Speaker 1: Let's get to our guest, Bill Lee, chief economist at
Speaker 1: Milken Institute. So given that that's those are the headlines, Bill,
Speaker 1: let me paint a slightly different picture here, that it's
Speaker 1: different this time and two very interesting dynamics. One, inflation
Speaker 1: maybe stickier than what we're used to, particularly because of
Speaker 1: all these bottlenecks we see in supply and a lot
Speaker 1: of things like Ukraine that are outside the Fed's control.
Speaker 1: And secondly, the recession might be very different too, in that,
Speaker 1: if indeed we are going into it, it's with a
Speaker 1: lot stronger job market than we're used to, and maybe
Speaker 1: maybe that means we can weather it better. Your thoughts, absolutely, Brian,
Speaker 1: I mean that that picture is exactly the picture that
Speaker 1: I have in my mind. Uh, this about of stipulation
Speaker 1: echoes the seventies, but it's nowhere near where what it
Speaker 1: was like before. It's going to take the FED quite
Speaker 1: a bit of effort to get rid of the inflation
Speaker 1: because it's we've been hit by so much on the
Speaker 1: supply side. The study from the San Francisco FET shows
Speaker 1: that about half of the inflation can be attributed to
Speaker 1: supply and about half from them demand. Actually a third
Speaker 1: a third and in between a third that's sort of mixed.
Speaker 1: And and because of these supply side elements that continue
Speaker 1: to get worse. I mean, after all, here we have
Speaker 1: shoot food shortages being caused by the cutoff of the
Speaker 1: wheat exports from the Ukraine. We just had an agreement
Speaker 1: that said, oh, we could resume food exports, especially to
Speaker 1: the starving emerging markets, and then all of a sudden,
Speaker 1: the port facilities in Odessa are bombed. Now that kind
Speaker 1: of supply shock, you know, you go crazy trying to
Speaker 1: forecast what's gonna happen to food inflation, um and similarly
Speaker 1: for for energy. So so I think these continued bounds
Speaker 1: of supply constraints, the fact that China doesn't really open
Speaker 1: because it keeps playing around with zero COVID policies, uh
Speaker 1: makes the the forecast of inflation for sure more persistent
Speaker 1: than anybody would have expected. And I think the FED
Speaker 1: causes so committed right now to putting inflation back to
Speaker 1: his two percent target, or at least on a clear
Speaker 1: path to two percent. It has to deal with the
Speaker 1: demand side. It has to weaken demand so much that
Speaker 1: it compensates for these continued supply side shocks. So Bill,
Speaker 1: that leads into the fact that we are expecting seventy
Speaker 1: five basis points this week. But what happens after that?
Speaker 1: In there forward guidance, did they continue with these really
Speaker 1: aggressive hikes or do they pull back? Well, Juliet I
Speaker 1: would have said, prior to the spring, because the FED
Speaker 1: has had become so wokeish and and and and emphasize
Speaker 1: so much the the spread of employment benefits, I would
Speaker 1: have said, they might blink. But right now the FED
Speaker 1: noses behind the curve. The FED knows as credibility is
Speaker 1: on the line, and it's going to go out of
Speaker 1: its way to to to keep policies tight and perhaps
Speaker 1: even tighter. I think a hundred basis points can be
Speaker 1: on the table. Um if inflation persists and and and
Speaker 1: gets even worse, and I think that's something that the
Speaker 1: markets are not ready for. I mentioned two parts. Um.
Speaker 1: You address the first part rather well, but the second part.
Speaker 1: It was basically that we have so many people employed,
Speaker 1: and we have more jobs than we have people to
Speaker 1: stick in them, that that maybe we're stronger and we
Speaker 1: handle it better this time. Do you want to refute
Speaker 1: that or not at all? Brian Bryant, If I would
Speaker 1: say double up on that. UM, I have never seen
Speaker 1: a recession start with the unemployment rate is three and
Speaker 1: a half percent UM. And not only that, I mean
Speaker 1: Paul talks about so many vacancies out for for the
Speaker 1: number of unemployed, and despite those vacancies, firms are not
Speaker 1: increasing the pace of hiring UM because they're looking for
Speaker 1: better workers. So there's a sort of like a micro
Speaker 1: economic dislocation in that labor market. People are are up
Speaker 1: upping the quality and and and and the workers themselves
Speaker 1: are looking for better jobs. So so I think everyone
Speaker 1: is looking for higher wage jobs and higher proctivity jobs.
