Speaker 1: Welcome to the Bloomberg Surveillance Podcast Hometown Keene. Along with
Speaker 1: Jonathan Ferroll and Lisa A. Brownwitz Jaylie, 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 I'm the Bloomberg terminal. Joining us now,
Speaker 1: Bill Dudley. I'm pleased to say, the Bloomberg Opinion columist
Speaker 1: Princeton University, senior research scholar at former New York Fed
Speaker 1: President joins us too. Bill. It's going to catch up
Speaker 1: with you and I enjoy your pieces and your piece
Speaker 1: out this morning. It's a little bit technical, but I
Speaker 1: want you to run through things. When the Bank of
Speaker 1: England comes out with the rate decision, bank rate means
Speaker 1: a lot for a lot of people in the UK
Speaker 1: for business loans, for mortgages. The Fed funds rate is
Speaker 1: a different beast, and you push him back against the
Speaker 1: continued use of targeting the Fed funds rate and using
Speaker 1: it almost can you just want me through the thinking head? Well?
Speaker 1: The Federal funds rate used to be important because reserves
Speaker 1: in the banking system were quite scarce and so banks
Speaker 1: had to trade the federal funds rate FED federal funds
Speaker 1: between themselves to satisfy the reserve requirements. That's not the
Speaker 1: situation today. The banking systems awash and reserves as a
Speaker 1: federal reserve continues to buy D twenty billion of treasuries
Speaker 1: and agency mortgage back securioes. So the federal fund market
Speaker 1: has become very different, very much much smaller, and much
Speaker 1: more idiot thing credit than it has been in the past.
Speaker 1: Motivation for this piece was the fact that the Fed
Speaker 1: last week had to make a technical adjustment to too
Speaker 1: short term interest rates the rate they pay on overnight
Speaker 1: reverse repurchase agreements and interest rate they pay on reserves
Speaker 1: five basis points each. Why supposedly keep the federal fund
Speaker 1: rate closer to the middle of his target range? Why
Speaker 1: are we tiring the federal fund rate in the first place.
Speaker 1: At this point, it's no longer an important market. The
Speaker 1: Fed has the ability to just to paid interest on reserves.
Speaker 1: Why not Why not ditch the federal funds rate target
Speaker 1: and just set the interest rate on reserves at the
Speaker 1: level that's a apropriate with the monetary conditions that the
Speaker 1: FED seeks to accomplish. Well, that's your simple solution in
Speaker 1: your words three words, drop the target. But could you
Speaker 1: anticipate a communication issue around doing that. If they were
Speaker 1: to do that this year, I think they could explain
Speaker 1: it very easily. They would no longer have to make
Speaker 1: these technical adjustments that I think are more confusing than illuminating. Also,
Speaker 1: another thing that they need to do is is exempt
Speaker 1: reserves from the leverage ratio. As they add more reserves
Speaker 1: to the banking system, that's putting downward pressure on race.
Speaker 1: The whole reason why they had to make this technical
Speaker 1: adjustment to the federal fund to these two interest rates
Speaker 1: push the federal fund rate up was the fact that
Speaker 1: they're flooding the banking system with reserves. Banks don't want
Speaker 1: the reserves because of the leverage ratio, which is starting
Speaker 1: to bind as a capital requirement for banks, and the
Speaker 1: example from the leverage ratio, then that problem goes away
Speaker 1: as well. And Bill, you're talking about the glut of
Speaker 1: deposits that you're seeing on some of the bank books,
Speaker 1: with some banks even saying to their corporate clients, we
Speaker 1: don't even want your money because it is getting to
Speaker 1: be excess of just taking a step back. How much
Speaker 1: is the change that you're proposing evidence that we're going
Speaker 1: to remain in this environment with a system awatch and
Speaker 1: cash and the Federal Reserve pumping money continually into it,
Speaker 1: even though there is so much cash. How much is
Speaker 1: it just sort of an acknowledgement of that reality over
Speaker 1: the near and frankly not even that near term. Well,
Speaker 1: I think we're gonna be in a system where there's
Speaker 1: lots of reserves in the banking system for some time
Speaker 1: to come. First of all, the Fed is not going
Speaker 1: to stop their asset purchases quickly. It's probably going to
Speaker 1: continue well into the fall. So the balancy is going
Speaker 1: to continue to grow. The munt of reserves in the
Speaker 1: bankasys we're going to continue to grow. And then when
Speaker 1: it finally decides to start to normalize, it's balancy. Balancy
Speaker 1: is so big now it's going to take a long
Speaker 1: time to get it back to, you know, the one
Speaker 1: a half trillion of excess reserves that we had prior
Speaker 1: to the pandemic. So I think we have a system
Speaker 1: where the interest rate the FED pays on reserves. It's
Speaker 1: a primary tool of Montrey policy. Let's acknowledge them. I
Speaker 1: understand Bill, the argument that the FED wants to continue
Speaker 1: with their very easy money policy is just comply to
Speaker 1: allow inflation to pick up and allow employment to get
Speaker 1: to a better place. However, people have pointed to certain
Speaker 1: fraud the areas and the mortgage market in particular. Do
Speaker 1: you think it's advisable. Do you think that it would
Speaker 1: harm the progress that the Fed is allowing to happen
Speaker 1: in the economy for them to pair back on some
Speaker 1: of the mortgage debt purchases that they make every month.
