Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple, podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. A good time
Speaker 1: to speak with Michael Darda of m CAM Holdings. Michael,
Speaker 1: I want to work at the nominal basis because that's
Speaker 1: where our listeners and our viewers are at. Forget about
Speaker 1: FED talk, forget about real inflation. How do we withstand
Speaker 1: a nominal inflation rate of eight point six percent? Well, Tom,
Speaker 1: I think this is exactly what you end up getting
Speaker 1: when you run the anomenal economy hot at double digit
Speaker 1: growth rates on average since the bottom of the business
Speaker 1: cycle in two thousan and twenty. Any look at historical
Speaker 1: experience will tell you that. And unfortunately for households, if
Speaker 1: we look at the May data, the proxy phenomenal income
Speaker 1: out of the Jobs Report, which is essentially just wage growth,
Speaker 1: hours growth, and employment growth sung together annualized it at
Speaker 1: about ten percent, all of that being eaten up by inflation.
Speaker 1: With today's report, that's where I wanted to go, Mike,
Speaker 1: And that's what I was watching was real average hourly wordings,
Speaker 1: both on an hourly as well as a weekly basis.
Speaker 1: On a weekly basis, it is now the most negative
Speaker 1: that it's been in data going back to two thousand
Speaker 1: and six, negative three point nine percent in terms of
Speaker 1: how far behind wage inflation is falling behind the actual
Speaker 1: stuff we buy every day. What does this do to
Speaker 1: your growth outlook, Mike, Yeah, I think unfortunately, you know,
Speaker 1: we're dealing with a little bit of a stagflationary environment here,
Speaker 1: at least for the month of May. So obviously we've
Speaker 1: had intensifying shocks and in food and energy prices. So
Speaker 1: hopefully at some point that will reverse. But you know,
Speaker 1: as Mike McKee went into, this is an inflationary process
Speaker 1: that has been broadening and deepening out. So you've got
Speaker 1: pressure on rental inflation. That's a significant portion of the CPI.
Speaker 1: If we look at services inflation excluding energy, that six
Speaker 1: of the c p I. It's running it more than
Speaker 1: double the average of the last business cycle. So it
Speaker 1: might be a bit of a fool's Errand here to
Speaker 1: just assume that if crude oil prices back off all
Speaker 1: of a sudden, the magic wand is waved in the
Speaker 1: inflation problem simply goes away. Mike, we thought that we
Speaker 1: had seen peak inflation. We had not. We now have
Speaker 1: an even higher print, that is a new post high.
Speaker 1: Is eight point six percent the high high water mark?
Speaker 1: Or are we going to see even higher ahead? Well,
Speaker 1: I think we're probably pretty close to peak inflation on
Speaker 1: a year over year basis, But none of that may
Speaker 1: matter for the path of FED tightening and the bond
Speaker 1: market and equity market valuations, because if inflation eases from
Speaker 1: here but still stays very high, then you know that
Speaker 1: is not an environment where the FED just moves to
Speaker 1: the sideline sidelines and we see some kind of huge
Speaker 1: revaluation and expensive equities that dominate the pulpit cap of
Speaker 1: the s and P five hundreds. So there are some
Speaker 1: macro commentators making kind of bizarre arguments, at least from
Speaker 1: my perspective um that aren't focused sufficiently on the nominal
Speaker 1: GDP backdrop, which is still way too strong. Aggregate demand
Speaker 1: is still way troops too strong, so the FED has
Speaker 1: more work to do. And the fact that if inflation eases,
Speaker 1: but is settling in at rates that are several times
Speaker 1: the Fed's target acceptable inflation over time, and that's still
Speaker 1: going to be a problem for the bond market and
Speaker 1: the problem for the Federal Reserve all And you know,
Speaker 1: Muhammad ali Arian, who was on yesterday with John Farrow, said, um,
Speaker 1: if you think we're going to have a recession, sure,
Speaker 1: inflation is going to come down. And I'm paraphrasing here,
Speaker 1: but that's not what you want to see, right, That's
Speaker 1: not how transitory inflation should be affected. So is that
