Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. Are Michael McKee
Speaker 1: now in conversation with Charles Evans. I have had many
Speaker 1: a guide, a long, long discussion with him years ago
Speaker 1: at the Council on Foreign Relations, and this is you
Speaker 1: know that all the FED presidents are hugely qualified, and
Speaker 1: they're all very, very different. This is a bulletproof freshwater
Speaker 1: academic on monetary policy and how it dovetails in to
Speaker 1: social policy. Let's listen. Hello, I'm Bloomberg's Michael McKee live
Speaker 1: on TV and Bloomberg Radio World with a special guest,
Speaker 1: Chicago FED President Charles Evans is joining us now and Charlie,
Speaker 1: thanks for coming in. It's nice to see somebody in
Speaker 1: person for a change. More. Mike is going to be here.
Speaker 1: A lot of people questioning now whether the FED is
Speaker 1: going to be debating monetary policy or whether we're kind
Speaker 1: of locked in for the rest of the year. The
Speaker 1: Fed has said, and j Pal has said fifty basis
Speaker 1: points at the next couple of meetings. Would you anticipate
Speaker 1: something like that running through December? Well, um, you know,
Speaker 1: we've been discussing the state of the economy and inflationary
Speaker 1: pressures for quite some time, and the Committee is definitely
Speaker 1: coalesced around um, you know, moving off the effect of
Speaker 1: lower bound We've already you know, begun doing that, and
Speaker 1: as Chapel said, we're going to be moving expeditiously towards
Speaker 1: something much more like a neutral Fed funds rate. My
Speaker 1: own assessment of neutral is in the two and a
Speaker 1: quarter to two and a half percent range for the
Speaker 1: federal funds, right. Uh. Um, you know, as the chair
Speaker 1: has said, Um, you know, we just did fifty and
Speaker 1: you know, fifties are on the table for uh some
Speaker 1: period of time. I would expect by the end of
Speaker 1: this year it could be quite likely that we were
Speaker 1: at a neutral setting, and I think we would be
Speaker 1: very well positioned to address them, you know, future inflationary
Speaker 1: pressures of three. I'm expecting things to improve from the
Speaker 1: very high inflation that we're having, but I do think
Speaker 1: that it's going to take us some time to take
Speaker 1: care of this. Do you see any probability or possibility
Speaker 1: or reason to that seventy mess point move would come
Speaker 1: to the table? Well, I think it's very useful to
Speaker 1: frontload our policy settings at the moment. We did fifty
Speaker 1: at our last meeting, and it's extremely likely that fifty
Speaker 1: at the next meeting, and you know, probably there after.
Speaker 1: You know, it's once we get to a good setting
Speaker 1: for the funds rate, when we can sort of after that,
Speaker 1: do a more measured pace of increases, say twenty five
Speaker 1: basis points at each meeting after that. I think that
Speaker 1: would be a nice shallow path that we give us
Speaker 1: time to assess the incoming data and know exactly what
Speaker 1: we're facing. So, um, if we do a little bit
Speaker 1: more sooner than we can get to that point where
Speaker 1: we can do the shallow path, or you know, maybe
Speaker 1: we take fifties a little bit longer. But you know,
Speaker 1: like I say, I think something like neutral by the
Speaker 1: end of the year. Whether or not, you you know,
Speaker 1: get there sooner or you know, earlier, is not that
Speaker 1: that that critical. It's being well positioned to address the
Speaker 1: problems that we expect to face. In three. That's first
Speaker 1: my first concern, how far above neutral do you think
Speaker 1: you may have to go to get the results you want.
Speaker 1: It's a hard question, um, you know, it's nobody reports
Speaker 1: what the neutral setting of the FED funds rate is.
Speaker 1: It moves around over time. It depends on whether or
Speaker 1: not we've got tail winds or at our back or
Speaker 1: headwinds that we're facing. And so I think we're gonna
Speaker 1: be feeling our way around that. Like I say, I've
Speaker 1: got a benchmark of what I think, and so if
Speaker 1: we go beyond that, we go fifty basis points beyond that,
Speaker 1: seventy basis points beyond that, then that restrictive setting a
Speaker 1: policy should be working to bring inflation down. We don't
Speaker 1: have to constantly increase the funds rate to be restrictive.
Speaker 1: We can get to a restrictive setting and sit there
Speaker 1: for a while. Maybe we sit there longer at a
Speaker 1: less restrictive, you know setting, and it takes a little
Speaker 1: bit longer for inflation to come down. But there are
Speaker 1: many special factors that have led to the very very
Speaker 1: high inflation rate that we're facing, and so I'm hopeful
Speaker 1: that in we're gonna be facing core PC under three pc.
Speaker 1: Wall Street would like to know whether if the economy slows,
Speaker 1: you're willing to slow the pace of rate increases to
Speaker 1: try to keep the economy from falling down to keep
Speaker 1: us out of recession, or whether you will continue to
Speaker 1: be aggressive if inflation remains high. And I suppose that
Speaker 1: begs the question of whether you see a recession or not.
