Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jayleie. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. Joining us now
Speaker 1: is Gaki Choundery, head of Ice Shares America's investment strategy
Speaker 1: at black Rock. Great to catch up with you again.
Speaker 1: Let's just start with CPI, What you're looking for tomorrow
Speaker 1: and how you expect this market to respond to it. Hey,
Speaker 1: good morning, Great to be here. So very exciting days
Speaker 1: for those of us who look at the inflation markets,
Speaker 1: which is everyone these days. Um So, I think we're
Speaker 1: probably going to get something that's a little bit stronger
Speaker 1: at least than what the market is pricing in on
Speaker 1: both the core and the headline. And when I think
Speaker 1: about the core or data, I think what will be
Speaker 1: important for us to look at is the breadth of
Speaker 1: the strength. Um So, thinking back to sort of the summer,
Speaker 1: you'll remember that most of the strength and cp I
Speaker 1: was coming from those reopening sectors. So whether you think
Speaker 1: about travel or f as or hotels, things like that.
Speaker 1: And I think what we saw in the October data
Speaker 1: more specifically, was that there was a little bit of
Speaker 1: a breath broadening out, so we were seeing strengthen both
Speaker 1: goods and services inflation. So I am looking forward to
Speaker 1: seeing more of that, more of strength and some of
Speaker 1: the goods parts of the market as well as services
Speaker 1: such as shelter inflation. Where is the opportunity for investors, Gary,
Speaker 1: given the fact that we've seen inflation rise to the
Speaker 1: fastest pace since the nineteen eighties, likely to continue in
Speaker 1: that vein with likely pressure then coming from the Fed
Speaker 1: next year. Yes, absolutely, so I would say a couple
Speaker 1: of things here. We do think that inflation, you know,
Speaker 1: if you look about a year ahead from now, so
Speaker 1: obviously we're going to see a pick up in the
Speaker 1: near town, but after that we're likely to moderate. But
Speaker 1: I think what it's important to note is we're still
Speaker 1: going to settle at a level that is higher than
Speaker 1: the pre pandemic period, which was obviously, as we know,
Speaker 1: below two percent. So we're going to settle at that
Speaker 1: higher level of inflation, and investors need to think about
Speaker 1: hedging their portfolios in a multi asset fashion. So obviously
Speaker 1: looking at equities of those companies what we call the
Speaker 1: quality companies that are able to pass on higher prices
Speaker 1: to their cast, you know, pass on the higher prices.
Speaker 1: Within the bond markets, obviously, you know expectations are our
Speaker 1: expectations are for yields to go higher. But at the
Speaker 1: same time, sort of moving your allocations to inflation link
Speaker 1: bonds I think could make sense. We've certainly seen a
Speaker 1: huge amount of flow both into T I P and
Speaker 1: S t I P, which are the two E t
Speaker 1: F tak us. Twenty of the fixed income E t
Speaker 1: F flows this year have come into inflation link bonds
Speaker 1: and I expect that to continue to do well as
Speaker 1: compared to nominal bonds. And in the last area, I
Speaker 1: think that makes sense. It's really looking at real assets,
Speaker 1: so you should be looking at a basket of diversified commodities,
Speaker 1: looking at reads UH and looking at infrastructure. I think
Speaker 1: all of those makes sense for an investor to think
Speaker 1: about in a regime of higher inflation than the pre
Speaker 1: pandemic one. Gargi, it's fantastic to speak with you, in
Speaker 1: part because you've got a bird's eye view for the
Speaker 1: retail and the institutional investors. Have you felt a big
Speaker 1: divergence between the two heading into year end as retail
Speaker 1: investors see the inflation concerns and a longer term nature
Speaker 1: of them potentially as being more of a threat in
Speaker 1: the institutions that seem relatively sanguine or even optimistic in
Speaker 1: their outlooks um, I don't think it's a retail versus
Speaker 1: institutional bifurcation. I think there are investors that brought into
