> 00:08:20,640 Speaker 1: worldwide factors are an enormous part of that. UM. You know, 156 00:08:20,920 --> 00:08:24,920 Speaker 1: um energy supplies, the Russian invasion of Ukraine is hitting uh. 157 00:08:25,360 --> 00:08:28,880 Speaker 1: You know, gas prices, agricultural prices. You know, a lot 158 00:08:28,960 --> 00:08:31,760 Speaker 1: of uh weed is produced in Ukraine and that has 159 00:08:31,800 --> 00:08:34,640 Speaker 1: global implications and all of that. Um, we have very 160 00:08:34,679 --> 00:08:38,000 Speaker 1: strong demand. So it's you know it, you know, it 161 00:08:38,120 --> 00:08:41,280 Speaker 1: makes sense. It's what everybody is dealing with. Higher prices, shortages. 162 00:08:41,320 --> 00:08:43,760 Speaker 1: You can't necessarily get exactly the product that you want, 163 00:08:44,200 --> 00:08:48,479 Speaker 1: and it's a lot higher. I'm hopeful that as inflation 164 00:08:48,960 --> 00:08:51,640 Speaker 1: comes down, Hopefully some of those prices will revert and 165 00:08:51,720 --> 00:08:54,240 Speaker 1: they they'll come down. Food prices often you know, can 166 00:08:54,320 --> 00:08:57,080 Speaker 1: can round trip and uh, energy prices too, but gas 167 00:08:57,120 --> 00:08:59,360 Speaker 1: prices are high and that's always you know, a negative 168 00:08:59,400 --> 00:09:01,719 Speaker 1: thing for considered more confidence if we can get that 169 00:09:01,920 --> 00:09:04,400 Speaker 1: in better shape. But that's not monetary policy, that's sort 170 00:09:04,440 --> 00:09:07,360 Speaker 1: of supply conditions. And wages have gone up, so I 171 00:09:07,440 --> 00:09:10,760 Speaker 1: think incomes. Incomes have gone up, and you know, the 172 00:09:10,840 --> 00:09:13,160 Speaker 1: labor market is good. People who want a job can 173 00:09:13,200 --> 00:09:15,880 Speaker 1: get a job. That's good for household income. If we 174 00:09:15,960 --> 00:09:18,760 Speaker 1: can get labor force participation up in some childcare to 175 00:09:18,840 --> 00:09:22,480 Speaker 1: adult care issues resolved to keep everybody in schools, that 176 00:09:22,480 --> 00:09:25,760 Speaker 1: will be beneficial for um, the economy. Have you been 177 00:09:25,800 --> 00:09:30,000 Speaker 1: surprised by the strength of ongoing consumer spending that people 178 00:09:30,080 --> 00:09:33,679 Speaker 1: are still buying a lot of stuff. Basically it has 179 00:09:33,720 --> 00:09:35,679 Speaker 1: been strong, hasn't it. And you know, some of that 180 00:09:35,800 --> 00:09:37,880 Speaker 1: I think is the fiscal support, but it was very 181 00:09:37,960 --> 00:09:41,040 Speaker 1: helpful for many households that otherwise would be um in 182 00:09:41,240 --> 00:09:46,439 Speaker 1: in very difficult situations. Um, I think that you know, 183 00:09:46,559 --> 00:09:49,280 Speaker 1: the growth of the economy. Many people are doing extremely well, 184 00:09:49,400 --> 00:09:53,040 Speaker 1: even if it's unequally shared and so sometimes those retail 185 00:09:53,080 --> 00:09:55,840 Speaker 1: sales you know, come from sort of a skewed distribution 186 00:09:56,080 --> 00:10:00,680 Speaker 1: of you know, um consumers and so um. It's nice 187 00:10:00,800 --> 00:10:04,560 Speaker 1: that the fiscal support packages and the strong labor market, 188 00:10:04,640 --> 00:10:08,560 Speaker 1: which has helped lower income workers you know, get jobs 189 00:10:08,640 --> 00:10:11,679 Speaker 1: at better wages and also at better schedules, probably more 190 00:10:11,800 --> 00:10:14,079 Speaker 1: full time. I mean, that's been beneficial, and so I 191 00:10:14,160 --> 00:10:17,040 Speaker 1: think that's contributed to the strength in retail, and I 192 00:10:17,080 --> 00:10:20,040 Speaker 1: hope that it continues. When you think about going forward, 193 00:10:20,040 --> 00:10:23,319 Speaker 1: how much confidence do you have in your ability to 194 00:10:23,480 --> 00:10:27,440 Speaker 1: bring inflation down, given that you've mentioned COVID and Ukraine 195 00:10:27,679 --> 00:10:30,280 Speaker 1: and all of the other things that are going on, 196 00:10:30,480 --> 00:10:33,280 Speaker 1: that our supply side problems and the FED works on 197 00:10:33,320 --> 00:10:36,760 Speaker 1: the demand side. That's right, that's right. I mean, you know, 198 00:10:36,840 --> 00:10:39,360 Speaker 1: one level I'm extremely confident that we can bring inflation down. 199 00:10:39,400 --> 00:10:45,000 Speaker 1: Inflation is the you know, ever increasing prices of all goods, 200 00:10:45,120 --> 00:10:47,800 Speaker 1: and you know that's a monetary phenomenon, and the setting 201 00:10:47,880 --> 00:10:50,640 Speaker 1: of the federal funds rate, the policy rate, can address that. 202 00:10:50,960 --> 00:10:53,040 Speaker 1: What I'm not confident about is we can't bring down 203 00:10:53,120 --> 00:10:55,280 Speaker 1: gas prices. Gas prices are going to be very high 204 00:10:55,640 --> 00:10:59,040 Speaker 1: because of real factors, um low inflation is going to 205 00:10:59,120 --> 00:11:01,680 Speaker 1: be well, they're high, but they're not continuing to go up. 206 00:11:01,760 --> 00:11:04,400 Speaker 1: But those are real factors, and it's another set of 207 00:11:04,440 --> 00:11:07,040 Speaker 1: public policies that need to deal with that. Food prices 208 00:11:07,080 --> 00:11:09,520 Speaker 1: are the same way. I'm confident that the setting of 209 00:11:09,760 --> 00:11:13,480 Speaker 1: monetary policy can keep them from ever increasing. They could 210 00:11:13,600 --> 00:11:16,800 Speaker 1: stay high on a relative basis compared to other prices 211 00:11:17,040 --> 00:11:19,040 Speaker 1: for longer than most people would like, but we can 212 00:11:19,080 --> 00:11:21,959 Speaker 1: get inflation down. Um You know, it probably would take 213 00:11:22,160 --> 00:11:25,840 Speaker 1: more restrictive setting a monetary policy if those special factors 214 00:11:25,880 --> 00:11:27,840 Speaker 1: continue to be high. Before we let you go, let 215 00:11:27,880 --> 00:11:29,360 Speaker 1: me ask you about the balance sheet, because that's the 216 00:11:29,440 --> 00:11:33,400 Speaker 1: other side of your monetary policy that has to play out. 217 00:11:34,000 --> 00:11:37,280 Speaker 1: What do you anticipate happening when you start lowering the 218 00:11:37,320 --> 00:11:41,480 Speaker 1: balance sheet? Should we see