Speaker 1: So I'll leave those two questions for you. Right well,
Speaker 1: we have a demandate, you know, we you know, we
Speaker 1: are trying to set the monetary and financial condem sans
Speaker 1: to support maximum employment and price stability. At the moment,
Speaker 1: the price stability objective is the one that's most critical
Speaker 1: because you know, at eight point three you know, CPI
Speaker 1: UM that's much too high. I think it's going to
Speaker 1: be coming down. The labor market is doing extremely well.
Speaker 1: There's tremendous demand for workers, and I'm hopeful that labor
Speaker 1: force participation will increase. But basically we have a vibrant
Speaker 1: labor market. So the first order of business is getting
Speaker 1: inflation under control. Now as we, you know, get to
Speaker 1: a restrictive setting of monetary policy, I do expect that
Speaker 1: the economy is going to cool a little bit by cooling.
Speaker 1: I mean, we're still going to be having growth. I
Speaker 1: think the growth at trend levels one in three quarters
Speaker 1: to two UM one trend is one in three quarters,
Speaker 1: but I'm looking for two to point two percent as
Speaker 1: we continue to have a neutral to restrictive setting, and
Speaker 1: so that's consistent with growth. If we see something that's
Speaker 1: weaker than that, we'll have to see what that means
Speaker 1: for inflation. Uh. If inflation the trajectory looks like it's
Speaker 1: confidently coming down and we're you know, going to hit
Speaker 1: our two percent objective or be close enough to it,
Speaker 1: then you know we'd have a little more latitude. But
Speaker 1: at the moment, we really need to be focusing on inflation.
Speaker 1: What's your forecast for inflation over the next quarters and year?
Speaker 1: And I asked that in the context of what you're
Speaker 1: hearing from the CEOs in your district about whether they're
Speaker 1: still feeling price pressures, whether they still feel they have
Speaker 1: pricing power. Right. So I want to talk to UM.
Speaker 1: You know businesses, UM, you know C suite individuals or
Speaker 1: you know small business, and you know they're facing a
Speaker 1: lot of cost pressures and to the extent that they've
Speaker 1: been able to do it they have passed along many
Speaker 1: of those cost pressures. UM. I think the days of
Speaker 1: how long they're going to be able to pass that
Speaker 1: along are probably numbered. I think consumers are you know,
Speaker 1: getting fed up with high prices, and they can respond
Speaker 1: by shifting their expenditures. But but businesses are, you know,
Speaker 1: facing those pressures. They've raised wages and in many cases
Speaker 1: where you know, um, you know, six months nine months ago,
Speaker 1: we heard that there were intense wage pressures. When wages
Speaker 1: have gone up, that is actually satisfied and improved the
Speaker 1: labor setting in those manufacturing plants, and so you know,
Speaker 1: higher wages, UM, it doesn't necessarily mean they have to
Speaker 1: keep going up each quarter, each month. And so i'm i'm,
Speaker 1: I'm you know, I feel confident that businesses are going
Speaker 1: to get on top of their labor costs and pricing
Speaker 1: behavior will be more in line with UM. You know
Speaker 1: what I think price stability is. I can't reel off
Speaker 1: what you know inflation is going to be three months
Speaker 1: from now or six months from now, because there are
Speaker 1: a lot of real factors that could play out in
Speaker 1: different ways. And that's part of what we're gonna be
Speaker 1: looking for. You know, if we get to a neutral
Speaker 1: setting by the end of this year. We're gonna have
Speaker 1: you know, many many more months of data to see
Speaker 1: as a trajectory coming down. Or do we still have
Speaker 1: a real problem on our hands and we need to
Speaker 1: be much more restrictive. Um, we're talking with Chicago FED
Speaker 1: President Charles Evans. Uh. Let me follow that up with
Speaker 1: a question, not from me, the professional economist markets watcher,
Speaker 1: but from the average American. When am I gonna feel
Speaker 1: like my paycheck is keeping up with inflation? Yeah? I
Speaker 1: mean it's been very difficult for households. Obviously. Gas prices
Speaker 1: have been extremely high, food prices are high. I think
Speaker 1: worldwide factors are an enormous part of that. UM. You know,
Speaker 1: um energy supplies, the Russian invasion of Ukraine is hitting uh.
Speaker 1: You know, gas prices, agricultural prices. You know, a lot
Speaker 1: of uh weed is produced in Ukraine and that has
Speaker 1: global implications and all of that. Um, we have very
Speaker 1: strong demand. So it's you know it, you know, it
Speaker 1: makes sense. It's what everybody is dealing with. Higher prices, shortages.