Speaker 1: that really did buy into that transitory story. I know
Speaker 1: we don't say that word anymore, it's been retired, but
Speaker 1: there were investors that did buy into that story, and
Speaker 1: they could have been from the wealth community as well
Speaker 1: as the institutional community. I think more and more we're
Speaker 1: gravitating towards the space where investors are asking me, and
Speaker 1: I'm sure many other strategies and portfolio managers across Wall Street,
Speaker 1: around what is the best inflation head? You know, we've
Speaker 1: written papers and we're coming out with our year ahead outlook,
Speaker 1: and this is something that we're focusing on because this
Speaker 1: is what our clients are asking us. So I think
Speaker 1: the story has changed from what do I need to
Speaker 1: do to insulate my portfolio for the next two or
Speaker 1: three months to very much a belief now that this
Speaker 1: is probably with us for a slightly longer period of time,
Speaker 1: and how should I play for it in that medium
Speaker 1: term period. And Gargy speaking of the two outlook, we've
Speaker 1: talked a lot already this morning about the divergence in
Speaker 1: the headline level where we think the SMB five were
Speaker 1: strategists think it will end up at the surface level
Speaker 1: when you talk about the leadership beneath. It was supposed
Speaker 1: to be value over growth, small caps over large that
Speaker 1: actually didn't really happen. Does that actually happen in you
Speaker 1: we'll see, I mean, listen, there there are a lot
Speaker 1: of reasons why it didn't happen. You know, we saw
Speaker 1: that did take place in the beginning of the year,
Speaker 1: and then you had the delta scare and again this year,
Speaker 1: right when we were all getting pretty optimistic about the
Speaker 1: growth prospect and you know we still are. You do
Speaker 1: have this omicron fear that is in the markets. We
Speaker 1: see that in the bond pricing right now. Um So
Speaker 1: for next year, I think there is reason to believe that, yes,
Speaker 1: we can see some of those cyclical components of the
Speaker 1: economy do better. But we have to be a little
Speaker 1: bit humble around some of the risks that have come
Speaker 1: up more recently, whether it is with the Federal Reserve,
Speaker 1: whether it's with the new variant. UM. So what we're
Speaker 1: telling investors to do is really focus on a value
Speaker 1: and a quality barbell and then really look at some
Speaker 1: of those companies that have that pricing power, that ability
Speaker 1: to pass on higher prices and um. You know, that's
Speaker 1: what we think investors should do for just awesome and
Speaker 1: so always and could hear from your county chantry there
Speaker 1: of plank Rock Market Banner. I wonder if he is
Speaker 1: the head of Right Strategy Bank America Global Research. Mark
Speaker 1: the front end the back end of the yeld curve.
Speaker 1: Let's start with the back end and then we can
Speaker 1: go to the front end. What is driving tens right now?
Speaker 1: Mark why we down at one fifty? So tends are
Speaker 1: believing that the Fed maybe making a policy error by
Speaker 1: essentially overweighting a fight against inflation versus supporting growth. UM.
Speaker 1: They're doing that because there's concerns about the omicron variant
Speaker 1: and the recent uptake in cases that we have seen.
Speaker 1: They're doing that because they're worried that the FED is
Speaker 1: going to be tightening into supply constrained inflation and reduction
Speaker 1: of consumer purchasing power. And they're doing it because they're
Speaker 1: worried that risk assets may be very sensitive to overall
Speaker 1: rate levels in the stance of policy. So that's what's
Speaker 1: keeping the back end relatively pinned. It's what's keeping it
Speaker 1: around one and a half percent right now. Um, But
Speaker 1: it's what's allowing the curve to flatten because the market
Speaker 1: has gotten the message from the FED and they know
Speaker 1: that the FED is going to be tightening in the
Speaker 1: not too distant future. This is a reason why I
Speaker 1: love covering this market. It's enough to make your head spin.
