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Speaker 1: Welcome to the Bloomberg Surveillance Podcast Hometown Keene. Along with

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Speaker 1: Jonathan Ferroll and Lisa A. Brownwitz Jaylie, we bring you

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Speaker 1: insight from the best and economics, finance, investment and international relations.

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Speaker 1: Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg dot Com

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Speaker 1: and of course I'm the Bloomberg terminal. Joining us now,

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Speaker 1: Bill Dudley. I'm pleased to say, the Bloomberg Opinion columist

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Speaker 1: Princeton University, senior research scholar at former New York Fed

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Speaker 1: President joins us too. Bill. It's going to catch up

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Speaker 1: with you and I enjoy your pieces and your piece

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Speaker 1: out this morning. It's a little bit technical, but I

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Speaker 1: want you to run through things. When the Bank of

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Speaker 1: England comes out with the rate decision, bank rate means

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Speaker 1: a lot for a lot of people in the UK

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Speaker 1: for business loans, for mortgages. The Fed funds rate is

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Speaker 1: a different beast, and you push him back against the

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Speaker 1: continued use of targeting the Fed funds rate and using

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Speaker 1: it almost can you just want me through the thinking head? Well?

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Speaker 1: The Federal funds rate used to be important because reserves

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Speaker 1: in the banking system were quite scarce and so banks

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Speaker 1: had to trade the federal funds rate FED federal funds

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Speaker 1: between themselves to satisfy the reserve requirements. That's not the

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Speaker 1: situation today. The banking systems awash and reserves as a

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Speaker 1: federal reserve continues to buy D twenty billion of treasuries

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Speaker 1: and agency mortgage back securioes. So the federal fund market

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Speaker 1: has become very different, very much much smaller, and much

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Speaker 1: more idiot thing credit than it has been in the past.

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Speaker 1: Motivation for this piece was the fact that the Fed

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Speaker 1: last week had to make a technical adjustment to too

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Speaker 1: short term interest rates the rate they pay on overnight

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Speaker 1: reverse repurchase agreements and interest rate they pay on reserves

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Speaker 1: five basis points each. Why supposedly keep the federal fund

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Speaker 1: rate closer to the middle of his target range? Why

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Speaker 1: are we tiring the federal fund rate in the first place.

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Speaker 1: At this point, it's no longer an important market. The

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Speaker 1: Fed has the ability to just to paid interest on reserves.

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Speaker 1: Why not Why not ditch the federal funds rate target

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Speaker 1: and just set the interest rate on reserves at the

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Speaker 1: level that's a apropriate with the monetary conditions that the

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Speaker 1: FED seeks to accomplish. Well, that's your simple solution in

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Speaker 1: your words three words, drop the target. But could you

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Speaker 1: anticipate a communication issue around doing that. If they were

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Speaker 1: to do that this year, I think they could explain

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Speaker 1: it very easily. They would no longer have to make

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Speaker 1: these technical adjustments that I think are more confusing than illuminating. Also,

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Speaker 1: another thing that they need to do is is exempt

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Speaker 1: reserves from the leverage ratio. As they add more reserves

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Speaker 1: to the banking system, that's putting downward pressure on race.

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Speaker 1: The whole reason why they had to make this technical

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Speaker 1: adjustment to the federal fund to these two interest rates

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Speaker 1: push the federal fund rate up was the fact that

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Speaker 1: they're flooding the banking system with reserves. Banks don't want

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Speaker 1: the reserves because of the leverage ratio, which is starting

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Speaker 1: to bind as a capital requirement for banks, and the

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Speaker 1: example from the leverage ratio, then that problem goes away

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Speaker 1: as well. And Bill, you're talking about the glut of

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Speaker 1: deposits that you're seeing on some of the bank books,

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Speaker 1: with some banks even saying to their corporate clients, we

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Speaker 1: don't even want your money because it is getting to

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Speaker 1: be excess of just taking a step back. How much

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Speaker 1: is the change that you're proposing evidence that we're going

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Speaker 1: to remain in this environment with a system awatch and

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Speaker 1: cash and the Federal Reserve pumping money continually into it,

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Speaker 1: even though there is so much cash. How much is

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Speaker 1: it just sort of an acknowledgement of that reality over

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Speaker 1: the near and frankly not even that near term. Well,

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Speaker 1: I think we're gonna be in a system where there's

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Speaker 1: lots of reserves in the banking system for some time

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Speaker 1: to come. First of all, the Fed is not going

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Speaker 1: to stop their asset purchases quickly. It's probably going to

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Speaker 1: continue well into the fall. So the balancy is going

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Speaker 1: to continue to grow. The munt of reserves in the

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Speaker 1: bankasys we're going to continue to grow. And then when

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Speaker 1: it finally decides to start to normalize, it's balancy. Balancy

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Speaker 1: is so big now it's going to take a long

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Speaker 1: time to get it back to, you know, the one

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Speaker 1: a half trillion of excess reserves that we had prior

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Speaker 1: to the pandemic. So I think we have a system

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Speaker 1: where the interest rate the FED pays on reserves. It's

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Speaker 1: a primary tool of Montrey policy. Let's acknowledge them. I

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Speaker 1: understand Bill, the argument that the FED wants to continue

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Speaker 1: with their very easy money policy is just comply to

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Speaker 1: allow inflation to pick up and allow employment to get

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Speaker 1: to a better place. However, people have pointed to certain

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Speaker 1: fraud the areas and the mortgage market in particular. Do

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Speaker 1: you think it's advisable. Do you think that it would

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Speaker 1: harm the progress that the Fed is allowing to happen

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Speaker 1: in the economy for them to pair back on some

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Speaker 1: of the mortgage debt purchases that they make every month.