Speaker 1: You can't necessarily get exactly the product that you want,
Speaker 1: and it's a lot higher. I'm hopeful that as inflation
Speaker 1: comes down, Hopefully some of those prices will revert and
Speaker 1: they they'll come down. Food prices often you know, can
Speaker 1: can round trip and uh, energy prices too, but gas
Speaker 1: prices are high and that's always you know, a negative
Speaker 1: thing for considered more confidence if we can get that
Speaker 1: in better shape. But that's not monetary policy, that's sort
Speaker 1: of supply conditions. And wages have gone up, so I
Speaker 1: think incomes. Incomes have gone up, and you know, the
Speaker 1: labor market is good. People who want a job can
Speaker 1: get a job. That's good for household income. If we
Speaker 1: can get labor force participation up in some childcare to
Speaker 1: adult care issues resolved to keep everybody in schools, that
Speaker 1: will be beneficial for um, the economy. Have you been
Speaker 1: surprised by the strength of ongoing consumer spending that people
Speaker 1: are still buying a lot of stuff. Basically it has
Speaker 1: been strong, hasn't it. And you know, some of that
Speaker 1: I think is the fiscal support, but it was very
Speaker 1: helpful for many households that otherwise would be um in
Speaker 1: in very difficult situations. Um, I think that you know,
Speaker 1: the growth of the economy. Many people are doing extremely well,
Speaker 1: even if it's unequally shared and so sometimes those retail
Speaker 1: sales you know, come from sort of a skewed distribution
Speaker 1: of you know, um consumers and so um. It's nice
Speaker 1: that the fiscal support packages and the strong labor market,
Speaker 1: which has helped lower income workers you know, get jobs
Speaker 1: at better wages and also at better schedules, probably more
Speaker 1: full time. I mean, that's been beneficial, and so I
Speaker 1: think that's contributed to the strength in retail, and I
Speaker 1: hope that it continues. When you think about going forward,
Speaker 1: how much confidence do you have in your ability to
Speaker 1: bring inflation down, given that you've mentioned COVID and Ukraine
Speaker 1: and all of the other things that are going on,
Speaker 1: that our supply side problems and the FED works on
Speaker 1: the demand side. That's right, that's right. I mean, you know,
Speaker 1: one level I'm extremely confident that we can bring inflation down.
Speaker 1: Inflation is the you know, ever increasing prices of all goods,
Speaker 1: and you know that's a monetary phenomenon, and the setting
Speaker 1: of the federal funds rate, the policy rate, can address that.
Speaker 1: What I'm not confident about is we can't bring down
Speaker 1: gas prices. Gas prices are going to be very high
Speaker 1: because of real factors, um low inflation is going to
Speaker 1: be well, they're high, but they're not continuing to go up.
Speaker 1: But those are real factors, and it's another set of
Speaker 1: public policies that need to deal with that. Food prices
Speaker 1: are the same way. I'm confident that the setting of
Speaker 1: monetary policy can keep them from ever increasing. They could
Speaker 1: stay high on a relative basis compared to other prices
Speaker 1: for longer than most people would like, but we can
Speaker 1: get inflation down. Um You know, it probably would take
Speaker 1: more restrictive setting a monetary policy if those special factors
Speaker 1: continue to be high. Before we let you go, let
Speaker 1: me ask you about the balance sheet, because that's the
Speaker 1: other side of your monetary policy that has to play out.
Speaker 1: What do you anticipate happening when you start lowering the
Speaker 1: balance sheet? Should we see um rise in interest rates
Speaker 1: at the long end because it was designed to push
Speaker 1: them down at the log end, And if so, by
Speaker 1: how much? That's right. So we've increased our balance sheet dramatically,
Speaker 1: and we've announced that we're gonna let materian assets roll off.
Speaker 1: We chose among the most aggressive roll off um PA
Speaker 1: that that we could. So I think we're going to
Speaker 1: get our balance sheet down to a more normal level
Speaker 1: before very long that will have a restrictive effect on
Speaker 1: financial markets that sometimes is measured. I think for what
Speaker 1: we're looking at it, maybe it's the same as if
Speaker 1: we had increase the federal funds rate by fifty basis
Speaker 1: points on top of what we're actually doing, so we
Speaker 1: do have that restrictive setting. I tend to think that
Speaker 1: markets are forward looking. They are, and they price this
Speaker 1: in pretty much when they know what it is. So
Speaker 1: I think that effect is already working its way through
Speaker 1: financial markets. And we've seen long rates go up some
Speaker 1: we've seen borrowing rates, auto rates, mortgage rates go up,
Speaker 1: and so I think it's having that effect. That's helped
Speaker 1: somewhat with the front loading of restrictive monetary policies, and
Speaker 1: so that's you know, we're probably better position to be
Speaker 1: bringing inflation down because of that. So um, you know,
Speaker 1: I think that's working pretty much as we were hoping. Well.
Speaker 1: We wish you luck. Thank you very much Charles Evans
Speaker 1: for joining us today, the president of the Chicago Federal
Speaker 1: Earve Bank. Let's get to Annahan Equity Strategistics, Farncy Securities. Anna,
Speaker 1: the marching pressure from Walmart to target your thoughts. Please, Well,
Speaker 1: it's certainly a big indicator. Like you mentioned earlier, they
Speaker 1: employ a lot of people, and as people have a
Speaker 1: tighter later market labor markets, and yet if people are
Speaker 1: spending lest the question is can really companies passlong price.
