Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily, 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 Com,
Speaker 1: and of course on the Bloomberg terminal. William Dudley of
Speaker 1: course went on to Goldman Sachs and then on to
Speaker 1: his public service at the New York Fed, and we're
Speaker 1: thrilled that Dr Dudley could join us this morning. We've
Speaker 1: got a lot of questions built off your important essay
Speaker 1: al at John and Lisa get to that define the
Speaker 1: difference between Vulker and brainerd inflation. What's different with this
Speaker 1: seven eight percent versus a seven eight percent when you
Speaker 1: were certified at Berkeley. I think the difference is that
Speaker 1: the inflation that Boker had to fight built up over
Speaker 1: a long period of time, and so inflation expectations started
Speaker 1: to rise pretty significantly. So it's much harder to get
Speaker 1: rid of the inflation than the inflation we have now.
Speaker 1: The good news is that the inflation expectations are still
Speaker 1: relatively well anchored, so that would imply that the Federal
Speaker 1: Reserve isn't gonna have to do quite as much to
Speaker 1: push inflation back down your line in your pace this morning.
Speaker 1: In the late paragraph, Bell, I think it's got everyone's attention,
Speaker 1: so I'll repeat it for everybody who hasn't heard it
Speaker 1: so far. To be effective, it will have to inflect
Speaker 1: more losses, inflict more losses on stock and bond investors
Speaker 1: than it has so far. Bill runners through financial conditions
Speaker 1: and how you gauge financial conditions and why you might
Speaker 1: believe it stocks for a big part of that. Well,
Speaker 1: financial conditions are important in the United States, and sure
Speaker 1: Paula has emphasized this in his prepared remarks because that's
Speaker 1: how Montrey policy works. So you guys, E commy doesn't
Speaker 1: really run on short term interest rates. It really runs
Speaker 1: on long term interest rates. And the stock market is
Speaker 1: also important because a lot of people have exposure to
Speaker 1: the stock market and the level of the stock market
Speaker 1: affects their wealth. So the Fed has said pretty clearly
Speaker 1: we need to tighten financial conditions to slow the economy down,
Speaker 1: to keep inflation and check, and so far financial conditions
Speaker 1: really haven't tightened very much. The stock market is only
Speaker 1: for percent or so off it's high. It's still up
Speaker 1: very sharply from where it was a couple of years ago.
Speaker 1: And body els, you know, two point five two point
Speaker 1: six are still really low, especially when you adjust for inflation.
Speaker 1: So in my mind, the FED hasn't really accomplished much yet,
Speaker 1: and if financial conditions don't cooperate with the Fed, the
Speaker 1: Fed is going to have to do more until financial
Speaker 1: markets do cooperate. Bill, talk a little bit about the
Speaker 1: consequences of this. If stocks are a reflection of sentiment,
Speaker 1: if they affect the way that people are willing to
Speaker 1: go out and make purchases based on their household wealth,
Speaker 1: what does that do to the economy. Are you basically
Speaker 1: saying that if things continue the way they are, the
Speaker 1: FED is going to after torpedo growth to a potentially
Speaker 1: recessionary degree. Well, the Fed right now is, you know,
Speaker 1: markets are pretty confident in the FEDS program because they
Speaker 1: have the FED kicking the flirture rates up to about three.
Speaker 1: That causes the economy is slow, and then the Fed
Speaker 1: reserve eases policy in two and we have a soft
Speaker 1: lanning live happily. Ever after. I don't think it's gonna
Speaker 1: be that easy because because the markets are so confident
Speaker 1: in the FED, the financial conditions are still quite buoyant.
Speaker 1: Financial conditions are buoyant. That means the FED has to
Speaker 1: do more because it's slow down the economy. Also, a
Speaker 1: soft lanning is very very hard to achieve when the
Speaker 1: unemployer rate is so low. Uh the soft lanning examples
Speaker 1: that Paul has cited in nineteen n n where all
Speaker 1: examples where the FED tightened and the economy slowed, but
Speaker 1: did not slow sufficiently to push up the unemployer rate,
Speaker 1: the unemployer rate and all three of those episodes kept declining.
Speaker 1: I think at the in the current environment, with the
Speaker 1: unemployer rate at three points six percent and wages running
Speaker 1: well above outrate consistent with two percent inflation, the Fed's
Speaker 1: gonna have to tighten enough to tighten financial conditions enough
Speaker 1: to push up the unemployer rate. And when the FED
Speaker 1: has done that in the past, it's always resulted in
Speaker 1: a recession. That's not their intention. They'll go for a
Speaker 1: soft lantic with their chances of pulling off are very
Speaker 1: very low. Do you think that rapidly reducing the balance
Speaker 1: sheet bill will be enough to achieve this sell off
Speaker 1: that you think is necessary in order to enact some
Speaker 1: of the tightening that the FEED is that trying to achieve. Well,
Speaker 1: certainly we'll work on in the right direction. Obviously, quantitative
Speaker 1: easing help pull down long term meles, and I think
Speaker 1: if as a reverse course, that should push them up.
Speaker 1: But we don't know by how much. Uh, we already
Speaker 1: know what the FEN is gonna do, and markets haven't
Speaker 1: really moved very much, so uh, you know, I think
Speaker 1: it's just a big wild card in terms of how
Speaker 1: much will the quantitative tightening do the FENS job for them.
Speaker 1: I think the big point I would just make it's
Speaker 1: just it's very unlikely uh that a year from now
Speaker 1: we're gonna be at this level of bonds is low
Speaker 1: and this level of stock prices this high, because that's
Speaker 1: probably not sufficiently tight financial conditions to do the FEDS
Speaker 1: job for them. Bill parts. The difference is inflation comes
Speaker 1: down of the importance of goods inflation coming down own
Speaker 1: versus service sector inflation coming down. Well, obviously both matter.
Speaker 1: I mean, I think where the Fed's expectations is that
Speaker 1: goods inflation will come down quite a lot over the
Speaker 1: next year because the composition of demand as the economy reopens,
Speaker 1: will shift away from goods back to services. And the
Speaker 1: fact that some of these supply chain disruptions, for example,
Speaker 1: the auto sector will gradually get resolved, and so car prices,
Speaker 1: for example, will be weaker. Use car prices a bit weaker,
Speaker 1: but the services sector. Inflation is going to be a
Speaker 1: lot more persistent because that's really about labor costs, and
Speaker 1: we're seeing that labor costs are going up because the
Speaker 1: labor market is unusually tight in the current setting. But
Speaker 1: one time, FED officials when they're in the state talk
Speaker 1: a lot. You just have now, well, it's unpleasant to
Speaker 1: be a FED official and talking about how you have
Speaker 1: to tighten financial conditions to push up the unemployee rate.
Speaker 1: You don't want to talk about putting people out of work.
Speaker 1: And that's not, obviously the deliberate goal of policy. The
Speaker 1: deliberate goal of policy is to keep inflation from getting
Speaker 1: out of hand. Unfortunately, one of the reasons ways you
Speaker 1: have to do that is to is to generate enough
Speaker 1: slack in the labor market to keep inflation in check.
Speaker 1: And that's just an unpleasant conversation to have. So with
Speaker 1: what the FED set officials talk about is how we
Speaker 1: have to keep inflation in check so we can sustain
Speaker 1: this economic expansion and keep the most number of people employed.
Speaker 1: And that's true too. What they're not telling you, though,
Speaker 1: is that how difficult that is to pull off. Built
Speaker 1: a clinic as always, and we appreciate your time this morning.
Speaker 1: Built down that the former New York Fed President and
Speaker 1: of course, amongst other things, now a Bloomberg opinion columnists.
Speaker 1: The title of his pace this morning tell me if
Speaker 1: stocks don't fold, the Fed nates to force them, let's
Speaker 1: get right to it. This is too important of a
Speaker 1: conversation and it's truly extraordinary. Evel and Farcus and her
Speaker 1: family are out of Hungary. They know the experience of
Speaker 1: moving out of continental Europe over to America, where their
Speaker 1: tour of duty at Franklin and Marshall College and then
Speaker 1: her PhD at the acclaimed Toughs University flood your school.
Speaker 1: What is fascinating is in her public service to President Obama.
Speaker 1: She is now on the same page is John Bolton.
Speaker 1: That is extraordinary. And Evelyn, we had John Bolton on
Speaker 1: the other day and both of you say, get over it.