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Speaker 1: I think it would have an effect more on expectations

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Speaker 1: about future mandrec polls we tell the market the FED

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Speaker 1: has now acknowledged that they made substantial further progress towards

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Speaker 1: their goals, and so people would change their expectations of

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Speaker 1: the timing of tightening. So I don't think it would

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Speaker 1: be that important in the neurrowness of the housing market.

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Speaker 1: I think it would be quite important as a signal

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Speaker 1: of the Monterrey policy and the timing of tightening. Montre

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Speaker 1: is that the preferred method versus first. I don't think

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Speaker 1: they're gonna do it. I don't think they're gonna do it.

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Speaker 1: I think they're gonna be pretty patient here. What about

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Speaker 1: perhaps maybe more of an equal waiting taper. I think

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Speaker 1: all December a discussion of five billion and treasuries five

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Speaker 1: billion in b asked. Is that just more of an

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Speaker 1: easy path to go? Well, I think that you have

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Speaker 1: a template from the last cycle, and so to deviate

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Speaker 1: from that template you have to have a really good reason.

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Speaker 1: I don't think they have a really good reason. I

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Speaker 1: think if they deviate from what they did last time

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Speaker 1: just raises a bunch of questions. What are you concerned about?

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Speaker 1: Why aren't you following the game plan that you followed West?

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Speaker 1: What do we learn from last time around bill? The

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Speaker 1: lessons of the last time we reduced asset purchases and

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Speaker 1: eventually actually had some balance sheet reductions several years later. Well,

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Speaker 1: I think it went in all fairness, quite smoothly, once

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Speaker 1: the Fed communicated clearly about what's the what's the what's

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Speaker 1: the sequence was going to be, First we stop the

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Speaker 1: asset purchases, we can taper the asset purchases down, then

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Speaker 1: we raise short term rates, and then we finally start

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Speaker 1: to normalize the size of the bounty. So this time

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Speaker 1: the market has a template to look at. Last time

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Speaker 1: they didn't, and so there's a lot more uncertainty about

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Speaker 1: what the favors are going to do in the last

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Speaker 1: cycle compared to this secle. I think it's one reason

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Speaker 1: why the markets are pretty comfortable with what's the Fed's

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Speaker 1: up to. Do you think that there's two much FED

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Speaker 1: speak at this point We've been talking about how there's

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Speaker 1: very little dissent and there basically is a FED official

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Speaker 1: every hour speaking. Well, there's always probably too much FED sean.

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Speaker 1: The thing to pay attention to is really the chairman,

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Speaker 1: the vice chairman of the of the Board of Governors,

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Speaker 1: and the vice chairman of the over Market Committee. So

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Speaker 1: how Clarida and Williams, what are you saying, ignore the

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Speaker 1: FED presidents when they go around doing speeches. Yes, I

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Speaker 1: wouldn't say ignore the FED presidents, but put a lot

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Speaker 1: less weight on them because they're just one member of

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Speaker 1: the committee. I mean, the big three set the agenda

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Speaker 1: for the Federal Market Committee. He's not gonna do something

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Speaker 1: if those three people aren't on board. So it's about weight.

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Speaker 1: Don't ignore the presidents, but don't put too much weight

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Speaker 1: on what one individual president might say, but just how

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Speaker 1: much they influence the conversation inside the Federal Reserve, when

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Speaker 1: you have those f ONMC meetings, when you have the

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Speaker 1: likes of plus official really pushing back at the turn

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Speaker 1: of the last crisis, going through the recovery, Just how

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Speaker 1: much do they influence the conversation. I think they have

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Speaker 1: any They influenced the conversation because they offer a different perspective,

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Speaker 1: and I think diversity of views is actually important. Diversity

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Speaker 1: of backgrounds is actually important in terms of getting good

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Speaker 1: monetary policymaking. By the end of the day, the committee

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Speaker 1: is gonna go where the consensus is, so someone's always dissenting.

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Speaker 1: They started marginalize themselves because they're not relevant in terms

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Speaker 1: of figuring out where the where's the committee gonna go

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Speaker 1: U in the future. Right now, there's a lot of

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Speaker 1: disagreement about, you know, when should we start to uh

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Speaker 1: paper asset purchases because people are uncertain about the state

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Speaker 1: of the recovery and how fast will it cut into

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Speaker 1: unused labor resources. There's quite a bit of disagree agreement

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Speaker 1: right now about timing. But the people that matter are WILLIAMS.

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Speaker 1: Laria and of course Howell, because they're the ones who

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Speaker 1: are going to determine the ultimate timing it's gonna catch up.