Speaker 1: The idea that at a certain point the FED might
Speaker 1: get a message from the markets that are getting a
Speaker 1: message from the Federal Reserve and say, well, they think
Speaker 1: that we're making a policy error. Perhaps will tap the
Speaker 1: brakes not raise rates as much. At what point does
Speaker 1: a yield curve flattening send that message to the Federal Reserve?
Speaker 1: So I think that the FED is probably not too
Speaker 1: happy about the shape of the curve, given where they
Speaker 1: are in their hiking cycle. They're just about to start
Speaker 1: and they know that the market is telling them that
Speaker 1: they may not be able to hike by all that much.
Speaker 1: That's not a real warm and fuzzy signal if you're
Speaker 1: at the Fed. But that's not your issue right now.
Speaker 1: Your issue is that you need to guard against elevated inflation.
Speaker 1: You need to start leaning against demand, and need to
Speaker 1: start doing that by tightening financial conditions. That's how the
Speaker 1: FED transmits monetary policy. And so even though it's not
Speaker 1: a great signal for the Fed, I don't think it's
Speaker 1: going to prevent them from taking the necessary action and
Speaker 1: beginning to withdraw a monetary policy accommodation. Well, the action
Speaker 1: that will be taking in the most immediate term may
Speaker 1: come on Wednesday, and of course we have the cp
Speaker 1: I print tomorrow mark or either of those events actually
Speaker 1: going to be catalyst for the bond market or is
Speaker 1: all of that already priced in and the market already
Speaker 1: front rent both of those events. So the market certainly
Speaker 1: expecting elevated inflation tomorrow. Our economists who have had a
Speaker 1: great call on this are projecting, though, that CPI is
Speaker 1: going to realize even higher than expected. Uh. They project
Speaker 1: a reading that's going to be two tents above consensus
Speaker 1: on headline at one tenth above consensus on four. So
Speaker 1: that's gonna be Probably it's gonna further this flattening dynamic
Speaker 1: that we're seeing in the market, or it's gonna firm, uh,
Speaker 1: the amount of rate hikes that are expected for next year. Now,
Speaker 1: the meeting next week, we think will confirm some things
Speaker 1: that are likely widely expected now by the market, such
Speaker 1: as a more accelerated pace of taper, essentially doubling the
Speaker 1: monthly just reduction and then ending purchases by the time
Speaker 1: of the March fo MC meeting, which may give the
Speaker 1: Fed there will give the Fed the option to hike
Speaker 1: if they want. Um. It's also going to give us
Speaker 1: an updated reading on the dot plot UM And certainly
Speaker 1: we're sympathetic to former New York Fed President Dudley's views
Speaker 1: that we're probably gonna see more hikes that get priced
Speaker 1: two maybe three for next year. But the thing that
Speaker 1: could surprise the market that we sense is still underappreciated
Speaker 1: by clients is a discussion of the Fed's balance sheet.
Speaker 1: At least you mentioned this earlier. The Fed maybe gearing
Speaker 1: up for quantitative tightening. They haven't given us much guidance yet.
Speaker 1: But if they start to shrink the balance sheet at
Speaker 1: some point next year, that we think could really weigh
Speaker 1: against risk assets, because it's going to be adding duration
Speaker 1: risk to the market. It will be adding more term
Speaker 1: premium that will lean against the flattening pressures slightly. But
Speaker 1: most importantly, it's going to be withdrawing liquidity out of
Speaker 1: markets um and the extent to which Powell elaborates on
Speaker 1: this or provides hints in that direction may end up
Speaker 1: being the big surprise for the meeting next week. Mark
Speaker 1: just quickly, just in terms of sequencing, then, do you
Speaker 1: think that needs to happen before we get that right?
Speaker 1: High can just that change your view on when they
Speaker 1: make a move Now, we think that the sequencing will
Speaker 1: be as they have historically done, rate hikes before balance
Speaker 1: sheet reduction, or perhaps rate hikes with balance sheet reduction.