um rise in interest rates 219 00:11:41,520 --> 00:11:43,560 Speaker 1: at the long end because it was designed to push 220 00:11:43,640 --> 00:11:45,840 Speaker 1: them down at the log end, And if so, by 221 00:11:45,920 --> 00:11:51,160 Speaker 1: how much? That's right. So we've increased our balance sheet dramatically, 222 00:11:51,280 --> 00:11:54,480 Speaker 1: and we've announced that we're gonna let materian assets roll off. 223 00:11:54,640 --> 00:11:59,800 Speaker 1: We chose among the most aggressive roll off um PA 224 00:12:00,240 --> 00:12:01,880 Speaker 1: that that we could. So I think we're going to 225 00:12:01,960 --> 00:12:04,040 Speaker 1: get our balance sheet down to a more normal level 226 00:12:04,360 --> 00:12:07,480 Speaker 1: before very long that will have a restrictive effect on 227 00:12:07,640 --> 00:12:11,520 Speaker 1: financial markets that sometimes is measured. I think for what 228 00:12:11,640 --> 00:12:13,760 Speaker 1: we're looking at it, maybe it's the same as if 229 00:12:13,800 --> 00:12:15,920 Speaker 1: we had increase the federal funds rate by fifty basis 230 00:12:15,960 --> 00:12:18,920 Speaker 1: points on top of what we're actually doing, so we 231 00:12:19,040 --> 00:12:21,800 Speaker 1: do have that restrictive setting. I tend to think that 232 00:12:22,559 --> 00:12:26,360 Speaker 1: markets are forward looking. They are, and they price this 233 00:12:26,679 --> 00:12:29,199 Speaker 1: in pretty much when they know what it is. So 234 00:12:29,240 --> 00:12:31,520 Speaker 1: I think that effect is already working its way through 235 00:12:31,559 --> 00:12:34,400 Speaker 1: financial markets. And we've seen long rates go up some 236 00:12:34,600 --> 00:12:38,120 Speaker 1: we've seen borrowing rates, auto rates, mortgage rates go up, 237 00:12:38,160 --> 00:12:40,240 Speaker 1: and so I think it's having that effect. That's helped 238 00:12:40,840 --> 00:12:44,240 Speaker 1: somewhat with the front loading of restrictive monetary policies, and 239 00:12:44,360 --> 00:12:46,880 Speaker 1: so that's you know, we're probably better position to be 240 00:12:46,920 --> 00:12:51,000 Speaker 1: bringing inflation down because of that. So um, you know, 241 00:12:51,040 --> 00:12:53,760 Speaker 1: I think that's working pretty much as we were hoping. Well. 242 00:12:53,880 --> 00:12:56,280 Speaker 1: We wish you luck. Thank you very much Charles Evans 243 00:12:56,520 --> 00:12:59,640 Speaker 1: for joining us today, the president of the Chicago Federal 244 00:13:00,040 --> 00:13:10,640 Speaker 1: Earve Bank. Let's get to Annahan Equity Strategistics, Farncy Securities. Anna, 245 00:13:11,040 --> 00:13:16,200 Speaker 1: the marching pressure from Walmart to target your thoughts. Please, Well, 246 00:13:16,280 --> 00:13:19,040 Speaker 1: it's certainly a big indicator. Like you mentioned earlier, they 247 00:13:19,120 --> 00:13:22,240 Speaker 1: employ a lot of people, and as people have a 248 00:13:22,360 --> 00:13:25,200 Speaker 1: tighter later market labor markets, and yet if people are 249 00:13:25,280 --> 00:13:28,880 Speaker 1: spending lest the question is can really companies passlong price. 250 00:13:29,320 --> 00:13:31,520 Speaker 1: But keep in mind also, John, this is sort of 251 00:13:31,600 --> 00:13:34,280 Speaker 1: what we're looking for, right We wanted to see demand 252 00:13:34,360 --> 00:13:37,520 Speaker 1: cool off a bit to balance things, to bring inflation 253 00:13:37,600 --> 00:13:40,079 Speaker 1: more under control. So you know, it's sort of the 254 00:13:40,559 --> 00:13:43,199 Speaker 1: what we were hoping for, but also a little concerning 255 00:13:43,240 --> 00:13:46,599 Speaker 1: on how much this raises the possibility of recession. And 256 00:13:46,760 --> 00:13:49,280 Speaker 1: we're looking at the physics of a rocket launch right now. 257 00:13:49,360 --> 00:13:52,240 Speaker 1: And they mentioned the maximum dynamic pressure. You did this 258 00:13:52,400 --> 00:13:56,520 Speaker 1: ballet in your physics of undergraduate Let's cut to the chase, Anna, 259 00:13:56,800 --> 00:14:00,440 Speaker 1: are we at the maximum dynamic pressure of inflation right now? 260 00:14:01,960 --> 00:14:05,319 Speaker 1: We do think generally inflation measures have peaked, but I 261 00:14:05,400 --> 00:14:07,720 Speaker 1: think it's going to be you know, using out Chirman 262 00:14:07,760 --> 00:14:11,199 Speaker 1: pals language here, it's gonna be harder to get that 263 00:14:11,440 --> 00:14:14,480 Speaker 1: soft ish landing. I think it's gonna be harder to 264 00:14:14,640 --> 00:14:17,400 Speaker 1: bring down that figure. People were hoping that when we 265 00:14:17,520 --> 00:14:20,360 Speaker 1: got this sort of eight percent headline number that it 266 00:14:20,400 --> 00:14:22,920 Speaker 1: could come right back down. But we're seeing that's going 267 00:14:22,960 --> 00:14:25,280 Speaker 1: to take several more quarters. But you know what's so 268 00:14:25,400 --> 00:14:30,600 Speaker 1: important here, Let's go astronautical again, aeronautical again if we can, uh, 269 00:14:30,680 --> 00:14:35,840 Speaker 1: and the the acceleration function is a squared function. Guessing 270 00:14:36,080 --> 00:14:39,720 Speaker 1: time on the x axis is the hardest thing to 271 00:14:39,840 --> 00:14:43,200 Speaker 1: do in this racket. What are the determinants you're gonna 272 00:14:43,400 --> 00:14:48,440 Speaker 1: use to guess when inflation rolls over? I think one 273 00:14:48,640 --> 00:14:51,640 Speaker 1: is a dynamic between really how does that good spending 274 00:14:51,720 --> 00:14:54,680 Speaker 1: go versus a service spending? I think also to see 275 00:14:54,880 --> 00:14:56,640 Speaker 1: what is the day name it between when you have 276 00:14:56,720 --> 00:14:59,640 Speaker 1: a tight labor market and companies are able to have 277 00:14:59,800 --> 00:15:03,920 Speaker 1: our have to be competitive and raise wages so that 278 00:15:04,040 --> 00:15:07,120 Speaker 1: consumers actually have more to spend. But how will that 279 00:15:07,320 --> 00:15:10,680 Speaker 1: offset with actually companies being able to pass along price 280 00:15:10,800 --> 00:15:13,880 Speaker 1: because consumers have more money to spend. And then a 281 00:15:14,040 --> 00:15:17,160 Speaker 1: third component I think that we're under appreciating here is 282 00:15:17,560 --> 00:15:20,600 Speaker 1: right now, household wealth is very heavily tied to the 283 00:15:20,680 --> 00:15:24,040 Speaker 1: equity markets. I think we saw historical amount of nearly 284 00:15:24,120 --> 00:15:26,560 Speaker 1: a quarter of household wealth is tied to equity. So 285 00:15:26,880 --> 00:15:28,920 Speaker 1: when equities are down like this, it can weigh on 286 00:15:29,000 --> 00:15:32,200 Speaker 1: consumer sentiment. If we stay down. At these levels, you 287 00:15:32,280 --> 00:15:35,400 Speaker 1: could see sort of that souring sentiment really start bleeding 288 00:15:35,440 --> 00:15:38,480 Speaker 1: into consumer spending. These are the indicators we are watching, 289 00:15:38,600 --> 00:15:42,800 Speaker 1: but we're not quite convinced yet that consumer is really decelerating. 