Speaker 1: We're not going to start world War three, discuss what
Speaker 1: America can do amid this fear that we have that
Speaker 1: O MG, We're gonna have World War three. Well, I mean,
Speaker 1: I think tom to the point that what what I've
Speaker 1: been arguing and I and I had a Washington Post
Speaker 1: all that about this, and I've been running around, Um,
Speaker 1: I guess like John Bolton, not with my mustache on fire,
Speaker 1: but my hair on fire, trying to explain that we
Speaker 1: shouldn't let Vladimir Putin deter us. Yes, unfortunately he has
Speaker 1: used chemical weapons and he has a lower threshold for
Speaker 1: nuclear use, but he does not want war with NATO.
Speaker 1: So we should really calculate the risk that we are
Speaker 1: willing to take in order to protect civilians. And I
Speaker 1: think me and several colleagues of mine who are national
Speaker 1: security and foreign policy experts, we signed a letter saying
Speaker 1: that the administration should not dismiss the idea of a
Speaker 1: humanitarian no fly zone completely out of hand. And what
Speaker 1: we're trying to do there is say, do not rule
Speaker 1: things out. We to be agile, and we need to
Speaker 1: understand that we may need to do more, take on
Speaker 1: more risks to save lives. And so I'm worried as
Speaker 1: we move into the next phase of the fighting, that
Speaker 1: we aren't thinking enough about how to save lives. We
Speaker 1: are providing additional military support and that is really important
Speaker 1: and that should continue. I look, Evelyn at the path forward,
Speaker 1: and we are shocked by these atrocities. I don't want
Speaker 1: to get in the debate of the war game, but
Speaker 1: I want to know from you how a Pentagon, or
Speaker 1: the Pentagon in Germany, or the Pentagon in France, how
Speaker 1: they respond the horror that we've seen. Well, I think
Speaker 1: everyone is horrified, and the question now is what can
Speaker 1: be done. In the past, even even in brutal wars
Speaker 1: like the Balkan Wars in Bosnia, I lived there after
Speaker 1: the war, we have had international agencies in their providing
Speaker 1: humanitarian assistance and trying to prevent the kind of massacre
Speaker 1: that happened in Buchan and elsewhere. And I would like
Speaker 1: to see some of these multilateral institutions like the Red
Speaker 1: Cross taking more risk, maybe going in with armed escort.
Speaker 1: They were held back more than twenty four hours from
Speaker 1: rescuing citizens, innocent civilians from Mariopal just this past week,
Speaker 1: so more needs to be done. Certainly, other countries need
Speaker 1: to be pressured to put pressure on Russia to allow
Speaker 1: for civilians to be evacuated. But unfortunately, what we see
Speaker 1: here is that Russia is purposely trying to slaughter civilians.
Speaker 1: It's part of their their effort to try to break
Speaker 1: the will of the Ukrainian people and the government. Evelyn,
Speaker 1: how do you see this ending? Well, of course, I'm
Speaker 1: hopeful that the Ukrainians can frankly take back their territory
Speaker 1: and beat the Russians on the battlefield. I don't think
Speaker 1: sanctions are going to destroy Vladimir Putin's intentions here, I
Speaker 1: mean his his his aggressive foreign policy will continue and
Speaker 1: sanctions will take a longer time to have an impact.
Speaker 1: So really it will be determined on the battlefield. We
Speaker 1: if we can provide sufficient or or enough I mean sufficient,
Speaker 1: I don't like the word. But if we can provide
Speaker 1: the military means necessary for Ukraine to push back the
Speaker 1: Russian military, there's a chance that they can regain their territory.
Speaker 1: Other than that, there's a compromise potentially where the Ukrainians
Speaker 1: might have to give up some territory, but I don't
Speaker 1: see that happening anytime soon. In a personal question, your
Speaker 1: father has been definitive on the collapse of the Hungarian
Speaker 1: aristocracy and the time from another place, even before Stalin
Speaker 1: and Hitler. I am fascinated how you believe we can
Speaker 1: laying to the Russian people that Ukraine doesn't need denazification.
Speaker 1: You live, your family lived Nazification. How do we explain
Speaker 1: to them that we don't need to denazify. Well, this
Speaker 1: is a problem. I mean, the Russian government has a
Speaker 1: lot of control over its population through its monopoly on
Speaker 1: the media. That they do have a lot of internet
Speaker 1: saturation in Russia now, and so some people can get
Speaker 1: alternative news and truth, but that's also being increasingly squeezed out.
Speaker 1: And yes, my family I was born in the United States,
Speaker 1: but my parents both fled Communist Hungry and as a
Speaker 1: child I went back to Hungry to visit my grandparents.
