WEBVTT - Surveillance: Inflation Persistence With Gray 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:30.360 dot com and of course on the Bloomberg Terminal inflation 0:00:30.480 --> 0:00:33.400 adjusted interest rates and that does fold over to real 0:00:33.520 --> 0:00:37.160 estate and our Shonali Bastik knows it has a modicum 0:00:37.200 --> 0:00:39.680 to do with a company named black Stone, and she 0:00:39.840 --> 0:00:42.960 is with Jonathan Gray this morning. Shall absolutely thank you, 0:00:43.000 --> 0:00:45.120 Tom John, thank you for joining us as the president 0:00:45.159 --> 0:00:48.840 and CEOO of Blackstone. You are coming off what you're 0:00:48.880 --> 0:00:53.080 calling your best quarter in your thirty six year history. Now, 0:00:53.320 --> 0:00:56.640 records are very hard to keep beating. What do you 0:00:56.760 --> 0:00:59.680 tell your investors about where you go from here and 0:00:59.720 --> 0:01:03.800 how you squeeze out that next let of growth. Well, Shinale, 0:01:03.880 --> 0:01:05.920 it's great to be with you. I'll just stop for 0:01:05.959 --> 0:01:08.920 a moment and talk about the quarter because it's nice 0:01:08.959 --> 0:01:12.360 to focus on it. We really delivered for our customers. 0:01:12.800 --> 0:01:17.560 We had nearly record appreciation in our funds. We had 0:01:17.600 --> 0:01:22.320 extraordinary fundraising and for our shareholders record fee related and 0:01:22.360 --> 0:01:26.520 distributable earnings. And what's driving that, I'd say is a 0:01:26.600 --> 0:01:29.959 couple of things. First off, is where we focus in 0:01:30.080 --> 0:01:35.680 terms of investing really thematically. Uh, some areas like global logistics, 0:01:35.720 --> 0:01:40.479 software and technology, the travel recovery out of COVID, all 0:01:40.520 --> 0:01:42.600 of those have done quite well. You saw that in 0:01:42.640 --> 0:01:45.400 the quarter. And the second thing I note is we 0:01:45.480 --> 0:01:48.720 continue to expand what our business is about, who we 0:01:48.760 --> 0:01:52.480 invest for, where we invest. We're moving more and more 0:01:52.520 --> 0:01:57.400 in core plus real estate and infrastructure, direct lending UM 0:01:57.600 --> 0:02:03.880 and we're also serving more clients. We're serving more institutions, retail, insurance, 0:02:04.320 --> 0:02:07.080 and we've described it as a ship that's been operating 0:02:07.080 --> 0:02:09.920 in a narrow channel moving to open water. So it 0:02:10.040 --> 0:02:12.880 was a great quarter for us, and we're excited about 0:02:12.880 --> 0:02:15.560 what we can do more for our clients now, John, 0:02:15.600 --> 0:02:18.240 A lot of this has also come from fund realization, 0:02:18.680 --> 0:02:21.840 you know, investment realization. You've said you've been selling assets 0:02:21.840 --> 0:02:25.720 as well as investing in them. Now, is it getting 0:02:25.800 --> 0:02:29.080 harder to invest at these valuations and with all of 0:02:29.080 --> 0:02:32.839 the choppiness we're starting to see in the markets, Well, 0:02:32.880 --> 0:02:36.640 it's certainly trickier as values move up to deploy capital. 0:02:37.120 --> 0:02:40.320 The good news is we have some competitive advantages. One 0:02:40.400 --> 0:02:43.320 is we operate in almost all our businesses at very 0:02:43.400 --> 0:02:47.440 large scale. So this year we've done something like thirteen 0:02:47.560 --> 0:02:51.160 public to privates that we've been invested in. Uh, that's 0:02:51.160 --> 0:02:55.200 a real competitive advantage given size. The breath of our 0:02:55.600 --> 0:02:59.640 platform continues to expand, as I noted before, that helps 0:02:59.720 --> 0:03:02.160 us a So many of our large investments were in 0:03:02.160 --> 0:03:05.760 our newer areas. And then again what we're trying to 0:03:05.840 --> 0:03:09.320 do is find interesting areas and some of these thematic 0:03:09.400 --> 0:03:12.160 neighborhoods that we love where we can buy in at 0:03:12.160 --> 0:03:15.520 a more favorable price. So we bought in India an 0:03:15.520 --> 0:03:19.320 automotive parts company several years ago that