Speaker 1: At the same time, we don't think it's likely that
Speaker 1: they begin balance sheet reduction before rate hikes, primarily because
Speaker 1: the Fed has a much better understanding of how rate
Speaker 1: hikes or increases in the Federal funds rate end up
Speaker 1: impacting the real economy. They've done this for years. They've
Speaker 1: got good models, they give them confidence and how it works,
Speaker 1: but they're less confidences. Less confident in is how the
Speaker 1: balance sheet actually influences underlying economic conditions. That said, Powell
Speaker 1: has told us all along that they have multiple tools
Speaker 1: with the emphasis on the plural here to deal with
Speaker 1: elevated inflation, and the two of the obvious tools to
Speaker 1: us are rate hikes and bounty reduction. That means that
Speaker 1: bounty reduction could potentially be pulled forward. Gets you thinking, Mark,
Speaker 1: just wonderful, brilliant. Thank you, sir, Mark o'banna of Bank
Speaker 1: America Global Research jointing us now is planned Herbert Columbia
Speaker 1: Professor of economics and former chairman of the Council of
Speaker 1: Economic Advisors. Professor, You've also got a book coming out
Speaker 1: at twenty two called The Wall and the Bridge. We
Speaker 1: can discuss that little bit later. I just want your
Speaker 1: response to your read how you gauge this labor market
Speaker 1: right now in America? Well, I think the labor market
Speaker 1: is improving and is in frankly fairly good shape even
Speaker 1: from a FED perspective. The question is what about the
Speaker 1: participation rate? If everything else looks good in terms of
Speaker 1: employment and monetary policy, bring back that participation rate. I'm
Speaker 1: skeptical there. I think the labor market is in great
Speaker 1: a bit is time for the FED to adjust. It's
Speaker 1: time for the FED to adjust. This is a message
Speaker 1: that you've sent before, and you're not alone in this,
Speaker 1: especially with the likes of Bill Dudley, formerly of the
Speaker 1: New York FED saying the same thing. At what point
Speaker 1: do we start to see it reflected in wages that
Speaker 1: are keeping up with the inflation that we're seeing consumer prices.
Speaker 1: I think that won't happen very soon, and I think
Speaker 1: in some respects it is already happening. We have demand
Speaker 1: running faster than supply. There are a lot of supply
Speaker 1: problems in the economy, but FED can't really fix those.
Speaker 1: I FED had been focused on the word transitory. Now
Speaker 1: fortunately it's backed away from from that definition. The game,
Speaker 1: of course, is to stop a wage spiral from starting.
Speaker 1: I think there is an opportunity for the FED to
Speaker 1: do that, but the pivot to tapering and rate hikes
Speaker 1: will have to be more aggressive than the FED and
Speaker 1: telegraphed before. What do you say to people who argue
Speaker 1: that inflation will naturally roll over next year, that some
Speaker 1: of these pressures will become less of a pressure as
Speaker 1: we get a more normal economy and people come back
Speaker 1: to work in more for some of those eleven million
Speaker 1: job openings get filled. What do you say, given the
Speaker 1: fact that that has been the regime we have been
Speaker 1: in for decades. Well, we certainly will see supply pressures attenuate.
Speaker 1: That will help, But let's remember there's been a lot
Speaker 1: of goose sing of demand. FED had been buying back
Speaker 1: mortgage backed securities when the housing market was on fire.
