WEBVTT - Bloomberg Surveillance: Mission Accomplished 0:00:05.080 --> 0:00:07.200 This is the Bloomberg Surveillance Podcast. 0:00:07.680 --> 0:00:08.280 I'm Lisa A. 0:00:08.320 --> 0:00:11.640 Bromoids, along with Tom Keen and Jonathan Ferrow. Join us 0:00:11.680 --> 0:00:15.280 each day for insight from the best in economics, geopolitics, 0:00:15.320 --> 0:00:19.480 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:19.600 --> 0:00:22.840 Spotify and anywhere you get your podcasts, and always on 0:00:22.880 --> 0:00:26.440 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:26.640 --> 0:00:27.200 What gives? 0:00:27.400 --> 0:00:29.280 Let's ask that question to Michael Gabin, head of US 0:00:29.360 --> 0:00:32.279 Economics at Bank of America Securities. Michael, what is your 0:00:32.320 --> 0:00:35.560 reaction given the fact that markets seem to be a 0:00:35.560 --> 0:00:38.840 little put off by consistently disinflationary data. 0:00:40.159 --> 0:00:41.839 I think the market's head well first of fall. Good 0:00:41.840 --> 0:00:44.600 morning Lisa and Katie, thanks for having me on. I 0:00:44.600 --> 0:00:48.800 think markets had priced this in already. With the CPI 0:00:49.040 --> 0:00:51.000 data in hand and the PPI data in the hand, 0:00:51.000 --> 0:00:54.000 we can make a pretty good projection of where PCE 0:00:54.400 --> 0:00:56.720 should come in. And we did expect the headline to 0:00:56.720 --> 0:00:58.480 be down in tenth in the core to only be 0:00:58.560 --> 0:01:01.760 up at ten. So this number really wasn't a surprise 0:01:01.880 --> 0:01:05.319 to us. And if you do the implied CPI forecast 0:01:05.360 --> 0:01:09.480 from market prices, they're looking for pretty soft inflation over 0:01:09.520 --> 0:01:11.280 the next three to six months, so I think that 0:01:11.319 --> 0:01:14.399 the market had largely priced in this number, as we 0:01:14.480 --> 0:01:17.520 all know they're looking for about twice as many cuts 0:01:17.520 --> 0:01:20.680 this year as the FED has planned, So I think 0:01:20.680 --> 0:01:23.199 this was a status quo number for markets. 0:01:22.959 --> 0:01:25.560 That might be status quo. The durable goods orders, as 0:01:25.600 --> 0:01:28.480 Katie pointed out, not so much. It came in significantly 0:01:28.520 --> 0:01:30.800 higher than expected, and I wonder if on the margins 0:01:30.800 --> 0:01:34.880 there's some anxiety that it seems sort of incompatible that 0:01:34.920 --> 0:01:39.280 we get ongoing better than expected growth while still seeing 0:01:39.319 --> 0:01:41.760 that disinflation that everyone's been hoping for. 0:01:42.840 --> 0:01:45.560 Yeah, there's certainly a limit to that, right, So, so far, 0:01:45.640 --> 0:01:49.720 the narratives is that the economy can cool, growth can 0:01:49.760 --> 0:01:54.480 remain modest or moderate but away from recession, and we 0:01:54.560 --> 0:01:57.840 can experience both moderate growth and disinflation at the same time. 0:01:57.920 --> 0:02:01.280 That's our view. I think that's the FEDS view for sure, 0:02:02.320 --> 0:02:04.680 and why they've shifted to say a more balanced reaction 0:02:04.760 --> 0:02:07.640 function between bringing inflation down and wanting to support a 0:02:07.680 --> 0:02:10.000 soft landing. But you're right, there's a limit to that. 0:02:10.040 --> 0:02:13.120 There is a risk to shifting to a doubvish stance 0:02:13.880 --> 0:02:16.520 now coming out of the December meeting and tilting the 0:02:16.520 --> 0:02:20.200 outlook towards rate cuts because markets have reacted quite quickly 0:02:20.240 --> 0:02:23.560 and financial conditions have ease. So the risk is that 0:02:23.639 --> 0:02:26.800 maybe you gin things up too much and you don't 0:02:26.800 --> 0:02:29.400 make as much progress as you want on the inflation front. 