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Speaker 1: I so always got to see a great pace to

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Speaker 1: a had a blow Bloomberg dot com and all the

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Speaker 1: Bloomberg terminal built dountly that Bloomberg opinion columnists at former

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Speaker 1: New York Fed President Danny Fledge Flower Target, professor of

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Speaker 1: Economics and former Bank of England Monetary Policy Committee remember

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Speaker 1: joining us. Now. We were just talking about how there

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Speaker 1: is not much being said that is new. However we

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Speaker 1: make here something in a half hour time from the

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Speaker 1: Bank of England when they release their rate decision. You're

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Speaker 1: looking for a potential policy error. Can you explain, Well,

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Speaker 1: both the Fed and the Bank of England are struggling

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Speaker 1: in the dark. We've never seen anything like this and

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Speaker 1: the best thing is to simply wait and see. Um. So,

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Speaker 1: any any suggestion that they have a clue. I mean

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Speaker 1: people say things that I think we're going to tighten

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Speaker 1: in three Well, they're just kind of winging. It's I

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Speaker 1: think that the potential area here at the Bank is

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Speaker 1: to say that they're going to start to perhaps um

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Speaker 1: do less quey start sort of stop it by August

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Speaker 1: rather than December, as the economy goes into lockdown. Um,

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Speaker 1: the data really are very confusing. So I think the

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Speaker 1: sensible thing for them to do is to say we're continuing,

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Speaker 1: we're waiting, and we're watching. Two people are going to

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Speaker 1: leave the committee how day, this is his last meeting.

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Speaker 1: Um Liese leaves in August and we get Catherine Man.

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Speaker 1: So I think the right thing to do is to

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Speaker 1: just say waiting, watching, and and and signaling that they

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Speaker 1: have a clue what they're going to do in the future.

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Speaker 1: I think it would be a major era. Well, Danny,

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Speaker 1: I got to think that all of people are all

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Speaker 1: of the discussion that we hear at of FED officials

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Speaker 1: at a Bank of England officials basically gets shrugged off

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Speaker 1: by markets because until fair FED chair J. Powell speaks,

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Speaker 1: no one's gonna listen. Basically, he's going to lead the

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Speaker 1: charge globally when it comes to tightening and until he

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Speaker 1: does so, you know, these members on different central banks

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Speaker 1: can say whatever they want, no one will believe them.

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Speaker 1: Isn't that the case? I think that's right, and I

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Speaker 1: think in many senses J palanas that both sound the same.

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Speaker 1: He's been very sensible. Um, what did I just say,

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Speaker 1: waiting and watching understanding they made a mistake in two

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Speaker 1: thousand fifteen and accepted that and saying, you know, we'll

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Speaker 1: we'll see how the economy moves. I mean, we've still

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Speaker 1: got to understand what happens in the with the vaccine,

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Speaker 1: and what happens in the in the Southern States in

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Speaker 1: the United States, of course, but then there's all these

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Speaker 1: issues about which firms are going to survive and are

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Speaker 1: people going to change their long run behavior, and that's

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Speaker 1: a risk of the downside. People are going to keep

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Speaker 1: those savings that they have and not not spend them.

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Speaker 1: We don't know, but the risk I think to the downside.

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Speaker 1: So if you go back to making the potential error

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Speaker 1: people saying, oh, we need to worry about inflation, well

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Speaker 1: what inflation? So the fact that the talk today is

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Speaker 1: the bank deblion worries about inflation, Well it's two point

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Speaker 1: one and we've had two very weird months where the

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Speaker 1: base effects dominated and the slight changes in the last

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Speaker 1: couple of months go away in twelve months time. So

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Speaker 1: everything looks to be transitory and temporary. And the answer

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Speaker 1: is we just don't know. And j Palace, but I

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Speaker 1: think fantastic and he's just been saying essentially that wait,

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Speaker 1: look and we'll risk bond if we need to. But

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Speaker 1: there ain't no inflation problem despite the fact two point

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Speaker 1: one and that's supposedly an inflation problem with a weird

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Speaker 1: couple of months. Come on, folks, get real, Danny. Do

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Speaker 1: you think we're suffering from a better group think? Yeah? Absolutely,

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Speaker 1: I mean the group think in a way that if

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Speaker 1: you follow Padal, is to be right. But I hear

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Speaker 1: these these fit governors he held in at the Bank

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Speaker 1: being making ludicrous claim saying inflation is going to take

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Speaker 1: off based upon what wild wishful thinking and guessing that's

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Speaker 1: not credible for a central plan. Danny, That dissents healthy,

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Speaker 1: isn't it even if they disagree, it's healthy to happen.

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Speaker 1: And I think what I've missed over the last ten years,

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Speaker 1: particularly the Bank of England, since Governor Carney came out

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Speaker 1: with some forward guidance. So let's face it didn't work.

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Speaker 1: But one thing he said off the back of that

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Speaker 1: forward guidance is that it helped to tie the hands

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Speaker 1: at a committee because you've got everyone to agree with

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Speaker 1: one thing and no one could dissent anymore. John, that

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Speaker 1: you and I were just chaffing on this. If you look,

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Speaker 1: if you look at the fit, not a single governor

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Speaker 1: since Greenspan has ever dissented. Governors at the Bank of

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Speaker 1: England have actually not dissent, although whole Dana's cheek economists

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Speaker 1: has um. I think a real debate is credible and sensible.

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Speaker 1: But I think if you if you realize that we

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Speaker 1: just don't know. Remember, we saw the biggest dropping output

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Speaker 1: ever seen, biggest and fastest dropping output ever seen. And

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Speaker 1: the question is what's the past data where we have

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Speaker 1: past data from the great influenza UM, and we've had

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Speaker 1: you know, so there's there's really not much to go

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Speaker 1: buy um. So, yeah, you're right, descent quite good. But

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Speaker 1: but in a sense, much of the descent we've actually

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Speaker 1: seen over the last decade has been dissent in error.

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Speaker 1: The reality is that people have argued that you should

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Speaker 1: have raised rates and you've dissented on that side, and

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Speaker 1: it's clear over the last decade every one of those

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Speaker 1: votes was in error. You shouldn't have done that. Big picture, Danny,

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Speaker 1: A lot of the notes that I've read the push

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Speaker 1: for wage pressures focus on human capital, a shift to

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Speaker 1: e s g. Those are structurally inflationary. Are we in

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Speaker 1: a new inflationary regime. Well, the answer, the answer is

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Speaker 1: go and read the blog written by C. C Rouse,

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Speaker 1: the chair of the c A, talks about Actually the

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Speaker 1: likehood is that the wage data really a messed up

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Speaker 1: and reality is very soon we're going to see negative

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Speaker 1: wage growth. I've got two nice indicators for the UK

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Speaker 1: how hard it is to understand wage growth. The official

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Speaker 1: data came out this week on wage growth eight point

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Speaker 1: four percent, but we've just had data this morning on

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Speaker 1: the size of wage settlements too, um and so what

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Speaker 1: you have are these base effects and composition effects. It's

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Speaker 1: very hard to understand what's going on. But in wage terms,

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Speaker 1: we've seen the bottom of the wage distribution dropout, and

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Speaker 1: so we're comparing to a weird thing from a year ago. Um.

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Speaker 1: And so I think the evidence is actually that, um, yeah,

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Speaker 1: there are going to be some bottlenecks, but that's not

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Speaker 1: something you want to respond to instantly. That's sorry. I

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Speaker 1: think that the wage pressure we will see, but I

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Speaker 1: think a lot of it is you know the world

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Speaker 1: is changing a bit. How many more Jata points would

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Speaker 1: it take for you to see three four? Um? I

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Speaker 1: don't know. I want to see evidence that significant bottlenecks

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Speaker 1: are occurring, and I don't see that in the data.

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Speaker 1: I'm not gonna I'm not gonna say three or four.

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Speaker 1: I would want to see sustained evidence. But I think

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Speaker 1: the wage settlement evidence is pretty good two percent, saying

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Speaker 1: as it's been for the last decade, it's been two

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Speaker 1: to to two. Yes, there are temporary bottlenecks, but what

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Speaker 1: should the central bank do to respond to a temporary bottle?

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Speaker 1: I think of price changes. We saw a big rise

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Speaker 1: in timber prices. Okay, people don't have to buy timber,

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Speaker 1: and so the price of timber now is halved. So

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Speaker 1: I think we'll we just have to watch an economy

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Speaker 1: recovering from a shot we've never seen before. Danny, just

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Speaker 1: to conclude things someone wrote into me just moments ago,

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Speaker 1: and I think you'd agree with them. The only mistake

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Speaker 1: has been to be too hawkish, never too davish. That's

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Speaker 1: been true over the last ten years. Is that what

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Speaker 1: you worry about now? I think that's right. I mean,

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Speaker 1: I don't understand how is it an error to sit

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Speaker 1: and wait and watch, just wait, don't, don't, don't do

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Speaker 1: anything more than you're doing now and watches the economy

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Speaker 1: resolves itself. Look look, look at the hawk ish folk

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Speaker 1: who I've been on your programs with many times over

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Speaker 1: the last decade, telling us inflation was going to take off,

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Speaker 1: that's what it was gonna do. You had to raise breack.

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Speaker 1: Oh that was nonsense. So I think that the error

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Speaker 1: has always been in a recovery, you're tightened too quickly.

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Speaker 1: There's enough really no error to be had in waiting

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Speaker 1: and looking and seeing it. And I think that's what's

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Speaker 1: going on. And we got to see in the UK.

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Speaker 1: The potential is the government is going to withdraw the stimulus,

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Speaker 1: perhaps in September in the in the US, these unemployment

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Speaker 1: benefits are going to go, and then we'll see, we'll

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Speaker 1: see what how the economy anounces back. But you know,

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Speaker 1: we look, watch and don't make another big mistakes like

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Speaker 1: George olds One did in the UK in two thousand ten.

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Speaker 1: Need we need a round table, don't we with you?

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Speaker 1: Andrew says we need to do that again? Oh no,

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Speaker 1: we get days and friends now we are good friends.

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Speaker 1: We both think brexit as a disaster. Let me go.

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Speaker 1: You agree on He still wants to raise rates, of course,

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Speaker 1: does he? Well, that's what I thought maybe that would

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Speaker 1: be the optimal man table for a program. What's the

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Speaker 1: discussion that you wanted forever and he wants higher rates.