Speaker 1: the way we're gonna see it? Well, Matt, I think
Speaker 1: unfortunately eventually that's where we probably end up. But the
Speaker 1: critical discussion is timing there. So I don't think that
Speaker 1: we're in a recession now, and I don't see a
Speaker 1: recession this year. I think the reception will come after
Speaker 1: the FED gets itself into a restrictive monetary posture, and
Speaker 1: that's going to take some time. Consider this fact, forget
Speaker 1: the backward looking numbers that we just got, as shocking
Speaker 1: as they are, the FED funds rate relative to five
Speaker 1: year expected inflation is still below two hundred basis points
Speaker 1: minus two d basis point, and that is below the
Speaker 1: trough of the last business cycle when you had very
Speaker 1: slow growth and you know, in in very weak realized inflation,
Speaker 1: and so this FED is still behind the curve, and
Speaker 1: that is going to create a situation where these underlying
Speaker 1: drive inflation like services and rents and wages are likely
Speaker 1: to continue accelerat well, Michael Dart, that's right where I
Speaker 1: wanted to go, because, frankly, folks, the most important inflation
Speaker 1: data of the day after this shock is at ten
Speaker 1: AM with a five year, five year forward Michigan statistic.
Speaker 1: Michael Darter, what are the ramifications to the to the
Speaker 1: the economic zeitgeist if we get the five year Michigan
Speaker 1: look to break out above three percent, to break out
Speaker 1: of the inflation level of two thousand six. Yeah, I
Speaker 1: think the f O m C would take note of that. Um.
Speaker 1: You know, those measures are are a bit stickier than
Speaker 1: the bond market break even measures, but you know they
Speaker 1: are elevated marginally relative to their averages of the last cycle.
Speaker 1: And we start to see a any kind of what
Speaker 1: looks like a breakout, I think that would create a
Speaker 1: lot of consternation on the f O m C that
Speaker 1: these high headline inflation numbers are bleeding into longer term
Speaker 1: expectations and you know, I think the FED would be
Speaker 1: alarmed by that. Michael Darta, thank you so much for
Speaker 1: the insight. Michael Darta, m CAM Partners, and can't say
Speaker 1: enough about his linkage of the equity markets into what
Speaker 1: we see in economics. This was scheduled before the inflation
Speaker 1: report and the importance of it. David Harrow, of course
Speaker 1: always looking at price change across America, but far more.
Speaker 1: We've tried to get David harrowin of Harris Associates to
Speaker 1: speak of EU banking. It has been an absolute shock
Speaker 1: and David, I've got to start with credit suites and
Speaker 1: the view back I'm gonna say fifteen years or so
Speaker 1: before the Great Financial Crisis of two thousand six, and
Speaker 1: it is has been an abject value trapped and an
Speaker 1: abject failure. You've been directly involved in this. You have
Speaker 1: been patient, David Harrow. Have you run out of patients
Speaker 1: with the gnomes of failure in Zurich? Well, not at
Speaker 1: this stage yet, because there has been wholesale changes at
Speaker 1: the bank, from the board to the management down, and
Speaker 1: I think we need to see what the new people
Speaker 1: who are involved with the bank, both from the Executive
Speaker 1: Management Committee and the Board of Directors can do too
Speaker 1: during this round. There is inherent value within the business,
Speaker 1: and I think these people should be given a chance
Speaker 1: to try to create this value and sustain this value.
Speaker 1: The bank trades at about a third or book value,
Speaker 1: so that the object now should be stabilization and then
Speaker 1: growth after stabilization. And they can't do it. Someone else
Speaker 1: asked to do they have a Swiss Are they not
Speaker 1: making tough decisions because they know this government has their back,
Speaker 1: that Zurich will be UBS and that Zurich will be
Speaker 1: credit Suite. I would hope not. By the way, I'm
Speaker 1: a believer in free market capitalism. Then there shouldn't be
Speaker 1: any protection. If they can't do it and someone comes
Speaker 1: in to make an acquisition to all our parts of
Speaker 1: the business, I think that should be allowed to happen. Now.