Speaker 1: But keep in mind also, John, this is sort of
Speaker 1: what we're looking for, right We wanted to see demand
Speaker 1: cool off a bit to balance things, to bring inflation
Speaker 1: more under control. So you know, it's sort of the
Speaker 1: what we were hoping for, but also a little concerning
Speaker 1: on how much this raises the possibility of recession. And
Speaker 1: we're looking at the physics of a rocket launch right now.
Speaker 1: And they mentioned the maximum dynamic pressure. You did this
Speaker 1: ballet in your physics of undergraduate Let's cut to the chase, Anna,
Speaker 1: are we at the maximum dynamic pressure of inflation right now?
Speaker 1: We do think generally inflation measures have peaked, but I
Speaker 1: think it's going to be you know, using out Chirman
Speaker 1: pals language here, it's gonna be harder to get that
Speaker 1: soft ish landing. I think it's gonna be harder to
Speaker 1: bring down that figure. People were hoping that when we
Speaker 1: got this sort of eight percent headline number that it
Speaker 1: could come right back down. But we're seeing that's going
Speaker 1: to take several more quarters. But you know what's so
Speaker 1: important here, Let's go astronautical again, aeronautical again if we can, uh,
Speaker 1: and the the acceleration function is a squared function. Guessing
Speaker 1: time on the x axis is the hardest thing to
Speaker 1: do in this racket. What are the determinants you're gonna
Speaker 1: use to guess when inflation rolls over? I think one
Speaker 1: is a dynamic between really how does that good spending
Speaker 1: go versus a service spending? I think also to see
Speaker 1: what is the day name it between when you have
Speaker 1: a tight labor market and companies are able to have
Speaker 1: our have to be competitive and raise wages so that
Speaker 1: consumers actually have more to spend. But how will that
Speaker 1: offset with actually companies being able to pass along price
Speaker 1: because consumers have more money to spend. And then a
Speaker 1: third component I think that we're under appreciating here is
Speaker 1: right now, household wealth is very heavily tied to the
Speaker 1: equity markets. I think we saw historical amount of nearly
Speaker 1: a quarter of household wealth is tied to equity. So
Speaker 1: when equities are down like this, it can weigh on
Speaker 1: consumer sentiment. If we stay down. At these levels, you
Speaker 1: could see sort of that souring sentiment really start bleeding
Speaker 1: into consumer spending. These are the indicators we are watching,
Speaker 1: but we're not quite convinced yet that consumer is really decelerating.
Speaker 1: And can you elaborate what you said, which is that
Speaker 1: this particular series of reports is a little concerning with
Speaker 1: how much it raises the risk of recession. How So, well,
Speaker 1: when you talk about what is the possibility of recession
Speaker 1: for us, it's still a tail probability. It is not
Speaker 1: our base case, and we still put the possibility of
Speaker 1: a recession by end of at around so that's actually
Speaker 1: quite low compared to where some people are on the street.
Speaker 1: But the main driver and something that we've all focused
Speaker 1: on and relied on to pull us out of the recession,
Speaker 1: post pandemic and continue to driver economy has been the
Speaker 1: US consumer. The strength of spending and that willingness to
Speaker 1: spend not just on goods, but as COVID was relaxed,
Speaker 1: as lockdowns, relaxed on experiences and get out there and
Speaker 1: travel and put that money to work and circulate through
Speaker 1: the economy. So if that driver starts to cool down,
Speaker 1: then becomes the concern our margins really coming under pressure
Speaker 1: enough that earnings growth will turn negative, that GDP growth
Speaker 1: could turn negative again. Not our base case, Lisa, but
Speaker 1: the tail risks could be getting bigger here. So there
Speaker 1: have been a number of strategists that have come on
Speaker 1: and said they still like consumer discretion area because there
Speaker 1: has been such a wave of spending and because of
Speaker 1: the strength and the consumer. Would you back away from
Speaker 1: that kind of idea based on what we're seeing right
Speaker 1: now in these numbers. I wouldn't particularly back away, but
Speaker 1: perhaps it wouldn't be our number one call here. And
Speaker 1: just to keep in mind, you know, some part of that.
Speaker 1: We've been actually pretty negative on the retailing space to
Speaker 1: begin with, but we're still positive on the sources where
Speaker 1: you can have leisure spending, we can have those reopening trades,
Speaker 1: the travel tide industries. On the other hand, what we've
Speaker 1: been looking at very carefully, especially with the more tightening
Speaker 1: of the monetary policy here, has been the growth style.
Speaker 1: You've seen it beaten down so badly this year, and
Speaker 1: you've seen the we think we're starting to see the
Speaker 1: bottom for the growth style, so we're starting to warm
Speaker 1: up to it again. And when we look at the
Speaker 1: market adjustment here, it is off central banks, it is
Speaker 1: off the Fed. I'm focused on the non linearity of
Speaker 1: their FED decisions they have to make. It's frankly true
Speaker 1: for e c B as well. Link equity market performance
Speaker 1: into the massive challenges the FED has after the July
Speaker 1: You know, you bring up a great point, Tom, is
Speaker 1: how our equity is going to handle it? If the
Speaker 1: Fed continues to tighten and we start to really see
Speaker 1: that GDP growth slow for us, we do expect GDP
Speaker 1: to come down, but we also still think that unemployment
Speaker 1: rates could come even lower. And in that kind of
Speaker 1: environment again, where jobs and wade growth is aggressive and
Speaker 1: wages are going higher, we still think a possibility that
Speaker 1: equities can go higher from here. Our price target remains
Speaker 1: forty seven fifteen, and there's a reason for that. We
Speaker 1: think that there could be a change in the leadership here. Again,
Speaker 1: if growth has bottomed and we start getting a better
Speaker 1: handle inflation, that's gonna bode much wetter for these growth sectors,
Speaker 1: and they are still a large part of the SMPI
Speaker 1: A hand, thank you, an a hand well spunk our security. St.