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Speaker 1: Danny's going to see it. It's going to hear from you,

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Speaker 1: Danny Blanche for dam professor Again, I'm trying former bankingron

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Speaker 1: a Monetary Policy Committee member. Let's turn to Luke UBSS

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Speaker 1: and Management Asset Allocation strategist Mr Kawa, going to see

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Speaker 1: you a good old friend, Luke. Central banks when they

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Speaker 1: change type baby steps and the baby step that I

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Speaker 1: think we're witnessing over the past week, both with the

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Speaker 1: Fedom Reserve and now the Bank of England seems to

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Speaker 1: be just reassessing the balance of risks around the outlook

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Speaker 1: and also around the outlook for inflation. What's your take

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Speaker 1: on that? Look? John, imagine if your your baby's first

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Speaker 1: step wasn't a first step, if it was you know,

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Speaker 1: a whole vaulter, a high jump. That's that's the shock

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Speaker 1: kind of the market had to deal with, even though

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Speaker 1: we're talking about things that were only out you know,

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Speaker 1: ine and do require a lot of of progress to

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Speaker 1: be sustained and to be actually realized. So kind of

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Speaker 1: looking at the FED and digesting how that might hit

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Speaker 1: cross asset action. What we're thinking about is kind of

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Speaker 1: the two reasons why German Powell said that the dots

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Speaker 1: did move up. One reason is that you know economic

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Speaker 1: activity is coming in, so there's more confidence within the

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Speaker 1: FED that the baseline outlook that they achieved and marked

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Speaker 1: that they outline of March is going to be achieved.

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Speaker 1: So on the one hand, this suggests that continued inline

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Speaker 1: data is going to be a force of pressure that

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Speaker 1: continues to pull orward dots. And if you're trading short

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Speaker 1: term interest rates, all you have to do is be

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Speaker 1: more confident than the FED that that economic outlook is

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Speaker 1: going to be achieved. You can kind of continue to

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Speaker 1: push the timeline on that front. On the other hand,

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Speaker 1: it's clear that the the inflation risk, the balance of

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Speaker 1: inflation risk that jumping too and that thirteen beneficials thinking

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Speaker 1: that the either risk to UH to a core PC

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Speaker 1: are tilted to the upside. That also influences the forecast,

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Speaker 1: the balance of risks, and when they think tightening might

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Speaker 1: be warranted. So on the other hand, you have what

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Speaker 1: we would expect to see over time, is that the

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Speaker 1: ebbing of these inflationary pressures and upside risk just as

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Speaker 1: these these do turn to be less persistent, to avoid

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Speaker 1: using the T word, inflationary forces. So kind of putting

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Speaker 1: this together, I think what you would expect coming out

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Speaker 1: of the f l NCY, and this is something we've

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Speaker 1: adjusted to take account of, is that that real yields

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Speaker 1: break even trade off has moved more into the real

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Speaker 1: yield side of it, driving moves in the tenure that

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Speaker 1: of course is going to also have an effect on

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Speaker 1: the dollar. So it's about seeing less widespread dollar weakness

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Speaker 1: and the scope for that deteriorating on the margin. What

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Speaker 1: I will say is encouraging to say from a risk

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Speaker 1: perspective is that even as we've had you know, a

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Speaker 1: broad dollar rebound in the wake of the f o MC,

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Speaker 1: it's rallying more against the d X Y components than

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Speaker 1: it is against the m f X components. So this

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Speaker 1: suggests this isn't about a kind of a dumping of

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Speaker 1: risk currencies so to speak, or a less positive view

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Speaker 1: on risk. It's just a reevaluation suation of the FED

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Speaker 1: real yields and what that means at the front end.

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Speaker 1: So Luke, the more we hear the two are in transitory.

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Speaker 1: The more people buy risk assets, exactly as you said,

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Speaker 1: they're going further into a risk in order to get returns.

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Speaker 1: There is a question at what point the Federal Reserve,

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Speaker 1: the Bank of England, other central banks starts to take

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Speaker 1: action just to curtail some of the moves that we've seen.

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Speaker 1: And I'm thinking of the mortgage market in particular to

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Speaker 1: Tailor's point earlier, this question of the composition of which

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Speaker 1: assets the FED may pair back on its purchases. How

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Speaker 1: much are you looking to the mortgage market to feel

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Speaker 1: some from that as people start to question the elevated

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Speaker 1: housing prices. Well, I think the main reason why the

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Speaker 1: FED at this point is still purchasing in both asset

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Speaker 1: classes because it knows, as we know, that by purchasing mbs,

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Speaker 1: it's it's sucking treasury fall out of the market. And

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Speaker 1: you know what one of the Fed's goals is to,

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Speaker 1: you know, use asset purchases to a certain extent, to

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Speaker 1: to calm markets, calm market volatility. So I think the

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Speaker 1: the signal from the FED that it's going in either

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Speaker 1: direction in terms of both purchasing less and moving to

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Speaker 1: to raise rates at some undustined but at some inconclusive

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Speaker 1: point in the future is really just a signal. They

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Speaker 1: will both be that the FED is moving more from

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Speaker 1: a val suppressant mode of purely baal suppressing mode in

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Speaker 1: order to get us through the crisis and get the

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Speaker 1: rebound completely on track, to one where the FED is

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Speaker 1: going to be more a source of two way volatility.