Speaker 1: I think it would have an effect more on expectations
Speaker 1: about future mandrec polls we tell the market the FED
Speaker 1: has now acknowledged that they made substantial further progress towards
Speaker 1: their goals, and so people would change their expectations of
Speaker 1: the timing of tightening. So I don't think it would
Speaker 1: be that important in the neurrowness of the housing market.
Speaker 1: I think it would be quite important as a signal
Speaker 1: of the Monterrey policy and the timing of tightening. Montre
Speaker 1: is that the preferred method versus first. I don't think
Speaker 1: they're gonna do it. I don't think they're gonna do it.
Speaker 1: I think they're gonna be pretty patient here. What about
Speaker 1: perhaps maybe more of an equal waiting taper. I think
Speaker 1: all December a discussion of five billion and treasuries five
Speaker 1: billion in b asked. Is that just more of an
Speaker 1: easy path to go? Well, I think that you have
Speaker 1: a template from the last cycle, and so to deviate
Speaker 1: from that template you have to have a really good reason.
Speaker 1: I don't think they have a really good reason. I
Speaker 1: think if they deviate from what they did last time
Speaker 1: just raises a bunch of questions. What are you concerned about?
Speaker 1: Why aren't you following the game plan that you followed West?
Speaker 1: What do we learn from last time around bill? The
Speaker 1: lessons of the last time we reduced asset purchases and
Speaker 1: eventually actually had some balance sheet reductions several years later. Well,
Speaker 1: I think it went in all fairness, quite smoothly, once
Speaker 1: the Fed communicated clearly about what's the what's the what's
Speaker 1: the sequence was going to be, First we stop the
Speaker 1: asset purchases, we can taper the asset purchases down, then
Speaker 1: we raise short term rates, and then we finally start
Speaker 1: to normalize the size of the bounty. So this time
Speaker 1: the market has a template to look at. Last time
Speaker 1: they didn't, and so there's a lot more uncertainty about
Speaker 1: what the favors are going to do in the last
Speaker 1: cycle compared to this secle. I think it's one reason
Speaker 1: why the markets are pretty comfortable with what's the Fed's
Speaker 1: up to. Do you think that there's two much FED
Speaker 1: speak at this point We've been talking about how there's
Speaker 1: very little dissent and there basically is a FED official
Speaker 1: every hour speaking. Well, there's always probably too much FED sean.
Speaker 1: The thing to pay attention to is really the chairman,
Speaker 1: the vice chairman of the of the Board of Governors,
Speaker 1: and the vice chairman of the over Market Committee. So
Speaker 1: how Clarida and Williams, what are you saying, ignore the
Speaker 1: FED presidents when they go around doing speeches. Yes, I
Speaker 1: wouldn't say ignore the FED presidents, but put a lot
Speaker 1: less weight on them because they're just one member of
Speaker 1: the committee. I mean, the big three set the agenda
Speaker 1: for the Federal Market Committee. He's not gonna do something
Speaker 1: if those three people aren't on board. So it's about weight.