Speaker 1: Joseph Feldman is with us. He holds court with Dana
Speaker 1: Telsey at the Telsa Advisory. We can talk about Walmart
Speaker 1: and Target, but Joe Felman, I want to talk about
Speaker 1: what you and I lived April two, two thousand thirteen,
Speaker 1: the real codification of reg f D. Are these corporations
Speaker 1: afraid to give guidance to animals like you? Well, I
Speaker 1: think the corporations are certainly afraid to give inter quarter
Speaker 1: commentary that would, you know, give too much of an
Speaker 1: insight into how the earnings might show up. And when
Speaker 1: doing so, they do have to make things broadly public
Speaker 1: and available at the same time, so that that definitely
Speaker 1: plays into this um and I do think that you
Speaker 1: you've seen corporations act differently. I've seen investor relations professionals
Speaker 1: get fired over it. So I think people are very
Speaker 1: careful to not give too much into quarter information struggle.
Speaker 1: When I say, a stoke down off the back of
Speaker 1: earnings on something that should not be a surprise, because
Speaker 1: they seem to be struggling with something cha other was
Speaker 1: obvious to everyone. I don't get that we've got a
Speaker 1: big execution problem at a single name or more broadly,
Speaker 1: and when you see two data points, it feels like
Speaker 1: a broader story it feels like Joe, from my perspective
Speaker 1: and others two looking in, they're struggling to find the
Speaker 1: right balance. These companies have gone from being understaffed, too overstaffed,
Speaker 1: undersupplied to what oversupplied and Joe, all of a sudden,
Speaker 1: there's all this inventory and they've done know what to
Speaker 1: do with it? Joe, how do you find the right
Speaker 1: balance in economy moving this fast? Yeah, I and I
Speaker 1: think that's really the challenge. And something actually Doug McMillan
Speaker 1: talked about yesterday was the speed of all of this
Speaker 1: that it's really hard to adjust the business that quickly
Speaker 1: to play some catch up. Obviously, the consumers moving and
Speaker 1: changing quite rapidly, and I think you're right. I think
Speaker 1: that you know, the retailers, we saw this with the
Speaker 1: Amazon too, where they kind of we're building out to
Speaker 1: the capacity that they needed at the time during the
Speaker 1: height of the pandemic, and now you're seeing some of
Speaker 1: the gift back. What's really interesting here is if you
Speaker 1: go back in history, Target targets gross margin has pretty
Speaker 1: been very stable right around obviously this quarter had really
Speaker 1: dropped a lot to five and a half percent, and
Speaker 1: their guidance for the year would imply that it's going
Speaker 1: to be certainly well below maybe more like I think
Speaker 1: that's transitory. And I know the stocks down a lot
Speaker 1: right now, and but if you kind of really look
Speaker 1: closely at that line item and look at the way
Speaker 1: they're operating the rest of the business, there's a lot
Speaker 1: of pressures right now on the supply chain, on fuel costs,
Speaker 1: on everything that's just hurting the business right now. I
Speaker 1: had a brain freeze there, Joe Feldman, because it just
Speaker 1: got the field cost to the Gulf stream to Davos
Speaker 1: Wold Lisa, that has gone up to say the least
Speaker 1: regulation f D I put two thousand thirteen wrong. That
Speaker 1: was a little bit ago on regg FD Lisa. I
Speaker 1: think I see that little violin in the corner that's
Speaker 1: just very very small. I think that, Look, I don't
Speaker 1: think that that's probably where people's focuses are on the
Speaker 1: jet stream. However, there is this issue of what comes next,
Speaker 1: what's the next shoe to drop? After we saw Walmart
Speaker 1: and Target, Joe, what's your sense here of the other
Speaker 1: players that will also see similar hits that are not
Speaker 1: yet priced in. Well, I think that you know, those
Speaker 1: that have more discretionary businesses are likely to see some pressure. Um,
Speaker 1: you know, we've pleasantly surprised actually to see like home
Speaker 1: deepon lows have been performing fairly well. Um, you know,
Speaker 1: in the face of this and everybody thought, well home
Speaker 1: was going to be done and it's not. At least
Speaker 1: home improvement is not. But it does feel like we've
Speaker 1: seen a slower trend in apparel and in um in
Speaker 1: other discretion and categories like home furnishings, that is where
Speaker 1: we see some concerns. So some of the other discounters
Speaker 1: maybe under some pressure today. Uh you know, I think
Speaker 1: you have to just start worrying about everybody on the
Speaker 1: gross margin side and see how that profitability could be
Speaker 1: impacted by that, even with stronger sales like we just
Speaker 1: left from Walmart and Target. So before we let you go,
Speaker 1: can you just frame this moment how much of a
Speaker 1: turning point this is for a lot of the consumer
Speaker 1: discretionary areas and frankly the consumer stable companies like grocery
Speaker 1: stores and others, especially in light of the surprise in
Speaker 1: the C suite that to a lot of us shouldn't
Speaker 1: have been a such a surprise. Yeah, I think that
Speaker 1: we were all exsuming that the supply chain pressures have
Speaker 1: been fully factored in at this point, and they're just not.