Speaker 1: And I think the tightening by the FED may not
Speaker 1: result in the kind of pain and angst that we
Speaker 1: had in previous sessions because people are looking for better jobs,
Speaker 1: they're qualified for better jobs, and and and companies have
Speaker 1: invested in technology and changed their business models in a
Speaker 1: way that would allow workers to be more productive. So
Speaker 1: I think the combination of these factors makes the next
Speaker 1: recession much less painful than would have been in the past.
Speaker 1: And people have money to spend. I mean every where
Speaker 1: you go, and that's globally. Airports are packed. Restaurants are
Speaker 1: packed too, so in that sense of the consumer. How
Speaker 1: much does that custion a deeper recession. Well, Juliet, I
Speaker 1: think that shows sort of the huge split in our
Speaker 1: in our economy, the dual economies that we have a
Speaker 1: lot of people in the middle class and upper middle
Speaker 1: class have so much to spend. I mean, don't forget
Speaker 1: during during COVID, there was a shortage of pelotons. Now
Speaker 1: that a peloton, I'm sorry, is not a necessity of life,
Speaker 1: but there are so many people who are poor, uh,
Speaker 1: struggling day to day to try to make ends beat
Speaker 1: by buying gasoline and food and then asking myself, am
Speaker 1: I gonna be able to pay today this month's rent
Speaker 1: because the rent increase just came through. Um So, So
Speaker 1: I think that the dual economy shows that that the
Speaker 1: pain is being felt by a lot of people, even
Speaker 1: because even now because of these high prices and we
Speaker 1: don't have any layoffs yet. But but you're right, a
Speaker 1: lot of people have a lot of money to spend. Yeah,
Speaker 1: And I think the scenario that we've been talking about
Speaker 1: for most of this interview is it's sort of augers
Speaker 1: for muddling through. And if we're actually able to muddle through. Okay,
Speaker 1: then there's too much negativity around. Oh. In the financial markets,
Speaker 1: no doubt, and especially in the equity markets. If you
Speaker 1: look at the bond markets, I would say the Fed
Speaker 1: has regained his credibility. The break evens now are down
Speaker 1: to about two and a half five year break evens
Speaker 1: or two and a half percent, down from three and
Speaker 1: a half percent several months ago. So the bond markets
Speaker 1: are I think I have pricing in the belief that
Speaker 1: we are going to come back to target inflation fairly quickly.
Speaker 1: Now it could be because of the recession, but regardless
Speaker 1: that pricing in the kind of stability and inflation in
Speaker 1: a fairly rapid period of time. Equity markets have not
Speaker 1: gotten the message yet because we're well below where we
Speaker 1: were before. And in terms of what we kind of
Speaker 1: see with people trying to position what this kind of
Speaker 1: downturn will be, where do you see potential upside moves
Speaker 1: for equity mon It has to be in these high
Speaker 1: growth companies that have been so hard hit because of
Speaker 1: this fear of inflation, fear of high interest rates, and
Speaker 1: the fear that these companies would not be able to
Speaker 1: raise prices and have revenues in line with cost increases,
Speaker 1: I think of the coverage like Tesla have have shown
Speaker 1: over and over again they can raise prices as much
Speaker 1: as they want and and and maintain their profit margins. Now,
Speaker 1: the things that could kill them would be another shutdown
Speaker 1: in China which would completely shut off their production, and
Speaker 1: that they would have no revenues because they don't have
Speaker 1: any production, not because they don't have any ability to
Speaker 1: raise prices. All right, Bill, thanks very much for joining us.
Speaker 1: We've got to get you back here to Hong Kong
Speaker 1: sometime soon. Be sure to come into our studios when
Speaker 1: you do. Bill Lead, chief economists at Milken Institute, with
Speaker 1: us live here on Bloomberg Daybreak Asia