290 00:15:43,080 --> 00:15:45,800 Speaker 1: And can you elaborate what you said, which is that 291 00:15:46,080 --> 00:15:48,960 Speaker 1: this particular series of reports is a little concerning with 292 00:15:49,040 --> 00:15:53,600 Speaker 1: how much it raises the risk of recession. How So, well, 293 00:15:53,640 --> 00:15:56,400 Speaker 1: when you talk about what is the possibility of recession 294 00:15:56,560 --> 00:15:59,280 Speaker 1: for us, it's still a tail probability. It is not 295 00:15:59,440 --> 00:16:02,280 Speaker 1: our base case, and we still put the possibility of 296 00:16:02,320 --> 00:16:07,240 Speaker 1: a recession by end of at around so that's actually 297 00:16:07,320 --> 00:16:09,920 Speaker 1: quite low compared to where some people are on the street. 298 00:16:10,400 --> 00:16:13,680 Speaker 1: But the main driver and something that we've all focused 299 00:16:13,760 --> 00:16:17,160 Speaker 1: on and relied on to pull us out of the recession, 300 00:16:17,200 --> 00:16:21,080 Speaker 1: post pandemic and continue to driver economy has been the 301 00:16:21,200 --> 00:16:24,800 Speaker 1: US consumer. The strength of spending and that willingness to 302 00:16:24,920 --> 00:16:28,440 Speaker 1: spend not just on goods, but as COVID was relaxed, 303 00:16:28,480 --> 00:16:31,760 Speaker 1: as lockdowns, relaxed on experiences and get out there and 304 00:16:31,920 --> 00:16:34,400 Speaker 1: travel and put that money to work and circulate through 305 00:16:34,440 --> 00:16:37,960 Speaker 1: the economy. So if that driver starts to cool down, 306 00:16:38,200 --> 00:16:41,760 Speaker 1: then becomes the concern our margins really coming under pressure 307 00:16:41,920 --> 00:16:45,080 Speaker 1: enough that earnings growth will turn negative, that GDP growth 308 00:16:45,160 --> 00:16:48,400 Speaker 1: could turn negative again. Not our base case, Lisa, but 309 00:16:48,520 --> 00:16:51,000 Speaker 1: the tail risks could be getting bigger here. So there 310 00:16:51,080 --> 00:16:52,800 Speaker 1: have been a number of strategists that have come on 311 00:16:52,880 --> 00:16:55,520 Speaker 1: and said they still like consumer discretion area because there 312 00:16:55,600 --> 00:16:57,520 Speaker 1: has been such a wave of spending and because of 313 00:16:57,560 --> 00:16:59,920 Speaker 1: the strength and the consumer. Would you back away from 314 00:17:00,000 --> 00:17:01,960 Speaker 1: that kind of idea based on what we're seeing right 315 00:17:01,960 --> 00:17:05,960 Speaker 1: now in these numbers. I wouldn't particularly back away, but 316 00:17:06,080 --> 00:17:09,000 Speaker 1: perhaps it wouldn't be our number one call here. And 317 00:17:09,160 --> 00:17:11,399 Speaker 1: just to keep in mind, you know, some part of that. 318 00:17:11,520 --> 00:17:14,399 Speaker 1: We've been actually pretty negative on the retailing space to 319 00:17:14,480 --> 00:17:17,960 Speaker 1: begin with, but we're still positive on the sources where 320 00:17:18,000 --> 00:17:21,200 Speaker 1: you can have leisure spending, we can have those reopening trades, 321 00:17:21,280 --> 00:17:24,600 Speaker 1: the travel tide industries. On the other hand, what we've 322 00:17:24,600 --> 00:17:28,240 Speaker 1: been looking at very carefully, especially with the more tightening 323 00:17:28,440 --> 00:17:32,000 Speaker 1: of the monetary policy here, has been the growth style. 324 00:17:32,240 --> 00:17:35,359 Speaker 1: You've seen it beaten down so badly this year, and 325 00:17:35,440 --> 00:17:37,280 Speaker 1: you've seen the we think we're starting to see the 326 00:17:37,359 --> 00:17:39,600 Speaker 1: bottom for the growth style, so we're starting to warm 327 00:17:39,680 --> 00:17:42,840 Speaker 1: up to it again. And when we look at the 328 00:17:42,920 --> 00:17:46,800 Speaker 1: market adjustment here, it is off central banks, it is 329 00:17:46,920 --> 00:17:50,560 Speaker 1: off the Fed. I'm focused on the non linearity of 330 00:17:50,680 --> 00:17:53,200 Speaker 1: their FED decisions they have to make. It's frankly true 331 00:17:53,200 --> 00:17:57,960 Speaker 1: for e c B as well. Link equity market performance 332 00:17:58,200 --> 00:18:01,960 Speaker 1: into the massive challenges the FED has after the July 333 00:18:04,600 --> 00:18:06,399 Speaker 1: You know, you bring up a great point, Tom, is 334 00:18:06,560 --> 00:18:08,320 Speaker 1: how our equity is going to handle it? If the 335 00:18:08,440 --> 00:18:11,320 Speaker 1: Fed continues to tighten and we start to really see 336 00:18:11,320 --> 00:18:14,720 Speaker 1: that GDP growth slow for us, we do expect GDP 337 00:18:14,880 --> 00:18:17,720 Speaker 1: to come down, but we also still think that unemployment 338 00:18:17,880 --> 00:18:20,600 Speaker 1: rates could come even lower. And in that kind of 339 00:18:20,840 --> 00:18:25,040 Speaker 1: environment again, where jobs and wade growth is aggressive and 340 00:18:25,160 --> 00:18:28,159 Speaker 1: wages are going higher, we still think a possibility that 341 00:18:28,320 --> 00:18:31,200 Speaker 1: equities can go higher from here. Our price target remains 342 00:18:31,280 --> 00:18:34,440 Speaker 1: forty seven fifteen, and there's a reason for that. We 343 00:18:34,520 --> 00:18:37,040 Speaker 1: think that there could be a change in the leadership here. Again, 344 00:18:37,119 --> 00:18:39,960 Speaker 1: if growth has bottomed and we start getting a better 345 00:18:40,040 --> 00:18:44,480 Speaker 1: handle inflation, that's gonna bode much wetter for these growth sectors, 346 00:18:44,680 --> 