had at that 0:03:19.360 --> 0:03:22.160 time a very small ev business, but we saw a 0:03:22.280 --> 0:03:26.200 huge potential. We invested in that considerably. The company is 0:03:26.240 --> 0:03:30.440 called sona com Star. That company has gone public. Hugely 0:03:30.560 --> 0:03:34.800 successful investment. We made something like fifteen times our investors 0:03:34.880 --> 0:03:38.440 capital because we found a really great company that people 0:03:38.480 --> 0:03:41.840 didn't realize was an on theme investment. And we're doing 0:03:41.880 --> 0:03:46.240 that this quarter again in the garage door opener business 0:03:46.240 --> 0:03:50.000 with a company called Chamberlain, which owns the Liftmaster brand. 0:03:50.280 --> 0:03:53.600 It's a play on the housing recovery that's happening, as 0:03:53.640 --> 0:03:57.040 well as e commerce and access to homes, which makes 0:03:57.040 --> 0:04:00.000 so much sense through the garage. So I would say 0:04:00.000 --> 0:04:02.720 our response to a high price market is trying to 0:04:02.840 --> 0:04:05.600 buy things we like, but do it in a little 0:04:05.600 --> 0:04:08.760 bit of one derivative off or where we find value 0:04:08.760 --> 0:04:11.120 in those areas, and that's the real challenge. Do you 0:04:11.120 --> 0:04:13.240 agree with some of the competitors that you have in 0:04:13.240 --> 0:04:16.360 the banking industry, some of you know that James Gorman 0:04:16.440 --> 0:04:19.680 over at Morgan Stanley, John Waldron over at Goldman Sachs. 0:04:19.760 --> 0:04:22.520 Do you believe that they have it right when it 0:04:22.520 --> 0:04:24.960 comes to inflation, that perhaps there are many who are 0:04:25.000 --> 0:04:29.360 under counting how much of an issue it's becoming. Yes, 0:04:29.480 --> 0:04:34.080 I would agree that inflation is definitely becoming more pervasive, 0:04:34.560 --> 0:04:37.960 more persistent than people had hoped uh. And I think 0:04:38.000 --> 0:04:41.159 that's happening for a couple of reasons. One is, money 0:04:41.160 --> 0:04:45.360 supply has grown really significantly by more than a third 0:04:45.400 --> 0:04:49.400 since COVID, which happened monetary fiscal response to the crisis. 0:04:49.680 --> 0:04:52.320 But it puts more money in the system, and then 0:04:52.360 --> 0:04:55.200 at the same time we have some big structural shortages. 0:04:55.680 --> 0:04:59.000 So in housing we've been building for Yeah, we've been 0:04:59.040 --> 0:05:02.000 building and fewer homes than we did in the past. 0:05:02.320 --> 0:05:05.200 We've been investing a lot less in energy of course, 0:05:05.960 --> 0:05:08.479 um for that, you know, because we're trying to balance 0:05:08.520 --> 0:05:11.839 that out in terms of green sustainability and so forth. 0:05:11.920 --> 0:05:16.000 And we've seen fewer people in the workforce. So go ahead, sorry, Jonathan, 0:05:16.040 --> 0:05:18.080 I want to get away from the CEO speak and 0:05:18.080 --> 0:05:20.960 talk about with the structural solution here in weakness. You 0:05:21.080 --> 0:05:23.960 came out of the University of Pennsylvania the year of 0:05:24.000 --> 0:05:28.039 Bill Clinton. You're a card carrying bona fide Democrat. You've 0:05:28.080 --> 0:05:32.560 been hugely charitable, You're an icon across the nation for charity. 0:05:32.920 --> 0:05:35.919 Help the Democratic Party now with some charity. How do 0:05:36.000 --> 0:05:39.800 you guys put the progressives and the moderates together? What's 0:05:39.800 --> 0:05:45.200 the great formula? Wow? Um, that is a big assignment. 0:05:45.480 --> 0:05:49.719 We're sorry to go. So I think it's where there 0:05:49.760 --> 0:05:52.599 are shared objectives, you know. I think there are things 0:05:52.640 --> 0:05:55.320 where you could say, how can we help people on 0:05:55.440 --> 0:05:58.839 lower and middle income areas and do things that drive 0:05:58.880 --> 0:06:02.520 the economy and drive opportunity for them. So immigration would 0:06:02.520 --> 0:06:05.120 be one where I think we can help the economy. 0:06:05.160 --> 0:06:07.720 We can help a lot of people. Ideally we can 0:06:07.760 --> 0:06:10.840 bring people out of the shadows. Housing would be another 0:06:10.960 --> 0:06:14.760 area where if we build more housing, that could drive 0:06:14.960 --> 0:06:17.800 you know, down the cost of rental housing and and 0:06:17.839 --> 0:06:20.479 buying homes for lots of people. I think in a 0:06:20.560 --> 0:06:24.720 green energy context, building housing would help a lot. Education, 0:06:24.880 --> 0:06:29.720 more investment, doing more and vocational schools, community schools, uh 0:06:29.760 --> 0:06:32.080 in order to help people. What I want to do 0:06:32.279 --> 0:06:34.680 is create more opportunity. I think the debate in the 0:06:34.720 --> 0:06:38.800 Democratic Party is about whether we should fundamentally change the 0:06:38.880 --> 0:06:42.680 system we have or should we give more opportunity to 0:06:42.800 --> 0:06:46.719 people who have less opportunities themselves today. And I vote 0:06:46.720 --> 0:06:49.120 with that second camp, which is I think we have 0:06:49.160 --> 0:06:53.240 a powerful system that creates incredible companies, but more people 0:06:53.279 --> 0:06:56.000 need access to it. My wife and I created a program, 0:06:56.240 --> 0:06:59.240 New York City Kids Rise, in order to give low 0:06:59.279 --> 0:07:04.600 income children a new city community to yourself. You're buying 0:07:04.640 --> 0:07:09.159 a building in northern Manhattan in hard cash to build 0:07:09.160 --> 0:07:14.320 the Gray Elementary School, right we we help support Harlem 0:07:14.400 --> 0:07:17.480 Village academies. It's certainly something that's important to us. We 0:07:17.600 --> 0:07:20.320 named it after my grandfather, Lean Gray, who believed a 0:07:20.400 --> 0:07:24.080 lot in education, the opportunity it created, and we do 0:07:24.240 --> 0:07:27.160 want to help as many people as possible. And I 0:07:27.200 --> 0:07:29.440 think that debate that you touch on, Tom is so 0:07:29.520 --> 0:07:32.440 important because there is a solution where we can bring 0:07:32.520 --> 0:07:36.360 more people into the system, give them more opportunity, and 0:07:36.440 --> 0:07:39.680 still keep the you know, the energy and power of 0:07:39.720 --> 0:07:43.200 our economic system to create lots of jobs and wealth. 0:07:43.360 --> 0:07:45.160 So that's why I wanted to go this idea of 0:07:45.440 --> 0:07:48.880 pairing some of the social objectives with the financial objectives 0:07:48.880 --> 0:07:51.800 of the Democratic Party. We've heard from them this desire 0:07:52.040 --> 0:07:54.520 to change the composition of a FED in large part 0:07:54.600 --> 0:07:58.320 because of the oversight of Wall Street. And I do wonder, 0:07:58.360 --> 0:08:00.520 from your vantage point of a seven hun than thirty 0:08:00.520 --> 0:08:04.160 one billion dollar firm that's expanding into an industry that 0:08:04.200 --> 0:08:07.600 typically has been private and not regulated as tightly, what 0:08:07.640 --> 0:08:12.400 do you expect and hope to see on that front? Wells, 0:08:12.600 --> 0:08:15.600 as it relates to our firm, I would say we 0:08:15.600 --> 0:08:19.720 we are regulated, certainly in lots of different ways, and 0:08:19.840 --> 0:08:23.720 we take that the responsibility to transparency how we operate 0:08:24.240 --> 0:08:27.800 is really really important. I think the difference between US 0:08:27.960 --> 0:08:32.559 and large financial firms banks is uh, they're highly levered, right, 0:08:32.600 --> 0:08:36.520 they operated ten to fifteen times leverage Uh. They also 0:08:36.679 --> 0:08:40.559 have access to the FED window and their depositors are guaranteed. 