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Speaker 1: I think that's the real reading from that, not necessarily

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Speaker 1: the nature of the components of the underlying asset purchases. Luke,

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Speaker 1: are you surprised by the cross asset resilience see with

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Speaker 1: equities at record highs, a VIX with a fifteen handle

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Speaker 1: and a very calm and well behaved bond market to

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Speaker 1: to a certain extent, yes, I think the markets have

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Speaker 1: been able to digest this quite well. Uh, the a

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Speaker 1: more hawks than expected FED, And I think kind of

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Speaker 1: when we're looking through what and why what we talked

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Speaker 1: about earlier in terms of the dollar being stronger, real

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Speaker 1: yields being stronger, how far can that filter out? What's

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Speaker 1: very important lately is that it hasn't filtered out really

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Speaker 1: all the way to commodities. Copper had had a pretty

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Speaker 1: bad move down, but that's kind of alleviated lately. Oil

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Speaker 1: still pushing forward to new highs, so the market is

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Speaker 1: still trading this idea of we're still getting very very

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Speaker 1: good activity going forward. The FED has cut off right

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Speaker 1: tail inflation outcomes. Therefore it's it's safe to buy equities.

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Speaker 1: In our view, there are there are limits to this, uh,

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Speaker 1: particularly the way that it's been kind of playing out

431
00:21:54,960 --> 00:21:58,080
Speaker 1: under the surface with with the rotation to growth. That's

432
00:21:58,119 --> 00:22:00,560
Speaker 1: not necessarily something we want to change us right now.

433
00:22:00,920 --> 00:22:03,359
Speaker 1: Right now, the equity is at the headline level. We

434
00:22:03,560 --> 00:22:05,680
Speaker 1: do think are due for a breather. And if you

435
00:22:05,720 --> 00:22:08,560
Speaker 1: look at over the past few months, equities have really

436
00:22:08,600 --> 00:22:11,359
Speaker 1: moved sideways on a global basis and on the SMP

437
00:22:11,520 --> 00:22:14,439
Speaker 1: five hundred, So we're not necessarily looking for a lot

438
00:22:14,520 --> 00:22:17,280
Speaker 1: of downside, but think there there will be in attractive

439
00:22:17,640 --> 00:22:20,440
Speaker 1: potentially to buy going forward in the coming weeks. And

440
00:22:20,520 --> 00:22:23,000
Speaker 1: this is just to do with the market needing to

441
00:22:23,119 --> 00:22:25,960
Speaker 1: digest that the second derivative is turning the that is

442
00:22:26,040 --> 00:22:28,840
Speaker 1: becoming less supportive. Luke always great to cash up. I

443
00:22:28,880 --> 00:22:31,240
Speaker 1: promise you we wouldn't tall baseball. We won't as ubs

444
00:22:31,240 --> 00:22:33,720
Speaker 1: got a call on you. Have you got a country

445
00:22:33,760 --> 00:22:37,520
Speaker 1: a nation? I I mean I I have to say

446
00:22:37,600 --> 00:22:41,480
Speaker 1: the Swiss, right, the Swiss? Do you I guess maybe?

447
00:22:41,880 --> 00:22:43,440
Speaker 1: Why do you have to say this one? Yes? I

448
00:22:43,520 --> 00:22:46,720
Speaker 1: guess right. You gotta go with You've gotta go with

449
00:22:46,800 --> 00:22:51,000
Speaker 1: Swiss Switzerland UBSAS and Management assa allocation strategist Luke Kawa,

450
00:22:58,119 --> 00:23:00,360
Speaker 1: let's bring it Terry heinha we penchi pol he found

451
00:23:00,440 --> 00:23:02,879
Speaker 1: rejoined us right now, So let's start there. What we

452
00:23:02,960 --> 00:23:05,240
Speaker 1: can expect as far as you're concerned down in d C.

453
00:23:05,359 --> 00:23:09,239
Speaker 1: On a fiscal front, what we can what we can

454
00:23:09,320 --> 00:23:14,640
Speaker 1: expect firstly is a touted roughly one trillion dollar infrastructure

455
00:23:14,680 --> 00:23:16,960
Speaker 1: package like what I've been talking about for the last

456
00:23:17,000 --> 00:23:20,000
Speaker 1: month or so, um of which, as Lisa says, about

457
00:23:20,520 --> 00:23:25,280
Speaker 1: fifty nine billion is new spending. Brings up a dichotomy

458
00:23:25,359 --> 00:23:28,440
Speaker 1: for markets. By the way, you'll hear Washington pump high numbers,

459
00:23:28,760 --> 00:23:30,639
Speaker 1: but then a lot of it isn't new spending. And

460
00:23:30,720 --> 00:23:33,680
Speaker 1: that's important to understand the code of the last COVID

461
00:23:33,720 --> 00:23:36,879
Speaker 1: relief bill, for example, uh touted is two trillion dollars,

462
00:23:36,920 --> 00:23:38,880
Speaker 1: but only one trillion is gonna get spent this year.

463
00:23:39,000 --> 00:23:41,520
Speaker 1: The rest of the run out over the next eight years,

464
00:23:41,840 --> 00:23:43,960
Speaker 1: so you're gonna get that are you going to get

465
00:23:44,119 --> 00:23:47,159
Speaker 1: much of anything else at this point. I really doubt it.

466
00:23:47,680 --> 00:23:51,679
Speaker 1: The so called Families Plan, another couple of trillion dollars,

467
00:23:51,760 --> 00:23:53,440
Speaker 1: I think is going to be very difficult to pass,

468
00:23:53,480 --> 00:23:56,440
Speaker 1: even with all Democratic votes. And then what you're into

469
00:23:56,880 --> 00:23:59,480
Speaker 1: is if you're into spending, which is going to be

470
00:23:59,600 --> 00:24:03,960
Speaker 1: large leaf flat uh into next year and uh, and

471
00:24:04,119 --> 00:24:07,840
Speaker 1: you've got the debt ceiling as a as a potential surprise.

472
00:24:08,240 --> 00:24:11,840
Speaker 1: But Washington's attention is going to be taken up between

473
00:24:11,920 --> 00:24:14,640
Speaker 1: now and the end of September, a time in which

474
00:24:15,000 --> 00:24:17,280
Speaker 1: the House and the Senator roughly and only one out

475
00:24:17,359 --> 00:24:21,440
Speaker 1: of those next three months, uh, with getting the infrastructure

476
00:24:21,440 --> 00:24:25,199
Speaker 1: bill done, and otherwise partisan warfare about all the other

477
00:24:25,240 --> 00:24:28,399
Speaker 1: stuff I just mentioned as we talked about five billion

478
00:24:28,440 --> 00:24:31,680
Speaker 1: dollars of new spending, Terry, how much political political momentum

479
00:24:31,800 --> 00:24:35,399
Speaker 1: is there behind balancing the budget, behind raising taxes or

480
00:24:35,440 --> 00:24:42,160
Speaker 1: cutting spending ahead of that August deficit ceiling? Oh? None, none. Uh.

481
00:24:42,920 --> 00:24:46,080
Speaker 1: You know, they both parties talk about debt and deficit

482
00:24:46,160 --> 00:24:49,719
Speaker 1: when it's when politically when it suits them Democrats did

483
00:24:50,119 --> 00:24:54,520
Speaker 1: over the four years of the previous administration. But in reality,

484
00:24:54,840 --> 00:24:57,040
Speaker 1: where the parties tend to come together and as as

485
00:24:57,080 --> 00:25:01,119
Speaker 1: we've seen, is on spending things. Uh. Uh, COVID is

486
00:25:01,160 --> 00:25:04,440
Speaker 1: a money spender. The China Bill was a money spender. Uh.

487
00:25:04,640 --> 00:25:07,480
Speaker 1: Those things are money spenders, and the parties come together

488
00:25:07,600 --> 00:25:10,000
Speaker 1: around those things. But most of the rest of it,

489
00:25:10,480 --> 00:25:12,080
Speaker 1: you know, I think federal spending is going to be

490
00:25:12,160 --> 00:25:15,520
Speaker 1: largely flat, as I say, But the rest of it, uh,

491
00:25:15,840 --> 00:25:18,520
Speaker 1: you know, they will they will fight over but but

492
00:25:18,640 --> 00:25:21,640
Speaker 1: I don't think you're gonna see anything beyond the infrastructure

493
00:25:21,680 --> 00:25:25,080
Speaker 1: package today anyway, Terry, Where then is the momentum on

494
00:25:25,440 --> 00:25:28,960
Speaker 1: how we're going to pay for all of this? Oh? Um,

495
00:25:29,320 --> 00:25:32,680
Speaker 1: we're gonna pay for a Taylor? Uh you know, I

496
00:25:33,400 --> 00:25:36,320
Speaker 1: you know, the devils and the details on the infrastructure bill.

497
00:25:36,400 --> 00:25:40,800
Speaker 1: I I edged up my odds on infrastructure uh the

498
00:25:41,040 --> 00:25:44,240
Speaker 1: last night, but on the news. But I'll sso give

499
00:25:44,280 --> 00:25:47,600
Speaker 1: you things fall apart. And one of the details here

500
00:25:47,920 --> 00:25:51,960
Speaker 1: is that we don't exactly know how they're going to

501
00:25:52,040 --> 00:25:53,560
Speaker 1: try to pay for it. And they say they are

502
00:25:53,560 --> 00:25:55,200
Speaker 1: going to pay for it, and they say they're gonna

503
00:25:55,200 --> 00:25:58,280
Speaker 1: pay for it without tax increases. So uh, there are

504
00:25:58,480 --> 00:26:03,080
Speaker 1: not insubstantial uh difficulties here yet. And well, then I

505
00:26:03,160 --> 00:26:08,000
Speaker 1: think what market see is a deal solidifying, I mean

506
00:26:08,040 --> 00:26:10,360
Speaker 1: the likeliest scenario here, the markets will see a deal

507
00:26:10,440 --> 00:26:14,200
Speaker 1: solidifying over the next week, but they'll see wrangling around

508
00:26:14,320 --> 00:26:17,080
Speaker 1: this deal and passing it out of both houses through

509
00:26:17,119 --> 00:26:18,959
Speaker 1: the month of July. So there's gonna be a lot

510
00:26:19,000 --> 00:26:21,359
Speaker 1: of volatility here. And one of the details that will

511
00:26:21,440 --> 00:26:24,000
Speaker 1: cause that volatility is exactly how the thing is paid for.