Speaker 1: And we are definitely seeing the slowdown or change in
Speaker 1: consumer behavior where there's more of a focus on, as
Speaker 1: you said, consumables basics, getting to work and just drive,
Speaker 1: you know, paying those high gas prices right now. And
Speaker 1: I think that that lends well to the more the
Speaker 1: CpG companies that are out there and the grocers and
Speaker 1: other value oriented retail where people are going to be
Speaker 1: looking to save money right now. Joe, Thank you, buddy.
Speaker 1: As always great perspective. Jeff found on there of TAUSI
Speaker 1: Advisory Group. Jukes thinks we need to talk more about Europe.
Speaker 1: So let's get to Kit Jukes now, the chief effect
Speaker 1: strategist at suck Gen. Kit your words, ECB rates have
Speaker 1: been negative for almost eight years. If the economy can
Speaker 1: sustain positive rates within the next year, the euro will
Speaker 1: be a lot stronger when it happens. If Kit, let's
Speaker 1: talk about the if. How big is that? If? Huge? Enormous?
Speaker 1: I mean, okay, so the first pieces, obviously the short
Speaker 1: term um elephants in the room downside risk, which is
Speaker 1: what if the gas gets turned off natural gas gets
Speaker 1: really really expensive. That's bad for everybody, but it's spectacularly
Speaker 1: about for Europe. So I don't see how we avoid
Speaker 1: a recessions that happens. Even you commissioned admits will pretty
Speaker 1: much admit that that that will get a recession if
Speaker 1: that happens. So that that's the first piece. Um. The
Speaker 1: second piece. You know, they've been going one way, really
Speaker 1: lower and lower rates for long enoughter that you know,
Speaker 1: the first turn upwards, we'll have a significant market reaction.
Speaker 1: And already you know we have clients asking, you know,
Speaker 1: where is the where is the real sensitive point on
Speaker 1: the spread between peripheral and German bond deals in Europe?
Speaker 1: You know all of these things. So I mean I'll
Speaker 1: put a bit if in in sort of you know,
Speaker 1: three foot high capital letters. Um, it's um, it's it's
Speaker 1: it's even less likely than Arsenal making the Champions League's
Speaker 1: The hamewark of your work is in a few paragraphs,
Speaker 1: you squeeze in a lot on a lot of different countries,
Speaker 1: cultures and economies. Right now, there is a mass excuse
Speaker 1: my French folks, pissing match in the United Kingdom over
Speaker 1: the governor of the Bank of England, Irvin King, the
Speaker 1: ex governor going after him, Ambrose Evans Pritchard in the Telegraph,
Speaker 1: and now there's coming to the defense of economy. So
Speaker 1: put their legs on their pants on one leg at
Speaker 1: a time. What's the kitchen scorecard on how central bankers
Speaker 1: worldwide are doing? Uh, they're doing their best. Look, I mean,
Speaker 1: the only analogy I can have the central bankers at
Speaker 1: the moment is we're saying cam Tom Hanks Land is
Speaker 1: playing on the Hudson, but his playing this time. It
Speaker 1: didn't have a bird strike. It was hit with a
Speaker 1: bird strike, then it was hit with an electrical storm,
Speaker 1: then it was hit with lightning, and then President putin
Speaker 1: fart a missile at it, which which Tom Hanks can
Speaker 1: do that for all the movies we've ever seen. So
Speaker 1: I I give them a break. They had no chance.
Speaker 1: They did their best by flooding the system with money
Speaker 1: back at the start of the pandemic, and since then
Speaker 1: they're literally it's why in the end we'll get a
Speaker 1: recession because this is too hard and critics can can
Speaker 1: criticize full of kit when you say we're going to
Speaker 1: get a recession. Talking about Europe, I know that you
Speaker 1: and your colleagues don't believe that the US necessarily is
Speaker 1: headed for recession. Do you think that those dualities are
Speaker 1: basically priced into the euro US dollar already or do
Speaker 1: you think this has more to go and you could
Speaker 1: get to parody and beyond. I think the trouble with
Speaker 1: the Euro to meet is back to that issue with
Speaker 1: with a stoppage to the gas which brings the recession
Speaker 1: forwards in terms of time and breaks through. And I
Speaker 1: can't I can't measure. I can't measure the downside of
Speaker 1: the Euro from that all the probability of it happening,
Speaker 1: So how can I buy the EU. It's just that's
Speaker 1: why I find it unbiable at this point in time,
Speaker 1: and I would go on trading. But yes, there is
Speaker 1: a big difference in US and Europe. I'm not sure
Speaker 1: it's complete de presdent. I definitely think it's why treasury
Speaker 1: gilds have got more upside. We have not seen the
Speaker 1: peak yet, and when that happens, I suspect i'll see
Speaker 1: lower levels in the Euro before we've done. I would say, though,
Speaker 1: you know we will get a recession. I mean models
Speaker 1: struggle with the recession because it's difficult to work out
Speaker 1: the accumulated effect of being bombarded by so many once
Speaker 1: every five year shocks in a two year period. You
Speaker 1: sound like a hard landing guy. You just said we'll
Speaker 1: get a recession. That's not really the cool though, is it?