Speaker 1: Don't ignore the presidents, but don't put too much weight
Speaker 1: on what one individual president might say, but just how
Speaker 1: much they influence the conversation inside the Federal Reserve, when
Speaker 1: you have those f ONMC meetings, when you have the
Speaker 1: likes of plus official really pushing back at the turn
Speaker 1: of the last crisis, going through the recovery, Just how
Speaker 1: much do they influence the conversation. I think they have
Speaker 1: any They influenced the conversation because they offer a different perspective,
Speaker 1: and I think diversity of views is actually important. Diversity
Speaker 1: of backgrounds is actually important in terms of getting good
Speaker 1: monetary policymaking. By the end of the day, the committee
Speaker 1: is gonna go where the consensus is, so someone's always dissenting.
Speaker 1: They started marginalize themselves because they're not relevant in terms
Speaker 1: of figuring out where the where's the committee gonna go
Speaker 1: U in the future. Right now, there's a lot of
Speaker 1: disagreement about, you know, when should we start to uh
Speaker 1: paper asset purchases because people are uncertain about the state
Speaker 1: of the recovery and how fast will it cut into
Speaker 1: unused labor resources. There's quite a bit of disagree agreement
Speaker 1: right now about timing. But the people that matter are WILLIAMS.
Speaker 1: Laria and of course Howell, because they're the ones who
Speaker 1: are going to determine the ultimate timing it's gonna catch up.
Speaker 1: I so always got to see a great pace to
Speaker 1: a had a blow Bloomberg dot com and all the
Speaker 1: Bloomberg terminal built dountly that Bloomberg opinion columnists at former
Speaker 1: New York Fed President Danny Fledge Flower Target, professor of
Speaker 1: Economics and former Bank of England Monetary Policy Committee remember
Speaker 1: joining us. Now. We were just talking about how there
Speaker 1: is not much being said that is new. However we
Speaker 1: make here something in a half hour time from the
Speaker 1: Bank of England when they release their rate decision. You're
Speaker 1: looking for a potential policy error. Can you explain, Well,
Speaker 1: both the Fed and the Bank of England are struggling
Speaker 1: in the dark. We've never seen anything like this and
Speaker 1: the best thing is to simply wait and see. Um. So,
Speaker 1: any any suggestion that they have a clue. I mean
Speaker 1: people say things that I think we're going to tighten
Speaker 1: in three Well, they're just kind of winging. It's I
Speaker 1: think that the potential area here at the Bank is
Speaker 1: to say that they're going to start to perhaps um
Speaker 1: do less quey start sort of stop it by August
Speaker 1: rather than December, as the economy goes into lockdown. Um,
Speaker 1: the data really are very confusing. So I think the
Speaker 1: sensible thing for them to do is to say we're continuing,
Speaker 1: we're waiting, and we're watching. Two people are going to
Speaker 1: leave the committee how day, this is his last meeting.
Speaker 1: Um Liese leaves in August and we get Catherine Man.
Speaker 1: So I think the right thing to do is to
Speaker 1: just say waiting, watching, and and and signaling that they
Speaker 1: have a clue what they're going to do in the future.
Speaker 1: I think it would be a major era. Well, Danny,
Speaker 1: I got to think that all of people are all
Speaker 1: of the discussion that we hear at of FED officials
Speaker 1: at a Bank of England officials basically gets shrugged off
Speaker 1: by markets because until fair FED chair J. Powell speaks,
Speaker 1: no one's gonna listen. Basically, he's going to lead the
Speaker 1: charge globally when it comes to tightening and until he
Speaker 1: does so, you know, these members on different central banks
Speaker 1: can say whatever they want, no one will believe them.
Speaker 1: Isn't that the case? I think that's right, and I
Speaker 1: think in many senses J palanas that both sound the same.
Speaker 1: He's been very sensible. Um, what did I just say,
Speaker 1: waiting and watching understanding they made a mistake in two
Speaker 1: thousand fifteen and accepted that and saying, you know, we'll
Speaker 1: we'll see how the economy moves. I mean, we've still
Speaker 1: got to understand what happens in the with the vaccine,
Speaker 1: and what happens in the in the Southern States in
Speaker 1: the United States, of course, but then there's all these
Speaker 1: issues about which firms are going to survive and are
Speaker 1: people going to change their long run behavior, and that's
Speaker 1: a risk of the downside. People are going to keep
Speaker 1: those savings that they have and not not spend them.