0:02:29.480 --> 0:02:32.360 So no free lunch in that regard. We think the 0:02:32.400 --> 0:02:34.640 Fed's in a good spot. We do think rate cuts 0:02:34.639 --> 0:02:38.040 are coming, but you make a good point, too much 0:02:38.160 --> 0:02:41.480 easing too much using in financial conditions could ultimately mean 0:02:41.960 --> 0:02:45.280 inflation is stickier to come down, or maybe even rises 0:02:45.320 --> 0:02:47.240 a little bit and kind of puts off some of 0:02:47.240 --> 0:02:49.200 these rate cuts that the market is expecting. 0:02:49.400 --> 0:02:51.760 Well, let's talk about just the magnitude of the rate 0:02:51.800 --> 0:02:54.200 cuts that the market is expecting. Of course, one hundred 0:02:54.200 --> 0:02:57.840 and fifty bases points price into next year, a big 0:02:57.880 --> 0:02:59.880 goalf between that and what we saw on the dot plot, 0:03:00.160 --> 0:03:03.280 just seventy five basis points of cuts penciled. And when 0:03:03.320 --> 0:03:05.840 you take in totality what we learned today, when it 0:03:05.880 --> 0:03:09.200 comes of course to PCE, to personal income, to spending 0:03:09.240 --> 0:03:12.560 and of course those durable goods orders, where does this 0:03:12.720 --> 0:03:15.400 land in terms of what the market is expecting. Do 0:03:15.520 --> 0:03:19.919 those six rate cuts look justified at this juncture. 0:03:21.360 --> 0:03:24.680 I think the inflation data certainly support the idea that 0:03:24.720 --> 0:03:28.040 the FED can start in March. So assuming the data 0:03:28.040 --> 0:03:31.680 flow trends in the way that it has, with a 0:03:31.680 --> 0:03:34.280 lot of evidence of disinflation and modest growth but a 0:03:34.320 --> 0:03:37.680 cooling economy, we do think rate cuts can start in 0:03:37.720 --> 0:03:40.360 March a little earlier than the FED things. We would say, 0:03:41.040 --> 0:03:43.520 you know, curb your enthusiasm a bit for one hundred 0:03:43.520 --> 0:03:45.920 and fifty or maybe more rate cuts over the course 0:03:46.200 --> 0:03:49.080 of the year, because we do think inflation will be 0:03:49.120 --> 0:03:52.640 a little more slower to come down. So we agree 0:03:52.680 --> 0:03:56.280 on the start earlier than later. But our view is 0:03:56.320 --> 0:03:58.320 you get about one hundred basis points of cuts, so 0:03:58.640 --> 0:04:00.560 the market may need to reprice some of these as 0:04:00.600 --> 0:04:01.480 the data comes. 0:04:01.280 --> 0:04:04.440 In, So okay, maybe that process back to target will 0:04:04.440 --> 0:04:07.560 be slower than expected. Compare that to what we heard 0:04:07.560 --> 0:04:10.400 from Jerome Pell last week. He said that he was 0:04:10.480 --> 0:04:13.600 reluctant to say that the last mile of this inflation 0:04:13.720 --> 0:04:18.159 fight will be more difficult. Is that your expectation or 0:04:18.279 --> 0:04:22.600 just slower than expected sort of imply there's some pain ahead. 0:04:23.760 --> 0:04:26.599 No, I would agree that at least, you know, again, 0:04:26.680 --> 0:04:29.200 the composition of the data flow that we've been seeing, 0:04:29.839 --> 0:04:33.080 I think suggests we can enjoy modest growth and disinflation, 0:04:33.600 --> 0:04:35.919 and it does suggest that the last mile may not 0:04:36.080 --> 0:04:40.200 be overly difficult. Right, So that does come from supply 0:04:40.279 --> 0:04:44.080 side effects, both on goods and on services, where reemployment 0:04:44.480 --> 0:04:47.960 has really helped increase services outputs. That we're getting a 0:04:48.000 --> 0:04:51.040 supply side effect there. As everyone knows, core goods have 0:04:51.120 --> 0:04:53.839 been falling for six months. So we'll see if things 0:04:53.880 --> 0:04:57.040 like shipping issues out of the red seat change that narrative. 0:04:57.600 --> 0:05:00.320 But otherwise, the last three to six months worth of 0:05:00.400 --> 0:05:03.440 data suggests maybe we can you know, it's more likely 0:05:03.480 --> 0:05:06.120 than not that we can get down to two percent 0:05:06.240 --> 0:05:11.240 consistent outcomes without needing to generate significant pain in labor markets, 0:05:11.400 --> 0:05:14.200 which would be a great outcome for the FED, the 0:05:14.360 --> 0:05:17.120 you know, the average US household and the average US business. 0:05:16.960 --> 0:05:19.200 It would be a great outcome for the economy. 0:05:19.320 --> 0:05:20.720 Well, I want to talk about that a little bit 0:05:20.720 --> 0:05:23.600 more because inflation has been an enemy number one from 0:05:23.600 --> 0:05:26.839 the Fed's perspective for really the last couple of years now. 0:05:26.880 --> 0:05:29.440 But now as we continue to get this march lower 0:05:29.640 --> 0:05:32.400 when it comes to some of these figures. Does the 0:05:32.400 --> 0:05:35.760 Fed's focus shift here, do they start paying more attention 0:05:36.240 --> 0:05:40.040 to economic growth, to the labor market, et cetera. 0:05:41.160 --> 0:05:44.040 Yeah, I still think inflation bringing inflation down as the 0:05:44.120 --> 0:05:46.680 number one goal, given where inflation's been where it is, 0:05:46.839 --> 0:05:51.320 and you know the Fed's internal consistency about, hey, we 0:05:51.400 --> 0:05:55.320 really control inflation. We set that long run inflation objective. 0:05:55.360 --> 0:05:59.039 We determine long run inflation outcomes. So that's it's kind 0:05:59.040 --> 0:06:00.839 of you know, it's in their blood, so to speak, 0:06:00.839 --> 0:06:03.279 and in their DNA. So I still think that's issue 0:06:03.400 --> 0:06:06.720 number one, But a very close issue number two, if 0:06:06.760 --> 0:06:09.400 not closer to balanced, is hey, I think we can 0:06:09.480 --> 0:06:12.520 soft land this economy. We don't need to generate as 0:06:12.600 --> 0:06:14.920 much pain in labor markets as we thought we might 0:06:15.040 --> 0:06:16.880 have had to do six to nine months ago, so 0:06:16.960 --> 0:06:19.880 we should keep an eye out for that. So yes, 0:06:20.080 --> 0:06:22.960 it does make an argument that one of the reasons 0:06:23.000 --> 0:06:25.120 why the market has so many cuts priced in is 0:06:26.240 --> 0:06:28.920 both of those cases moving to a more balanced reaction 0:06:29.040 --> 0:06:32.920 function in an environment where the economy is cooling and 0:06:33.040 --> 0:06:35.960 inflation is flowing, that just increases the odds you're likely 0:06:36.000 --> 0:06:37.800 to get rape cuts. So I think the market is 0:06:37.880 --> 0:06:39.839 listening to that message. 0:06:39.360 --> 0:06:43.120 Michael, what's the gap between just weakening that is good 0:06:43.240 --> 0:06:46.000 and weakening that is bad? And I ask this because 0:06:46.080 --> 0:06:50.040 I'm trying to still understand the language at the cfo's 0:06:50.080 --> 0:06:52.960 office at Nike when they said that demand is cooling 0:06:53.160 --> 0:06:56.560 faster than they expected, revised downwards some of their expectations 0:06:56.600 --> 0:07:00.400 for sales, talked about cutting jobs. Is this something that 0:07:00.520 --> 0:07:04.800 is just an idiosyncratic business overlaid with a weakening economy 0:07:04.839 --> 0:07:07.919 in a good sense, or is this potentially something bad? 0:07:09.279 --> 0:07:09.479 Yeah? 0:07:09.720 --> 0:07:12.280 I think I would put that narrative probably inside the 0:07:12.360 --> 0:07:16.160 you know, the rotation story away from goods purchases back 0:07:16.160 --> 0:07:19.720 to services. The good side of the economy. The manufacturing 0:07:19.760 --> 0:07:21.600 sector has been kind of on the edge, if not 0:07:21.720 --> 0:07:25.680 in a mild recession for some time now, at least 0:07:25.680 --> 0:07:29.160 in terms of you know, production and inventory adjustment and 0:07:29.200 --> 0:07:31.240 so forth. So I think the good side of the 0:07:31.240 --> 0:07:36.160 economy is reacting in part to that rotation story. What 0:07:36.320 --> 0:07:39.400 still looks pretty solid is activity and employment on the 0:07:39.440 --> 0:07:41.640 services side of the ledger, which is, you know, two 0:07:41.720 --> 0:07:44.960 thirds or more of outputs. So I think, you know, 0:07:45.080 --> 0:07:47.920 the to use your phrasing the quote goods slowing and 0:07:47.960 --> 0:07:51.600 cooling is about the rotation story, the end of the 0:07:51.600 --> 0:07:56.200 COVID reopening impulse. Things should naturally slow down anyway. We 0:07:56.320 --> 0:07:58.560 need to provide an environment for the economy to do 0:07:58.600 --> 0:08:01.680 that while we bring inflation down without tamping on the 0:08:01.680 --> 0:08:04.040 brakes too hard. So you're right, there's a fine line 0:08:04.080 --> 0:08:07.320 between slowing that we think should happen as a result 0:08:07.360 --> 0:08:11.400 of a very unusual pandemic driven cycle and oops, we've 0:08:11.400 --> 0:08:15.440 got the monetary policy setting calibrated incorrectly. It's too tight. 0:08:15.520 --> 0:08:17.160 We have to back out of it more quickly. 0:08:17.280 --> 0:08:20.280 Does anything about the services inflation concern you, given the 0:08:20.320 --> 0:08:22.680 fact that it still is running above which you would 0:08:22.680 --> 0:08:24.720 expect for two percent consistent inflation. 0:08:25.800 --> 0:08:28.640 Yeah, certainly. Shelter and kind of the structural issues in 0:08:28.680 --> 0:08:31.840 the housing market without a lot of supply and inventory 0:08:31.880 --> 0:08:36.640 and available homes to contract for sale or purchase. So 0:08:36.760 --> 0:08:39.840 the shelter story, shelter is moderating. It is coming down, 0:08:39.880 --> 0:08:42.160 but it's coming down more slowly than our models would 0:08:42.160 --> 0:08:45.120 have suggested, So we think that there's stickiness there, and 0:08:45.200 --> 0:08:49.000 even non shelter services inflation has been more sticky. So 0:08:49.040 --> 0:08:50.959 this is where we would say, maybe you know, curb 0:08:50.960 --> 0:08:54.640 your enthusiasm. We have inflation for PCE coming down to 0:08:54.679 --> 0:08:56.440 around two and a half year and near by the 0:08:56.559 --> 0:08:59.760 end of this year where market implied pricing is closer 0:08:59.760 --> 0:09:03.720 to so it's easy to see how a stickier inflation 0:09:03.920 --> 0:09:06.400 path could mean some of these rate cuts are not realized. 0:09:06.880 --> 0:09:13.200 Michael Gape in a Bank of America security, joining us 0:09:13.200 --> 0:09:15.240 now as someone who's gotten it right all year at 0:09:15.320 --> 0:09:17.839 your Denny, president of your Denny Research called for the 0:09:17.920 --> 0:09:21.959 Roaring twenties, is leaning into that now talking about disinflation, 0:09:22.120 --> 0:09:24.719 we're seeing it now. What keeps you up at night, ed, 0:09:24.800 --> 0:09:26.880 considering that so far you've gotten a lot of things 0:09:26.960 --> 0:09:28.840 very right, Well, I've. 0:09:28.679 --> 0:09:31.600 Been sleeping pretty well quite honestly, I guess I do 0:09:31.640 --> 0:09:36.000 worry about the Middle East, the geopolitical situation, the fog 0:09:36.040 --> 0:09:39.480 of war. You never know how things unfold once a 0:09:39.559 --> 0:09:43.760 war starts, and we have this fairly contained localized war 0:09:44.679 --> 0:09:48.440 in Gaza, and that the risk is that it becomes 0:09:48.480 --> 0:09:51.280 a regional war and it affects the price of oil. 0:09:51.360 --> 0:09:54.280 But so far, the price of oil has been telling me, 0:09:54.400 --> 0:09:57.200 telling me that there's not going to be a regional 0:09:57.240 --> 0:09:59.840 war going on here anytime soon. 0:10:00.080 --> 0:10:02.480 So putting aside some of those tail risks, is the 0:10:02.559 --> 0:10:06.520 risk in your mind that people aren't bullish enough, considering 0:10:06.559 --> 0:10:09.800 that everyone's been upping their expectations for end of the 0:10:09.880 --> 0:10:12.840 year targets, but we're catching up to it really quick 0:10:12.840 --> 0:10:14.760 already it hasn't even been the end of the year. 0:10:15.559 --> 0:10:18.120 Yeah, I think that's true. At the beginning of the year, 0:10:18.160 --> 0:10:21.360 I was talking about forty six hundred, that wasn't bullish enough. 0:10:21.400 --> 0:10:24.120 We're already above that for the end of this year, 0:10:24.200 --> 0:10:27.120 and then I'm looking for fifty four hundred next year, 0:10:27.160 --> 0:10:30.520 and now there's more people talking about over five thousand, 0:10:31.120 --> 0:10:34.200 and then for twenty twenty five, I'm talking about six thousand. 0:10:34.320 --> 0:10:38.280 So I think I'm bullish enough. I don't think things 0:10:38.280 --> 0:10:40.520 can get much better than that. So that's kind of 0:10:40.559 --> 0:10:43.360 at the top end of the scale on an optimism 0:10:43.440 --> 0:10:46.200 I think. But I think in the near term here 0:10:46.440 --> 0:10:50.520 we've got everybody seems to be too happy, at least 0:10:50.520 --> 0:10:53.040 in terms of the sentiment indicators. So that's on a 0:10:53.080 --> 0:10:55.240 near term basis. I don't lose any sleep over it, 0:10:55.280 --> 0:10:56.120 but I do watch it. 0:10:56.640 --> 0:10:58.880 And with only what a week or so left until 0:10:59.000 --> 0:11:01.680 twenty twenty four, the fact that everyone is maybe too 0:11:01.720 --> 0:11:04.480 happy right now? Is that why you haven't boosted your 0:11:04.559 --> 0:11:06.839 year end target for this year? I believe that was 0:11:06.880 --> 0:11:09.680 at forty six hundred, and we're pretty firmly above that 0:11:09.760 --> 0:11:10.079 right now. 0:11:10.240 --> 0:11:10.320 Ed. 0:11:10.600 --> 0:11:13.480 Yeah, well, you know, I don't find you in my 0:11:14.080 --> 0:11:18.199 forecast that much because we are, as you said, we're 0:11:18.240 --> 0:11:20.760 only a week away, So what's the point of getting 0:11:20.760 --> 0:11:25.320 cute about it? Instead? I did talk. I am talking 0:11:25.360 --> 0:11:27.960 about fifty four hundred by the end of next year 0:11:28.000 --> 0:11:31.600 and six thousand after that, So that just puts me 0:11:31.600 --> 0:11:34.520 in the bullish camp pretty clearly. Yeah. 0:11:34.559 --> 0:11:36.600 If I, of course had to put out these forecasts, 0:11:36.600 --> 0:11:39.160 I think I'd revise on like December thirtieth every year 0:11:39.160 --> 0:11:41.440 and just nail it every single time. But I do 0:11:41.520 --> 0:11:44.000 want to talk a little bit about twenty twenty five 0:11:44.040 --> 0:11:47.480 because six thousand is a staggering number and twenty twenty 0:11:47.480 --> 0:11:51.280 five feels very very far away. What is the work 0:11:51.320 --> 0:11:53.080 that gets you there and how do you project that 0:11:53.200 --> 0:11:55.319 with a certain degree of confidence. 0:11:56.200 --> 0:12:00.920 Well, first, on a short term basis, looks like there's 0:12:00.960 --> 0:12:04.440 still some what I call die hard heard Landers who 0:12:04.520 --> 0:12:06.400 think that we're going to have a recession next year. 0:12:06.960 --> 0:12:09.520 I've been talking about a rolling recession for the past 0:12:09.600 --> 0:12:12.880 two years, and I think in the in the next 0:12:12.880 --> 0:12:16.400 two years we'll have rolling recoveries. Clearly, we're starting to 0:12:16.400 --> 0:12:19.360 see a rolling recovery in the housing market. I think 0:12:19.400 --> 0:12:24.200 we've bottomed in terms of retail merchandise. A lot of 0:12:24.440 --> 0:12:27.560 inventories pile up now. I think consumers are going to 0:12:27.640 --> 0:12:30.160 go back next year and buy some goods in addition 0:12:30.200 --> 0:12:30.880 to services. 0:12:31.280 --> 0:12:31.800 And I think. 0:12:31.679 --> 0:12:36.520 Commercial real estate will be in a rolling recession in 0:12:36.559 --> 0:12:38.920 this coming year, but then beyond that, I think there 0:12:38.920 --> 0:12:43.200 will be a recovery. So I think that's the way 0:12:43.240 --> 0:12:45.600 I look at the business cycle is sort of spread out. 0:12:46.240 --> 0:12:49.760 Most importantly, I think we've got a labor shortage, significant 0:12:49.880 --> 0:12:54.200 chronic labor shortage, and I think companies will use technology 0:12:54.240 --> 0:12:58.360 to increase productivity dramatically. Right now, we're averaging about one 0:12:58.440 --> 0:13:01.520 point eight percent over the past five years. I think 0:13:01.720 --> 0:13:03.280 by the end of the decade we'll be looking at 0:13:03.280 --> 0:13:04.800 three and a half to four and a half percent, 0:13:05.520 --> 0:13:09.520 which sounds far fetched, if not illusional, I admit, but 0:13:10.080 --> 0:13:13.840 that's the way productivity boom cycles have gone in the past. 0:13:14.320 --> 0:13:15.320 This one should do the same. 0:13:15.720 --> 0:13:16.640 Does it worry you at all? 0:13:16.679 --> 0:13:19.319 And I realized the anecdotes can't tell entire stories, and 0:13:19.360 --> 0:13:21.959 you can extrapolate out an entire research paper for one 0:13:22.080 --> 0:13:24.360 particular example. But let's take a look at Nike. They 0:13:24.400 --> 0:13:25.680 came out and they said that they're going to be 0:13:25.679 --> 0:13:28.120 cutting workers, They're going to be having cost cuts, and 0:13:28.160 --> 0:13:30.920 it is because, yes, they are working down their inventory, 0:13:30.960 --> 0:13:33.000 but because of weakness and weakness that they expect to 0:13:33.000 --> 0:13:36.360 continue going forward. Does that kind of contradict some of 0:13:36.400 --> 0:13:39.120 your optimism about the recovery and the retail space. 0:13:39.320 --> 0:13:41.320 Yeah, well, that's a good point, and that's why I 0:13:41.320 --> 0:13:44.760 think a lot of forecasters have missed the past couple 0:13:44.800 --> 0:13:48.000 of years and had this attitude that or view that 0:13:48.160 --> 0:13:50.960 the only way inflation could come down in the United 0:13:50.960 --> 0:13:54.679 States is if we have a recession. You mentioned the 0:13:54.960 --> 0:13:59.679 phrase immaculate disinflation, and I think that's what we've had. 0:13:59.800 --> 0:14:02.600 We've had inflation come down without a recession. And the 0:14:02.679 --> 0:14:05.440 reason for that is because the Chinese and the Europeans 0:14:05.440 --> 0:14:08.080 have done us a great favor. They've had the recession 0:14:08.559 --> 0:14:12.840 so on a global basis, particularly China has been exporting deflation. 0:14:13.440 --> 0:14:15.640 Their PPI is down on a year over year basis, 0:14:15.640 --> 0:14:18.120 even their CPI is down a little bit on a 0:14:18.200 --> 0:14:20.600 year over year basis. So I think the United States 0:14:21.160 --> 0:14:27.040 is going to benefit from the recession the property depression 0:14:27.480 --> 0:14:29.760 in China for a long time in terms of having 0:14:29.800 --> 0:14:32.240 a low inflation and I think Year of starts to 0:14:32.400 --> 0:14:35.520 recover from its shallow recession next year, which will help 0:14:35.600 --> 0:14:36.880 us on the export side. 0:14:37.520 --> 0:14:40.320 And let's bring this conversation to the bond market, because 0:14:40.840 --> 0:14:43.640 the reversal that we've seen there has been stunning, and 0:14:43.680 --> 0:14:45.440 of course you've done a lot of great work on 0:14:45.520 --> 0:14:49.120 deficits what that means for bonds and the demand for bonds, 0:14:49.200 --> 0:14:51.720 and it felt like for a while maybe the bond 0:14:51.760 --> 0:14:56.400 vigilantes were reappearing. Why did deficit concern seem to fall 0:14:56.440 --> 0:14:57.120 off the radar. 0:14:57.880 --> 0:15:01.800 Yeah, I've had the point of view for many years 0:15:01.840 --> 0:15:04.720 that I'll care about the deficit when the bond market 0:15:04.720 --> 0:15:07.520 cares about the deficit, and the past supply really hasn't 0:15:07.520 --> 0:15:10.040 been much of a problem because you get the biggest 0:15:10.040 --> 0:15:13.520 supply in recessions. When interest the Fed was cutting interest rates, 0:15:13.960 --> 0:15:16.200 we had this brief period where the bond vigilani is 0:15:16.280 --> 0:15:21.320 saddled up and started to move on concerns of fiscal excesses, 0:15:21.800 --> 0:15:25.680 and that period didn't last very long. Basically, from August 0:15:25.680 --> 0:15:30.560 to October we saw this monstrous increase in the tenure 0:15:30.640 --> 0:15:32.880 bond deal from basically four and a quarter percent to 0:15:32.960 --> 0:15:35.880 five percent, and here we are back below four percent. 0:15:36.440 --> 0:15:39.280 I think, you know, there's an expression, don't fight the Fed. 0:15:39.920 --> 0:15:42.080 Maybe we should also say don't fight Janet Yale. And 0:15:42.200 --> 0:15:45.440 now that she's a treasury because she was very cleverly 0:15:45.480 --> 0:15:49.600 cut back on the supply of long term bonds and 0:15:49.680 --> 0:15:52.760 notes and issued a lot of bills and the bond 0:15:52.800 --> 0:15:54.480 Vigilani said, Oh, if that's the way you're going to 0:15:54.520 --> 0:15:56.600 play the game, we can live with that. Meanwhile, I 0:15:56.600 --> 0:15:59.120 think the big story has been how inflation has come down. 0:15:59.160 --> 0:16:01.600 I mean, it's been only the past couple of months 0:16:01.600 --> 0:16:04.000 that the consensus really has become that we can't have 0:16:04.800 --> 0:16:09.320 immaculate this inflation. Even that Chair palin As press conference 0:16:09.680 --> 0:16:12.720 seemed to indicate that, you know what, we may actually get. 0:16:12.520 --> 0:16:15.640 It, and everybody let out a collective cheer. And you 0:16:15.720 --> 0:16:18.560 still hear that cheer today at your of your Dunny Research. 0:16:28.760 --> 0:16:31.600 Kim Wallace, head of Washington Policy Research at twenty twenty 0:16:31.600 --> 0:16:35.560 twenty two v Research, joining us here in studio for 0:16:35.640 --> 0:16:38.760 the holiday party for the holiday spirit fordy York City. 0:16:38.800 --> 0:16:39.880 Thank you so much for being with us. 0:16:39.920 --> 0:16:40.640 We really appreciate it. 0:16:40.760 --> 0:16:41.720 Morning, happy to be here. 0:16:41.800 --> 0:16:44.680 Good morning. I know that you put out an outlook 0:16:44.760 --> 0:16:46.880 for what to expect in twenty twenty four, and I 0:16:46.880 --> 0:16:50.000 want to start an industrial policy hinging off the latest 0:16:50.040 --> 0:16:52.840 news of US steel and some of the administration pushback 0:16:53.080 --> 0:16:57.920 to a Japanese conglomerate purchasing the largest steelmaker in the country. 0:16:58.560 --> 0:17:00.480 Well, you know, there's a lot of now's that will 0:17:00.480 --> 0:17:04.320 go into the ultimate reaction from the administration. Obviously, the 0:17:04.359 --> 0:17:07.040 Committee on Foreign Investment in the US will investigate the 0:17:07.080 --> 0:17:09.919 proposed merger. But when you break it down, the promise 0:17:10.000 --> 0:17:13.040 is made by Nipon probably upset a few people in 0:17:13.080 --> 0:17:15.879 the political side, but don't in my view at least 0:17:16.080 --> 0:17:19.439 imply disruption to the production of steel in the US. 0:17:19.800 --> 0:17:23.800 The deal proposes to combine globally number four and number 0:17:23.880 --> 0:17:27.240 twenty seven. So the first question for the competition policy 0:17:27.280 --> 0:17:30.400 reviewers is is it a global market you're defining when 0:17:30.440 --> 0:17:33.320 you review the deal of the national market. My sense 0:17:33.400 --> 0:17:35.440 is it'll be a global market. And if that's the case, 0:17:35.720 --> 0:17:38.680 we look at Japan as a strategic partner. It's difficult 0:17:38.680 --> 0:17:41.240 to imagine that if Japan can't close the deal like this, 0:17:41.600 --> 0:17:43.359 that anyone can close the deal like this. 0:17:43.600 --> 0:17:46.119 Do you think the Biden administration has been consistent with 0:17:46.240 --> 0:17:50.000 industrial policy? On one hand, talking about America first in 0:17:50.040 --> 0:17:54.480 some ways and talking about unionization, but not necessarily celebrating 0:17:54.520 --> 0:17:57.080 the fact that the United States is pumping a record 0:17:57.119 --> 0:17:59.200 amount of oil, which is really offset a lot of 0:17:59.200 --> 0:18:01.240 the prices, and kept gasoline low. 0:18:01.560 --> 0:18:03.679 I think they've been as consistent as you can be 0:18:03.760 --> 0:18:07.320 as a policymaker in this environment. A couple of points there. First, 0:18:07.359 --> 0:18:10.440 we have started from a very low point in industrial 0:18:10.480 --> 0:18:13.520 production and manufacturing. We gave away that base in the 0:18:13.600 --> 0:18:16.639 nineties in the first part of this century. Reclaiming it 0:18:16.680 --> 0:18:19.480 is going to take a long time. The report that 0:18:19.520 --> 0:18:22.480 the National Economic Council and the National Security Council put 0:18:22.520 --> 0:18:26.280 out in June of twenty twenty one quantified how far 0:18:26.359 --> 0:18:29.760 back the US is. The President then sought to make 0:18:29.840 --> 0:18:32.119 up a gap there. Congress joined them. This has been 0:18:32.160 --> 0:18:37.440 a bipartisan effort, particularly in infrastructure. So we are way 0:18:37.440 --> 0:18:39.840 behind the ball when it comes to in the US 0:18:39.960 --> 0:18:44.199 when it comes to infrastructure, when it comes to chips, 0:18:44.240 --> 0:18:47.400 semit conductors. We have a long way to go. Deals 0:18:47.480 --> 0:18:50.480 like this have to be reviewed from all of those 0:18:50.520 --> 0:18:54.199 perspectives we talked about, but ultimately what's best for the 0:18:54.320 --> 0:18:57.679 US in terms of short term supplies and then longer 0:18:57.760 --> 0:19:00.800 term building out of the industrial base. That's part of 0:19:00.800 --> 0:19:05.399 the President's proposal in the Emergency selplemental almost sixty billion 0:19:05.440 --> 0:19:08.080 dollars for a defense industrial base, three billion of that 0:19:08.760 --> 0:19:10.560 to build more submarines. 0:19:11.040 --> 0:19:13.000 And you bring up chips, and that's where I want 0:19:13.040 --> 0:19:15.600 to go because you think about the US China relationship. 0:19:15.640 --> 0:19:17.639 Obviously still a lot of tensions. There are a lot 0:19:17.680 --> 0:19:20.400 of that playing out in the semiconductor arena. But when 0:19:20.440 --> 0:19:23.880 you look over the totality of twenty twenty three, how 0:19:23.880 --> 0:19:26.440 has the US China relationship evolved. 0:19:27.040 --> 0:19:31.399 It has stabilized and the optics are better against the 0:19:31.440 --> 0:19:35.959 backdrop of severe competition, competition across a lot of platforms, 0:19:35.960 --> 0:19:38.639 and that's not going to change. We see that almost daily. 0:19:38.680 --> 0:19:41.800 We saw it this week in critical minerals. And so 0:19:42.240 --> 0:19:44.560 when China decides that it's not going to allow the 0:19:44.640 --> 0:19:49.320 export of processing technology for critical minerals, that's a shot 0:19:49.359 --> 0:19:52.560 across the bow. It again points to a deficiency in 0:19:52.600 --> 0:19:57.359 the US industrial base and something that it's hard to 0:19:57.400 --> 0:19:59.119 make this political if you look at it from an 0:19:59.119 --> 0:20:01.960 economic standpoint. Of course people will make it political, but 0:20:03.280 --> 0:20:07.600 making up for the deficiency will require decades, not just years. 0:20:08.080 --> 0:20:10.840 Well, in the context of critical minerals and of course 0:20:11.080 --> 0:20:12.800 the news that we saw this week, both on that 0:20:12.800 --> 0:20:16.600 front and also that US steal nip On deal. You 0:20:16.680 --> 0:20:20.880 talked about Japan as a strategic ally here and when 0:20:20.920 --> 0:20:24.560 you think about the arena of critical mirror not miracles, 0:20:24.600 --> 0:20:28.160 minerals and of course the competition going on there, how 0:20:28.200 --> 0:20:31.600 important does that make Japan potentially other partners. 0:20:32.320 --> 0:20:35.520 It's that last part, Katie, potentially other partners. Japan is 0:20:35.560 --> 0:20:38.720 critically important. There is no Indo Pacific strategy which is 0:20:38.760 --> 0:20:42.240 important to this administration without Japan, and that goes back 0:20:42.240 --> 0:20:45.119 to my saying if Japan can't close deals, then no 0:20:45.160 --> 0:20:48.240 one can. But it's the other players. What we saw 0:20:48.280 --> 0:20:50.239 at the beginning of the APEC week that didn't get 0:20:50.280 --> 0:20:53.520 a lot of attention was a national security partnership signed 0:20:53.520 --> 0:20:58.880