Speaker 1: We've been very accommodated fiscal and monetary policy, so those
Speaker 1: really have to adjust. I don't think we can think
Speaker 1: it's just going to roll back on its own. You know,
Speaker 1: consensus for PC next year will be about three c
Speaker 1: p I, more than four. The FED really has overshot
Speaker 1: in the manner it's suggested in its new framework. It's
Speaker 1: still time to adjumpt. Well, glad you mentioned fiscal policy there,
Speaker 1: and Michael McKee when talking about these jobless claims, the
Speaker 1: idea that maybe people went back into the labor market
Speaker 1: as they've had to start drawing down their savings that
Speaker 1: they built up over the course of the pandemic things
Speaker 1: in part to fiscal policy. What do you think happens
Speaker 1: as that winds down, and what happens especially to can humors,
Speaker 1: tolerance of some of the higher prices that they're facing. Well,
Speaker 1: I think we will start to see people re entering
Speaker 1: the labor force, but there's still a lot of excess
Speaker 1: savings out there, albeit there unevenly distributed in the in
Speaker 1: the population. I think a bigger issue may be consumers
Speaker 1: and households workers fears of going back to work, and
Speaker 1: I think that will have to sort its out out
Speaker 1: with the vaccine more than with physical calls. Well, and
Speaker 1: we're seeing return to office plans push back for some
Speaker 1: Wall Street banks for the likes of Lift. What is
Speaker 1: the economic consequence? And John was alluding to this earlier,
Speaker 1: the idea that if people aren't going into the office
Speaker 1: in the cities, they're not going to visit their coffee
Speaker 1: shops or their lunch places. Do you see a risk
Speaker 1: of us reverting if we do go back to a
Speaker 1: kind of work from home environment as we move forward
Speaker 1: throughout the winter and into two Well, I think most
Speaker 1: large employers want to avert that for simple reasons that
Speaker 1: having people together can improve collaboration and productivity. But of
Speaker 1: course the down us to be safe, and so the
Speaker 1: real issue is to focus on the public health and
Speaker 1: get people back to work for all the reasons you suggest.
Speaker 1: Having said that, I don't think the new world will
Speaker 1: look like yold. I think companies will have to adjust
Speaker 1: and be more flexible to work from home, just not
Speaker 1: as extreme as all the time. Glenn, can I make
Speaker 1: a suggestion that those empty shafts behind you, we filled
Speaker 1: them with your new book. We're moving to a new
Speaker 1: campus in a week, so they've just packed up my office.
Speaker 1: I'm not part of the great resignation. Just wanted to
Speaker 1: try and find out, Glenn. As this book release comes
Speaker 1: out early next year, can you walk us through it? Glenn?
Speaker 1: What's in the book? What's the objective? What's the essencelf
Speaker 1: In Sure, it's a book called The Wall in the Branch.
Speaker 1: It's a love letter to Adam Smith across the centuries,
Speaker 1: uh founder of modern capitalism and economics. Basically, we're living
Speaker 1: in a world a big change, and big change means
Speaker 1: good things to a lot of people, but disruption for others.
Speaker 1: Our policy makers on both sides have tended to try
Speaker 1: to build walls on the left and the right to
Speaker 1: protect people betters to go back to small and other
Speaker 1: classical fingers. You wanted to build bridges. How do you
Speaker 1: help people compete? How do you bring communities back? That's
Speaker 1: what the books about, really really thoughtful stuff. And Glenn,
Speaker 1: you're always generous with your time. We appreciate it. So Professor,
Speaker 1: thank you, Glenn over there of Columbia, Dctor, thanks for
Speaker 1: being with us. Dr Chris Bira, Professor the JOHNS. Halkins
Speaker 1: Bloombergh School of Public Health, Dodger. I want to start
Speaker 1: here because yesterday all we talked about was this lamb
Speaker 1: based study from Fire to Beyond Tech. Can you help
Speaker 1: us understand the difference between a lamp based study and
Speaker 1: a real world study. How wide the gap is between
Speaker 1: the two. Well, you know, the lab studies are very
Speaker 1: informative and they're important, but at the end of the day,
Speaker 1: what really matters is what the real world data looks like.
Speaker 1: What we're seeing with infections, hospitalization, serious disease fisor study
Speaker 1: UM was small, fewer than fifty people. It's lab based data.
Speaker 1: It suggests good antibody responses to O macron with the
Speaker 1: third dose boost in this small number of people UM.
Speaker 1: But there's other data that we're more excited about, like
Speaker 1: the fact that what we're seeing from South Africa is
Speaker 1: that many of the people hospitalized with A macron are
Speaker 1: on room air and don't appear to be as gravely
Speaker 1: ill as people, for example, infective with delta. Dr Buyer.