Speaker 1: There's taught that if someone does bid, they will give
Speaker 1: UBS a chance to do some kind of a deal combination.
Speaker 1: But I would certainly hope that is not the case.
Speaker 1: Is Europe even ready for big cross border bank m
Speaker 1: and A. I don't think you can here across a
Speaker 1: border bank M and A in uh Europe and a
Speaker 1: wide scale until some of the rules and laws are changed.
Speaker 1: At some point this may happen, but you still have
Speaker 1: fragmented banking markets, which it makes it non conducive to
Speaker 1: cross border. I think there is a possibility for some
Speaker 1: an isolated on an isolated levels and basis, but at
Speaker 1: this stage you still need regulatory evening out that would
Speaker 1: make it more conducive to cross border M and A.
Speaker 1: On the other hand, a company like Credit Suits has
Speaker 1: a huge private wealth management business which is now bigger
Speaker 1: than their global markets investment banking business. And for any
Speaker 1: big global bank that wants exposure in this lucrative area,
Speaker 1: you would think Credit Sweets would be in an attractive asset.
Speaker 1: I gotta ask you about um China because every morning
Speaker 1: it seems like futures lately have are driven by the
Speaker 1: idea that China may um get a little bit lighter
Speaker 1: on tech companies. Yesterday there's a report that Aunt could
Speaker 1: revive its I p L, although that's been kind of
Speaker 1: pooh pooed. I see that you own a stake in Process,
Speaker 1: which in turn owns a stake inten cent Right, what's
Speaker 1: your view on China tech now? It does appear that
Speaker 1: we've hit peaked regulatory initiatives in China. As you know,
Speaker 1: over the last year or so, they've been increasing a
Speaker 1: regulatory scrutiny and the Chinese tech sector, so the whole
Speaker 1: sector has been kind of hit. We also owned some
Speaker 1: Ali Baba as well, and both these sectors have been hit.
Speaker 1: But we believe that even with this additional regulatory scrutiny. Now,
Speaker 1: keep in mind, what's happening is these businesses around the
Speaker 1: globe have grown much faster than the regulator's ability around
Speaker 1: the globe to regulate them. In China's kind of taken
Speaker 1: a first staff. But what we have seen what appears
Speaker 1: to be statements from the government that we're getting getting
Speaker 1: to the end of the regulatory initiatives. And then you
Speaker 1: even saw in the case of ten Cents, lots of
Speaker 1: games that were approved this week. This is one of
Speaker 1: the things that they were concerned about, uh withholding game approvals, uh,
Speaker 1: you know, for the various reasons. So we are starting
Speaker 1: to see regulatory relief or at least movements by the
Speaker 1: government that the worst is behind the sector. In Meanwhile,
Speaker 1: these are really well run, world class tech companies that
Speaker 1: trade a load double digit multiple. David Harrow, thank you
Speaker 1: so much too brief a visit, but we've got so
Speaker 1: much going on in inflation, David Harrold Harris associates there.
Speaker 1: Jonathan galub is having a difficult Friday. He's a credit
Speaker 1: squeeze and of course their chief US equity strategist, John,
Speaker 1: I've got to get out in front of your research note.
Speaker 1: Will you amend your targets this weekend for Monday trading? No,
Speaker 1: we won't amend our our target and I think you
Speaker 1: know our call all along is that the inflation is
Speaker 1: going to be stickier at a much higher level, and
Speaker 1: we've been recommending companies that benefit from higher inflation. So
Speaker 1: the two ways of thinking about this. Today's report is
Speaker 1: bad for the market in general, but there are certain
Speaker 1: companies that hold up better or worse in a higher
Speaker 1: inflation environment than others, and that's more focusing John Goda.