Speaker 1: I spent summers in Hungary. I know what it's like
Speaker 1: to live under communism when you can't speak the truth,
Speaker 1: and being told as a ten year old to be
Speaker 1: quiet because I might get my grandparents in trouble, and
Speaker 1: by trouble I understood it meant jail and something pretty serious. So, um,
Speaker 1: you know, the Russian people, we don't really know exactly
Speaker 1: what they think even when there are polls that are taken,
Speaker 1: those are probably somewhat suspect. But unfortunately the brandwashing is
Speaker 1: pretty effective. It's going to take, frankly speaking, the Russian
Speaker 1: soldiers coming home or not coming home, for the Russian
Speaker 1: people to start to figure out what actually they their
Speaker 1: government is doing in their names. So, as I said,
Speaker 1: the home front in Moscow in Russia proper is not
Speaker 1: really where the war is going to be determined. I
Speaker 1: think it's really going to be on the battlefield evident.
Speaker 1: Thank you, as a wife said, you want to get
Speaker 1: seven and focused that the former Deputy Assistant Secretary of
Speaker 1: Defense Dr. Cassidy. Bill Cassidy is from Louisiana. He is
Speaker 1: a force in Baton Rouge win the vote in two
Speaker 1: thousand twenty. Senator Cassidy, thank you so much for joining
Speaker 1: this morning. Before we dive into the clear and present,
Speaker 1: Gou Jing, I need to talk to you about the
Speaker 1: distance from Detroit and the Democrat big Dingle and John
Speaker 1: Dingle out to Kalamazoo on Root ninety four and Fred Upton.
Speaker 1: Fred Upton retired yesterday almost in tears from the Senate
Speaker 1: because he's being pushed out by the Trump part of
Speaker 1: the GOP. You live this. You had a nice re
Speaker 1: election in two thousand twenty. Can you comment on the
Speaker 1: GOP vendetta against those that said we need to impeach
Speaker 1: the president. Well, first, Fred was redistrict in a tough way.
Speaker 1: He lost three hundred fifty thousand of his base voters.
Speaker 1: Now there are some of the party who are mad
Speaker 1: at folks like Upton Matt of folks like me who
Speaker 1: voted for impeachment. Uh, that's just the way it is.
Speaker 1: You do what's right and you live with it. And
Speaker 1: I think Fred is incredibly proud of the integrity that
Speaker 1: he showed with that vote, with the enthusiasm that we hear,
Speaker 1: and suggest that the Republicans may take the House. Indeed,
Speaker 1: the Republicans may take this Senate. What does the new
Speaker 1: majority Republican Congress need to do day one? Yeah, day one,
Speaker 1: we need to have to We need to start going
Speaker 1: after inflation. Inflation. Inflation right now is being driven by energy.
Speaker 1: Uh cost both direct the cost of the pomp on
Speaker 1: your fuel build, but the indirect the inputs to the fertilizer,
Speaker 1: the go to the crops. That's a lot higher now
Speaker 1: as well, I proposed an operation warp speed. Just like
Speaker 1: we took the vaccine and within ten months had something
Speaker 1: predicted to take two to ten years, we should take
Speaker 1: a regulatory kind of let's get all together and figure
Speaker 1: out how we can increase supply and decrease prices for
Speaker 1: US and our allies within ten months, if not shorter.
Speaker 1: We can do that, but we need the regulatory agencies.
Speaker 1: We need an operation warp speed. Seneca, where do you
Speaker 1: see this fitting into eventually moving away from less of
Speaker 1: a reliance and fossil fuels. Yeah, so right now, believe
Speaker 1: it or not, there is a regulatory uncertainty for renew doubles.
Speaker 1: There's a regulatory uncertainty for carbon capture utilization sequestration. So
Speaker 1: what I'm speaking of is not just oil and gas.
Speaker 1: It is also the ccus that Louisiana has been waiting
Speaker 1: for Regions six E p A in Dallas to get
Speaker 1: off their duff on our application since October of last year.
Speaker 1: So excuse me, senator, are you saying basically that it
Speaker 1: could just be a regulatory fix that could plug the hole,
Speaker 1: that could plug the gap in some of the supplies
Speaker 1: that we're seeing, at least in part stemming from Russia.
Speaker 1: It could be a regulatory fix as well as regulatory certainty. Um.
Speaker 1: Right now, it's death by a thousand cuts to fossil fuel.
Speaker 1: So why are you going to invest when OPEC may
Speaker 1: decide to collapse prices and you're left with regulations which etcetera, etcetera.
Speaker 1: So my point being that if you could have regulatory certainty,
Speaker 1: have a little bit of capital injection to kind of
Speaker 1: commit the federal government, yes, you oil field service providers,
Speaker 1: we're not going to leave you out hanging bankrupt, then
Speaker 1: we could rapidly improve, increase production, Bill cassidy. You on
Speaker 1: the high ground on this and today it's gonna be
Speaker 1: big oil that's gonna talk about price gouging and that.
Speaker 1: But you live it in Donaldsonville, Louisiana, with CF Industries
Speaker 1: the largest nitrogen fertilizer company, I believe in America maybe
Speaker 1: in the world, I'm not sure on that explained to
Speaker 1: us how the people in Donaldsonville aren't price gouging fertilizer. Yeah,
Speaker 1: so natural gas is a feedstock for fertilizer UM, and
Speaker 1: so if your inputs rise, then it's going to increase
Speaker 1: the cost of the final product. Now there's also the
Speaker 1: ability to ship. There's also other aspects of the logistical
Speaker 1: supply chain. Obviously, it costs more to maintain your plant,
Speaker 1: costs more for labor because of general inflation. But that's
Speaker 1: just gonna be a little bit of a gap. Now,
Speaker 1: you could sell it below prod ice in which some
Speaker 1: middle person is going to buy it and then sell
Speaker 1: it at the market rate, but in somewhere there's going
Speaker 1: to be a markup. Senator, amid this soup of information,
Speaker 1: the soup of concern around gas prices, how concerned are
Speaker 1: you or how upset will you be if you see
Speaker 1: oil companies post bang gangbusters up profits in the next
Speaker 1: earning season, Well, you want to look at the reason
Speaker 1: for their profit. Um uh, let me just say that.
Speaker 1: And if they're going to use that profit to turn
Speaker 1: around and invest in the new um fields that we
Speaker 1: need in order to increase production, well isn't that a
Speaker 1: good thing? And let me point out about I don't know,
Speaker 1: a year ago, people had to sell their oil at
Speaker 1: a zero below zero price. There was no storage, They
Speaker 1: had to pay people to take their oil. So there's
Speaker 1: always going to be some rises and falls. What you
Speaker 1: want to see those the capital investment that long term
Speaker 1: creates more certainty in terms of our fuel supply. Senator
Speaker 1: Bill Cassidy, if Louisiana said it, thank you for being
Speaker 1: with us today with Michael Collins. He's a pie jum.
Speaker 1: And what's cool for our global audience is the state
Speaker 1: university system of New York. And in my ute, everyone
Speaker 1: knew the most prestigious math program was if you could
Speaker 1: survive it at Binghamton, New York. Michael Collins survived mathematics
Speaker 1: at Binghamton, which is a big deal when we were
Speaker 1: growing up. He's senior portfolio manager again, pijam, Mike Buried
Speaker 1: in your mathematical note, is the economic bet of pijum
Speaker 1: that the wage spiral or the wage worry, including what
Speaker 1: Bill Dudley saw in the last hour, May ebb away.
Speaker 1: Do you see evidence of that yet? You know, we're
Speaker 1: just started to see Tom the wage growth uh and
Speaker 1: the labor market growth start to flatten out here UH
Speaker 1: and maybe start to roll over. You see it in
Speaker 1: hours worked in the in the report we got on Friday.
Speaker 1: So so I think you have probably passed the peak
Speaker 1: rate of growth UH in wage certainly the peak rate
Speaker 1: of inflation. I would argue as well. You're going on
Speaker 1: calculus on it's like lyle Brainer did yesterday when she
Speaker 1: talked about the rapid pace. Let's call it the second
Speaker 1: derivatives of in these markets? How do you actually prosecute
Speaker 1: bond management given the rate of the rate of change
Speaker 1: right now? Yeah, Well we all know, Tom that the
Speaker 1: markets really do focus on second derivatives, right, and it's
Speaker 1: it's the change that really matters more than the stock right.
Speaker 1: When it comes to quantitative tightening, for example, you know
Speaker 1: a lot of people will look at well, the balance
Speaker 1: sheet is nine trillion, so it goes to eight and
Speaker 1: a half. What's the big deal? Uh, it is a
Speaker 1: big deal. Right. When the Fed embarks on quantitative easing,
Speaker 1: you see a super high direct correlation with asset prices
Speaker 1: going up. So what we're contemplating in our shop, Tom,
Speaker 1: is when they do unitative tightening, do you get a
Speaker 1: symmetrical um pull back in asset prices or is it
Speaker 1: more measured as the Fed tries to um signal that
Speaker 1: quantitative tightening is watching paint dry and it's on autopilot,
Speaker 1: and it's it's not going to be a big impact
Speaker 1: on the markets. But I do worry that it will
Speaker 1: result in much tighter financial conditions. So let's since you
Speaker 1: walked right into the big debate of the day. It
Speaker 1: does quantitative tightening cause higher longer term bond fields or
Speaker 1: lower ones? Yeah, it's the opposite of what everybody thinks. Right.
Speaker 1: By the time they start the quantitative easing, right, typically
Speaker 1: rates have plummeted, your your inner recession. Uh it's a
Speaker 1: big risk off. And what happens when they start buying
Speaker 1: bonds rates go up because what they're trying to do
Speaker 1: is get inflation higher. And it's going to be the
Speaker 1: exact opposite when they do quantitative tightening. The markets have
Speaker 1: already priced in. Look where rates are, right, Look where
Speaker 1: inflation expectations are, they're kind of peaking here. Uh So
Speaker 1: by the time they start tightening policy through through rate
Speaker 1: hikes and simultaneous quantitative tightening, which we've never seen in
Speaker 1: our lives. Right, this this kind of quick reversal of
Speaker 1: monetary policy on so many fronts. I think you're going
Speaker 1: to see a peak and rates at that time. So
Speaker 1: a peak and rates at that time, are you buying
Speaker 1: tenure treasuries at this point? Saying two point six looks
Speaker 1: golden over the long term. Yeah. I mean, fortunately we
Speaker 1: had we had cut duration earlier this year and we
Speaker 1: were we were short uh duration marginally in the US
Speaker 1: and just really in the last week or so, we've
Speaker 1: we've covered in most of that and we're kind of
Speaker 1: flat duration. I mean, there there can be a better
Speaker 1: entry point. I mean, personally, I'd love to be you know,
Speaker 1: long duration at some point over the next you know,
Speaker 1: a few months or a few quarters. But for this
Speaker 1: at this point, we're just kind of waiting for for
Speaker 1: the right entry point, uh and it will come right
Speaker 1: and it typically comes right around the time the Fed
Speaker 1: starts fighting policy aggressively, and they really haven't started that
Speaker 1: right and they're going to start in earnest really soon, Michael.
Speaker 1: The movable feast, which is the terminal yield or the
Speaker 1: terminal dot plot as an ex exist and also a
Speaker 1: level what's the level of the tenure yield and how
Speaker 1: far out is that terminal yield right now? Yeah, it's
Speaker 1: really fascinating time to to look at what's happening with
Speaker 1: forward rates, what the market is pricing in the markets
Speaker 1: are basically pricing in a funds rate right now and
Speaker 1: like a year or year and a half of close
Speaker 1: to three and a quarter now, right, so three hundred
Speaker 1: basis points almost of incremental hikes. But a year and
Speaker 1: two years and three years after that, the markets are
Speaker 1: pricing in almost a hundred basis points of rate cuts.
Speaker 1: I don't recall ever in our life FED has FED,
Speaker 1: hasn't even started or has just started hiking, and the
Speaker 1: markets are pricing in a hundred basis points of cuts
Speaker 1: in in the out years. And I actually think that's
Speaker 1: a pretty brilliant And I called up the parlor game.
Speaker 1: It's just to me, it's just absolutely idiotic. But what
Speaker 1: you just said what I find fascinating, And this goes
Speaker 1: to what Bill Dudley was talking about an hour ago.
Speaker 1: Is the idea of in a year and a half,
Speaker 1: what does your world, seriously, what is the PGAM insurance
Speaker 1: asset management conservative money world do if you get that
Speaker 1: magnitude of change over eighteen months. Yeah, well, I mean
Speaker 1: that's that's based probably our base case, Tom, that you're
Speaker 1: going to have growth slowing. I believe we're already at
Speaker 1: the beginning stages of what could be a pretty significant
Speaker 1: level of demand destruction from higher inflation. And now you're
Speaker 1: seeing higher rates and tighter financial conditions, I mean mortgage
Speaker 1: refinancings are plummeting, mortgage rates are pressing against five percent
Speaker 1: this morning. I mean housing has become basically unaffordable for
Speaker 1: for most of the people in this country. That is
Speaker 1: tighter financial conditions. Growth is going to slow. It's just
Speaker 1: a matter of how much and how fast. But certainly
Speaker 1: in a year, a year and a half from now,
Speaker 1: we could be in a very different world where the
Speaker 1: FED is pausing on rate hikes and maybe even contemplate
Speaker 1: and cuts. So what you do as an investor you
Speaker 1: try to take the long term view, knowing that in
Speaker 1: three and five years, Tom, the funds rate is going
Speaker 1: to be back to zero, right, the tenure will probably
Speaker 1: be back to one at some point over the next
Speaker 1: five years, So you want to take advantage of that,
Speaker 1: capitalize on that, on that capital gain you can get
Speaker 1: by being along duration. Tom, I just want to be cleared.
Speaker 1: Did you just call the parlor game of trying to
Speaker 1: game out FED policy into the future? Idiotic? Is that right?
Speaker 1: I agree with Michael Collins were in an absolutely original place.
Speaker 1: I just I was talking to uh. I think it
Speaker 1: was a quantist this morning about Richard Timberlake of of Georgia.
Speaker 1: Timberlake never wrote about this. Meltzer never wrote about this.
Speaker 1: Anna Schwartz never wrote about this. This is unheard of
Speaker 1: territory and what we're moving toward. And Michael, this is
Speaker 1: what you were picking up on the idea that at
Speaker 1: some point the feed is going to trigger a downturn.
Speaker 1: You're going to see growth materially slow down. The question
Speaker 1: is will it be something controlled or will it be
Speaker 1: a dramatic downturn, something that's a recession that's sooner than expected.
Speaker 1: Deutsche Bank came out and so they expect a recession
Speaker 1: in the United States in do you agree? Do you
Speaker 1: think that that's looking increasingly likely as we look at
Speaker 1: what the FED has to do to get markets basically
Speaker 1: to believe them. Yeah, I think the probability of a
Speaker 1: pretty significant global slowdown, and you're already seeing it, you know,
Speaker 1: in big parts of the world in Europe and China.
Speaker 1: We got p m I s out of China below
Speaker 1: fifty today and and the US just cannot you know,
Speaker 1: be an island of prosperity onto itself. So you will
Speaker 1: see global growth slow. The question is what does the
Speaker 1: recession the recession look like and I actually am pretty
Speaker 1: constructive on this one, right, And if you look at
Speaker 1: consumer balance sheets, you look at corporate balance sheets and
Speaker 1: the liquidity they have in the profit margins and the
Speaker 1: and the wherewithal to kind of withstand some weakness here.
Speaker 1: This is not going to be a big business or
Speaker 1: consumer led contraction. I feel like it's gonna be almost
Speaker 1: like two thousand and two thousand one, where you get
Speaker 1: a big correction and asset prices possibly uh and some
Speaker 1: some pain in the markets. But but you know, back then,
Speaker 1: you hardly saw consumers spending uh, you know, go down
Speaker 1: at all. And maybe it's that kind of mild recession
Speaker 1: or big gold global slowdown. Mike, you are just awesome.
Speaker 1: I'm miss sitting around a table with you, Sir Mike
Speaker 1: Collins there of AJM. Mike, thank you a well time
Speaker 1: meeting with Lindsay pigs a chief economists of Steve What.
Speaker 1: We're thrilled that she could join us this morning. Lindsay,
Speaker 1: I got to get to May four, and I guess
Speaker 1: there's the hides of March, but tell me about the
Speaker 1: IDEs of April. First, I got to get to April
Speaker 1: fift What data matters for loud Brainer, Jerome Paul, and
Speaker 1: Lindsay pigs Uh. As we try to get to the
Speaker 1: IDEs of April, I think, first and foremost, the FED
Speaker 1: is going to be focused on inflation. Inflation is the
Speaker 1: driver of the fed's new more hawkish position, and it's
Speaker 1: inflation that's driving this forward pathway for rate hikes. The
Speaker 1: FED telling us now that the consensus is for six
Speaker 1: additional increases potentially coming in fifty basis point increases. That
Speaker 1: new position, that more aggressive pathway is driven by inflation.
Speaker 1: So as prices continue to rise, be that lingering pressures
Speaker 1: from the supply chain disruptions or new upward pressures from
Speaker 1: the Russia Ukraine conflict, that is what is going to
Speaker 1: determine the pathway forward for the federal funds race and
Speaker 1: goods and services. What is the distinction in moving from
Speaker 1: seven to a survey to eight point three percent? Is
Speaker 1: that a goods umph or a service umph? Oh? I
Speaker 1: think it's both. I think we're seeing price pressures in both.
Speaker 1: I think the FED is washing the fact that prices
Speaker 1: are no longer transitory. They're now broad brain, excuse me,
Speaker 1: broad based across nearly every sector of the economy, and
Speaker 1: that is sparking fears that we're moving closer and closer
Speaker 1: to a wage price spiral where prices rise, pushing wages higher,
Speaker 1: pushing prices higher, etcetera, etcetera. And so the FED is
Speaker 1: very much focused on capping inflation, starting to imply that
Speaker 1: second derivative decline, meaning a still positive pace of price pressures,
Speaker 1: but a slower pace, and then eventually moving on to
Speaker 1: an outright decline in price growth towards that two percent
Speaker 1: two percent target for the FED. Lindsay, do you think
Speaker 1: that people are overestimating or underestimating the strength of the
Speaker 1: consumer right now? Oh, I think people are overestimating the
Speaker 1: strength of the consumer. We hear about the consumer being strong,
Speaker 1: we hear about the economy being strong, and the potential
Speaker 1: for the FED to undermine this strength in the economy.
Speaker 1: The economy is not overheating. The economy is not strong.
Speaker 1: The economy is just moderate at best, and arguably poised
Speaker 1: to already slow as we're still struggling to grow organic
Speaker 1: legs in the aftermath of the worst of the COVID pandemic.
Speaker 1: Consumers are still very much relying on an accumulated savings
Speaker 1: as a result of very generous federal programs as a
Speaker 1: result of a shift in spending patterns from pre pandemic
Speaker 1: to post pandemic. As we saw an additional and check
Speaker 1: in many people's mailboxes for that enhanced child tax credits.
Speaker 1: There were a number of different factors that really build
Speaker 1: up that wealth cushion, and that continues to support consumers
Speaker 1: for now, but it will not support consumers indefinitely. Well,
Speaker 1: and that was really where I was going to go
Speaker 1: the time frame here, How long is it going to
Speaker 1: take before that weakness that you're talking about starts to
Speaker 1: present itself in earnings in other economic data. Oh, I
Speaker 1: think we're already seeing the weakness. Even if you look
Speaker 1: at fourth quarter GDP, which was up near seven percent.
Speaker 1: When you strip out inventories and we look at real
Speaker 1: final sales, you're talking about one point five percent and
Speaker 1: Q one GDP shaping up to be a significant disappointment,
Speaker 1: well below two percent. So we're already seeing that weakness now.
Speaker 1: When I think the bigger question is when do we
Speaker 1: see that translate into negative GDP? And do think we'll
Speaker 1: continue to float around positive territory for the next six
Speaker 1: to nine months, but getting that first outright negative print
Speaker 1: by the first quarder of next year. You're looking for
Speaker 1: a negative print on real g d P by the
Speaker 1: first quarter of two thousand three. That's correct. I do
Speaker 1: think at that point the FED will have raised rates
Speaker 1: enough to choke off domestic growth. Now will we see
Speaker 1: a technical recession? That's a question for whether or not
Speaker 1: the FED can identify the weakness and then pull back
Speaker 1: after a series of bread increases. If they continue to
Speaker 1: move forward, I do think we go into technical recession.
Speaker 1: If they have the wherewithal to pull back, we may
Speaker 1: be able to navigate not necessarily a soft landing, but
Speaker 1: a very brief dip into negative territory. And there you
Speaker 1: are two days in a row. Folks is Lindsay Pegs
Speaker 1: of pulls forward or Deutsche Bank and Matt Lozettie we're
Speaker 1: talking about yesterday from late two thousand twenty three. If
Speaker 1: the Fed bollox is it up, maybe we see a
Speaker 1: Q one of two thousand dr pigs. And thank you
Speaker 1: so much for joining yours. This is the Bloomberg Surveillance Podcast.
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