Speaker 1: We don't know, but the risk I think to the downside.
Speaker 1: So if you go back to making the potential error
Speaker 1: people saying, oh, we need to worry about inflation, well
Speaker 1: what inflation? So the fact that the talk today is
Speaker 1: the bank deblion worries about inflation, Well it's two point
Speaker 1: one and we've had two very weird months where the
Speaker 1: base effects dominated and the slight changes in the last
Speaker 1: couple of months go away in twelve months time. So
Speaker 1: everything looks to be transitory and temporary. And the answer
Speaker 1: is we just don't know. And j Palace, but I
Speaker 1: think fantastic and he's just been saying essentially that wait,
Speaker 1: look and we'll risk bond if we need to. But
Speaker 1: there ain't no inflation problem despite the fact two point
Speaker 1: one and that's supposedly an inflation problem with a weird
Speaker 1: couple of months. Come on, folks, get real, Danny. Do
Speaker 1: you think we're suffering from a better group think? Yeah? Absolutely,
Speaker 1: I mean the group think in a way that if
Speaker 1: you follow Padal, is to be right. But I hear
Speaker 1: these these fit governors he held in at the Bank
Speaker 1: being making ludicrous claim saying inflation is going to take
Speaker 1: off based upon what wild wishful thinking and guessing that's
Speaker 1: not credible for a central plan. Danny, That dissents healthy,
Speaker 1: isn't it even if they disagree, it's healthy to happen.
Speaker 1: And I think what I've missed over the last ten years,
Speaker 1: particularly the Bank of England, since Governor Carney came out
Speaker 1: with some forward guidance. So let's face it didn't work.
Speaker 1: But one thing he said off the back of that
Speaker 1: forward guidance is that it helped to tie the hands
Speaker 1: at a committee because you've got everyone to agree with
Speaker 1: one thing and no one could dissent anymore. John, that
Speaker 1: you and I were just chaffing on this. If you look,
Speaker 1: if you look at the fit, not a single governor
Speaker 1: since Greenspan has ever dissented. Governors at the Bank of
Speaker 1: England have actually not dissent, although whole Dana's cheek economists
Speaker 1: has um. I think a real debate is credible and sensible.
Speaker 1: But I think if you if you realize that we
Speaker 1: just don't know. Remember, we saw the biggest dropping output
Speaker 1: ever seen, biggest and fastest dropping output ever seen. And
Speaker 1: the question is what's the past data where we have
Speaker 1: past data from the great influenza UM, and we've had
Speaker 1: you know, so there's there's really not much to go
Speaker 1: buy um. So, yeah, you're right, descent quite good. But
Speaker 1: but in a sense, much of the descent we've actually
Speaker 1: seen over the last decade has been dissent in error.
Speaker 1: The reality is that people have argued that you should
Speaker 1: have raised rates and you've dissented on that side, and
Speaker 1: it's clear over the last decade every one of those
Speaker 1: votes was in error. You shouldn't have done that. Big picture, Danny,
Speaker 1: A lot of the notes that I've read the push
Speaker 1: for wage pressures focus on human capital, a shift to
Speaker 1: e s g. Those are structurally inflationary. Are we in
Speaker 1: a new inflationary regime. Well, the answer, the answer is
Speaker 1: go and read the blog written by C. C Rouse,
Speaker 1: the chair of the c A, talks about Actually the
Speaker 1: likehood is that the wage data really a messed up
Speaker 1: and reality is very soon we're going to see negative
Speaker 1: wage growth. I've got two nice indicators for the UK
Speaker 1: how hard it is to understand wage growth. The official
Speaker 1: data came out this week on wage growth eight point
Speaker 1: four percent, but we've just had data this morning on
Speaker 1: the size of wage settlements too, um and so what
Speaker 1: you have are these base effects and composition effects. It's
Speaker 1: very hard to understand what's going on. But in wage terms,
Speaker 1: we've seen the bottom of the wage distribution dropout, and
Speaker 1: so we're comparing to a weird thing from a year ago. Um.
Speaker 1: And so I think the evidence is actually that, um, yeah,
Speaker 1: there are going to be some bottlenecks, but that's not
Speaker 1: something you want to respond to instantly. That's sorry. I
Speaker 1: think that the wage pressure we will see, but I
Speaker 1: think a lot of it is you know the world
Speaker 1: is changing a bit. How many more Jata points would
Speaker 1: it take for you to see three four? Um? I
Speaker 1: don't know. I want to see evidence that significant bottlenecks
Speaker 1: are occurring, and I don't see that in the data.
Speaker 1: I'm not gonna I'm not gonna say three or four.
Speaker 1: I would want to see sustained evidence. But I think
Speaker 1: the wage settlement evidence is pretty good two percent, saying
Speaker 1: as it's been for the last decade, it's been two
Speaker 1: to to two. Yes, there are temporary bottlenecks, but what
Speaker 1: should the central bank do to respond to a temporary bottle?
Speaker 1: I think of price changes. We saw a big rise
Speaker 1: in timber prices. Okay, people don't have to buy timber,
Speaker 1: and so the price of timber now is halved. So
Speaker 1: I think we'll we just have to watch an economy
Speaker 1: recovering from a shot we've never seen before. Danny, just
Speaker 1: to conclude things someone wrote into me just moments ago,
Speaker 1: and I think you'd agree with them. The only mistake
Speaker 1: has been to be too hawkish, never too davish. That's
Speaker 1: been true over the last ten years. Is that what
Speaker 1: you worry about now? I think that's right. I mean,
Speaker 1: I don't understand how is it an error to sit
Speaker 1: and wait and watch, just wait, don't, don't, don't do
Speaker 1: anything more than you're doing now and watches the economy
Speaker 1: resolves itself. Look look, look at the hawk ish folk
Speaker 1: who I've been on your programs with many times over
Speaker 1: the last decade, telling us inflation was going to take off,
Speaker 1: that's what it was gonna do. You had to raise breack.
Speaker 1: Oh that was nonsense. So I think that the error
Speaker 1: has always been in a recovery, you're tightened too quickly.
Speaker 1: There's enough really no error to be had in waiting
Speaker 1: and looking and seeing it. And I think that's what's
Speaker 1: going on. And we got to see in the UK.
Speaker 1: The potential is the government is going to withdraw the stimulus,
Speaker 1: perhaps in September in the in the US, these unemployment
Speaker 1: benefits are going to go, and then we'll see, we'll
Speaker 1: see what how the economy anounces back. But you know,
Speaker 1: we look, watch and don't make another big mistakes like
Speaker 1: George olds One did in the UK in two thousand ten.
Speaker 1: Need we need a round table, don't we with you?
Speaker 1: Andrew says we need to do that again? Oh no,
Speaker 1: we get days and friends now we are good friends.
Speaker 1: We both think brexit as a disaster. Let me go.
Speaker 1: You agree on He still wants to raise rates, of course,
Speaker 1: does he? Well, that's what I thought maybe that would
Speaker 1: be the optimal man table for a program. What's the
Speaker 1: discussion that you wanted forever and he wants higher rates.
Speaker 1: Danny's going to see it. It's going to hear from you,
Speaker 1: Danny Blanche for dam professor Again, I'm trying former bankingron
Speaker 1: a Monetary Policy Committee member. Let's turn to Luke UBSS
Speaker 1: and Management Asset Allocation strategist Mr Kawa, going to see
Speaker 1: you a good old friend, Luke. Central banks when they
Speaker 1: change type baby steps and the baby step that I
Speaker 1: think we're witnessing over the past week, both with the
Speaker 1: Fedom Reserve and now the Bank of England seems to
Speaker 1: be just reassessing the balance of risks around the outlook
Speaker 1: and also around the outlook for inflation. What's your take
Speaker 1: on that? Look? John, imagine if your your baby's first
Speaker 1: step wasn't a first step, if it was you know,
Speaker 1: a whole vaulter, a high jump. That's that's the shock
Speaker 1: kind of the market had to deal with, even though
Speaker 1: we're talking about things that were only out you know,
Speaker 1: ine and do require a lot of of progress to
Speaker 1: be sustained and to be actually realized. So kind of
Speaker 1: looking at the FED and digesting how that might hit
Speaker 1: cross asset action. What we're thinking about is kind of
Speaker 1: the two reasons why German Powell said that the dots
Speaker 1: did move up. One reason is that you know economic
Speaker 1: activity is coming in, so there's more confidence within the
Speaker 1: FED that the baseline outlook that they achieved and marked
Speaker 1: that they outline of March is going to be achieved.