Speaker 1: What's so important to me here is the behavior. And
Speaker 1: I don't mean to hearken back to the fossil dim
Speaker 1: that I am in the nineties seventies, but let's look
Speaker 1: at the deck of cards. We've got the worst bond
Speaker 1: market since time began. Price down, yield up. We've got
Speaker 1: these inflation numbers today, the FED parlor game that we're
Speaker 1: going to see out to the end of the year.
Speaker 1: What do you in the credit SUITEZ Securities research team
Speaker 1: field corporations will do. And my estimation they have to
Speaker 1: rapidly act even into June and July and make the
Speaker 1: plans that they thought they would make come October. Am
Speaker 1: I right on that? You know, Tom, I don't think
Speaker 1: you are right on that. I think that I think
Speaker 1: the companies in a very high nominal GDP environment, which
Speaker 1: is what we have, the underlying eco out of me
Speaker 1: for all the recession concerns is fine. Revenues are rip
Speaker 1: roaring strong, and so bigger companies in this environment have
Speaker 1: tended to do a bit of a better job at
Speaker 1: being able to make maintain costs. But profits are really high.
Speaker 1: The thing which is getting smacked around, um are the
Speaker 1: stock multiples, not the earnings. And that's important to think about.
Speaker 1: So what kind of multiple do you think is right
Speaker 1: for this market, especially if the FED has a terminal
Speaker 1: rate of three and a half percent. Well, first of all,
Speaker 1: I think that the FED is going to and I
Speaker 1: think this is going to lead to dialogue that this
Speaker 1: this conversation that we were having over the last couple
Speaker 1: of weeks. Can the Fed pause in September. Well, we
Speaker 1: know that the answer to that now is no, UM
Speaker 1: and the said probably has to move beyond three and
Speaker 1: a half percent UM. But we still have a you know,
Speaker 1: we have a very powerful earnings environment, the revisions, the
Speaker 1: you know, the kind of the analyst adjustment to the earnings.
Speaker 1: With all discussion that we've been having about weak earnings,
Speaker 1: they're going up almost every day. So um, we think
Speaker 1: that the market so how much how much should investors
Speaker 1: be paying for forward earnings? You know, if you if
Speaker 1: you look at a corporate bond yield, which is what
Speaker 1: your discount rate, it's not Fed funds, it's still you know,
Speaker 1: still something like five percent, which is a low number.
Speaker 1: So we think that stocks are attractively valued at these levels,
Speaker 1: and we would be going in the level of concern
Speaker 1: in the market is we think is much higher than
Speaker 1: the than the underlying backdrop. C IBC report and this
Speaker 1: is Catherine Judge reporting from c IBC Toronto, and folks,
Speaker 1: I think this really sums it up. C IBC calls
Speaker 1: US inflation report read hot, and they go Matt Miller
Speaker 1: right to the heart of the matter which McKee alluded to,
Speaker 1: which is shelter is the most gain since two thousand four.
Speaker 1: We've been hot highlighting this today, folks from Senator Mansions Charleston,
Speaker 1: West Virginia to Senator Miller's uh suburb north of New York.
Speaker 1: I mean, Matt Miller, this is nothing that anybody already knows.
Speaker 1: We are aware of this. I mean, if you look
Speaker 1: at the what's it called the SMP core logic case Shiller,
Speaker 1: we should really ask Bob to shorten that. If you
Speaker 1: look at their twenties city index UM and max it out,
Speaker 1: we're at a level that towers over what we saw
Speaker 1: in two thousand four, two thousand five. So in terms
Speaker 1: of the absolute level, it's just unbelievable. The amount of
Speaker 1: appreciation to seeen in the house prices. John Gala with
Speaker 1: credit sweets with us here. John, you talk about the
Speaker 1: animal spirit of nominal g d P. But at eight
Speaker 1: point six percent headline, is there a point where the
Speaker 1: inflation price change part of nominal absolutely overwhelms actual economic growth?