Speaker 1: To band magnitude and timing? Where are you on there?
Speaker 1: I kind of think next year is really the difficult year,
Speaker 1: but but it could come again. There are things that
Speaker 1: can make it come forward. So you know, um, when
Speaker 1: when you're talking about all prices are upen and saying
Speaker 1: that other prices are are more, every other version of
Speaker 1: oil that I use is up more than than crude,
Speaker 1: So most is jet fuel, diesels up a lot, heating
Speaker 1: oils up a lot, so they're all they're all up
Speaker 1: by more than crude. So if we get another push
Speaker 1: higher and crude, it's going to really hurt. If this
Speaker 1: summer's harvest to give us brutal food prices, that's going
Speaker 1: to really hurt. The housing market in the UK is
Speaker 1: just threatening to roll over now and yours could follow.
Speaker 1: So um, So I would say recessions are pretty likely
Speaker 1: in three in lots of places, I think it's it's
Speaker 1: just plain blind luck. If we can avoid them with
Speaker 1: with the with the number of pressures coming to the system.
Speaker 1: But Europe is right in the firing line. That's okay,
Speaker 1: awesome to catch up. And just remember you brought up
Speaker 1: passin tell mc norda and I didn't mention it. Okay,
Speaker 1: you know it's it's still friends. Thank you, buddy. I'm
Speaker 1: really get right to it here, because time is so
Speaker 1: special with Douglas Cass. He was a Subris partners as
Speaker 1: the traitor is Paul bentioned earlier. He has been gifted
Speaker 1: on caution. He's gotten a little more optimistic recently, Doug,
Speaker 1: What do you do when Bank of America's Michael Hartnett
Speaker 1: says cash levels are back to the gloom after September
Speaker 1: eleven of two thousand one, What does young Cass do
Speaker 1: amid the gloom? Are you referring to the gloom of
Speaker 1: the Boston Red Sox? You're going there? You know you
Speaker 1: think I wouldn't broach the subject of Major League Baseball, Dan,
Speaker 1: I've you know, you know the Boston Red Sox of
Speaker 1: the New Baltimore Orio. Oh, those are fighting. And by
Speaker 1: the way, I'll get to you. I'll field your question
Speaker 1: a second but the Yankees are now on page with
Speaker 1: a winning percentage of point seven five oh, to be
Speaker 1: better than the two greatest Yankee teams in history. You
Speaker 1: got you think these guys are as solid as twenty seven.
Speaker 1: Look for the first time in the history of the franchise,
Speaker 1: through thirty five games, three players Rizzo, Stanton and Judge
Speaker 1: hit ten homers or more. This is amazing? Is Bran
Speaker 1: Cashing a genius? And now, now can you remind me
Speaker 1: what the question was? The question was the cash build
Speaker 1: up that's out there is on the edge of red
Speaker 1: sox gloom. What do you do when you see everybody's
Speaker 1: saying go to cash. Sure, I'll frame my view right now,
Speaker 1: which is a lot than the view that I've expressed
Speaker 1: to you, Paul and John. In the last twelve months,
Speaker 1: UM continued to find myself of the view that the
Speaker 1: consensus has very abruptly shifted from wearing rose colored glasses
Speaker 1: of complacency in late now being fearful and embracing many
Speaker 1: of the long held fundamental concerns that had a slugflation
Speaker 1: um geopolitical risks and a flat world, high valuations, persistent
Speaker 1: supply chain problems, and obviously two elevated economic and profit expectations.
Speaker 1: So last week I began for the first time to
Speaker 1: increase our net long exposure on the dip on Wednesday
Speaker 1: and Thursday. As to me getting back to your question
Speaker 1: about capitulation, market participants seem to have already capitulated, providing
Speaker 1: potential positive optionality. We began the year while most participants
Speaker 1: were unprepared. We were prepared. I started up Sea Breeze
Speaker 1: at the end of UM last year. By the way,
Speaker 1: Sea Breeze Partners LP dot com is our new website,
Speaker 1: UH and our commentary is on that UM and I'm
Speaker 1: happy to say that we're not only up for the month,
Speaker 1: we're positive for all of two, which puts us in
Speaker 1: good stead against our peers and against the markets UM.