Speaker 1: So on the one hand, this suggests that continued inline
Speaker 1: data is going to be a force of pressure that
Speaker 1: continues to pull orward dots. And if you're trading short
Speaker 1: term interest rates, all you have to do is be
Speaker 1: more confident than the FED that that economic outlook is
Speaker 1: going to be achieved. You can kind of continue to
Speaker 1: push the timeline on that front. On the other hand,
Speaker 1: it's clear that the the inflation risk, the balance of
Speaker 1: inflation risk that jumping too and that thirteen beneficials thinking
Speaker 1: that the either risk to UH to a core PC
Speaker 1: are tilted to the upside. That also influences the forecast,
Speaker 1: the balance of risks, and when they think tightening might
Speaker 1: be warranted. So on the other hand, you have what
Speaker 1: we would expect to see over time, is that the
Speaker 1: ebbing of these inflationary pressures and upside risk just as
Speaker 1: these these do turn to be less persistent, to avoid
Speaker 1: using the T word, inflationary forces. So kind of putting
Speaker 1: this together, I think what you would expect coming out
Speaker 1: of the f l NCY, and this is something we've
Speaker 1: adjusted to take account of, is that that real yields
Speaker 1: break even trade off has moved more into the real
Speaker 1: yield side of it, driving moves in the tenure that
Speaker 1: of course is going to also have an effect on
Speaker 1: the dollar. So it's about seeing less widespread dollar weakness
Speaker 1: and the scope for that deteriorating on the margin. What
Speaker 1: I will say is encouraging to say from a risk
Speaker 1: perspective is that even as we've had you know, a
Speaker 1: broad dollar rebound in the wake of the f o MC,
Speaker 1: it's rallying more against the d X Y components than
Speaker 1: it is against the m f X components. So this
Speaker 1: suggests this isn't about a kind of a dumping of
Speaker 1: risk currencies so to speak, or a less positive view
Speaker 1: on risk. It's just a reevaluation suation of the FED
Speaker 1: real yields and what that means at the front end.
Speaker 1: So Luke, the more we hear the two are in transitory.
Speaker 1: The more people buy risk assets, exactly as you said,
Speaker 1: they're going further into a risk in order to get returns.
Speaker 1: There is a question at what point the Federal Reserve,
Speaker 1: the Bank of England, other central banks starts to take
Speaker 1: action just to curtail some of the moves that we've seen.
Speaker 1: And I'm thinking of the mortgage market in particular to
Speaker 1: Tailor's point earlier, this question of the composition of which
Speaker 1: assets the FED may pair back on its purchases. How
Speaker 1: much are you looking to the mortgage market to feel
Speaker 1: some from that as people start to question the elevated
Speaker 1: housing prices. Well, I think the main reason why the
Speaker 1: FED at this point is still purchasing in both asset
Speaker 1: classes because it knows, as we know, that by purchasing mbs,
Speaker 1: it's it's sucking treasury fall out of the market. And
Speaker 1: you know what one of the Fed's goals is to,
Speaker 1: you know, use asset purchases to a certain extent, to
Speaker 1: to calm markets, calm market volatility. So I think the
Speaker 1: the signal from the FED that it's going in either
Speaker 1: direction in terms of both purchasing less and moving to
Speaker 1: to raise rates at some undustined but at some inconclusive
Speaker 1: point in the future is really just a signal. They
Speaker 1: will both be that the FED is moving more from
Speaker 1: a val suppressant mode of purely baal suppressing mode in
Speaker 1: order to get us through the crisis and get the
Speaker 1: rebound completely on track, to one where the FED is
Speaker 1: going to be more a source of two way volatility.