Speaker 1: I've been asking for a couple of months now, when
Speaker 1: we can transfer from a pandemic to something endemic when
Speaker 1: the illness is not severe enough, whether because of immunizations
Speaker 1: or because of a variant, it isn't as severe to
Speaker 1: allow us to treat it like the cold. Are we
Speaker 1: getting close? Is O macron close to that threshold? Well? Unfortunately,
Speaker 1: you know the world is in a serious delta search.
Speaker 1: So I think right now the answer is no. Infections
Speaker 1: are up in Europe as you know they're up here.
Speaker 1: We are approaching eight hundred thousand American dead. We're going
Speaker 1: to pass that threshold in a few days, is uh.
Speaker 1: And we had a hundred eighteen thousand infections yesterday. Most
Speaker 1: of that or almost all of it is delta. So
Speaker 1: I think the answer so far is no. It does
Speaker 1: appear that O macron is more transmissible even than delta.
Speaker 1: And if it is really true, and we'll know that
Speaker 1: in another week or two, that it's a milder disease. Uh,
Speaker 1: that may be something of attorney, but for right now,
Speaker 1: we're in the middle of a serious delta search. Can
Speaker 1: you elaborate on that this idea that if it is
Speaker 1: four or more times as transmissible as a delta variant,
Speaker 1: is this one Japanese study showed and it is less
Speaker 1: virulence that it could cause her immunity. And I hate
Speaker 1: to use this when it's Tom Keene's birthday, but her
Speaker 1: immunity in a more efficient way. How realistic is that
Speaker 1: possibility among some of the health care professionals that you
Speaker 1: speak with, well, I herd immunity has been elusive, unfortunately, Lisa.
Speaker 1: And one of the reasons why is because one of
Speaker 1: the things we've seen with O macron that's concerning is
Speaker 1: that any of the people infected with omicron have recovered
Speaker 1: from previous infections with coronavirus, So natural immunity does not
Speaker 1: appear to be that protective. What we really need to see,
Speaker 1: of course, is people getting their full immunization and then
Speaker 1: now clearly needing to be boosted. If you look at
Speaker 1: the total US population including children under five, we're only
Speaker 1: at six percent fully immunized, So that is not enough
Speaker 1: to achieve herd immunity in this country for sure. When
Speaker 1: we look at the policy response to this in the
Speaker 1: public sector in the UK, for example, where they're putting
Speaker 1: in massive restrictions on the entire country, or the private
Speaker 1: sector here in the U S where you have Jeffrey
Speaker 1: saying work from home again, lift pushing their return to
Speaker 1: office date out into what is the appropriate policy response
Speaker 1: at this point in the pandemic, given how little we know, well,
Speaker 1: I have to say that I think the vaccine mandates
Speaker 1: are a very important part of this. And by the way,
Speaker 1: as I've said four to you all, they are constitutional,
Speaker 1: at least as far as the five case that went
Speaker 1: to the Supreme Court in the case of the smallpox
Speaker 1: vaccine mandate, and it was determined to be constitutional. So
Speaker 1: I think the workplace employment mandate that President Biden has
Speaker 1: put forward is a really important policy step. In the meantime,
Speaker 1: we are in the middle of a delta surge. We
Speaker 1: are seeing that related to the winter and the cold
Speaker 1: weather and people going inside, and that means that non
Speaker 1: vaccine interventions like indoor mask mandates and people working from
Speaker 1: home are again going to be important. We know now
Speaker 1: the O macron is here in fifty states. We're still
Speaker 1: very carefully following this to see if indeed it's going
Speaker 1: to be less virulent um. But of course in the
Speaker 1: middle of a delta surge, we need to really practice
Speaker 1: the basics of control of coronavirus. Dot gonna catch out
Speaker 1: with you, sir, Dr Chris Biro that at John's helpines.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg