Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg terminal. Right now, an
Speaker 1: extensive conversation with Jason Furman of Harvard University and of
Speaker 1: courses public Service to the Nation with the Council of
Speaker 1: Economic Advisors. Jackson. Wonderful to have you with us at
Speaker 1: this moment. You're gonna tell me as a public policy
Speaker 1: type that we need to see more data that we
Speaker 1: need to see two or three months data. Does President
Speaker 1: Biden and others wait for that data or must they
Speaker 1: adjust to this report? Ok? I think the main people
Speaker 1: who need to adjust to this report, adjust to the
Speaker 1: job's report we got last year is the federal Reserve.
Speaker 1: The other part of it is looking at what we
Speaker 1: can do in our economy to address the biggest thing
Speaker 1: we have, which is a constraint on supply. We need
Speaker 1: more supply. Shots and arms are doing a lot. My
Speaker 1: guess is there's a lot more people are working in
Speaker 1: May than in April. But when you take this plus
Speaker 1: the jobs report on Friday, plus the totality of the data,
Speaker 1: I think we have a very different picture of the
Speaker 1: economy right now than a lot of people held a
Speaker 1: week ago. It's a different picture of the economy. Vice
Speaker 1: Chairman Clarata will speak here and I believe twenty four minutes.
Speaker 1: Does he adjust Is there one word or one sentence
Speaker 1: that will begin a tone of a Federal Reserve shifting
Speaker 1: their language. I don't know. I mean, they're very big
Speaker 1: on this being transitory. A lot of this is transitory.
Speaker 1: We saw a ten percent increase in the youth call
Speaker 1: is in trucks market in April. Okay, but Jason, Jason,
Speaker 1: I don't want to interrupt you, but I'm looking at
Speaker 1: rentals in New York City that are not transitory. Is
Speaker 1: Michael McKee just mentioned higher rents are real not transitory. Oh?
Speaker 1: I agree. I was gonna say, you are going to
Speaker 1: be able to point to things that are transitory. I
Speaker 1: think your best guest has to be that this isn't
Speaker 1: entirely transitory. The FED and others have rested a lot
Speaker 1: on inflation expectations being anchored this is the type of
Speaker 1: thing that's going to start to move those inflation expectations.
Speaker 1: So yes, I think the problem is you can point
Speaker 1: to all sorts of chransitory things, strip all of those out,
Speaker 1: add in what we know about how much demand we
Speaker 1: have in our economy, how little supply we still have. Uh,
Speaker 1: you know, I think this this there's some caution and
Speaker 1: should change the way people are thinking about the economy. Jason,
Speaker 1: what do you think that means for the relief package
Speaker 1: we passed just a couple of months ago, when Larry
Speaker 1: summer Is another court including Olivia Blanchard, came out and
Speaker 1: said it was too big for the moment we're in.
Speaker 1: Do you think this is evidence of that? But it
Speaker 1: was definitely too big for the moment. I don't know
Speaker 1: any economist that was recommending something the size that what
Speaker 1: was done. Um, the question is how big the downside was.
Speaker 1: I wouldn't leak to a judgment yet on the basis
Speaker 1: of April. This is one month's data. The data are
Speaker 1: obviously extremely noisy. We knew as the economy reopened there
Speaker 1: would be all sorts of patches along the way, rough
Speaker 1: patches along the way. But you know, I think there's
Speaker 1: a you know, a certain amount to that logic, and
Speaker 1: let's try to do what we can to make it
Speaker 1: not true. How do we make Larry's prediction not true?
Speaker 1: We increased labor supply and the FED is a little
Speaker 1: bit more cautious to help keep inflation inflation anchored. Jason,
Speaker 1: can I get your thoughts then on what happened on
Speaker 1: Friday when we saw that big miss, and we talked
Speaker 1: about the supply side story and the mismatch between demand
Speaker 1: a supply, and the maybe prices would need to adjust.
Speaker 1: Arguably is view pointed out. We saw that in wages
Speaker 1: already and we could see that a whole lot more
Speaker 1: in months to come. Some governors of Republican states have
Speaker 1: decided that they need to remove the additional UI, the
Speaker 1: unemployment insurance that was offered by the federal government and
Speaker 1: the package that was delivered recently. Do you think that's
Speaker 1: the right decision to fill that gap? Yeah, So the
Speaker 1: big miss on Friday was wages. The expectation for wages
Speaker 1: was zero point zero percent. The actual number was zero
Speaker 1: point seven percent. Even that actual number understated what actually
Speaker 1: happened because of composition effects that the real number is
Speaker 1: probably more like zero point nine percent UM. Either way,
Speaker 1: that's the fastest wage growth we've had since the nineteen eighties.
Speaker 1: So you're not looking at you know, one isolated data
Speaker 1: point around used truck. This is everywhere around us. If
Speaker 1: I were in a state with a three point five
Speaker 1: percent unemployment rate, I'd be thinking seriously about whether UM
Speaker 1: paying bulmore to not work than to work was a
Speaker 1: good thing to continue doing. Jason lost for words that
Speaker 1: even agreement with Republican governors. Then in places like corkinsil Iowa, Montana,
Speaker 1: South Carolina, you know, it depends on where you are
Speaker 1: in the virus. It depends on where you are in
Speaker 1: your unemployment rate. But by certainly by June July August
Speaker 1: of this year, I don't think we need the same
Speaker 1: UI system we had in January. In January it made
Speaker 1: sense three thousand people were dying a day. We did.
Speaker 1: We wanted to give people an option other than work
Speaker 1: and support them in that option. UM in an increasingly
Speaker 1: hot labor market for a lot of states, it may
Speaker 1: not make sense. It may not make sense in the
Speaker 1: same way. So I think they should be taking a
Speaker 1: hard look at it. Dr frem and I just did
Speaker 1: a study here. Thank you John for extending that out
Speaker 1: because I was working the Bloomberg terminal, Jason, I did
Speaker 1: a standard deviation study on a monthly basis. Of course
Speaker 1: cp I back to the time of Paul Boker, maybe
Speaker 1: around I can find a jump condition in course cp
Speaker 1: I like we see now we do interview after interview
Speaker 1: or experts like you say, it's about the jump that
Speaker 1: we see an inflation. Right now, we're seeing a jump
Speaker 1: that I would suggest is near original. How do should
Speaker 1: we respond to that? Yeah, I mean the economy is
Speaker 1: gonna do weird things. We saw a collapse that was um,
Speaker 1: you know, historic last year in prices. We're seeing. Some
Speaker 1: of what we're seeing now is the unwinding of that.
Speaker 1: Some of what we're seeing is different sectors come back
Speaker 1: at different paces. So I wouldn't leap all the way
Speaker 1: to where, you know, we're not worried about inflation now,
Speaker 1: we're worried about hyper inflation. It's going to be zero
Speaker 1: point nine every month from now one. But what I'm
Speaker 1: saying it's just a recalibration of views. Discount the data
Speaker 1: a lot because of the weirdness. Don't discount the data
Speaker 1: all the way. You should update your views. How do
Speaker 1: you think that meeting in the White House changes later
Speaker 1: between the Big Four and the President of the United
Speaker 1: States with this inflation data this morning. Now every single
Speaker 1: market participant, every economist will come on the show today
Speaker 1: and talk about it only being one data point. But
Speaker 1: that's the data point. I imagine that the Republicans will
Speaker 1: be talking about all day going into that meeting in
Speaker 1: the White House. Lank, Yeah, the meeting is there, and
Speaker 1: that's a political discussion. It will be emotional like Gasolene
Speaker 1: and all that. I'm way more interested in people like
Speaker 1: Jason Furman, and I would go to the Vice chairman
Speaker 1: where particularly if he does Q and A, John, that
Speaker 1: will be fascinating. We get the Q and A in
Speaker 1: about fifteen minutes today, Jason, just to find a one
Speaker 1: from me before I have to run your view on that.
Speaker 1: How the Federal Reserve will talk about this when we
Speaker 1: hear from the Vice chair in about fifteen minutes. What
Speaker 1: would you anticipate What do you expect them to say
Speaker 1: in the coming weeks off the back of this data.
Speaker 1: I would expect them to make very little in the
Speaker 1: way of adjustment. I would expect them to emphasize this
Speaker 1: is transitory. Some of the quirkish parts of this, like
Speaker 1: um use cars and the like. I'd love to see
Speaker 1: them Tilton notch towards concern about inflation, but I think
Speaker 1: they'll mostly I'll be doing more to explain this away
Speaker 1: than to express any concerns about it. Jason Furman, let's
Speaker 1: do a little bit of a history lesson of the
Speaker 1: shock here, and I went back to Neil Dutta talks
Speaker 1: about the biggest one month game since June of two
Speaker 1: thousand nine. Dr Furman take us back to the sixties,
Speaker 1: and Robert Samuelson at the Washington Post has written about
Speaker 1: this the time of Walter Heller. What did they do
Speaker 1: in the sixties about the inflation shock and trude should
Speaker 1: we use that as a template. First of all, they
Speaker 1: did a lot of emphasizing one time factors and micro stories.
Speaker 1: You know, there's this segment is doing this, that's a
Speaker 1: mint is doing that, um and they missed the bigger
Speaker 1: macro forces what was going on with fiscal and monetary policy.
Speaker 1: So number one is, look at the macro, don't do
Speaker 1: each try to explain away each one of them micro
Speaker 1: um lesson to that which I think is a good
Speaker 1: one for us. It took years and years and years
Speaker 1: of a policy change to get us to the place
Speaker 1: we were at in the late sixties. We've just been
Speaker 1: through a freakish pandemic. We've just been through a highly
Speaker 1: unusual period of policy. I don't expect policy uh too.
Speaker 1: I don't think there's been a huge regime change. I
Speaker 1: think we'll go back to the old regime and this
Speaker 1: should hopefully all stay under control as a result. But
Speaker 1: we do need to get back to a little bit
Speaker 1: more of the old regime for that to work. We
Speaker 1: certainly heard that from young Hotzi yes yesterday, folks of
Speaker 1: Goldman Sex. Then I look at what wages will do,
Speaker 1: and there's a phrase from ancient history, Jason Furman, a
Speaker 1: cost push inflation. I don't observe that anywhere. Am I wrong?
Speaker 1: Are we gonna redux the sixties and seventies, I should say,
Speaker 1: and cost push inflation? Where we have to whip inflation now?
Speaker 1: I mean we just seven in April, wages were up
Speaker 1: by about zero point seven zero point nine, depending on
Speaker 1: how you look at the number. Prices were up by
Speaker 1: that same amount. You know. Again, I mean, we obviously
Speaker 1: don't want to read too much into any one data point.
Speaker 1: But unless people start heading back to work in bigger numbers,
Speaker 1: we're gonna have concerns now that should happen, should happen
Speaker 1: no later than September when unemployment insurance expires, but you
Speaker 1: know it needs to happen. Jason Furman, thank you so much,
Speaker 1: greatly appreciate it. With Harvard University, UNI, course of Peterson Institute,
Speaker 1: we're all Marcus, Marcus markets, John, I'm gonna go to
Speaker 1: the real economy, like Jason Furman, jobs formation and that
Speaker 1: you wonder if a little bit of rising inflation finally
Speaker 1: helps people in a booming g DP economy eight percent,
Speaker 1: whatever the number is. So that's attention, folks, as we
Speaker 1: go here twenty five minutes from now on the financial
Speaker 1: aspects and the asset aspects, the real economy aspects. No
Speaker 1: one better to dovetail those two together than Alicia Levine
Speaker 1: of b n Y Melon always writing smart. And what's
Speaker 1: so important about Alicia Levine is really looking almost at
Speaker 1: a strategic basis of where we are. Given this rising inflation.
Speaker 1: You talk about a regime change. Alicia in America described
Speaker 1: that right. So look, we we think that When the
Speaker 1: new administration came in, it was really focused on Main
Speaker 1: Street versus Wall Street, and I think the policies that
Speaker 1: have flowed from the fiscal side and frankly for the
Speaker 1: monetary side, really are creating that. So, as you've said
Speaker 1: all morning, you know, a little bit of inflation is
Speaker 1: actually quite positive for main Street. You get higher wages,
Speaker 1: you get some pricing power, you know, you get assets
Speaker 1: moving higher, and in the real economy that's not such
Speaker 1: a bad thing. It tends to be terrible for equity markets,
Speaker 1: particularly in the long duration assets, as we've seen in
Speaker 1: the last couple of days, where the tantrum really was
Speaker 1: in the equity market and not in the bond market.
Speaker 1: The equity market is telling you that their inflation fears
Speaker 1: all over the place for investors. So, look, we think
Speaker 1: there is a regime change, So higher growth, higher inflation,
Speaker 1: that doesn't mean, you know, terrible inflation. It does mean, though,
Speaker 1: that higher than it was in the post global financial crisis,
Speaker 1: and therefore higher rates eventually. But right now we're seeing
Speaker 1: we think, we think it's sustainable. We don't think this
Speaker 1: is a sugar high. Okay, it's very clear it's not
Speaker 1: a sugar high. It's literally a regime change. You've got
Speaker 1: fancy degrees, you're expert at the mathematics of the financial system,
Speaker 1: and you and me what in common. As we started
Speaker 1: out dishwashing. You had a love affair with the Hobart
Speaker 1: dishwashing machine at a camp years and years ago. Let's
Speaker 1: talk about the real world effects of this inflation in
Speaker 1: the old days that meant rising wages. Do you fold
Speaker 1: that into your strategy or is this time different from
Speaker 1: when you were running a Hobart. So so those were
Speaker 1: great days, and actually I didn't get paid at all.
Speaker 1: So yes, there's inflation for those jobs. But look, there
Speaker 1: is clearly supply constraints in the labor market as well,
Speaker 1: which is what we learned on Friday. Wages are going higher,
Speaker 1: and they're going higher because we don't have as much
Speaker 1: slack in the labor force overall, even if you strip
Speaker 1: out the extra unemployment benefits, which of course are a
Speaker 1: downward pressure on on labor coming into the market. But
Speaker 1: if you think about the expedited retirements in the boomers
Speaker 1: and above, you think about the fact that two million
Speaker 1: women have simply dropped out of the labor force, probably
Speaker 1: because schools are not open by the time those schools open.
Speaker 1: You know, it's been eighteen months that people are disassociated
Speaker 1: from the labor force, very hard to get back into
Speaker 1: the same job. So we think participation will be lower,
Speaker 1: slack is lower, and wages will be higher. You know,
Speaker 1: as we saw with Jolty yesterday, there are eight point
Speaker 1: one million jobs available ostensibly, the same number of jobs
Speaker 1: as those who do not have jobs today that did February.
Speaker 1: Something's wrong, right, something there's a mismatch. So there's a
Speaker 1: skills mismatch, and there's a need to pay labor higher.
Speaker 1: And I do think that the fiscal policy that's been
Speaker 1: enacted has conditioned people, frankly, to want more and to
Speaker 1: expect more. We've just spent eight hundred and fifty billion
Speaker 1: dollars from January one, as the economy is reopening directly
Speaker 1: into households, directly into bank accounts, more than we and
Speaker 1: we spent that was six hundred billion last year when
Speaker 1: the economy was closed, and we're expecting another four hundred
Speaker 1: billion by early September. All that is going to create
Speaker 1: upward pressure on wages. Next logical question, then, what does
Speaker 1: that mean for margentilation? And one of the sectors that
Speaker 1: you would avoid. Right. Look, I think I think the
Speaker 1: rotation that came became apparent in the fall last year
Speaker 1: still plays out, right. So, you know, commodities, materials, industrials, financials,
Speaker 1: and energy are really the sectors that benefit from higher inflation.
Speaker 1: And that's where we would be very hard to ignore.
Speaker 1: Your profitable tech. You know, the future is digital. You
Speaker 1: have to be there. We just think that those that
Speaker 1: sector probably underperforms a bit. And we do think that
Speaker 1: speculative tech, you know, those companies that we know in
Speaker 1: love and are valued on revenue and not earnings, were
Speaker 1: really suffer here and we would stay away from those.
Speaker 1: We just think it's a long term secular change and
Speaker 1: where rates are going, where yields are going, and where
Speaker 1: expectations are going. So I think the cyclical trade will
Speaker 1: have legs and we'll have legs for longer. We saw
Speaker 1: a ton of companies in the first quarter, right seeing prices,
Speaker 1: P and G, Kimberly Clark, others as well. Alicia, there's
Speaker 1: a nice little debate debate plank out on the south
Speaker 1: side at the moment on staples, bt I G on
Speaker 1: the one side, BEMO on the other, bt I g
Speaker 1: likes the pricing path. Bemo is worried about the input costs.
Speaker 1: Where are you in the team on Staples? I like
Speaker 1: Staples simply because they've underperformed so woefully. That is just
Speaker 1: a good It's not a bad place to come in here.
Speaker 1: They do have pricing power. I think households are are
Speaker 1: are becoming conditioned to paying it, frankly, because there's so
Speaker 1: much extra liquidity in the household sector, right, you're not
Speaker 1: getting pushback, so therefore those price changes will be sticky.
Speaker 1: If you add to that that the sector has completely underperformed,
Speaker 1: as the here and now looks better than worrying about
Speaker 1: the future three years from now. I think it's not
Speaker 1: a bad place to add two staples here. You know,
Speaker 1: you want to add when it seems like the wrong
Speaker 1: thing to do, so it seems like the wrong Yeah,
Speaker 1: there you go. I mean, we like we we've learned
Speaker 1: this right. How many times do we have to be
Speaker 1: hit over the head? And so I actually do like
Speaker 1: Staples here for the reason I think this pricing power
Speaker 1: will be very sticky. When you raise wages, you don't
Speaker 1: lower them. When you raise prices that you don't lower them.
Speaker 1: Get comfortable feeling uncomfortable. That's a lifeless Alicia, Thank you,
Speaker 1: Alicia Levy bm Y Melon Investment Management right now. This
Speaker 1: is a joy for John and I to bring in
Speaker 1: Terry Weisman with us out of vest Or in Harvard.
Speaker 1: Terry Weisman iconic on emerging markets at Bear Strings long ago,
Speaker 1: and most importantly he is the director of Global Currencies
Speaker 1: and interest rates for the crew at fifty Martin Place
Speaker 1: in Sydney, Australia with Macquarie, and where thrilled he could
Speaker 1: join us right now with a real touch of this economics.
Speaker 1: But also it is linked to the commodity boom. Does
Speaker 1: inflation cause commodities or is a commodity boom gonna cause
Speaker 1: the inflation to come Terry, you know it could be
Speaker 1: two ways. Um. One of the aspects of inflation that
Speaker 1: I think is driving the commodity boom is just public policy. Right.
Speaker 1: You have quite a lot of of an imperative around
Speaker 1: the world to move towards a green economy, and that's
Speaker 1: clearly causing some commodity prices to go up. So here
Speaker 1: the causality runs from public policy to commodities. But you
Speaker 1: also have to take into account that the rising commodities,
Speaker 1: whether it's speculative or not, is going to put pressure
Speaker 1: on things that have nothing to do with that green economy.
Speaker 1: If copper prices go up, home prices can go up
Speaker 1: as a results, even because of the cost push inflation.
Speaker 1: So it runs two ways, um and and I suspect
Speaker 1: that there is a little bit of a specult development
Speaker 1: in some of the commodity prices that have seen a
Speaker 1: big increase recently, but more so iron than copper. Let's say, right,
Speaker 1: that's right where I wanted to go cheery. When you
Speaker 1: talk to the commodity experts at Macquarie, and truly folks,
Speaker 1: they are Australian experts. How does iron or dynamics filter
Speaker 1: into a more developed world inflation Wednesday? Not too much
Speaker 1: because because iron goes into steal, and steal is really
Speaker 1: a construct auction material, it's not something that's really prevalent
Speaker 1: that much in the consumer basket. But I will tell
Speaker 1: you this McQuary's view on iron is not positive. We
Speaker 1: see a lot of the run up recently as having
Speaker 1: been caused by hoarding on the part of Chinese steel mills,
Speaker 1: who are worried. The Chinese in the second half of
Speaker 1: this year, Chinese policy makers will come down hard on
Speaker 1: the steel mills because of environmental issues, and that they
Speaker 1: will do that by restricting iron imports in the second half,
Speaker 1: and as a result, steel mills are hoarding iron now
Speaker 1: ahead of that and obviously hedging against future price increases.
Speaker 1: But that's not really a demand based story as much
Speaker 1: as it is a story about fear of import controls
Speaker 1: and fear of restrictions copper, as I mentioned, a different
Speaker 1: story that is that is purely structurally demand ern people
Speaker 1: are excited about the the implications for copper demand coming
Speaker 1: from green economy imperatives. Harry, what's China's role in all
Speaker 1: of this? If you shewed me a chance of China's
Speaker 1: credit impulse, I might have made a different decision on
Speaker 1: the direction to travel that seeing across some of these markets.
Speaker 1: What is China's rolled in this cycle? Well, well, normally
Speaker 1: China's role is as as a commodity UH importer and
Speaker 1: demander and and of course the credit cycle is hugely
Speaker 1: important to determining how much credit is being is being
Speaker 1: directed towards construction towards infrastructure UH in China, so credit
Speaker 1: normally plays a strong role. We all I'm saying is
Speaker 1: that this time around, and maybe the reason you're seeing
Speaker 1: this divergence between credit growth and commodity prices is because,
Speaker 1: in the case of some commodities, what's being driven is
Speaker 1: not structural. What's driving is not structural demand coming out
Speaker 1: of China, or certainly not the outlook for stronger structural demand. China,
Speaker 1: after all, maybe moving towards monitoring tightening in the bad
Speaker 1: latter part of this year, but might be moving these
Speaker 1: commandis instead is concerned about restrictions on the use of
Speaker 1: them later or the import of them later, I should say,
Speaker 1: and as a result, is hoarding today. Very different story,
Speaker 1: very different dynamic. Let's say that what we normally get
Speaker 1: out of China where credit drives the commodity price cycle,
Speaker 1: when you look at market based inflation expectations in the
Speaker 1: momentary that's time of two stories together. What degree do
Speaker 1: you think that being influenced by what we're seeing in
Speaker 1: the commodity male kit not that much. I you know,
Speaker 1: to some extent. We're talking about consumer prices here, um
Speaker 1: and the price of a house does not figure into
Speaker 1: the consumer price in deck, but figures into the persumer
Speaker 1: price index. Is the service price of renting a house,
Speaker 1: let's say, or the owner of equivalent rent that's not
Speaker 1: affect too much by the price of a home. So
Speaker 1: I don't think commodities themselves, not certainly, not those those
Speaker 1: those basic metal commodities are having that much of an
Speaker 1: impact on CP I know. I think what's having, or
Speaker 1: for that matter, expectations. I think what's driving inflation expectations
Speaker 1: is somewhat different. It's it's a FED that has been
Speaker 1: politically inclined to be to sound very dubbish and therefore
Speaker 1: fuel inflation expectations higher. And of course we have everything
Speaker 1: pertaining to the demand impulse around the world coming from
Speaker 1: public policy, more spending in the US, prospectively more in Europe.
Speaker 1: I think that's fueling a little bit the inflation expectation
Speaker 1: increase that we've seen recently. Terry Device Chairman, I believe,
Speaker 1: speaks at nine am, well street time. Can they shock
Speaker 1: the market or can they actually have a dialogue the
Speaker 1: next ninety days where we ease our way towards the
Speaker 1: beginning of a discussion of less accommodation, so they can
Speaker 1: ease into it. And can they do that? Not today?
Speaker 1: Not today? Just because I said that they can ease
Speaker 1: into it, doesn't mean they're going to ease into it today.
Speaker 1: I think this is too soon. Even if the CPI
Speaker 1: print comes out high, let's say, on the headline base
Speaker 1: three point seven or three point eight, it's way too
Speaker 1: early for the FED to make a determination as to
Speaker 1: whether or not, uh the increase in inflation is permanent
Speaker 1: or temporary. And the reasons because we know that a
Speaker 1: lot of it's driven by supply shocks, and the market
Speaker 1: has a way of addressing those supply shocks ultimately with
Speaker 1: more supply. And as a result, I don't think the
Speaker 1: FED is going to say today. I don't think Richard
Speaker 1: Cloud is gonna say today that it's time for the
Speaker 1: FED to talk about tapering. By August. Maybe, I think
Speaker 1: by August I will have ease their way into it,
Speaker 1: in part because by August the economy will be better,
Speaker 1: it will be a synchronized global recovery as well, potentially
Speaker 1: will be more some more pressure as a result of
Speaker 1: that on some basic goods, not necessarily copper and iron,
Speaker 1: but others. And I think at that point they can
Speaker 1: talk about the need to have a discussion about taping
Speaker 1: and then and then the countdown begins, but today is
Speaker 1: too early. Sorry, gonna catch up. As always was that
Speaker 1: McClary on currencies commodities and writes as well, we're making
Speaker 1: jokes about it, but the inflation is real and it
Speaker 1: affects all of us, truly. The right guest at the
Speaker 1: right time, Stephen Rashida joins us seas with the zooo,
Speaker 1: and he does acute, I mean scary acute in detail.
Speaker 1: I'm breaking apart the American economic landscape, he joins us.
Speaker 1: Right now, Stephen, shooter, Let's go right through the function
Speaker 1: and let's start with the consumer. How will the consumer
Speaker 1: adjust to new inflation? Well, I think the stimulus checks
Speaker 1: that have been provided are real. The adjustment the amount
Speaker 1: of excess savings or increase in savings that the household
Speaker 1: sector has accumulated as well over the last year plus
Speaker 1: of stimulus checks is going to help the consumer get
Speaker 1: beyond these problems. I think you also have to understand
Speaker 1: that for a lot of these components such as airline fares,
Speaker 1: hotel rates, um, you know, used car prices, new car prices.
Speaker 1: You know, there was a big down draft in inflation
Speaker 1: that occurred last year in many of these components, and
Speaker 1: these are the components that are coming back now as
Speaker 1: the economy is reopening up, as the vaccine has become
Speaker 1: more important than the virus, and so therefore we're getting
Speaker 1: back to more normal life. Okay, this is really important, folks,
Speaker 1: and trust me, I've had hate mail on this before.
Speaker 1: We'll do it when Mr roshutto right now. Steve, you
Speaker 1: know the sinodal function or sinusoidal function a boy physics.
Speaker 1: You've got the squiggly little line in it dampens down
Speaker 1: towards zero, and that's called a damp fun action. Or
Speaker 1: if you were a bow tie, it's called a dampen function.
Speaker 1: Steps Shudo, is inflation gonna dampen out over the next
Speaker 1: number of months to a level that's more appropriate? Or
Speaker 1: do you have a fear of a trend like the sixties.
Speaker 1: I don't have a fear of the trend like the sixties.
Speaker 1: You know, the sixties was a wage price spiral. The
Speaker 1: wage price spiral is largely a function of the cost
Speaker 1: of living adjustments that were rolled into unique contracts um
Speaker 1: and those are what created the wage price spiral. This time,
Speaker 1: we don't have a direct linkage between wages and prices
Speaker 1: like we had before. And to the extent that we
Speaker 1: have global excess supply. Now where we had global excess demand,
Speaker 1: their corporations had pricing power, so they thought they could
Speaker 1: pass the price increases on through to the consumer, and
Speaker 1: that's what created the cycle this time through. Yes, there
Speaker 1: will be an upward movement and inflation, but it will
Speaker 1: not be anywhere near that wage price spiral that you
Speaker 1: know people are still fearful of all these year later.
Speaker 1: Paul John from Lester emails and he says, Tommy, you idiot.
Speaker 1: Damped is when the signs of waves dampens down towards zero.
Speaker 1: Dampened is when your tire gets wet. Okay, but he
Speaker 1: spelled a t y r E. We're throwing that out
Speaker 1: all right. So Steve fed, chairman of Vice vice chairman
Speaker 1: Richard Clarenda this morning said he was surprised by the
Speaker 1: rise in consumer prices, but continues to believe that they
Speaker 1: are transitory. What's your take there, Well, again, this is
Speaker 1: this is the theme that they're running under. It again
Speaker 1: in my world, with excess supply, they are likely to
Speaker 1: prove to be correct. You know, we had a big
Speaker 1: downward draft and inflation due to COVID. Now we're having
Speaker 1: a big response back up due to the vaccine being
Speaker 1: more important than the virus, and that tends to drive
Speaker 1: the price is higher. What the FED is concerned about
Speaker 1: is they want to see real increases in compensation costs
Speaker 1: to drive a sustained move upwards in prices so that
Speaker 1: they could be assured prices are going to be at
Speaker 1: that too slightly higher level on a sustained basis. So
Speaker 1: not until they see that happen are they going to
Speaker 1: change their view. Uh. And they believe they need to
Speaker 1: get to maximum and ploy should say full employment to
Speaker 1: get to that view. And clearly, if you believe the
Speaker 1: SEP where they think the long term trend in the
Speaker 1: unemployment rate is four percent and you're at six point
Speaker 1: one percent after the April data, they feel they've got
Speaker 1: a long way to go before those conditions will be
Speaker 1: in place. Now from my perspective, the stimulus, the monetizing,
Speaker 1: the debt all are important factors pushing up on inflation.
Speaker 1: But by the same token, global access supply is a
Speaker 1: big force pushing down on inflation, and the net net
Speaker 1: is I think we're probably going to get back to
Speaker 1: a sustained two percent rise in inflation, But I don't
Speaker 1: think we'd get substantially higher than that. Well, Steve, you know,
Speaker 1: when you think about obviously wage inflation, that needs to
Speaker 1: be there a big driver. Um, But you could argue
Speaker 1: that the uh, everything is in place to get some
Speaker 1: real wage inflation. Everywhere you go down the street there
Speaker 1: are you know, help wanted signs in there. It looks
Speaker 1: like if you want to get people off their couches
Speaker 1: and back in the workforce, you're going to have to
Speaker 1: raise wages, perhaps significantly. Are you concerned about that? Well, again,
Speaker 1: you're given the unemployment compensation benefits that are being provided.
Speaker 1: It is certainly said a much higher threshold for low
Speaker 1: wage jobs to come into the marketplace. And not only
Speaker 1: do you have to match that wage, but when you
Speaker 1: consider if I could get that wage and not have
Speaker 1: to go to work, you're gonna have to pay me
Speaker 1: some something even more than that to get me to
Speaker 1: actually come into work. So the net result is they
Speaker 1: will look at even this upward movement in wages as
Speaker 1: a result of the compensation costs as a temporary consideration.
Speaker 1: It will be a one time adjustment upwards in the
Speaker 1: cost of living, and that's what they're looking at their
Speaker 1: betting on that one time adjustment. Not a move we've
Speaker 1: been talking that's why they're focusing on maximum employment. Sime. No,
Speaker 1: that's fine. We've been talking about that all morning. I
Speaker 1: think it's really profound. But do we get a one
Speaker 1: time adjustment in boom economy? What is your reframe? I mean,
Speaker 1: I guess you got away for retail sales Friday, but
Speaker 1: I get it. We're in a boom economy and then
Speaker 1: we get another ninety days of a sort of kind
Speaker 1: of like boom economy. What's the SHOOTO taken on Q three,
Speaker 1: Q four, Q one two. I love saying that. I
Speaker 1: sound like it's so fancy. Richardo would throw me off
Speaker 1: the stage. Q one two twenty two, Steve, what's it
Speaker 1: looked like? Yeah, the economy by three on average will
Speaker 1: be back to two to two and a quarter percent growth.
Speaker 1: All right. Everything they're doing is transitory in terms of
Speaker 1: its transfer payments. It's not leading to real productive growth
Speaker 1: in the economy, and therefore we're going to get back
Speaker 1: to a more shallow growth trajectory. You keep on providing
Speaker 1: steamullis out of you, you're gonna keep on being able
Speaker 1: to drive it up temporarily. But once you get to
Speaker 1: the point where they aren't get any more stimulus down
Speaker 1: the pipeline, out of the balance power changes in Washington
Speaker 1: or whatever, we're gonna be right back to an economy
Speaker 1: that grows at two to two and a quarter percent.
Speaker 1: It's just a question of where we are in the
Speaker 1: labor market. By tom we get there, all right. So
Speaker 1: one of the questions I have is when is transitory
Speaker 1: not transitory? Is it one month, two months, three months?
Speaker 1: Can we get back to V shaped exactly? I mean,
Speaker 1: when should we get concerned or when do you think
Speaker 1: more importantly, the Fed will say, oh boy, our transitory
Speaker 1: call may not be the right one. As we approach
Speaker 1: two that's when you begin to see if these things
Speaker 1: haven't worked their way through the system this year. Given
Speaker 1: the growth numbers everybody, I mean, my number at five
Speaker 1: point nine percent for growth for this year is kind
Speaker 1: of on the low end of street expectations. And then
Speaker 1: people are looking at it, you know, another four percent
Speaker 1: type growth next year. So the reality is you have
Speaker 1: to get into two UM and that's when they're going
Speaker 1: to begin looking at this and saying, okay, is this sustainable?
Speaker 1: Is this not sustainable? Have these pressures been one time?
Speaker 1: Have they been transitory? You're not. The presumption is that
Speaker 1: the vaccine will become more important than the virus in
Speaker 1: a lot of our trading partners at that point in time,
Speaker 1: and again that global excess supply thing will come back
Speaker 1: in a vengeance and wind up dampening prices. Keep them
Speaker 1: on a lot of what we're seeing here, or adjustments
Speaker 1: and things like hotel rates and airfairs. You know, how
Speaker 1: long is it going to be prayer lines start bringing
Speaker 1: more planes back onto the market. You know, this is
Speaker 1: the kind of thing. It takes time to ramp these
Speaker 1: things up, and that's what they're betting on. So you
Speaker 1: have to get into two, which is a long way
Speaker 1: away from here. We're only in may See. Thank you
Speaker 1: so much, Stephen. We should have brilliant with the zoo
Speaker 1: there as well. This is the Bloomberg Surveillance Podcast. Thanks
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