Speaker 1: You know? It's that's like the the ultar bit the
Speaker 1: ultimate question, the the like Like I said, before the
Speaker 1: earnings are fine, the stock multiple is in five multiple points.
Speaker 1: Is a decline in stock multiples this year. Today's news,
Speaker 1: taken by itself, should push the multiple down. The market,
Speaker 1: you know, the futures are down something like one in
Speaker 1: a quarter percent on this news. That is perfectly that's
Speaker 1: exactly what you'd expect to happen. But the market has
Speaker 1: already you know, adjusted, you know, enormously for this inflation environment.
Speaker 1: So I think that the market probably is has taken
Speaker 1: all the bad news into account already, which is one
Speaker 1: of the reasons why I'm not as concerned, not because
Speaker 1: this isn't a good report, but because the markets already
Speaker 1: discounted a ton of bad news. And most importantly, you know,
Speaker 1: a red hot and you're just talking about the c
Speaker 1: ib report. A red hot economy does not equal recession,
Speaker 1: and this is a red hot economy, not a recessionary economy.
Speaker 1: John Gallup, thank you so much. Right now, Ellen Wall
Speaker 1: joins us. I can't say enough about her book, Saudi Inc.
Speaker 1: It is a window into the layers of the Ebon
Speaker 1: Sad family, the heritage of the family, and most importantly,
Speaker 1: the new family. She's senior fellow at the Atlantic Council.
Speaker 1: I guess Mr Biden will visit Riot. It's not formally
Speaker 1: announced yet, but there it is. Ellen is well when
Speaker 1: he visits. Can there be a belief that Saudi Arabia
Speaker 1: can adjust the price of a gallon of gas in America?
Speaker 1: I think that if you if you have that belief still,
Speaker 1: you need to re examine your your belief system, because
Speaker 1: Saudi Arabia does not have the ability to change the
Speaker 1: price of a gallon of gasoline like that unless they
Speaker 1: do something so incredibly drastic um and at this point,
Speaker 1: even with demand way it is and with other producers
Speaker 1: and you know, kind of falling off a cliff, even
Speaker 1: if Saudi Arabia put another two million barrels a dave
Speaker 1: oil in the market, I don't think we would even
Speaker 1: see that much of a drop in US gasolene prices.
Speaker 1: The hope and prayer here, Ellen is a redux of
Speaker 1: OPEC one, OPEC two six, And there was a moment
Speaker 1: in night six were oil cratered. Can we relive that? Well? Um,
Speaker 1: we could. I mean we almost relived that in um.
Speaker 1: If you remember in in March of win just as
Speaker 1: global oil demand was cratering, Russia and Saudi Arabia both
Speaker 1: kind of opened their taps, so uh and and saw
Speaker 1: in April and May of that year an incredible amount
Speaker 1: of oil just slotting the market and crashing prices. I
Speaker 1: don't think that we are likely to see a redux
Speaker 1: of that in this case, unless there's some sort of
Speaker 1: major shock to the global economy that that causes demand
Speaker 1: to create. At this point, we're so tight in supply,
Speaker 1: and um, there's enough Russian oil that has been off
Speaker 1: the market. There's a question about whether it's really coming
Speaker 1: back or not. I think that it's coming back a
Speaker 1: little bit more than people think. But still demand has
Speaker 1: just been so high, and with China reopening and demand
Speaker 1: expected to go up there, it's really just it seems
Speaker 1: like there really isn't enough oil in production now in
Speaker 1: the world to get that to get these prices down significantly.
Speaker 1: And then when you throw in uh, you know, the
Speaker 1: situation in Ukraine and Russia, it's just that it's just
Speaker 1: a recipe too for prices to keep rising. Ellen the
Speaker 1: people who say this is a policy error and we
Speaker 1: should have been investing more in fossil fuels, if there
Speaker 1: were some sort of change in policy that would encourage
Speaker 1: more investment. How long would it take before those barrels
Speaker 1: would actually come online to ramp up production. So it
Speaker 1: would definitely take um some time. You know, we're not
Speaker 1: Saudi Arabia. We don't just have spare capath city that
Speaker 1: can come online that quickly. But it's not as slow
Speaker 1: as it would take in other areas, because there are
Speaker 1: shale oil resources that can come online, you know, within month,
Speaker 1: two months, three months, things like that. UM. Longer term, though,
Speaker 1: we would need a lot of investment in big long
Speaker 1: term projects, say in the Gulf of Mexico and other
Speaker 1: areas that could pump a substantial amount of oil that
Speaker 1: would bring down prices in the long use of her
Speaker 1: you'd have that. Why would why would those executives want
Speaker 1: to do that kind of investment? I mean they've been vilified,
Speaker 1: um by not only this administration but by the US Congress. Um.
Speaker 1: Why make that kind of long term investment when you
Speaker 1: know that policies and regulations can change on a dime
Speaker 1: against you, precisely. I mean, this is this is the question.
Speaker 1: You know, if you're an oil and gas executive and
Speaker 1: you're responsible for making decisions about the health of the company,
Speaker 1: returning value to your shareholders of Coorse, you're not going
Speaker 1: to want to make any of these long term investments
Speaker 1: because you are concerned that any project that you invest
Speaker 1: in could just either get shut down by government regulations
Speaker 1: or for all you know, they're finally going to issue
Speaker 1: the methane regulations and you're just gonna have to spend
Speaker 1: a huge amount more money to comply. That uncertainty I
Speaker 1: think is really keeping production from increasing. On the flip
Speaker 1: side of Ellen, how much can some of the renewable
Speaker 1: sources of energy start to offset fossil fuel usage in
Speaker 1: a way that is more material in the near term
Speaker 1: and frankly expedite that transition. But I don't want to
Speaker 1: be a downer about wind and solar, because I think
Speaker 1: they are great technologies and they're improving all the time.
Speaker 1: But if you look at the amount of energy you
Speaker 1: get from renewable energy and you compare it to the
Speaker 1: amount of energy you get from breaking down a hydrocarbon,
Speaker 1: you just can't compare it. It's it's not you need
Speaker 1: so much more of these renewable sources in order to
Speaker 1: compensate for hydrocarbons, And we're at a point where energy
Speaker 1: use is still increasing, and so all of the renewables
Speaker 1: that are coming online are helping to to create that
Speaker 1: to offset that new demand. Forget replacing old old sources.
Speaker 1: Oh well, very quickly. Here I have a moving average
Speaker 1: of inflation adjusted brent, which tells me that when we
Speaker 1: get up to a hundred forty a barrel, things change,
Speaker 1: how our behavior change? If we see brent move on
Speaker 1: up to one and you know what, you know, if
Speaker 1: you'd asked me a month ago whether we get there,
Speaker 1: I'd say, well, one forty is a long way off.
Speaker 1: Now it doesn't seem so far so far away. I
Speaker 1: think that if we hit one forty brent, we're definitely
Speaker 1: going to see um a lot of people and also
Speaker 1: businesses to making decisions to u not you know, not
Speaker 1: expand and maybe cut back on production. We're already seeing
Speaker 1: businesses say that depend on troleum products. We saw Lulu
Speaker 1: Lemon earlier. This Week's say hey, we're raising the prices
Speaker 1: of our products because they are made from petroleum, and
Speaker 1: patroleum is just that much more expective. So it's not
Speaker 1: just relying on energy, it's also every business that uses
Speaker 1: oil products. Now you're seeing Ellen will thank you for
Speaker 1: the brief on oil with the Atlantic Council. Can't say
Speaker 1: enough about weekend reading with Saudi and as well. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg