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, Suncloud, Bloomberg dot
Speaker 1: Com and of course on the Bloomberg terminal right now.
Speaker 1: And this is critically important with hindsight to look back
Speaker 1: at somebody who nailed the last great moment of the bullmarket.
Speaker 1: John Gollob and Credit Sweets had the courage to come
Speaker 1: out with a Barbell strategy which was blah blah blah
Speaker 1: blah blah and don't give up on a big text.
Speaker 1: He was a genius. The genius joins us this morning.
Speaker 1: John Gollob is head of US equity Strategy and quantitative
Speaker 1: research for Credit at Sweets. Now, what John, you know,
Speaker 1: if I if I have Amazon, Apple, what ever, and
Speaker 1: I'm gonna hold them, what is the prescription to recover?
Speaker 1: You know, Tom, we actually think that in a high
Speaker 1: inflation environment that tech just doesn't do as well. So
Speaker 1: it's interesting we we've been table pounding on tech throughout
Speaker 1: the last couple of years, but as we rolled into
Speaker 1: this year, we didn't say short that we said basically
Speaker 1: good of neutral, because as long as the cycle continues
Speaker 1: to be inflationary, they just struggle a little bit more.
Speaker 1: And what we actually see, and we've done a whole
Speaker 1: bunch of qualt work around this, is that when inflation
Speaker 1: is high and stubbornly high, you actually want to be
Speaker 1: in stuff that's more cyclical beneficiaries of this, so energy stocks,
Speaker 1: material stocks and the like. Not because these are the
Speaker 1: best stocks forever, but they're the best stocks for the moment.
Speaker 1: Will those tech stocks continue to have revenue growth? Um? Yeah,
Speaker 1: But if you take a look like in the last
Speaker 1: let's say the most recent earnings sea season, tech names, um,
Speaker 1: you know grew about seven percent, but those cyclical groups
Speaker 1: grew something like thirty or forty because they just they
Speaker 1: just did better. They have more operating leverage, more physical infrastructure,
Speaker 1: in in in the kind of old economy cyclicals, and
Speaker 1: therefore they have more upset. And if you look at
Speaker 1: this earning season, those tech companies were, you know, the well,
Speaker 1: the megacap tech companies were pretty lack luster. So it's
Speaker 1: not just a sentiment issue. They're they're having a harder time.
Speaker 1: But but also they went into the year very expensive.
Speaker 1: That run that we were predicting in Tech played out
Speaker 1: beautifully and sometimes you have to know when it's time
Speaker 1: to take your foot off the battle, which is what
Speaker 1: we did on Tech earlier this year. How do retail
Speaker 1: earnings fit into your thesis? Well, you know, um, Lisa,
Speaker 1: the I think that everybody, starting really last Friday, thought
Speaker 1: that the worst was behind us. And then with you know,
Speaker 1: Walmart and Target News, people felt like they got kicked
Speaker 1: in the stomach that maybe the consumers rolling over and
Speaker 1: companies are gonna have margin problems. And then if you
Speaker 1: actually look, you know, we had a lot of companies
Speaker 1: like you know, t J Max and Home Depo and
Speaker 1: Lows and they did fine that they had beats in
Speaker 1: the high single digits. It was really a couple of
Speaker 1: these prominent names like Home Depot Lows at hard time,
Speaker 1: and a lot of those were really what I would
Speaker 1: call is a mix issue. People were buying groceries, but
Speaker 1: they didn't want to buy furniture and TV sets and
Speaker 1: and in many cases these were really merchandising problems. They
Speaker 1: were kind of the wrong products as people are rotating
Speaker 1: towards um experiences and restaurants and hotels and getting back out.
Speaker 1: So I'm not sure that we should be over extrapolating
Speaker 1: some of the bad news from those retails, but I
Speaker 1: will tell you it surely shook the market in the
Speaker 1: middle part of this week. So that's the glass half
Speaker 1: full view of these retail earnings that basically it is
Speaker 1: a mixed issue, not a consumer health issue. And some
Speaker 1: people would agree with you, Jonathan, But doesn't that give
Speaker 1: you a sense that the FED is going to raise
Speaker 1: rates all the more so to try to stave off
Speaker 1: some of the inflationary pressure because the consumer still has
Speaker 1: momentum and that presents a valuation problem for stocks. As
Speaker 1: we were hearing from Sevita Supermannia in a Bank of
Speaker 1: America earlier this morning. Yeah, I'm not sure that the
Speaker 1: FED responds to the retail earnings that but but I
Speaker 1: mean generally, but the trend. But listen, wage inflation is
Speaker 1: really high. When when when a year ago, when we
Speaker 1: when we had three percent inflation, people were saying, is
Speaker 1: oh that speaking, there's no way to get to four percent?
Speaker 1: And now we're we're over eight. So the Fed, I
Speaker 1: don't want to say there at autopilot for a little while,
Speaker 1: but they're gonna have to push rates, you know, at
Speaker 1: least a three percent, which is what the markets discounting.
Speaker 1: And my view is by the end of next year
Speaker 1: we maybe closing to four percent on on FED funds
Speaker 1: if if they need to, you know, really hold on
Speaker 1: a second, Jonathan, in all honesty, then how canst keep rallying?
Speaker 1: How can you get to near five thousand and by
Speaker 1: the end of the year on the SMP if you
Speaker 1: get three or four percent fund funds rate? Well, I mean,
Speaker 1: the most important thing is corporate profits are holding up
Speaker 1: really well on and so take a look at this
Speaker 1: this earning season. Revenues are running on the SMP four percent.
Speaker 1: This quarter, earnings are up twelve, so the margin pressure
Speaker 1: is tiny. But we had this really weird thing going
Speaker 1: on with the banks with reserve releases, and if you
Speaker 1: took that out, the revenues were and the EPs was twenty.
Speaker 1: So the earnings are super powerful and stocks are cheap
Speaker 1: at this boy, John, John, John, that is the most
Speaker 1: intelligent thing I've heard this week on equity optimism. That
Speaker 1: differential equation is linked at the hip with nominal g
Speaker 1: d P and the decline. Are you suggesting within all
Speaker 1: the credit suites work that the great miss here is
Speaker 1: at nominal GDP will sustain longer, which will allow companies
Speaker 1: to adapt into the gloom Lisa just mentioned Tom, I
Speaker 1: think that is the only story. I mean, my favorite
Speaker 1: that The one screen that I look at the most
Speaker 1: of my Bloomberg terminal is e c f C. What
Speaker 1: where is the consensus view on what the economy is
Speaker 1: going to do over the next quarter and year and
Speaker 1: two years. And what it tells you is that nominal
Speaker 1: GDP this year should run nine percent. I mean normal
Speaker 1: is three and a half. For all of those folks
Speaker 1: who say, oh, we're going into recession, economists all over
Speaker 1: are basically saying this is a recoring economy. You know,
Speaker 1: I'm gonna tear up here. John Golub, John Farrow. John
Speaker 1: Golub is really drunk the kool a did credit Suiteze Donaldson, Lufkin, Jenrette.
Speaker 1: He's on the edge of Tom Galvin here with a
Speaker 1: sales centric view. I'm gonna try and beat polite hair
Speaker 1: um a c FC Okay, John, has that ever been
Speaker 1: a leading indicator for anything? Well, I mean, you know, Jonathan,
Speaker 1: you have to use some framework to say directionally, where
Speaker 1: do we think that the economy is going. So if
Speaker 1: you're looking at you know, where inflation is going. You
Speaker 1: can look at the tips market. If you're looking where
Speaker 1: GDP is, it's not there's no tradeable instrument on your Bloomberg.
Speaker 1: You have no choice but to use either your own
Speaker 1: house economists and and and our continentst guys are also
Speaker 1: pretty bullish. But but or you can just say where's
Speaker 1: where's the whole gang? Thinking that that that the the
Speaker 1: growth is gonna be and and that's what you find
Speaker 1: on the terminal. And not only can you do it,
Speaker 1: but I can see it by firm, so I can
Speaker 1: say what are the biggest shops? What are the people
Speaker 1: at the FED think it's gonna be. They're all in
Speaker 1: the same direction, which is the underlying economic growth measurement
Speaker 1: in nominal dollars, that's including inflation is gonna be really
Speaker 1: strong this year and here's the most important thing, and
Speaker 1: really strong next year as well. That's that's not you know,
Speaker 1: that's that's that's that Haro that it's just the FED
Speaker 1: full cost John, When did the FED a full cost
Speaker 1: of recession? It's just not well they do it with
Speaker 1: they do it about a year with a year delay.
Speaker 1: You know there there, they do it after the fact.
Speaker 1: But but listen, I get that, But you have to
Speaker 1: use some framework saying where do you think the world
Speaker 1: is going? And if you ask me what the most
Speaker 1: important issue is on inflation and growth. We have an
Speaker 1: incredibly tight labor market, which is leaving the consumer really
Speaker 1: confident in their ability to find work, and that leads
Speaker 1: people to be willing to go out and over extend
Speaker 1: themselves on credit. And it also means that you have
Speaker 1: high wage inflation. You add those two things together, it's
Speaker 1: all about the labor market. And and that's my take.
Speaker 1: Independent of what you have on that, that forecasting is great.
Speaker 1: Define both John is gonna catch up buddy as always,
Speaker 1: Johnathan of the Credit swas right now in an important conversation,
Speaker 1: and I will go to John Pharaoh here in a moment.
Speaker 1: But I want to slip in one question with the
Speaker 1: United Kingdoms Secretary of State for Business, Energy and Industrial Strategy,
Speaker 1: he John and the rest of the nation enjoying a
Speaker 1: nine percent inflation. Kasi Carton is with us. He's celebrating
Speaker 1: Liverpool's European dominance and more than anything understands the gridlock
Speaker 1: of British politics. Author a decade ago of gridlock nation.
Speaker 1: What's the level of gridlock right now, Minister, in terms
Speaker 1: of dealing with nine percent inflation? Well, it's a huge challenge, Tom,
Speaker 1: and you will know that it's a global challenge. We
Speaker 1: had a pandemic, we had lockdowns right across the world,
Speaker 1: we had a huge surgeon demand when those lockdowns were eased,
Speaker 1: and now we've got this unprecedented situation in Ukraine, first
Speaker 1: time in seventy years, seventy five years that we're seeing
Speaker 1: an actual war in Europe. So these are unprecedented times
Speaker 1: and the British government has very much decided to help consumers,
Speaker 1: help people in the UK. We had a good announcement
Speaker 1: from the Chancellor in February about the kind of help
Speaker 1: that he was willing to give, and he and the
Speaker 1: Prime Minister have said that they are looking to help
Speaker 1: people more. Let's talk about that and whether situation the
Speaker 1: consumer the people of the UK feeling that right now.
Speaker 1: Because he wrote a letter recently two petrol retailers about
Speaker 1: the concerns that the Chancellor's five fuel duty cup wasn't
Speaker 1: being passed on in any visible or meaningful way. What's
Speaker 1: the response been, Well, we're looking at that still. I mean,
Speaker 1: I think it's very wrong of Petrol the four courts
Speaker 1: not to pass on the reduction um and I think,
Speaker 1: you know, we we're seeing that there's some behavior change,
Speaker 1: but they could There's a lot more they could do
Speaker 1: and I'm very keen that they actually help out. You're
Speaker 1: against the windfall tax, why is there? I've been always
Speaker 1: against wind full tax. I think there arbitrary. I think
Speaker 1: they discourage investment. And when you look at the companies
Speaker 1: that invest in the North Sea, you know it's a
Speaker 1: very cyclical business. So when they make money, they tend
Speaker 1: to make a lot of money, and then when they lose,
Speaker 1: they make big losses and they're not they're not supported
Speaker 1: when they do make those losses. You've talked about investment
Speaker 1: in the UK and you're worried that it would deter investment,
Speaker 1: but not learning of tre P said to The Times
Speaker 1: earlier this month. He was asked basically whether he change
Speaker 1: any spending plans because of a windfall tax, and he said, quote,
Speaker 1: there are none that we wouldn't do. Isn't that good
Speaker 1: news that you can do that? He won't change your
Speaker 1: spending plants. He's telling you, well, it's up to I mean,
Speaker 1: you can speak to Bernard directly yourself. I'm not quite
Speaker 1: sure what he was referring to, but there's no doubt
Speaker 1: that other players in the industry say that any kind
Speaker 1: of wind full tax would deter future investment. I mean,
Speaker 1: that's pretty obvious, um, and they need fiscal certainty. They
Speaker 1: don't want rabbits out of the hat, so they just speach.
Speaker 1: I just wanted to jump in with something the chancellors
Speaker 1: said to the Chancellor said what I want to see
Speaker 1: a significant investment back into the UK economy to support jobs,
Speaker 1: to support energy security, and I want to see that suit.
Speaker 1: If that doesn't happen, then no options are off the
Speaker 1: table now, as you know quality the printent response from
Speaker 1: any chance there is not to take things off the
Speaker 1: table ahead of a plan. But I want your view
Speaker 1: on there. I want some goals. I want to understand
Speaker 1: what kind of investments do you want to see from
Speaker 1: these players and over what time frame, because if we're
Speaker 1: going to wait for these guys, they've got a ten
Speaker 1: year time of writing for their spending plans will be
Speaker 1: out a decade and then we'll say, oh, okay, maybe
Speaker 1: we should have do a win full tax. Now what's
Speaker 1: the time frame how much spending you want to see
Speaker 1: over what time we want to see spending I'm not
Speaker 1: going to quantify, but we want to see actual, real spending.
Speaker 1: And there's evidence that they're doing that. I mean, if
Speaker 1: you look at our program for carbon capture blue hydrogen production,
Speaker 1: both SHELL and BP are directly involved in that in
Speaker 1: the northeast of our country of England, and they can
Speaker 1: see that there is a huge opportunity in terms of investment.
Speaker 1: And that's exactly what the chance of, the kind of investment,
Speaker 1: the chance that wants to see. And as you say,
Speaker 1: the chance is quite right to say all options are
Speaker 1: on the table. Every chancellor I've known since i've been
Speaker 1: an MP has always said that there's no way that
Speaker 1: he's going to take options off the table ahead of
Speaker 1: the budget. Dr Quartine, you enjoy a PhD in economic
Speaker 1: history from a small shop the University of Cambridge. You
Speaker 1: know the history of this and the simple history as
Speaker 1: windfall profit taxes do not work period. It's well documented.
Speaker 1: But as John alludes to, there is a generational trust
Speaker 1: that has been broken between corporate elites and the people.
Speaker 1: How do you guarantee, given the lack of trust, a
Speaker 1: process here that helps the people of the United Kingdom.
Speaker 1: So that's why the Chance that was very clear Tom
Speaker 1: that they have to invest in the UK. We want
Speaker 1: to see their ambitions realized by there. Do you need
Speaker 1: an investrating? Does is it so urgent that it needs
Speaker 1: to be crtified to be in writing? I think I
Speaker 1: think the commitments are already there. I'm not sure that
Speaker 1: we need any kind of legal document or quasi legal document.
Speaker 1: But what what they understand is that these new technologies,
Speaker 1: the decarbonization, all of that stuff needs investment and it
Speaker 1: actually creates jobs. And you will also know that we're
Speaker 1: very interested, are very focused on leveling up. That's actually
Speaker 1: giving opportunity to areas of our country in the UK
Speaker 1: which in the last few years few decades have been underinvested.
Speaker 1: And so BP and Shell and others know that our
Speaker 1: commitment to leveling up and our commitment also to decobinization
Speaker 1: mean that business investment needs to happen, and they're very
Speaker 1: aware of that. And they also know, as the Chance
Speaker 1: that said, that if they don't step up to that plate,
Speaker 1: then they could well be subject to win full tax,
Speaker 1: because I think that's a reasonable conversation. Just to final question, sir,
Speaker 1: just on the final point, to understand what people are
Speaker 1: going through right now if they listen to this conversation.
Speaker 1: You've got a company BP engaged in buy backs. I'm
Speaker 1: not here to say that's the wrong thing. They've referred
Speaker 1: to themselves as a cash machine when all prices are
Speaker 1: climate like they are. You've got the CEO who's saying
Speaker 1: he wouldn't change his spending plan if he faced the
Speaker 1: windfall tax, and we've got the government saying we don't
Speaker 1: want to do that. You're saying that, do you understand
Speaker 1: how deeply uncomfortable that might be for people who can't
Speaker 1: pay their energy bills this month. Look, it's really difficult,
Speaker 1: but the investment actually helps people. People have pension plans,
Speaker 1: they have they want to have jobs, they want to
Speaker 1: have energy security. So I can't, as an energy minister say,
Speaker 1: please invest in our energy security of supply. But by
Speaker 1: the way, I'm going to give you a wind full tax.
Speaker 1: That doesn't make sense. In order to protect energy supply,
Speaker 1: we need investment, and in order to have investment, they
Speaker 1: need we need a stable fiscal situation. We can't simply
Speaker 1: just threatened people with will have arbitrary wind full taxes.
Speaker 1: Having said all of that, as you know, the chance
Speaker 1: of the check is responsible for the budget. He's not
Speaker 1: taking any options off the table, and he wouldn't be
Speaker 1: the first chance that did to do it, as you know,
Speaker 1: because we could go back to the conservative chance of
Speaker 1: night one he did something similar. Quasi thank you, right
Speaker 1: to catch up. Thank you, sir Quasi kwat sing the
Speaker 1: UK the Secretary of Energy and Business. It is a
Speaker 1: joy right now on this Friday, as we regroup again
Speaker 1: for meetings with someone who stopped us in Davos a
Speaker 1: couple of years ago. Sevina Supermannian was in Davous with
Speaker 1: her Bank of America holding court on E s G.
Speaker 1: She's had of US equity and quantitative strategy for the bank. Sevina,
Speaker 1: time has marched on E s G. Seems so yesterday's
Speaker 1: story given record call prices as well. How does the
Speaker 1: shock of these many global risks fold all over into
Speaker 1: moving forward in the stock market? How do you regroup
Speaker 1: now to get ready for two thousand twenty three? Yeah,
Speaker 1: I mean I think that where we are now is
Speaker 1: Tom a tough time for E s G investors because
Speaker 1: the best performing areas of the market are hard to
Speaker 1: bold defense energy. These are two areas that are typically
Speaker 1: excluded from e SG funds. So I think that's been
Speaker 1: hurting these, uh, these types of investors from a market perspective,
Speaker 1: I still think the worst is not behind us. UM.
Speaker 1: We published yesterday that it was sort of a realistic
Speaker 1: worst case floor for the S and P five hundred
Speaker 1: would be about three thousand, thirty two hundred UM. You know,
Speaker 1: here's the thing I think when I talk to clients now,
Speaker 1: folks are asking me, you know, give me any reason
Speaker 1: to be bullish right now? And I think the reasons
Speaker 1: to be bullish are the fact that clients are asking
Speaker 1: that question. There's a pervasive, uh kind of fog of
Speaker 1: negative sentiments out there which would argue that at the
Speaker 1: bad news is priced in. I think what you want
Speaker 1: to buy at this point in the cycle is still
Speaker 1: very late cycle inflation beneficiary. So we're still overweight energy.
Speaker 1: I think energy. You know, to your point about China reopening,
Speaker 1: energy could be Oil could be depressed right now, just
Speaker 1: given the fact that the second largest economy in the
Speaker 1: world is offline um, I think that materials look less
Speaker 1: interesting to US commodities and metals because we are seeing
Speaker 1: some slowing trends in China despite the fact that they
Speaker 1: are trying to you know, stimulate the economy. And we're
Speaker 1: also seeing a shift in demand from finished hard goods
Speaker 1: and you know, big ticket items to services. So under
Speaker 1: that backdrop, it makes sense to continue to go along oil,
Speaker 1: but you know, maybe move off of the raw materials.
Speaker 1: So long agoing far away, a guy named Ken Lewis
Speaker 1: was pillorated Bank of American. I always thought that Ken
Speaker 1: us was brilliant on his Pacific RIM strategy. Bank of
Speaker 1: America didn't go into the Pacific rim or their head
Speaker 1: cut off. They were very measured about it and attempted
Speaker 1: to be responsible. I want to know what you think
Speaker 1: about the bet on Pacific RIM equity is given a
Speaker 1: China reopening. Is it worth playing or do you stay
Speaker 1: in the US? I think you stay in the US.
Speaker 1: I mean, look, you know this this year, we've seen
Speaker 1: a very interesting rewriting of countries based on energy security.
Speaker 1: Countries that can don't need to import oil are probably
Speaker 1: you know, kind of enjoying a unique advantage. And and
Speaker 1: I think that second of all, the US is further
Speaker 1: along in terms of trying to stimulate the economy, trying
Speaker 1: to push up interest rates. We have corporates and consumers
Speaker 1: that are better capitalized. They've you know, basically gotten all
Speaker 1: this money from the FED and the government. So I
Speaker 1: think that when I look at the US relative to
Speaker 1: rest of world, I still think this is a year
Speaker 1: or two where the US is going to continue to
Speaker 1: outperform rest of world. So emerging markets, to me, it
Speaker 1: still looks a little bit uh uh, you know, potentially risky.
Speaker 1: Not to mention that if you look at our economists,
Speaker 1: they're advising down their growth forecasts outside of the US
Speaker 1: much more aggressively than within the US. So I think
Speaker 1: those are all reasons to stay local, stay US focused.
Speaker 1: Even small caps I think could do well in an
Speaker 1: environment where the US economy is potentially you know, going
Speaker 1: to see a little bit of a list of companies
Speaker 1: start spending again. You know, Tom, I just want to say,
Speaker 1: the most surprising thing to me during this earning season
Speaker 1: is that even though all of these companies are guiding
Speaker 1: down and you know, very negative in terms of what
Speaker 1: they're expecting over the next couple of years, they're still
Speaker 1: guiding up on cap X. They're still telling us they're
Speaker 1: going to spend more than we think they're going to spend.
Speaker 1: Capex cycles are generally good for the economy, they're good
Speaker 1: for small caps. Maybe they're negati for the companies that
Speaker 1: have to spend the money. But I think it's interesting
Speaker 1: to see that capex is still a theme that companies
Speaker 1: haven't dialed back. Serveta, this week's staples have been absolutely hammered.
Speaker 1: Retails already struggled. You've been on top of that story.
Speaker 1: I want to want to send from your perspective, whether
Speaker 1: we're confusing two things right now, the difference between how
Speaker 1: much the consumer is spending and how they're spending it.
Speaker 1: There seemed to be a massive focus on just the weakness,
Speaker 1: the signal that you're getting from the retailers that there
Speaker 1: was some weakness out there. Do you think the biggest
Speaker 1: story this week was just a shift in how they're spending,
Speaker 1: not how much they're spending. So I think the big
Speaker 1: shifts are how they're spending and also just you know, labor,
Speaker 1: there's a there's a sort of a really dramatic shift
Speaker 1: in terms of undersupplied to oversupplied that we're hearing from companies,
Speaker 1: and that could actually benefit some of the more labor
Speaker 1: intensive areas of the consumer sector, like supermarkets or you know,
Speaker 1: we haven't seen these companies perform well, but I think
Speaker 1: that where we're where we are seeing a little bit
Speaker 1: of an alleviation is in terms of the the labor supply,
Speaker 1: so that's you know, potentially a positive for margins. We're
Speaker 1: overweight staples for the long haul because our idea is,
Speaker 1: as Ethan Harris, our global economists continues to warn of
Speaker 1: rising recession risks, we think that staples, healthcare, no matter what,
Speaker 1: you still have to take your drugs and you know,
Speaker 1: eat your food. So defensive sectors to us still make
Speaker 1: a lot of sense. In a stipulationary backdrop. The best
Speaker 1: performing sectors are energy, consumer, staples, utilities, to a lesser extent, materials.
Speaker 1: You want to stay defensive and you want to overweight
Speaker 1: sectors that benefit from inflation. Civita, you sound actually somewhat pessimistic,
Speaker 1: and yet your outlook for the end of the year
Speaker 1: is incredibly optimistic. At a target yest might be the
Speaker 1: low case. Are you thinking of downgrading is the base case?
Speaker 1: And if not how do we get there? Look, so,
Speaker 1: you know, our our target is made up of you know,
Speaker 1: a few for factors, one of which is our our
Speaker 1: house view on interest rates, and I think that is
Speaker 1: the swing factor. If you look at this here, most
Speaker 1: of the big moves that we've seen have been accompanied
Speaker 1: by a move higher in either real rates or the
Speaker 1: equity risk premium. Our view is that real rates continue
Speaker 1: to move higher, but rates volatility kind of abates, and
Speaker 1: we start to see um, you know, pe multiples essentially
Speaker 1: stabilize as rates volatility stabilizes. If that's not the case,
Speaker 1: we would be more negative. And I think that's the
Speaker 1: key factor to watch. Every tiny move and interest rates
Speaker 1: has an outsized impact on the SMP five hundred in
Speaker 1: terms of you know, it's longer duration, and we've talked
Speaker 1: about this on the program. The SMP five hundred is
Speaker 1: now a thirty five years euro coupon bond is super
Speaker 1: sensitive to the cost of capital. You're saying this is
Speaker 1: Ethan's fault or monks folt? Whose fault is it? Both?
Speaker 1: They're both excellent, but we incorporate she's gonna get out
Speaker 1: of us. We're watching keep going. Now we're done We're done.
Speaker 1: Thank you, Brian. Little friends over there an set. They
Speaker 1: aren't some, they're all friends. I love that. Right now,
Speaker 1: John Riding joining us your chief economic advisor, bring capital.
Speaker 1: But on a Friday before the close are Premier League football.
Speaker 1: Lisa and I opened this up for full discussion with
Speaker 1: a gentleman of Preston North then and young Pharaoh as well,
Speaker 1: John Farrell. The only player I remember from my ute
Speaker 1: was Gerard. I don't understand why I loved him, but
Speaker 1: I loved him. And I want you, in writing to
Speaker 1: talk right now about Sunday in for America, why Steve
Speaker 1: Gerard really matters. There's a great subplot to the story
Speaker 1: on Sunday. So on Sunday you've got Manchester City top
Speaker 1: of the league, of the Premier League. You've got Liverpool second,
Speaker 1: Manchester City win. It's all Loafer but Manchester City. John
Speaker 1: Riding of playing aston Villa and aston Villa are coached
Speaker 1: by Stevie g the former great captain of Liverpool. That
Speaker 1: is a nice little subplot going into Sunday's games. Yeah,
Speaker 1: and and add to the fact that two of the
Speaker 1: key players for aston Villa are former Liverpool players. In
Speaker 1: Danny Ings and in Philip Continial who were arrested against
Speaker 1: Wolverhampton yesterday, gets right against Burnley yesterday, and you've got
Speaker 1: a your potential chance for those uh two if if,
Speaker 1: if they hold City, they'll deserve winners medals from Liverpool.
Speaker 1: That is a big, big game, Tom, not just for
Speaker 1: Manchester City and Liverpool, but for some of those people
Speaker 1: and Aston Villa as well. So lining things up on Sunday, Tom,
Speaker 1: I've talked Eastern time, eleven Eastern, all the games all
Speaker 1: at once, the final games of the year played simultaneously.
Speaker 1: It is great to see Lisa's their soccer Barn Davos.
Speaker 1: I mean, is this what I'm you'll find one? I'm good,
Speaker 1: I'm good. I wanted to talk about John Riding's experiences
Speaker 1: and wanted to actually talk about I know, well fine, John,
Speaker 1: but I want to talk about the FED. So bear
Speaker 1: with me. Let me just take a quick move over
Speaker 1: there and then you guys can all talk about football
Speaker 1: and I will let you go to the public together
Speaker 1: on it. I am curious though, especially after being at
Speaker 1: the Atlanta FED confab just recently, there seems to be
Speaker 1: a belief in markets that the FED is going to
Speaker 1: recognize the slowdown that we're seeing in some of the data,
Speaker 1: and respond by pausing by not raising rates as much.
Speaker 1: That seems to be opposite the rhetoric from FED officials.
Speaker 1: What was the scuttle But when people were talking to you,
Speaker 1: when they were not on camera, when they were not
Speaker 1: on the podia, what did they say when it came
Speaker 1: to their frustration with markets and their belief in a
Speaker 1: FED put. Well, what's remarkable is they don't pay. FED
Speaker 1: officials don't pay anywhere near as much attention to the
Speaker 1: markets as we do on a day to day sadly
Speaker 1: minute to minute basis um. And you have to think
Speaker 1: we're with the markets in the fourth quarter of last year,
Speaker 1: before the FED had made its pivot, they were seeing
Speaker 1: very little interest rate action from the FED this year,
Speaker 1: and then they overshot FED guidance this year to get
Speaker 1: into the point where it was almost half a point
Speaker 1: to every meeting, and now markets are pulling back a bit.
Speaker 1: I think the FEDS looking that they've they've they've laid
Speaker 1: out the game plan. We want to get some rate
Speaker 1: hikes underneath our belt, and we're gonna get fifty basis
Speaker 1: points done in June fifty basis points done in July.
Speaker 1: That takes you to the September meeting, and that is
Speaker 1: really the key meeting for I think we're short term
Speaker 1: interest rates sore going because it's all about inflation persistence
Speaker 1: at that point, and if inflation has ebbed sufficiently, then
Speaker 1: they're going to look for an opportunity to dial back
Speaker 1: I think on the rate hikes and slow to quarter
Speaker 1: point rate hikes. But the experience that people have had
Speaker 1: with the FED for the last twenty years or so
Speaker 1: will not particularly help them guide the FED because it's
Speaker 1: different because we've got nineteen late seventies early eighties style inflation.
Speaker 1: We haven't had that in the last twenty thirty well
Speaker 1: obviously in the last forty years during the rethume take,
Speaker 1: and so market responses to the FED, equity market responses
Speaker 1: to the FED aren't We're not going to see the
Speaker 1: same kind of sensitivity of the FED to market moves
Speaker 1: as we've had when inflation was not a problem. So, John,
Speaker 1: it actually is probably appropriate that you guys started the
Speaker 1: conversation talking about football, and that people would rather talk
Speaker 1: about football right now than this because it's basically been
Speaker 1: the same story for a number of weeks now, and basically,
Speaker 1: the Fed is going to do its thing. It's an autopilot.
Speaker 1: Let's reconvene in September and see what happens. It's a
Speaker 1: quiet day for data for data, excuse me going forward?
Speaker 1: What's going to change this narrative? Is there a data
Speaker 1: point or a series of them that you're looking for
Speaker 1: to really guide into September. It's the persistence of inflation, Lisa,
Speaker 1: the Fed. My all my interactions, all my reading that
Speaker 1: the FED is serious about getting inflation back towards the
Speaker 1: two percent target, and the problem is they don't know
Speaker 1: what it's going to take to get there. There's something
Speaker 1: of an odd narrative coming from FED officials where they
Speaker 1: talk about two and a half percent being neutral because
Speaker 1: that's the long run neutral rate when inflation is back
Speaker 1: at two percent target rate, and right now inflation is
Speaker 1: much much higher than that. An underlying inflation is probably
Speaker 1: somewhere around four percent. So the first talking about we
Speaker 1: need to get back to neutral and then maybe we'll
Speaker 1: have to get a little bit restrictive, and throwing that
Speaker 1: two and a half percent number out there as the
Speaker 1: estimate of neutral wants inflations defeat and that's a little
Speaker 1: bit put in the cart before the horse when you're
Speaker 1: trying to defeat inflation. But they are insistent. I think
Speaker 1: they're going to get moved towards that two percent target,
Speaker 1: and so the opportunity to dial back is going to
Speaker 1: depend how much inflation has fallen over the summer. And
Speaker 1: I think that the chances are the inflation doesn't ebb
Speaker 1: as much as the Fed is hoping at this point
Speaker 1: because the broad two things that the broad based nature
Speaker 1: of the price increases, and we calculate in the last
Speaker 1: CPR report, for example, there was the items within CPI
Speaker 1: that were rising at a six per center faster rate
Speaker 1: over the last year, So that that's that's very broad
Speaker 1: based persistence. That's the first thing. A Secondly, it's inflation
Speaker 1: expectations by the public and they are holding in in
Speaker 1: longer term expectations by their fingernails. And yesterday, um we
Speaker 1: had the Philadelphia Fed reporting that tenure inflation expectations by
Speaker 1: businesses had gone up from three to three and a
Speaker 1: half percent, and people have seen food pricing increases and
Speaker 1: very sadly and that the dis conflict in the Ukraine
Speaker 1: has such terrible humanitarian dimensions but the main economic dimension
Speaker 1: for the US may well be higher food prices because
Speaker 1: of the impact on grain exports, because of the impact
Speaker 1: on fertilizers, And that feeds into people's expectations because that
Speaker 1: is repeat shopping every week when they see prices. Right,
Speaker 1: So that was a clinic. I want to go back
Speaker 1: to David mel Pass, John writing and Conrad de Quadros
Speaker 1: of ages and ages ago John, and the bottom line
Speaker 1: is maybe, for whatever reasons you're worry back then has happened.
Speaker 1: We are so far from any constructed Taylor rule right now,
Speaker 1: it's unthinkable. And as you correctly say, we're hanging onto
Speaker 1: an inflation expectations by our fingernails. What the institutional leaders
Speaker 1: do to quell the fear of higher inflation expectations? What's
Speaker 1: the prescription to keep us hanging on by our fingernails? Well,
Speaker 1: I think what we really need is a new monetary
Speaker 1: policy framework strategy. I think one area targeting are you're
Speaker 1: going to go on New Zealand down here? Well, the
Speaker 1: Fed has a two percent inflation talk and how to
Speaker 1: two per cent inflation target that they bemoaned missing it
Speaker 1: to the low end by a few tens of a
Speaker 1: percentage points. So they adopted a deliberate strategy to raise
Speaker 1: inflation and and raise it above two percent by a
Speaker 1: moderate amount for some time. And now careful what you
Speaker 1: wish for. We've got it substantially above two percent for
Speaker 1: a prolonged period of time. And and now what is
Speaker 1: the what is the strategy They need to really reassure
Speaker 1: the public, and in various ways, not just in Fed states,
Speaker 1: that they are very serious in getting inflation down, because
Speaker 1: it turns out inflation is not the stimulus to economic
Speaker 1: activity that the FED hoped. At least moderate inflation, it's
Speaker 1: hard to hold it at two percent, and the public
Speaker 1: hates inflation. Jonathan and I, for example, have talked about
Speaker 1: this a lot about what our mothers think about it,
Speaker 1: and neither of our mothers think that inflation is very
Speaker 1: good for them when they see what's happening to the
Speaker 1: utility bills. John, fail talk about there right now, you
Speaker 1: and writing are living this in real time. The family
Speaker 1: chat yesterday was lighting up, Tom just in terms of
Speaker 1: petrol prices going up, up, up and away, and John,
Speaker 1: just to speak to what the moms are going through
Speaker 1: right now for you and I for personally, that the
Speaker 1: call I get all the time is about utility bill
Speaker 1: at the end of the month. For those listening in,
Speaker 1: don't worry. I pay it and I'm sure John does too.
Speaker 1: And John, things are getting really, really tough for people.
Speaker 1: What we saw this week from the retailers was just
Speaker 1: to shift in where they're spending. I'm not sure if
Speaker 1: we saw a drop off in how much they're spending, though, John,
Speaker 1: because when I hear from the airlines, the airlines are
Speaker 1: talking up how robust things are, how resilient the consumer
Speaker 1: is that the price tolerance is still there. What's your
Speaker 1: read on that, John, Well, I think that's right. I
Speaker 1: think the companies are having difficult team managing an inflation
Speaker 1: environment and an environment in which there are severe labor shortages.
Speaker 1: You know, we need more workers, and you know, this
Speaker 1: is a weekend fortunately across New York City where we're
Speaker 1: going to see those future workers appear as you see
Speaker 1: all the grad's graduates on the street. And that's great
Speaker 1: and that's hopeful for the future. But right now we're
Speaker 1: an environment of labor market constraints, and those constraints are
Speaker 1: causing companies difficulty in managing um managing the businesses, and
Speaker 1: so I think the story of those retailers early in
Speaker 1: the week was really more of a margin story than
Speaker 1: it was a consumer spending story. After all, April retail
Speaker 1: sales looked fairly sprightly numbers, April industrial production looked quite strong.
Speaker 1: Even April housing starts were flat on the first quarter.
Speaker 1: And that that's the most interest sensitive sector economy. Sorry,
Speaker 1: I think all these fears that this is really about
Speaker 1: demand shortages are misplaced. This tremendous scess demand almost two
Speaker 1: job openings per workers. I said, that's good news for
Speaker 1: those graduates in this weekend. Um, but you know, if
Speaker 1: we take some demand out of the economy, we're really
Speaker 1: taking excess demand out. And I'm my fears have recession
Speaker 1: in the short run are are are very low. That
Speaker 1: the problem is the longer term if these inflation expectations
Speaker 1: become embedded. John fifteen seconds on the clock. Finish where
Speaker 1: we started. Results Sunday prediction uh Liverpool win and uh
Speaker 1: Aston Villa Holt City to withdraw on the quadruple. Still
Speaker 1: on there we go, John riding a bring capital. John.
Speaker 1: Thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening.
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Speaker 1: the terminal, I'm Tom keene In. This is Bloomberg, m