00:18:47,120 Speaker 1: and they are still a large part of the SMPI 347 00:18:47,920 --> 00:18:50,800 Speaker 1: A hand, thank you, an a hand well spunk our security. St. 348 00:18:54,920 --> 00:18:57,960 Speaker 1: Joseph Feldman is with us. He holds court with Dana 349 00:18:58,040 --> 00:19:01,760 Speaker 1: Telsey at the Telsa Advisory. We can talk about Walmart 350 00:19:01,840 --> 00:19:04,600 Speaker 1: and Target, but Joe Felman, I want to talk about 351 00:19:04,680 --> 00:19:09,200 Speaker 1: what you and I lived April two, two thousand thirteen, 352 00:19:09,320 --> 00:19:14,880 Speaker 1: the real codification of reg f D. Are these corporations 353 00:19:15,040 --> 00:19:21,240 Speaker 1: afraid to give guidance to animals like you? Well, I 354 00:19:21,720 --> 00:19:25,920 Speaker 1: think the corporations are certainly afraid to give inter quarter 355 00:19:26,080 --> 00:19:29,159 Speaker 1: commentary that would, you know, give too much of an 356 00:19:29,200 --> 00:19:32,720 Speaker 1: insight into how the earnings might show up. And when 357 00:19:32,800 --> 00:19:35,840 Speaker 1: doing so, they do have to make things broadly public 358 00:19:35,920 --> 00:19:38,840 Speaker 1: and available at the same time, so that that definitely 359 00:19:39,440 --> 00:19:42,639 Speaker 1: plays into this um and I do think that you 360 00:19:42,800 --> 00:19:48,720 Speaker 1: you've seen corporations act differently. I've seen investor relations professionals 361 00:19:48,800 --> 00:19:51,639 Speaker 1: get fired over it. So I think people are very 362 00:19:51,680 --> 00:19:56,640 Speaker 1: careful to not give too much into quarter information struggle. 363 00:19:57,240 --> 00:20:00,280 Speaker 1: When I say, a stoke down off the back of 364 00:20:00,320 --> 00:20:04,160 Speaker 1: earnings on something that should not be a surprise, because 365 00:20:04,560 --> 00:20:06,440 Speaker 1: they seem to be struggling with something cha other was 366 00:20:06,440 --> 00:20:08,560 Speaker 1: obvious to everyone. I don't get that we've got a 367 00:20:08,600 --> 00:20:10,960 Speaker 1: big execution problem at a single name or more broadly, 368 00:20:11,000 --> 00:20:12,680 Speaker 1: and when you see two data points, it feels like 369 00:20:12,720 --> 00:20:16,440 Speaker 1: a broader story it feels like Joe, from my perspective 370 00:20:16,440 --> 00:20:18,440 Speaker 1: and others two looking in, they're struggling to find the 371 00:20:18,600 --> 00:20:22,120 Speaker 1: right balance. These companies have gone from being understaffed, too overstaffed, 372 00:20:22,520 --> 00:20:25,359 Speaker 1: undersupplied to what oversupplied and Joe, all of a sudden, 373 00:20:25,359 --> 00:20:26,720 Speaker 1: there's all this inventory and they've done know what to 374 00:20:26,760 --> 00:20:28,359 Speaker 1: do with it? Joe, how do you find the right 375 00:20:28,400 --> 00:20:32,119 Speaker 1: balance in economy moving this fast? Yeah, I and I 376 00:20:32,240 --> 00:20:35,040 Speaker 1: think that's really the challenge. And something actually Doug McMillan 377 00:20:35,080 --> 00:20:37,119 Speaker 1: talked about yesterday was the speed of all of this 378 00:20:37,280 --> 00:20:41,000 Speaker 1: that it's really hard to adjust the business that quickly 379 00:20:41,119 --> 00:20:44,760 Speaker 1: to play some catch up. Obviously, the consumers moving and 380 00:20:44,920 --> 00:20:47,800 Speaker 1: changing quite rapidly, and I think you're right. I think 381 00:20:47,880 --> 00:20:50,879 Speaker 1: that you know, the retailers, we saw this with the 382 00:20:50,880 --> 00:20:53,960 Speaker 1: Amazon too, where they kind of we're building out to 383 00:20:54,119 --> 00:20:57,680 Speaker 1: the capacity that they needed at the time during the 384 00:20:57,720 --> 00:21:00,320 Speaker 1: height of the pandemic, and now you're seeing some of 385 00:21:00,400 --> 00:21:03,280 Speaker 1: the gift back. What's really interesting here is if you 386 00:21:03,400 --> 00:21:07,600 Speaker 1: go back in history, Target targets gross margin has pretty 387 00:21:08,440 --> 00:21:13,640 Speaker 1: been very stable right around obviously this quarter had really 388 00:21:13,720 --> 00:21:16,399 Speaker 1: dropped a lot to five and a half percent, and 389 00:21:16,920 --> 00:21:19,000 Speaker 1: their guidance for the year would imply that it's going 390 00:21:19,040 --> 00:21:25,600 Speaker 1: to be certainly well below maybe more like I think 391 00:21:25,680 --> 00:21:28,600 Speaker 1: that's transitory. And I know the stocks down a lot 392 00:21:28,760 --> 00:21:32,400 Speaker 1: right now, and but if you kind of really look 393 00:21:32,440 --> 00:21:34,960 Speaker 1: closely at that line item and look at the way 394 00:21:35,000 --> 00:21:37,440 Speaker 1: they're operating the rest of the business, there's a lot 395 00:21:37,480 --> 00:21:41,080 Speaker 1: of pressures right now on the supply chain, on fuel costs, 396 00:21:41,760 --> 00:21:45,080 Speaker 1: on everything that's just hurting the business right now. I 397 00:21:45,119 --> 00:21:47,240 Speaker 1: had a brain freeze there, Joe Feldman, because it just 398 00:21:47,280 --> 00:21:49,680 Speaker 1: got the field cost to the Gulf stream to Davos 399 00:21:49,840 --> 00:21:52,879 Speaker 1: Wold Lisa, that has gone up to say the least 400 00:21:53,040 --> 00:21:56,480 Speaker 1: regulation f D I put two thousand thirteen wrong. That 401 00:21:56,640 --> 00:22:00,480 Speaker 1: was a little bit ago on regg FD Lisa. I 402 00:22:00,560 --> 00:22:03,120 Speaker 1: think I see that little violin in the corner that's 403 00:22:03,160 --> 00:22:06,000 Speaker 1: just very very small. I think that, Look, I don't 404 00:22:06,040 --> 00:22:08,600 Speaker 1: think that that's probably where people's focuses are on the 405 00:22:08,760 --> 00:22:12,200 Speaker 1: jet stream. However, there is this issue of what comes next, 406 00:22:12,320 --> 00:22:14,840 Speaker 1: what's the next shoe to drop? After we saw Walmart 407 00:22:15,119 --> 00:22:17,680 Speaker 1: and Target, Joe, what's your sense here of the other 408 00:22:17,840 --> 00:22:20,280 Speaker 1: players that will also see similar hits that are not 409 00:22:20,440 --> 00:22:24,400 Speaker 1: yet priced in. Well, I think that you know, those 410 00:22:24,520 --> 00:22:29,959 Speaker 1: that have more discretionary businesses are likely to see some pressure. Um, 411 00:22:30,200 --> 00:22:33,000 Speaker 1: you know, we've pleasantly surprised actually to see like home 412 00:22:33,080 --> 00:22:36,480 Speaker 1: deepon lows have been performing fairly well. Um, you know, 413 00:22:36,640 --> 00:22:38,920 Speaker 1: in the face of this and everybody thought, well home 414 00:22:39,040 --> 00:22:41,640 Speaker 1: was going to be done and it's not. At least 415 00:22:41,680 --> 00:22:44,680 Speaker 1: home improvement is not. But it does feel like we've 416 00:22:44,720 --> 00:22:49,320 Speaker 1: seen a slower trend in apparel and in um in 417 00:22:49,520 --> 00:22:53,600 Speaker 1: other discretion and categories like home furnishings, that is where 418 00:22:53,640 --> 00:22:56,399 Speaker 1: we see some concerns. So some of the other discounters 419 00:22:56,880 --> 00:22:59,880 Speaker 1: maybe under some pressure today. Uh you know, I think 420 00:23:01,359 --> 00:23:03,720 Speaker 1: you have to just start worrying about everybody on the 421 00:23:03,760 --> 00:23:07,840 Speaker 1: gross margin side and see how that profitability could be 422 00:23:07,960 --> 00:23:11,119 Speaker 1: impacted by that, even with stronger sales like we just 423 00:23:11,280 --> 00:23:13,840 Speaker 1: left from Walmart and Target. So before we let you go, 424 00:23:14,119 --> 00:23:16,600 Speaker 1: can you just frame this moment how much of a 425 00:23:16,720 --> 00:23:18,920 Speaker 1: turning point this is for a lot of the consumer 426 00:23:18,960 --> 00:23:22,920 Speaker 1: discretionary areas and frankly the consumer stable companies like grocery 427 00:23:22,960 --> 00:23:26,560 Speaker 1: stores and others, especially in light of the surprise in 428 00:23:26,640 --> 00:23:28,840 Speaker 1: the C suite that to a lot of us shouldn't 429 00:23:28,880 --> 00:23:32,320 Speaker 1: have been a such a surprise. Yeah, I think that 430 00:23:33,720 --> 00:23:37,320 Speaker 1: we were all exsuming that the supply chain pressures have 431 00:23:37,440 --> 00:23:39,760 Speaker 1: been fully factored in at this point, and they're just not. 432 00:23:40,320 --> 00:23:42,760 Speaker 1: And we are definitely seeing the slowdown or change in 433 00:23:42,840 --> 00:23:45,879 Speaker 1: consumer behavior where there's more of a focus on, as 434 00:23:45,920 --> 00:23:49,560 Speaker 1: you said, consumables basics, getting to work and just drive, 435 00:23:49,720 --> 00:23:52,359 Speaker 1: you know, paying those high gas prices right now. And 436 00:23:53,000 --> 00:23:56,200 Speaker 1: I think that that lends well to the more the 437 00:23:56,280 --> 00:24:01,399 Speaker 1: CpG companies that are out there and the grocers and 438 00:24:01,800 --> 00:24:04,879 Speaker 1: other value oriented retail where people are going to be 439 00:24:04,920 --> 00:24:07,440 Speaker 1: looking to save money right now. Joe, Thank you, buddy. 440 00:24:07,520 --> 00:24:10,600 Speaker 1: As always great perspective. Jeff found on there of TAUSI 441 00:24:10,960 --> 00:24:20,240 Speaker 1: Advisory Group. Jukes thinks we need to talk more about Europe. 442 00:24:20,280 --> 00:24:22,119 Speaker 1: So let's get to Kit Jukes now, the chief effect 443 00:24:22,119 --> 00:24:25,280 Speaker 1: strategist at suck Gen. Kit your words, ECB rates have 444 00:24:25,400 --> 00:24:27,919 Speaker 1: been negative for almost eight years. If the economy can 445 00:24:27,960 --> 00:24:30,440 Speaker 1: sustain positive rates within the next year, the euro will 446 00:24:30,440 --> 00:24:33,800 Speaker 1: be a lot stronger when it happens. If Kit, let's 447 00:24:33,840 --> 00:24:37,680 Speaker 1: talk about the if. How big is that? If? Huge? Enormous? 448 00:24:37,840 --> 00:24:40,200 Speaker 1: I mean, okay, so the first pieces, obviously the short 449 00:24:40,280 --> 00:24:43,720 Speaker 1: term um elephants in the room downside risk, which is 450 00:24:43,760 --> 00:24:46,960 Speaker 1: what if the gas gets turned off natural gas gets 451 00:24:47,080 --> 00:24:50,680 Speaker 1: really really expensive. That's bad for everybody, but it's spectacularly 452 00:24:50,720 --> 00:24:53,400 Speaker 1: about for Europe. So I don't see how we avoid 453 00:24:53,440 --> 00:24:56,720 Speaker 1: a recessions that happens. Even you commissioned admits will pretty 454 00:24:56,760 --> 00:24:59,479 Speaker 1: much admit that that that will get a recession if 455 00:24:59,520 --> 00:25:03,480 Speaker 1: that happens. So that that's the first piece. Um. The 456 00:25:03,800 --> 00:25:06,920 Speaker 1: second piece. You know, they've been going one way, really 457 00:25:07,160 --> 00:25:10,200 Speaker 1: lower and lower rates for long enoughter that you know, 458 00:25:10,320 --> 00:25:14,679 Speaker 1: the first turn upwards, we'll have a significant market reaction. 459 00:25:14,760 --> 00:25:17,480 Speaker 1: And already you know we have clients asking, you know, 460 00:25:17,600 --> 00:25:20,159 Speaker 1: where is the where is the real sensitive point on 461 00:25:20,240 --> 00:25:23,800 Speaker 1: the spread between peripheral and German bond deals in Europe? 462 00:25:24,400 --> 00:25:26,240 Speaker 1: You know all of these things. So I mean I'll 463 00:25:26,280 --> 00:25:27,960 Speaker 1: put a bit if in in sort of you know, 464 00:25:28,080 --> 00:25:31,360 Speaker 1: three foot high capital letters. Um, it's um, it's it's 465 00:25:32,080 --> 00:25:35,000 Speaker 1: it's even less likely than Arsenal making the Champions League's 466 00:25:35,040 --> 00:25:38,520 Speaker 1: The hamewark of your work is in a few paragraphs, 467 00:25:38,600 --> 00:25:41,560 Speaker 1: you squeeze in a lot on a lot of different countries, 468 00:25:41,680 --> 00:25:46,040 Speaker 1: cultures and economies. Right now, there is a mass excuse 469 00:25:46,160 --> 00:25:50,280 Speaker 1: my French folks, pissing match in the United Kingdom over 470 00:25:50,359 --> 00:25:53,040 Speaker 1: the governor of the Bank of England, Irvin King, the 471 00:25:53,119 --> 00:25:57,160 Speaker 1: ex governor going after him, Ambrose Evans Pritchard in the Telegraph, 472 00:25:57,240 --> 00:26:00,080 Speaker 1: and now there's coming to the defense of economy. So 473 00:26:00,240 --> 00:26:02,560 Speaker 1: put their legs on their pants on one leg at 474 00:26:02,600 --> 00:26:07,480 Speaker 1: a time. What's the kitchen scorecard on how central bankers 475 00:26:08,080 --> 00:26:12,800 Speaker 1: worldwide are doing? Uh, they're doing their best. Look, I mean, 476 00:26:12,880 --> 00:26:14,919 Speaker 1: the only analogy I can have the central bankers at 477 00:26:14,960 --> 00:26:17,560 Speaker 1: the moment is we're saying cam Tom Hanks Land is 478 00:26:17,600 --> 00:26:19,920 Speaker 1: playing on the Hudson, but his playing this time. It 479 00:26:19,960 --> 00:26:21,680 Speaker 1: didn't have a bird strike. It was hit with a 480 00:26:21,720 --> 00:26:25,280 Speaker 1: bird strike, then it was hit with an electrical storm, 481 00:26:25,359 --> 00:26:28,200 Speaker 1: then it was hit with lightning, and then President putin 482 00:26:28,800 --> 00:26:32,159 Speaker 1: fart a missile at it, which which Tom Hanks can 483 00:26:32,200 --> 00:26:34,480 Speaker 1: do that for all the movies we've ever seen. So 484 00:26:34,680 --> 00:26:36,840 Speaker 1: I I give them a break. They had no chance. 