0:08:40.960 --> 0:08:43.440 None of that exists in our private you know, in 0:08:43.480 --> 0:08:48.160 our business managing capital for third parties. So we are regulated, 0:08:48.600 --> 0:08:51.400 but it is a different type of regulation. Our activities 0:08:51.440 --> 0:08:54.240 are different. And I would just say generally today, I 0:08:54.280 --> 0:08:57.120 think the financial system in the US is as healthy 0:08:57.160 --> 0:08:59.920 as i've seen. The banks have a lot of cap 0:09:00.000 --> 0:09:03.120 at all. There is really good oversighted markets. We're not 0:09:03.160 --> 0:09:06.240 seeing big accesses out there, John, real quick here, I 0:09:06.240 --> 0:09:09.080 know this big year for succession on Wall Street. A 0:09:09.080 --> 0:09:11.080 lot of your peers have turned over the ranks at 0:09:11.120 --> 0:09:13.520 the top. Do you have a timeline over a Blackstone 0:09:13.640 --> 0:09:18.520 for taking the lead? No, we we feel pretty good 0:09:18.520 --> 0:09:24.960 about what's happening. I didn't do it to us next time. No, no, no, no, 0:09:25.040 --> 0:09:27.680 I would say this, look we we Uh, we have 0:09:27.760 --> 0:09:30.960 a really good set up here. Steve Schwarzman is an 0:09:31.000 --> 0:09:34.840 amazing leader, visionary business person, and I can tell you 0:09:34.920 --> 0:09:38.040 somebody who's worked with him now for thirty years. Uh, 0:09:38.080 --> 0:09:40.720 it's an incredible ye from me and the other So 0:09:40.800 --> 0:09:43.360 we're sticking with our approach to be a fly on 0:09:43.400 --> 0:09:45.559 the wall and Gray and Schwartzman go out of it 0:09:45.600 --> 0:09:50.120 on politics. Jonathan Gregg, thank you so much for joining 0:09:50.200 --> 0:09:52.520 us with a small real estate startup, fir in Black 0:09:52.720 --> 0:10:01.480 on this spring. Gainst joins Now, founder and CEO of 0:10:01.600 --> 0:10:04.040 Exante Data. Yes, let's just start with this. Had a 0:10:04.080 --> 0:10:07.160 conversation recently with pimcom about the shape of this cycle. 0:10:07.520 --> 0:10:09.400 Can you walk me through why this one's going to 0:10:09.480 --> 0:10:11.160 be different? If you do, indeed think it will be, 0:10:13.160 --> 0:10:15.080 I think we can already see that it's a totally 0:10:15.120 --> 0:10:17.599 different cycle. Right, So the recession lasted a couple of 0:10:17.640 --> 0:10:22.000 months rather than typically several years, Right, so everything is 0:10:22.559 --> 0:10:26.400 moving at a turbo kind of pace, and really that 0:10:26.520 --> 0:10:28.839 what is so different about this cycle is is not 0:10:29.000 --> 0:10:31.360 just the type of the shock. Obviously, a pandemic shock 0:10:31.440 --> 0:10:35.000 is normal, like it's different from a normal business cycle shock, 0:10:35.080 --> 0:10:37.559 but it's also the policy of response, like just the 0:10:37.720 --> 0:10:42.680 incredible strength of both monetary But what was really unusual 0:10:42.880 --> 0:10:45.200 is just the size of the fiscal impulse we have had. 0:10:45.920 --> 0:10:50.280 And and not only is the fiscal impulse huge, it's 0:10:50.400 --> 0:10:54.880 also the stigma associated with using phiscal policy very aggressively 0:10:54.920 --> 0:10:57.000 has been kind of removed, and that means that maybe 0:10:57.040 --> 0:10:59.720 we'll get more we're going forward. We're already discussing at 0:10:59.760 --> 0:11:01.839 this on steps in the US, right, even though we've 0:11:01.880 --> 0:11:04.400 had such a big push already, So it's a totally 0:11:04.480 --> 0:11:07.880 different cycle. Like we used to have essentially only monetary 0:11:07.960 --> 0:11:10.880 policy driving the stimulus for a multi year period, right 0:11:10.960 --> 0:11:13.959 and now finally fiscal policies stepped on the gas, and 0:11:14.040 --> 0:11:18.040 it's been enough to really change inflation expectations. And look 0:11:18.120 --> 0:11:20.040 around the world, like, it's not just in the US. 0:11:20.120 --> 0:11:22.880 We have inflation that is on the move, it's everywhere, 0:11:22.920 --> 0:11:25.000 and we even have a bunch of central banks that 0:11:25.160 --> 0:11:28.360 are like feeling kind of behind and have to catch up. 0:11:28.440 --> 0:11:31.480 So we have em central banks that they were hundred 0:11:31.600 --> 0:11:33.920 or even more basis points in one go, and they 0:11:33.960 --> 0:11:35.600 would say a couple of months ago that they would 0:11:35.600 --> 0:11:37.439 be on cerri for a long time. We have the 0:11:37.559 --> 0:11:39.040 UK where we thought they were going to be in 0:11:39.080 --> 0:11:41.360 serer for a long time and now expectations they're gonna 0:11:41.400 --> 0:11:45.240 hight next month. Things are moving really, really fast. The 0:11:45.360 --> 0:11:50.319 consequences of this shift are basically disagreed upon pretty dramatically 0:11:50.480 --> 0:11:52.440 depending on who you speak to. Some people are saying 0:11:52.720 --> 0:11:55.720 it means shorter and hotter cycles. Other people mean say 0:11:55.760 --> 0:11:58.679 that it means pretty much flattened out cycles with no 0:11:58.800 --> 0:12:02.280 credit cycle whatsoever, because central bankers have their backs. What's 0:12:02.320 --> 0:12:05.400 your view? So I think I think one point that 0:12:05.480 --> 0:12:08.720 it is really important to make is that the market 0:12:08.800 --> 0:12:12.600 has this perception from the experience over the last ten years, 0:12:12.760 --> 0:12:15.520 that as soon as the central bank hikes rates by 0:12:16.360 --> 0:12:20.680 fifty basis points hunter points, something very moderate, the economy 0:12:20.760 --> 0:12:23.480 can't take it. I think we have to be very 0:12:23.559 --> 0:12:25.959 careful there, because what happened over the last ten to 0:12:26.080 --> 0:12:28.480 fifteen years was that the global economy is gonna weak, 0:12:28.960 --> 0:12:32.439 and it wasn't necessarily that the rate sensitive sectors got 0:12:32.520 --> 0:12:34.760 damaged by those rate hikes. There were other things going 0:12:34.800 --> 0:12:36.800 on that meant that the central bank had to stop. 0:12:37.120 --> 0:12:39.199 So how far the central bank can go is a 0:12:39.280 --> 0:12:41.720 totally open question, right, So, for example, in the UK, 0:12:41.920 --> 0:12:44.880 now the market is convinced that the UK economy can 0:12:44.920 --> 0:12:47.079 only take Hunter basis points and then they will have 0:12:47.160 --> 0:12:50.079 to cut again. Right, that's a really big question, and 0:12:50.200 --> 0:12:52.240 I think for a number of countries around the world, 0:12:52.480 --> 0:12:54.600 the economy can take a great deal more on Hunter 0:12:54.679 --> 0:12:58.360 basis points. As you've got industry leading work with exante 0:12:58.640 --> 0:13:01.600 on COVID and you to day with your wonderful musty 0:13:01.760 --> 0:13:05.959 releases on Twitter. You focus on cases, I'm focusing on 0:13:06.080 --> 0:13:11.320 a really ugly country by country flow. The Guardian emphasizes 0:13:11.440 --> 0:13:16.000 Bulgaria Latvia in lockdown and John Farrell's briefing me on 0:13:16.120 --> 0:13:20.280 the United Kingdom are we ready for another global set 0:13:20.559 --> 0:13:27.000 of lockdowns? So? Um, we look at cases, who look 0:13:27.000 --> 0:13:30.280 at hospitalizations, who look at fatalities, right, we have to 0:13:30.320 --> 0:13:32.000 look at the whole picture, and clearly we're in a 0:13:32.080 --> 0:13:35.440 part of the cycle where just the cases is going 0:13:35.480 --> 0:13:37.920 to give a different picture about how severe this is 0:13:38.000 --> 0:13:40.920 relative to previous waves, right, because they do don't translate 0:13:41.000 --> 0:13:43.360 into hospitalizations in the same degree. But that's it. If 0:13:43.480 --> 0:13:46.800 if you look at what's going on right now, you're 0:13:46.880 --> 0:13:48.839 right that there's some spikes in Eastern Europe. So I'll 0:13:48.880 --> 0:13:52.520 give you an anecdote. Um, a couple of months ago, 0:13:52.720 --> 0:13:56.520 Romania sold their vaccines to Denmark, which the country I'm 0:13:56.559 --> 0:13:59.400 born in, because they didn't want to use them their selves. Right, 0:13:59.520 --> 0:14:03.440 So some countries where the vaccination rates are very low 0:14:03.520 --> 0:14:06.920 still and they're gonna have issues in the winter. Then 0:14:06.960 --> 0:14:09.200 there's a different group of countries where we have very 0:14:09.320 --> 0:14:12.480 very high vaccination rates, where presumably the hospital pressure will 0:14:12.480 --> 0:14:15.679 be very very much lower than previous cycles. So we're 0:14:15.720 --> 0:14:19.320 gonna have pockets of winter waves that are concentrated in 0:14:19.400 --> 0:14:22.000 the places where that they are very way behind on 0:14:22.080 --> 0:14:25.720 the vaccinations. And I think from the economic perspective, you're 0:14:25.720 --> 0:14:28.280 going to find that this wave that we potentially are 0:14:28.320 --> 0:14:31.240 phasing now is going to be having much much less 0:14:31.280 --> 0:14:33.360 of an impact than any of the previous ones. And 0:14:33.520 --> 0:14:35.680 we hope, so we hope, so thank you, sir. As 0:14:35.680 --> 0:14:45.040 always data we need to frame up and see what 0:14:45.160 --> 0:14:47.320 has changed. We do that with the chief yours economist 0:14:47.360 --> 0:14:51.200 to PIMCO, Tiffany wild enjoins us this morning. Tiffany, in 0:14:51.360 --> 0:14:55.720 your orbit, in your excel spreadsheet, what have you changed 0:14:55.800 --> 0:14:59.040 in the last week or what are you really focusing 0:14:59.120 --> 0:15:04.280 on the it's subject to change. Well, I think um, 0:15:04.360 --> 0:15:06.400 and first of all, thanks for having me, um, But 0:15:06.520 --> 0:15:09.040 but I think what we're seeing is um and that 0:15:09.200 --> 0:15:15.200 the economy actually is re accelerating after this summer period, 0:15:15.560 --> 0:15:18.480 summer soft patch, as a result of you know, rising 0:15:18.560 --> 0:15:22.200 cases associated with this new delta van rising case of 0:15:22.240 --> 0:15:25.040 COVID nineteen. We are starting to see as those case 0:15:25.120 --> 0:15:28.840 counts are going down. Um, a pick up in spending 0:15:29.000 --> 0:15:32.440 across leisure and travel services industries. And you know, we're 0:15:32.480 --> 0:15:35.080 talking about the labor market this morning because the claims 0:15:35.160 --> 0:15:37.440 data just came out. It does suggest to us that 0:15:37.560 --> 0:15:39.520 you are going to see a re acceleration in the 0:15:39.640 --> 0:15:43.000 labor market as well. And we expect jobs in October 0:15:43.640 --> 0:15:45.880 net job gains to to start to pick up when 0:15:45.920 --> 0:15:48.040 we finally get that report in a couple of weeks, 0:15:48.400 --> 0:15:51.000 you know, so we do see some really encouraging signs 0:15:51.040 --> 0:15:53.160 that the economy is re accelerating, you know. And again 0:15:53.240 --> 0:15:56.120 this makes us, you know, more confident that um, you know, 0:15:56.200 --> 0:15:58.760 monetary policy can kind of get on, get on with 0:15:58.880 --> 0:16:01.800 this tapering business we expect in November and and and 0:16:01.960 --> 0:16:05.560 we can continue to recover from this pandemic. Will the 0:16:05.720 --> 0:16:13.200 FED be surprised by nominal and inflation adjusted wage growth? Um? Well, so, 0:16:13.720 --> 0:16:15.600 you know, I think that we've had a couple of 0:16:15.840 --> 0:16:18.200 you know, just in terms of high frequency data over 0:16:18.240 --> 0:16:20.200 the last couple of months, we've had a couple of 0:16:20.360 --> 0:16:25.440 very strong wage gains that are that have been reported 0:16:25.720 --> 0:16:28.680 in in the official statistics. You know, we think that 0:16:28.760 --> 0:16:31.120 maybe there's a little bit of noise in that um 0:16:31.200 --> 0:16:33.920 and that you actually could see the wage data moderate 0:16:34.000 --> 0:16:36.720 a little bit um. And that's as you get this 0:16:36.880 --> 0:16:41.080 pick up in leisure services, which tend to just have lower, 0:16:41.520 --> 0:16:44.120 lower wage jobs, you know. But I think if you 0:16:44.200 --> 0:16:47.080 think more broadly here, going out to the next year, 0:16:47.240 --> 0:16:50.400 you know, we should see wages accelerate. And that's because 0:16:50.480 --> 0:16:53.160 we've seen a broad pickup and productivity in the economy. 0:16:53.440 --> 0:16:55.280 You know, I should get paid for how productive I 0:16:55.320 --> 0:16:57.720 am and how much prices are rising, So we should 0:16:57.760 --> 0:17:01.160 see wages accelerate, um, you know. And and and ultimately 0:17:01.320 --> 0:17:04.560 the fact that the labor market is getting tighter um, 0:17:04.720 --> 0:17:07.919 which which it is, that should also put upper pressure 0:17:07.920 --> 0:17:10.639 on wages across a wider range of sectors than just 0:17:10.760 --> 0:17:14.280 kind of the low uh, you know, low income and 0:17:14.720 --> 0:17:17.400 lower skilled jobs that we're seeing the biggest wage gains 0:17:17.480 --> 0:17:19.480 right now. Did you hear that, Tom Off, you're more productive, 0:17:19.520 --> 0:17:21.960 you need to get paid more. That was Tiffany money 0:17:22.080 --> 0:17:24.919 better be listening this morning. That's Tiffany want to delivers 0:17:24.960 --> 0:17:27.359 that sermon on what should happen in the labor market. Tiffany, 0:17:27.400 --> 0:17:30.040 talk to me about what should happen. November three, Matlazetti 0:17:30.200 --> 0:17:32.439 was in your seat twenty four hours ago talking up 0:17:32.440 --> 0:17:34.960 a rate hiker the FED year and next year. Where 0:17:34.960 --> 0:17:37.639 are you giving the team at the moment? Yeah, I 0:17:37.680 --> 0:17:40.400 mean so, so ultimately we we we are we think 0:17:40.480 --> 0:17:43.000 that you probably get a rate hike in the beginning 0:17:43.080 --> 0:17:47.359 of three um and and the reason for that is 0:17:47.440 --> 0:17:50.359 is that we still believe that inflation is likely to 0:17:50.440 --> 0:17:52.440 moderate by the end of next year. Now, there have 0:17:52.600 --> 0:17:56.360 been some you know, kind of a series of shocks 0:17:56.440 --> 0:17:59.720 if you will, you know, that have kept inflation you know, 0:17:59.760 --> 0:18:02.400 more higher for a little bit longer than I think 0:18:02.480 --> 0:18:05.640 people were expecting. Um, you know, but we do ultimately 0:18:05.720 --> 0:18:07.639 think that that still comes down that should give the 0:18:07.720 --> 0:18:10.240 feed a little bit of breathing room, uh, in the 0:18:10.359 --> 0:18:13.199 in the latter half of next year. Um. And as 0:18:13.240 --> 0:18:15.560 a result, you know, we think that they will ultimately 0:18:15.600 --> 0:18:19.080 it will be three before before they hike. Tiffany, do 0:18:19.119 --> 0:18:22.080 you think that FETE officials appreciate the tightening of the 0:18:22.200 --> 0:18:25.960 labor market to it's full Um? Yeah, so so I 0:18:26.040 --> 0:18:28.720 think that there are you know, they've certainly highlighted what 0:18:28.960 --> 0:18:31.920 what we would agree are sort of quote temporary friends 0:18:32.119 --> 0:18:34.960 that are probably resulting in the labor market being tighter 0:18:35.000 --> 0:18:36.800 than it otherwise would be, and you know that's health, 0:18:37.320 --> 0:18:40.000 you know, just general anxiety around health as a result 0:18:40.080 --> 0:18:42.600 of this pandemic. A lot of these service jobs, of course, 0:18:42.640 --> 0:18:45.199 are very public facing, and then of course there's been 0:18:45.280 --> 0:18:48.480 child childcare disruption. But I do think there are some 0:18:48.680 --> 0:18:50.520 you know, kind of more medium term factors here that 0:18:50.560 --> 0:18:53.280 will take a little longer to work themselves out, but 0:18:53.400 --> 0:18:55.680 ultimately we do think that they will. And and that's 0:18:55.720 --> 0:18:58.520 related to actually geography, which is kind of weird, but 0:18:58.640 --> 0:19:03.119 this work from home dynamic has really changed, you know, 0:19:03.200 --> 0:19:06.400 kind of the local market dynamics and where jobs are demanded. 0:19:06.520 --> 0:19:09.119 So there maybe not you know, you're not demanding as 0:19:09.119 --> 0:19:11.800 many jobs and some of these urban city centers, um, 0:19:11.920 --> 0:19:14.080 you're you're demanding those jobs out and kind of more 0:19:14.080 --> 0:19:16.040 of the suburban or maybe even the rural areas. And 0:19:16.080 --> 0:19:18.399 so we're getting that mismatch. So really the question is 0:19:18.440 --> 0:19:20.320 how long does it take for for that labor to 0:19:20.400 --> 0:19:23.359 sort of migrate out. We're kind of we're optimistic. Um, 0:19:23.480 --> 0:19:25.879 you know, we look at at data on migration from 0:19:25.920 --> 0:19:28.879 the credit reporting agencies and it does suggest that you know, 0:19:28.960 --> 0:19:31.560 some of these lower income zip codes and lower income 0:19:31.600 --> 0:19:35.040 folks are able to move. We've seen excess moves from 0:19:35.119 --> 0:19:37.680 from those zip codes, so that's good news. But ultimately, 0:19:37.760 --> 0:19:39.959 these things take a little time to work out. Um 0:19:40.000 --> 0:19:42.199 and then and then also keep in mind that usually 0:19:42.280 --> 0:19:46.200 a hot labor market does draw people back into the 0:19:46.280 --> 0:19:50.280 labor mark, and we saw that from seventeen to twenty nineteen. 0:19:50.680 --> 0:19:53.280 You know. So I do think labor markets will get tighter. 0:19:53.800 --> 0:19:56.119 We do think you get some wage inflation, you know. 0:19:56.200 --> 0:19:57.920 But again, I think all of this is will sort 0:19:57.960 --> 0:20:00.440 of be moderated to some extent by by some labor 0:20:00.480 --> 0:20:02.879 supply gains that we're going to get next year as well, Tiffany. 0:20:02.880 --> 0:20:04.960 In the meantime, as we were talking about earlier today, 0:20:05.000 --> 0:20:07.520 the market expectation for five year inflation, if you look 0:20:07.560 --> 0:20:10.640 at TIPS, is actually climbed to the highest since two 0:20:10.720 --> 0:20:13.800 thousand and five, at two point eight percent north of that. 0:20:14.359 --> 0:20:16.639 Do you think that that is correct, that that is 0:20:16.680 --> 0:20:21.360 an accurate assessment of the five year inflationary outlook, Well, 0:20:21.840 --> 0:20:24.240 you know, I think that, you know, obviously there's more 0:20:24.400 --> 0:20:27.280 going on with the you know, the TIPS market than 0:20:27.440 --> 0:20:31.440 just in expectations around the near term path of inflation, 0:20:31.560 --> 0:20:33.240 you know, But what I would say is, I think 0:20:33.280 --> 0:20:37.280 that the path has become more uncertain lately, UM, and 0:20:37.560 --> 0:20:40.040 we believe that kind of over that five year time horizon, 0:20:40.240 --> 0:20:43.439 it's it's going to remain uncertain. And that's because we think, um, 0:20:43.560 --> 0:20:45.800 we're moving into what we're calling this kind of age 0:20:45.840 --> 0:20:49.679 of transition where you have these kind of brown degree transitions, 0:20:49.800 --> 0:20:53.280 some um, you know, trends towards de globalization and more 0:20:53.320 --> 0:20:56.080 of a policy focus on inclusivity. And that's both on 0:20:56.160 --> 0:20:59.320 the fiscal and monetary side, you know, and that has 0:20:59.359 --> 0:21:02.600 the potential to produce some some upside um and inflation. 0:21:03.040 --> 0:21:04.800 But I would just also keep in mind here, and 0:21:04.840 --> 0:21:07.680 I think this is much less talked about, is that 0:21:07.720 --> 0:21:10.560 there also some downside risk to inflation as well as 0:21:10.600 --> 0:21:13.640 a result of this pandemic coming into the next five years. 0:21:13.720 --> 0:21:17.360 And that's that we've seen productivity and innovation really get 0:21:17.560 --> 0:21:20.520 jump started, um as a result of this pandemic. You 0:21:20.600 --> 0:21:22.240 have the work from home, but then you also have 0:21:22.400 --> 0:21:25.639 trends towards digitization, um, you know. And I think you know, 0:21:25.720 --> 0:21:27.560 the other thing is is we've also seen a big 0:21:27.680 --> 0:21:30.200 build up in in debt and leverage as a result 0:21:30.240 --> 0:21:33.280 of this pandemic. It's okay now because interest rates are low, 0:21:33.680 --> 0:21:35.920 but if we have a negative economic shock, it just 0:21:36.080 --> 0:21:38.639 increases the risk that you get this uh, you know, 0:21:38.720 --> 0:21:41.320 sort of debt fuel deflationary environment. So I think their 0:21:41.400 --> 0:21:43.920 risks to the upside and the downside here. You know, 0:21:44.000 --> 0:21:47.320 of course the market's trying to incorporate that, um, you know. 0:21:47.400 --> 0:21:48.880 But I think the other thing to keep in mind 0:21:48.920 --> 0:21:51.119 here is that if you look further out in the 0:21:51.200 --> 0:21:53.840 tips market, kind of at the five year five years forward, 0:21:53.920 --> 0:21:56.040