Speaker 1: I think that's the real reading from that, not necessarily
Speaker 1: the nature of the components of the underlying asset purchases. Luke,
Speaker 1: are you surprised by the cross asset resilience see with
Speaker 1: equities at record highs, a VIX with a fifteen handle
Speaker 1: and a very calm and well behaved bond market to
Speaker 1: to a certain extent, yes, I think the markets have
Speaker 1: been able to digest this quite well. Uh, the a
Speaker 1: more hawks than expected FED, And I think kind of
Speaker 1: when we're looking through what and why what we talked
Speaker 1: about earlier in terms of the dollar being stronger, real
Speaker 1: yields being stronger, how far can that filter out? What's
Speaker 1: very important lately is that it hasn't filtered out really
Speaker 1: all the way to commodities. Copper had had a pretty
Speaker 1: bad move down, but that's kind of alleviated lately. Oil
Speaker 1: still pushing forward to new highs, so the market is
Speaker 1: still trading this idea of we're still getting very very
Speaker 1: good activity going forward. The FED has cut off right
Speaker 1: tail inflation outcomes. Therefore it's it's safe to buy equities.
Speaker 1: In our view, there are there are limits to this, uh,
Speaker 1: particularly the way that it's been kind of playing out
Speaker 1: under the surface with with the rotation to growth. That's
Speaker 1: not necessarily something we want to change us right now.
Speaker 1: Right now, the equity is at the headline level. We
Speaker 1: do think are due for a breather. And if you
Speaker 1: look at over the past few months, equities have really
Speaker 1: moved sideways on a global basis and on the SMP
Speaker 1: five hundred, So we're not necessarily looking for a lot
Speaker 1: of downside, but think there there will be in attractive
Speaker 1: potentially to buy going forward in the coming weeks. And
Speaker 1: this is just to do with the market needing to
Speaker 1: digest that the second derivative is turning the that is
Speaker 1: becoming less supportive. Luke always great to cash up. I
Speaker 1: promise you we wouldn't tall baseball. We won't as ubs
Speaker 1: got a call on you. Have you got a country
Speaker 1: a nation? I I mean I I have to say
Speaker 1: the Swiss, right, the Swiss? Do you I guess maybe?
Speaker 1: Why do you have to say this one? Yes? I
Speaker 1: guess right. You gotta go with You've gotta go with
Speaker 1: Swiss Switzerland UBSAS and Management assa allocation strategist Luke Kawa,
Speaker 1: let's bring it Terry heinha we penchi pol he found
Speaker 1: rejoined us right now, So let's start there. What we
Speaker 1: can expect as far as you're concerned down in d C.
Speaker 1: On a fiscal front, what we can what we can
Speaker 1: expect firstly is a touted roughly one trillion dollar infrastructure
Speaker 1: package like what I've been talking about for the last
Speaker 1: month or so, um of which, as Lisa says, about
Speaker 1: fifty nine billion is new spending. Brings up a dichotomy
Speaker 1: for markets. By the way, you'll hear Washington pump high numbers,
Speaker 1: but then a lot of it isn't new spending. And
Speaker 1: that's important to understand the code of the last COVID
Speaker 1: relief bill, for example, uh touted is two trillion dollars,
Speaker 1: but only one trillion is gonna get spent this year.
Speaker 1: The rest of the run out over the next eight years,
Speaker 1: so you're gonna get that are you going to get
Speaker 1: much of anything else at this point. I really doubt it.
Speaker 1: The so called Families Plan, another couple of trillion dollars,
Speaker 1: I think is going to be very difficult to pass,
Speaker 1: even with all Democratic votes. And then what you're into
Speaker 1: is if you're into spending, which is going to be
Speaker 1: large leaf flat uh into next year and uh, and
Speaker 1: you've got the debt ceiling as a as a potential surprise.
Speaker 1: But Washington's attention is going to be taken up between
Speaker 1: now and the end of September, a time in which
Speaker 1: the House and the Senator roughly and only one out
Speaker 1: of those next three months, uh, with getting the infrastructure
Speaker 1: bill done, and otherwise partisan warfare about all the other
Speaker 1: stuff I just mentioned as we talked about five billion
Speaker 1: dollars of new spending, Terry, how much political political momentum
Speaker 1: is there behind balancing the budget, behind raising taxes or
Speaker 1: cutting spending ahead of that August deficit ceiling? Oh? None, none. Uh.
Speaker 1: You know, they both parties talk about debt and deficit
Speaker 1: when it's when politically when it suits them Democrats did
Speaker 1: over the four years of the previous administration. But in reality,
Speaker 1: where the parties tend to come together and as as
Speaker 1: we've seen, is on spending things. Uh. Uh, COVID is
Speaker 1: a money spender. The China Bill was a money spender. Uh.
Speaker 1: Those things are money spenders, and the parties come together
Speaker 1: around those things. But most of the rest of it,
Speaker 1: you know, I think federal spending is going to be
Speaker 1: largely flat, as I say, But the rest of it, uh,
Speaker 1: you know, they will they will fight over but but
Speaker 1: I don't think you're gonna see anything beyond the infrastructure
Speaker 1: package today anyway, Terry, Where then is the momentum on
Speaker 1: how we're going to pay for all of this? Oh? Um,
Speaker 1: we're gonna pay for a Taylor? Uh you know, I
Speaker 1: you know, the devils and the details on the infrastructure bill.
Speaker 1: I I edged up my odds on infrastructure uh the
Speaker 1: last night, but on the news. But I'll sso give
Speaker 1: you things fall apart. And one of the details here
Speaker 1: is that we don't exactly know how they're going to
Speaker 1: try to pay for it. And they say they are
Speaker 1: going to pay for it, and they say they're gonna
Speaker 1: pay for it without tax increases. So uh, there are
Speaker 1: not insubstantial uh difficulties here yet. And well, then I
Speaker 1: think what market see is a deal solidifying, I mean
Speaker 1: the likeliest scenario here, the markets will see a deal
Speaker 1: solidifying over the next week, but they'll see wrangling around
Speaker 1: this deal and passing it out of both houses through
Speaker 1: the month of July. So there's gonna be a lot
Speaker 1: of volatility here. And one of the details that will
Speaker 1: cause that volatility is exactly how the thing is paid for.
Speaker 1: And you don't worry about debt and deficits during wartime,
Speaker 1: When then should we begin to discuss it? Uh? You
Speaker 1: know the you know, my view of this very simply
Speaker 1: is that unless unless Washington gets a market signal that uh,
Speaker 1: that that there's too much debt or too much deficit,
Speaker 1: Washington is not going to he he to call. You know.
Speaker 1: But my favorite example of this is the tax bill,
Speaker 1: and you know, no disrespect to anybody who put that together,
Speaker 1: but but you know, understand that the the the redline
Speaker 1: for Republicans was they weren't going to spend they weren't
Speaker 1: going to go into depths in any more than one
Speaker 1: point five trillion over ten years. Now, when you're talking about,
Speaker 1: you know, how to manage a deficit increase, uh, that's
Speaker 1: a sign that you're really not serious. About bringing the
Speaker 1: depsit down. And that's the way Washington is these days,
Speaker 1: regardless of party. Yeah, and Terry. If it weren't that way,
Speaker 1: people probably would be accusing it of not recognizing the
Speaker 1: reality we're in a pretty low bond yield. Since Tom
Speaker 1: Keene is not here, I'm going to channel him and
Speaker 1: talk about how close we are to the two midterm elections.
Speaker 1: Is this fiscal package that we're seeing coalesce in Washington,
Speaker 1: d C. Going to be viewed as a win for
Speaker 1: the Republicans or a win for the Democrats? Yes, Uh,
Speaker 1: The answer to that is yes. Uh. By the infrastructure
Speaker 1: spending is bipartisan. Uh. Members of both parties want to
Speaker 1: see better roads, bridges, fundamental infrastructure. They all want to
Speaker 1: be able to go home and say that they did that.
Speaker 1: Uh and uh. And the you know, the key for
Speaker 1: me at the same time will be, uh see if
Speaker 1: they can goose them along more quickly. You know, there's uh.
Speaker 1: In my home state of Pennsylvania, there's been a now
Speaker 1: a ten year long project just to redo forty miles
Speaker 1: of old interstate And if it's gonna things are gonna
Speaker 1: take that long, there's gonna be a lot of frustration
Speaker 1: out there in the world. So one thing that they're
Speaker 1: going to need to do is goose their states along
Speaker 1: and make things go a lot more quickly in order
Speaker 1: to gain the maximum out of political benefit out of it.
Speaker 1: That's the best way of answering its home King question.
Speaker 1: Ye Sterry, Thank you, Sera Hines Fanchia Policy found it
Speaker 1: that in Washington day sake. This is the Bloomberg Surveillance Podcast.
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Speaker 1: Tom keene In. This is Bloomer