Speaker 1: Everyone me was offside at the end of last year
Speaker 1: and is starting to go offside this year. They were
Speaker 1: builled up as we entered the year, and now they're
Speaker 1: buried up after a very large market run down. And
Speaker 1: and I think that forced liquidation and defensive posturing UM
Speaker 1: on part of the marginal investor hedge funds remains a
Speaker 1: very important constructive part of my argument. The first liquable
Speaker 1: rally is ahead the first liquidation was a red sox
Speaker 1: picture after one and two thirds. Going back to the dug,
Speaker 1: I mean, seriously, seriously, tom Um, I've I've observed over
Speaker 1: time the tops are processes. We saw an important one,
Speaker 1: I believe in late when the market was top heavy
Speaker 1: with all the fangs, when the rest of the market
Speaker 1: was foundering, and that bottoms are so to me, capitulation
Speaker 1: was the event when you force retail and institutional liquidation
Speaker 1: and head funds owing to all these redemption requests. It's
Speaker 1: very important to recognize that in our financial markets, the
Speaker 1: strongest known gravitational force is produced by the presence of
Speaker 1: stop losses and liquidations imposed by leverage. The larger the stop,
Speaker 1: the grade of the poll. So we have this non
Speaker 1: virtuous cycle of force hedge fund selling because of bad
Speaker 1: performance that led to redemptions, and that was a key
Speaker 1: factor in changing my market view. But there's a whole
Speaker 1: bunch of other statistics that I could tell you. For example,
Speaker 1: the stock bond strategy, the return was it was the
Speaker 1: worst concurrent in the history in a century, minus twelve percent.
Speaker 1: Do you know what the second worst performance year to
Speaker 1: date April was industry four, so is three X that
Speaker 1: this is so so, so so so important. Well, I
Speaker 1: did this a week ago. Dog, I did it myself, Paul,
Speaker 1: this is so important, dog, cass, how do you do
Speaker 1: equities with the record bond losses we have? I mean I,
Speaker 1: I am absolutely fascinated by the financial industry certitude. Bonds
Speaker 1: never go down and we're having a bear market? You
Speaker 1: and I never you and I mean Babe Ruth didn't
Speaker 1: see a bear market like this? Right? Well? Um, in
Speaker 1: terms of bonds, I think today's target report is pretty important. UM.
Speaker 1: And let me let me tie it into fixed income. UM.
Speaker 1: One of the one of the primary concerns, Paul, we
Speaker 1: had going into was that lower demand from higher prices
Speaker 1: seemed inevitable and price elasticity of demand UH is something
Speaker 1: we learned in economics classes that measures the responsiveness of
Speaker 1: the quantity demanded or supplied of a good to a
Speaker 1: change in its price. It's computed by the percentage change
Speaker 1: in quantity demanded or supply divided by the percentage change
Speaker 1: in price, and elasticity can be described as elastic or
Speaker 1: very responsive, or inelastic not very responsive. So we've been
Speaker 1: fearful for some time that whether it's a twelve dollar
Speaker 1: smartphone from Apple, a cup of Starbucks coffee groceries at
Speaker 1: Walmart on costco get used for f one fifty. Lower
Speaker 1: demand from higher prices is today's reality. But this is
Speaker 1: why it's positive. And everyone is going to be selling
Speaker 1: into all right. So when I see it news, as
Speaker 1: you said in the prior segment, is the cure for
Speaker 1: higher inflation is our inflation. And the sort of reaction
Speaker 1: is ultimately good news from the standpoint of a FED,
Speaker 1: which will probably not be as hawkish as so I
Speaker 1: assumed and many assumed. Let it in here because so, Doug.
Speaker 1: I mean, I'm a big fan of tar J. When
Speaker 1: I see a hundred billion dollar market cap stock, it's
Speaker 1: a real company, real demand, real customers, you know, real cash.
Speaker 1: Lower earnings down twenty What does that tell you? It
Speaker 1: tells me if I had a four percent invested position
Speaker 1: in Walmart, my portfolio just lost one percent today. I'll
Speaker 1: be honest with you. I mean, this is an environment
Speaker 1: pole where uh, the man is separated from the boys,
Speaker 1: and I maybe still be a boy. I don't. I'm
Speaker 1: not sure yet, even though we're up on the year. Um,
Speaker 1: but you know, so where do you want where do
Speaker 1: you dip your toes here, Doug, I mean if if, if,
Speaker 1: if you feel like you've seen some type of capitulation,
Speaker 1: where are you dipping your toes? The two areas really
Speaker 1: quickly are the banks, which is by far my largest position.
Speaker 1: I have a lot of background um and home builders.
Speaker 1: All right, Okay, I gotta ask about Amazon very quickly here,
Speaker 1: Cloud on fire, cardboard boxes, not so much. You've been
Speaker 1: long Amazon, you say it's even a long term hold,
Speaker 1: Doug Cast on Amazon. This may we markedly reduced our
Speaker 1: exposure to Amazon at around I haven't take end position,
Speaker 1: which I plan on increasing. Okay, Doug Cass. Thanks. Can
Speaker 1: you come on the next time the Yankees win. I'm
Speaker 1: not available tomorrow morning, Okay, Doug Cast, Thank you so much.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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