512
00:26:24,359 --> 00:26:27,000
Speaker 1: And you don't worry about debt and deficits during wartime,

513
00:26:27,160 --> 00:26:31,879
Speaker 1: When then should we begin to discuss it? Uh? You

514
00:26:31,960 --> 00:26:34,320
Speaker 1: know the you know, my view of this very simply

515
00:26:34,560 --> 00:26:39,800
Speaker 1: is that unless unless Washington gets a market signal that uh,

516
00:26:40,119 --> 00:26:43,440
Speaker 1: that that there's too much debt or too much deficit,

517
00:26:44,040 --> 00:26:46,840
Speaker 1: Washington is not going to he he to call. You know.

518
00:26:47,000 --> 00:26:50,520
Speaker 1: But my favorite example of this is the tax bill,

519
00:26:51,160 --> 00:26:54,359
Speaker 1: and you know, no disrespect to anybody who put that together,

520
00:26:54,800 --> 00:27:00,560
Speaker 1: but but you know, understand that the the the redline

521
00:27:00,600 --> 00:27:04,600
Speaker 1: for Republicans was they weren't going to spend they weren't

522
00:27:04,600 --> 00:27:06,480
Speaker 1: going to go into depths in any more than one

523
00:27:06,560 --> 00:27:11,040
Speaker 1: point five trillion over ten years. Now, when you're talking about,

524
00:27:11,280 --> 00:27:14,120
Speaker 1: you know, how to manage a deficit increase, uh, that's

525
00:27:14,119 --> 00:27:15,960
Speaker 1: a sign that you're really not serious. About bringing the

526
00:27:16,000 --> 00:27:18,600
Speaker 1: depsit down. And that's the way Washington is these days,

527
00:27:18,640 --> 00:27:21,239
Speaker 1: regardless of party. Yeah, and Terry. If it weren't that way,

528
00:27:21,280 --> 00:27:23,520
Speaker 1: people probably would be accusing it of not recognizing the

529
00:27:23,600 --> 00:27:26,160
Speaker 1: reality we're in a pretty low bond yield. Since Tom

530
00:27:26,240 --> 00:27:27,960
Speaker 1: Keene is not here, I'm going to channel him and

531
00:27:28,040 --> 00:27:31,160
Speaker 1: talk about how close we are to the two midterm elections.

532
00:27:31,680 --> 00:27:35,560
Speaker 1: Is this fiscal package that we're seeing coalesce in Washington,

533
00:27:35,680 --> 00:27:37,240
Speaker 1: d C. Going to be viewed as a win for

534
00:27:37,280 --> 00:27:41,800
Speaker 1: the Republicans or a win for the Democrats? Yes, Uh,

535
00:27:41,960 --> 00:27:45,719
Speaker 1: The answer to that is yes. Uh. By the infrastructure

536
00:27:45,760 --> 00:27:49,560
Speaker 1: spending is bipartisan. Uh. Members of both parties want to

537
00:27:49,600 --> 00:27:52,879
Speaker 1: see better roads, bridges, fundamental infrastructure. They all want to

538
00:27:52,880 --> 00:27:54,520
Speaker 1: be able to go home and say that they did that.

539
00:27:55,320 --> 00:27:57,800
Speaker 1: Uh and uh. And the you know, the key for

540
00:27:57,920 --> 00:28:00,639
Speaker 1: me at the same time will be, uh see if

541
00:28:00,680 --> 00:28:03,600
Speaker 1: they can goose them along more quickly. You know, there's uh.

542
00:28:03,960 --> 00:28:07,040
Speaker 1: In my home state of Pennsylvania, there's been a now

543
00:28:07,119 --> 00:28:10,439
Speaker 1: a ten year long project just to redo forty miles

544
00:28:10,480 --> 00:28:12,680
Speaker 1: of old interstate And if it's gonna things are gonna

545
00:28:12,720 --> 00:28:15,119
Speaker 1: take that long, there's gonna be a lot of frustration

546
00:28:15,200 --> 00:28:17,480
Speaker 1: out there in the world. So one thing that they're

547
00:28:17,520 --> 00:28:19,440
Speaker 1: going to need to do is goose their states along

548
00:28:19,480 --> 00:28:21,840
Speaker 1: and make things go a lot more quickly in order

549
00:28:21,880 --> 00:28:24,040
Speaker 1: to gain the maximum out of political benefit out of it.

550
00:28:24,240 --> 00:28:26,240
Speaker 1: That's the best way of answering its home King question.

551
00:28:27,040 --> 00:28:33,159
Speaker 1: Ye Sterry, Thank you, Sera Hines Fanchia Policy found it

552
00:28:33,240 --> 00:28:37,399
Speaker 1: that in Washington day sake. This is the Bloomberg Surveillance Podcast.

553
00:28:37,680 --> 00:28:41,040
Speaker 1: Thanks for listening. Join us live weekdays from seven to

554
00:28:41,160 --> 00:28:44,600
Speaker 1: ten a m. Eastern on Bloomberg Radio and on Bloomberg

555
00:28:44,640 --> 00:28:49,120
Speaker 1: Television each day from six to nine am for insight

556
00:28:49,400 --> 00:28:53,520
Speaker 1: from the best in economics, finance, investment, and international relations.

557
00:28:54,080 --> 00:28:58,680
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

558
00:28:58,880 --> 00:29:02,440
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

559
00:29:02,520 --> 00:29:05,080
Speaker 1: Tom keene In. This is Bloomer