485 00:26:37,160 --> 00:26:39,840 Speaker 1: They did their best by flooding the system with money 486 00:26:40,520 --> 00:26:43,120 Speaker 1: back at the start of the pandemic, and since then 487 00:26:44,119 --> 00:26:46,720 Speaker 1: they're literally it's why in the end we'll get a 488 00:26:46,760 --> 00:26:50,399 Speaker 1: recession because this is too hard and critics can can 489 00:26:50,480 --> 00:26:52,560 Speaker 1: criticize full of kit when you say we're going to 490 00:26:52,640 --> 00:26:54,760 Speaker 1: get a recession. Talking about Europe, I know that you 491 00:26:54,840 --> 00:26:57,600 Speaker 1: and your colleagues don't believe that the US necessarily is 492 00:26:57,680 --> 00:27:01,040 Speaker 1: headed for recession. Do you think that those dualities are 493 00:27:01,080 --> 00:27:04,080 Speaker 1: basically priced into the euro US dollar already or do 494 00:27:04,200 --> 00:27:06,240 Speaker 1: you think this has more to go and you could 495 00:27:06,280 --> 00:27:09,200 Speaker 1: get to parody and beyond. I think the trouble with 496 00:27:09,280 --> 00:27:10,960 Speaker 1: the Euro to meet is back to that issue with 497 00:27:11,840 --> 00:27:14,000 Speaker 1: with a stoppage to the gas which brings the recession 498 00:27:14,080 --> 00:27:17,399 Speaker 1: forwards in terms of time and breaks through. And I 499 00:27:17,480 --> 00:27:20,399 Speaker 1: can't I can't measure. I can't measure the downside of 500 00:27:20,440 --> 00:27:22,439 Speaker 1: the Euro from that all the probability of it happening, 501 00:27:22,520 --> 00:27:24,640 Speaker 1: So how can I buy the EU. It's just that's 502 00:27:24,680 --> 00:27:27,320 Speaker 1: why I find it unbiable at this point in time, 503 00:27:27,560 --> 00:27:29,359 Speaker 1: and I would go on trading. But yes, there is 504 00:27:29,400 --> 00:27:31,240 Speaker 1: a big difference in US and Europe. I'm not sure 505 00:27:31,280 --> 00:27:34,400 Speaker 1: it's complete de presdent. I definitely think it's why treasury 506 00:27:34,400 --> 00:27:36,639 Speaker 1: gilds have got more upside. We have not seen the 507 00:27:36,680 --> 00:27:39,360 Speaker 1: peak yet, and when that happens, I suspect i'll see 508 00:27:39,400 --> 00:27:42,200 Speaker 1: lower levels in the Euro before we've done. I would say, though, 509 00:27:42,440 --> 00:27:44,480 Speaker 1: you know we will get a recession. I mean models 510 00:27:44,800 --> 00:27:48,440 Speaker 1: struggle with the recession because it's difficult to work out 511 00:27:48,520 --> 00:27:52,720 Speaker 1: the accumulated effect of being bombarded by so many once 512 00:27:52,760 --> 00:27:55,800 Speaker 1: every five year shocks in a two year period. You 513 00:27:55,880 --> 00:27:57,800 Speaker 1: sound like a hard landing guy. You just said we'll 514 00:27:57,800 --> 00:27:59,720 Speaker 1: get a recession. That's not really the cool though, is it? 515 00:28:00,000 --> 00:28:02,640 Speaker 1: To band magnitude and timing? Where are you on there? 516 00:28:03,640 --> 00:28:05,840 Speaker 1: I kind of think next year is really the difficult year, 517 00:28:05,880 --> 00:28:07,840 Speaker 1: but but it could come again. There are things that 518 00:28:07,960 --> 00:28:11,679 Speaker 1: can make it come forward. So you know, um, when 519 00:28:11,800 --> 00:28:14,680 Speaker 1: when you're talking about all prices are upen and saying 520 00:28:14,680 --> 00:28:17,200 Speaker 1: that other prices are are more, every other version of 521 00:28:17,280 --> 00:28:20,080 Speaker 1: oil that I use is up more than than crude, 522 00:28:20,160 --> 00:28:23,919 Speaker 1: So most is jet fuel, diesels up a lot, heating 523 00:28:23,960 --> 00:28:26,679 Speaker 1: oils up a lot, so they're all they're all up 524 00:28:26,720 --> 00:28:29,040 Speaker 1: by more than crude. So if we get another push 525 00:28:29,160 --> 00:28:31,240 Speaker 1: higher and crude, it's going to really hurt. If this 526 00:28:31,600 --> 00:28:35,000 Speaker 1: summer's harvest to give us brutal food prices, that's going 527 00:28:35,080 --> 00:28:38,000 Speaker 1: to really hurt. The housing market in the UK is 528 00:28:38,760 --> 00:28:42,200 Speaker 1: just threatening to roll over now and yours could follow. 529 00:28:42,360 --> 00:28:45,320 Speaker 1: So um, So I would say recessions are pretty likely 530 00:28:45,400 --> 00:28:50,120 Speaker 1: in three in lots of places, I think it's it's 531 00:28:50,200 --> 00:28:53,200 Speaker 1: just plain blind luck. If we can avoid them with 532 00:28:53,360 --> 00:28:56,080 Speaker 1: with the with the number of pressures coming to the system. 533 00:28:56,800 --> 00:29:01,120 Speaker 1: But Europe is right in the firing line. That's okay, 534 00:29:01,160 --> 00:29:03,160 Speaker 1: awesome to catch up. And just remember you brought up 535 00:29:03,160 --> 00:29:05,760 Speaker 1: passin tell mc norda and I didn't mention it. Okay, 536 00:29:07,120 --> 00:29:15,440 Speaker 1: you know it's it's still friends. Thank you, buddy. I'm 537 00:29:15,440 --> 00:29:17,720 Speaker 1: really get right to it here, because time is so 538 00:29:17,880 --> 00:29:20,640 Speaker 1: special with Douglas Cass. He was a Subris partners as 539 00:29:20,680 --> 00:29:24,040 Speaker 1: the traitor is Paul bentioned earlier. He has been gifted 540 00:29:24,280 --> 00:29:28,560 Speaker 1: on caution. He's gotten a little more optimistic recently, Doug, 541 00:29:28,840 --> 00:29:33,200 Speaker 1: What do you do when Bank of America's Michael Hartnett 542 00:29:33,280 --> 00:29:37,520 Speaker 1: says cash levels are back to the gloom after September 543 00:29:37,640 --> 00:29:42,240 Speaker 1: eleven of two thousand one, What does young Cass do 544 00:29:43,120 --> 00:29:47,240 Speaker 1: amid the gloom? Are you referring to the gloom of 545 00:29:47,320 --> 00:29:51,000 Speaker 1: the Boston Red Sox? You're going there? You know you 546 00:29:52,000 --> 00:29:56,360 Speaker 1: think I wouldn't broach the subject of Major League Baseball, Dan, 547 00:29:56,520 --> 00:29:58,880 Speaker 1: I've you know, you know the Boston Red Sox of 548 00:29:58,920 --> 00:30:03,479 Speaker 1: the New Baltimore Orio. Oh, those are fighting. And by 549 00:30:03,520 --> 00:30:06,560 Speaker 1: the way, I'll get to you. I'll field your question 550 00:30:06,600 --> 00:30:10,200 Speaker 1: a second but the Yankees are now on page with 551 00:30:10,240 --> 00:30:13,160 Speaker 1: a winning percentage of point seven five oh, to be 552 00:30:13,320 --> 00:30:16,920 Speaker 1: better than the two greatest Yankee teams in history. You 553 00:30:17,040 --> 00:30:20,080 Speaker 1: got you think these guys are as solid as twenty seven. 554 00:30:21,840 --> 00:30:24,880 Speaker 1: Look for the first time in the history of the franchise, 555 00:30:25,320 --> 00:30:29,520 Speaker 1: through thirty five games, three players Rizzo, Stanton and Judge 556 00:30:29,920 --> 00:30:33,280 Speaker 1: hit ten homers or more. This is amazing? Is Bran 557 00:30:33,400 --> 00:30:37,520 Speaker 1: Cashing a genius? And now, now can you remind me 558 00:30:37,600 --> 00:30:41,800 Speaker 1: what the question was? The question was the cash build 559 00:30:41,880 --> 00:30:44,280 Speaker 1: up that's out there is on the edge of red 560 00:30:44,360 --> 00:30:48,560 Speaker 1: sox gloom. What do you do when you see everybody's 561 00:30:48,560 --> 00:30:52,240 Speaker 1: saying go to cash. Sure, I'll frame my view right now, 562 00:30:52,320 --> 00:30:54,920 Speaker 1: which is a lot than the view that I've expressed 563 00:30:54,960 --> 00:30:58,160 Speaker 1: to you, Paul and John. In the last twelve months, 564 00:30:58,960 --> 00:31:03,480 Speaker 1: UM continued to find myself of the view that the 565 00:31:03,600 --> 00:31:08,880 Speaker 1: consensus has very abruptly shifted from wearing rose colored glasses 566 00:31:09,000 --> 00:31:14,520 Speaker 1: of complacency in late now being fearful and embracing many 567 00:31:14,640 --> 00:31:18,360 Speaker 1: of the long held fundamental concerns that had a slugflation 568 00:31:19,120 --> 00:31:22,800 Speaker 1: um geopolitical risks and a flat world, high valuations, persistent 569 00:31:22,880 --> 00:31:27,680 Speaker 1: supply chain problems, and obviously two elevated economic and profit expectations. 570 00:31:28,120 --> 00:31:30,200 Speaker 1: So last week I began for the first time to 571 00:31:30,280 --> 00:31:34,280 Speaker 1: increase our net long exposure on the dip on Wednesday 572 00:31:34,320 --> 00:31:37,880 Speaker 1: and Thursday. As to me getting back to your question 573 00:31:37,920 --> 00:31:42,840 Speaker 1: about capitulation, market participants seem to have already capitulated, providing 574 00:31:43,160 --> 00:31:48,720 Speaker 1: potential positive optionality. We began the year while most participants 575 00:31:48,760 --> 00:31:51,800 Speaker 1: were unprepared. We were prepared. I started up Sea Breeze 576 00:31:52,120 --> 00:31:54,239 Speaker 1: at the end of UM last year. By the way, 577 00:31:54,280 --> 00:31:57,560 Speaker 1: Sea Breeze Partners LP dot com is our new website, 578 00:31:58,200 --> 00:32:01,280 Speaker 1: UH and our commentary is on that UM and I'm 579 00:32:01,400 --> 00:32:03,560 Speaker 1: happy to say that we're not only up for the month, 580 00:32:03,920 --> 00:32:08,520 Speaker 1: we're positive for all of two, which puts us in 581 00:32:08,600 --> 00:32:13,120 Speaker 1: good stead against our peers and against the markets UM. 582 00:32:14,240 --> 00:32:17,400 Speaker 1: Everyone me was offside at the end of last year 583 00:32:17,440 --> 00:32:19,760 Speaker 1: and is starting to go offside this year. They were 584 00:32:19,800 --> 00:32:22,120 Speaker 1: builled up as we entered the year, and now they're 585 00:32:22,160 --> 00:32:25,320 Speaker 1: buried up after a very large market run down. And 586 00:32:26,160 --> 00:32:30,959 Speaker 1: and I think that forced liquidation and defensive posturing UM 587 00:32:31,800 --> 00:32:34,840 Speaker 1: on part of the marginal investor hedge funds remains a 588 00:32:34,960 --> 00:32:38,360 Speaker 1: very important constructive part of my argument. The first liquable 589 00:32:38,480 --> 00:32:41,600 Speaker 1: rally is ahead the first liquidation was a red sox 590 00:32:41,680 --> 00:32:44,240 Speaker 1: picture after one and two thirds. Going back to the dug, 591 00:32:45,600 --> 00:32:49,360 Speaker 1: I mean, seriously, seriously, tom Um, I've I've observed over 592 00:32:49,440 --> 00:32:52,520 Speaker 1: time the tops are processes. We saw an important one, 593 00:32:52,520 --> 00:32:55,920 Speaker 1: I believe in late when the market was top heavy 594 00:32:56,000 --> 00:32:57,840 Speaker 1: with all the fangs, when the rest of the market 595 00:32:57,920 --> 00:33:02,560 Speaker 1: was foundering, and that bottoms are so to me, capitulation 596 00:33:02,800 --> 00:33:06,320 Speaker 1: was the event when you force retail and institutional liquidation 597 00:33:06,400 --> 00:33:09,360 Speaker 1: and head funds owing to all these redemption requests. It's 598 00:33:09,520 --> 00:33:13,280 Speaker 1: very important to recognize that in our financial markets, the 599 00:33:13,400 --> 00:33:17,840 Speaker 1: strongest known gravitational force is produced by the presence of 600 00:33:17,920 --> 00:33:22,640 Speaker 1: stop losses and liquidations imposed by leverage. The larger the stop, 601 00:33:22,760 --> 00:33:25,360 Speaker 1: the grade of the poll. So we have this non 602 00:33:25,520 --> 00:33:29,040 Speaker 1: virtuous cycle of force hedge fund selling because of bad 603 00:33:29,120 --> 00:33:31,719 Speaker 1: performance that led to redemptions, and that was a key 604 00:33:31,800 --> 00:33:34,800 Speaker 1: factor in changing my market view. But there's a whole 605 00:33:34,840 --> 00:33:37,720 Speaker 1: bunch of other statistics that I could tell you. For example, 606 00:33:38,400 --> 00:33:44,280 Speaker 1: the stock bond strategy, the return was it was the 607 00:33:44,360 --> 00:33:48,480 Speaker 1: worst concurrent in the history in a century, minus twelve percent. 608 00:33:49,120 --> 00:33:51,520 Speaker 1: Do you know what the second worst performance year to 609 00:33:51,680 --> 00:33:55,840 Speaker 1: date April was industry four, so is three X that 610 00:33:56,680 --> 00:34:00,560 Speaker 1: this is so so, so so so important. Well, I 611 00:34:00,640 --> 00:34:03,440 Speaker 1: did this a week ago. Dog, I did it myself, Paul, 612 00:34:03,520 --> 00:34:06,080 Speaker 1: this is so important, dog, cass, how do you do 613 00:34:06,280 --> 00:34:11,320 Speaker 1: equities with the record bond losses we have? I mean I, 614 00:34:11,800 --> 00:34:17,120 Speaker 1: I am absolutely fascinated by the financial industry certitude. Bonds 615 00:34:17,200 --> 00:34:19,960 Speaker 1: never go down and we're having a bear market? You 616 00:34:20,080 --> 00:34:23,399 Speaker 1: and I never you and I mean Babe Ruth didn't 617 00:34:23,440 --> 00:34:27,120 Speaker 1: see a bear market like this? Right? Well? Um, in 618 00:34:27,280 --> 00:34:32,239 Speaker 1: terms of bonds, I think today's target report is pretty important. UM. 619 00:34:32,480 --> 00:34:35,279 Speaker 1: And let me let me tie it into fixed income. UM. 620 00:34:36,320 --> 00:34:40,200 Speaker 1: One of the one of the primary concerns, Paul, we 621 00:34:40,360 --> 00:34:46,000 Speaker 1: had going into was that lower demand from higher prices 622 00:34:46,000 --> 00:34:52,600 Speaker 1: seemed inevitable and price elasticity of demand UH is something 623 00:34:52,920 --> 00:34:56,440 Speaker 1: we learned in economics classes that measures the responsiveness of 624 00:34:56,560 --> 00:34:59,040 Speaker 1: the quantity demanded or supplied of a good to a 625 00:34:59,160 --> 00:35:02,440 Speaker 1: change in its price. It's computed by the percentage change 626 00:35:02,719 --> 00:35:05,919 Speaker 1: in quantity demanded or supply divided by the percentage change 627 00:35:05,960 --> 00:35:09,800 Speaker 1: in price, and elasticity can be described as elastic or 628 00:35:09,960 --> 00:35:13,880 Speaker 1: very responsive, or inelastic not very responsive. So we've been 629 00:35:13,960 --> 00:35:17,040 Speaker 1: fearful for some time that whether it's a twelve dollar 630 00:35:17,080 --> 00:35:23,160 Speaker 1: smartphone from Apple, a cup of Starbucks coffee groceries at 631 00:35:23,239 --> 00:35:27,439 Speaker 1: Walmart on costco get used for f one fifty. Lower 632 00:35:27,480 --> 00:35:30,279 Speaker 1: demand from higher prices is today's reality. But this is 633 00:35:30,360 --> 00:35:33,160 Speaker 1: why it's positive. And everyone is going to be selling 634 00:35:33,200 --> 00:35:35,319 Speaker 1: into all right. So when I see it news, as 635 00:35:35,360 --> 00:35:37,719 Speaker 1: you said in the prior segment, is the cure for 636 00:35:37,840 --> 00:35:40,880 Speaker 1: higher inflation is our inflation. And the sort of reaction 637 00:35:41,000 --> 00:35:43,319 Speaker 1: is ultimately good news from the standpoint of a FED, 638 00:35:43,640 --> 00:35:46,200 Speaker 1: which will probably not be as hawkish as so I 639 00:35:46,239 --> 00:35:50,520 Speaker 1: assumed and many assumed. Let it in here because so, Doug. 640 00:35:50,560 --> 00:35:52,600 Speaker 1: I mean, I'm a big fan of tar J. When 641 00:35:52,640 --> 00:35:55,319 Speaker 1: I see a hundred billion dollar market cap stock, it's 642 00:35:55,320 --> 00:35:59,560 Speaker 1: a real company, real demand, real customers, you know, real cash. 643 00:35:59,640 --> 00:36:06,200 Speaker 1: Lower earnings down twenty What does that tell you? It 644 00:36:06,320 --> 00:36:08,960 Speaker 1: tells me if I had a four percent invested position 645 00:36:09,040 --> 00:36:13,960 Speaker 1: in Walmart, my portfolio just lost one percent today. I'll 646 00:36:14,000 --> 00:36:18,040 Speaker 1: be honest with you. I mean, this is an environment 647 00:36:18,160 --> 00:36:22,520 Speaker 1: pole where uh, the man is separated from the boys, 648 00:36:22,560 --> 00:36:24,719 Speaker 1: and I maybe still be a boy. I don't. I'm 649 00:36:24,760 --> 00:36:27,319 Speaker 1: not sure yet, even though we're up on the year. Um, 650 00:36:27,719 --> 00:36:30,880 Speaker 1: but you know, so where do you want where do 651 00:36:30,960 --> 00:36:33,120 Speaker 1: you dip your toes here, Doug, I mean if if, if, 652 00:36:33,400 --> 00:36:36,440 Speaker 1: if you feel like you've seen some type of capitulation, 653 00:36:37,320 --> 00:36:42,000 Speaker 1: where are you dipping your toes? The two areas really 654 00:36:42,080 --> 00:36:46,880 Speaker 1: quickly are the banks, which is by far my largest position. 655 00:36:46,920 --> 00:36:51,040 Speaker 1: I have a lot of background um and home builders. 656 00:36:51,600 --> 00:36:54,960 Speaker 1: All right, Okay, I gotta ask about Amazon very quickly here, 657 00:36:55,120 --> 00:36:59,080 Speaker 1: Cloud on fire, cardboard boxes, not so much. You've been 658 00:36:59,160 --> 00:37:01,719 Speaker 1: long Amazon, you say it's even a long term hold, 659 00:37:02,160 --> 00:37:07,040 Speaker 1: Doug Cast on Amazon. This may we markedly reduced our 660 00:37:07,080 --> 00:37:12,040 Speaker 1: exposure to Amazon at around I haven't take end position, 661 00:37:12,120 --> 00:37:15,680 Speaker 1: which I plan on increasing. Okay, Doug Cass. Thanks. Can 662 00:37:15,719 --> 00:37:19,480 Speaker 1: you come on the next time the Yankees win. I'm 663 00:37:19,520 --> 00:37:22,960 Speaker 1: not available tomorrow morning, Okay, Doug Cast, Thank you so much. 664 00:37:23,440 --> 00:37:27,200 Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join 665 00:37:27,320 --> 00:37:30,640 Speaker 1: us live weekdays from seven to ten am Eastern on 666 00:37:30,760 --> 00:37:34,959 Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six 667 00:37:35,120 --> 00:37:39,920 Speaker 1: to nine am for insight from the best in economics, finance, investment, 668 00:37:40,120 --> 00:37:45,080 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 669 00:37:45,200 --> 00:37:49,040 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 670 00:37:49,160 --> 00:37:53,239 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.