Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am
Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. Paul, why don't you bring in this guy? Let me just say he's my Economist of the Year last year. This is a guy who nailed intelligent optimism. He not only would say I believe in the system, I believe in the post pandemic environment, but
he said the American economic experiment is vital. That was a courageous call eighteen months ago.
And Tom, we got some pretty good people booking guests for us. It makes us look good. I mean we had Ira Jersey, now Neil Dutter, Renaissance Macro Research Partners, head of the US economic research over there, and Neil, I'm going to ask you the question I asked Ira Jersey here inflation. I mean, do we have to think about it coming back into our economy or are some of these recent CPI PPI data is just kind of a don't worry about it's gonna be a little sticky
on on the way down from here. How concerned should we be?
Well, I'm a little bit more concerned today than I was maybe a month or two ago. You know, of course, it's important to remember that, you know, we are coming off a extended period where core inflation was generally coming in below consensus forecasts. And you know, now we have a month or so where you know, the inflation data has generally been surprising to the upside. You know there'd be some residual seasonality in the data. I mean we
saw this last January as well. But I think whenever you get numbers like this, it's just important to go back to first principles, right And you know, for the FED, compensation growth equals inflation plus productivity. That's a fairly standard sort of identity in macro And what do we know about compensation growth? It's moderating if you look at the last employment cost index, it ran about three and a
half percent at an annual rate. We know that productivity is picking up, so I think generally the inflationary impulse that's coming out of the labor markets are basically consistent with two percent inflation. And at the same time, we know that business and household inflation expectations are declining for you know, in the short, medium, and longer run. So I think that's encouraging for the FED. So January was a bad month for inflation that pushed off the timing
of the first rate cut. But I think it's important for people to understand what are we still talking about here. We're talking about how much the economy is growing and when the FED is going to start cutting rates.
So let's just go right to that, Neil. You know, I think the FED fit chairman j pal did a very good job communicating this that you know, in the last time he spoke that, all right, March, March really isn't in the cars cards, So the markets started discounting May. Now it seems like they're the market's pushing this out to June, and I guess a data point like today would give more ammunition to the folks that are thinking about a June cut.
Yeah, I think that that's probably right. I mean, you know, June probably goes up a little bit. But you know, look, I mean we could be back here in March or April talking about downside surprises to core inflation. Uh, you know, in the March data and so and that, and that could then push the probabilities of May up. So again, I think it's important. It's important for people to understand. I think you know, what is the overarching state for the year again, it's the economy is growing and the
feed is probably cutting. I think that's a reasonably good backdrop for risk appetity.
Neil, in an hour.
Ago when you were in makeup to come on YouTube Bloomberg podcast for US, you did a wonderful Renmec thing out on Twitter, folks, I'll retweet it Renmec, Renaissance, macro Research. It's to some goofy name at r E nmac llc. There it is renmc llc. And Neilia said, sentiment matters. Green Span agrees with you, and the sentiment right now is a bull market. Basically, there's a bid to the AI market. Even other things I guess are doing okay? How does the sentiment get you out into twenty twenty
four right now? Is it a bull economy as well as a bull market?
That's my view. I mean, I think when you look at sentiment, what you have right now is a simultaneous improvement in business and consumer confidence. So it kind of reeks very you know of early cycle type dynamics in the economy. Obviously, this has been a very unusual cycle where you know, certain industries have kind of shut off shut turned on at different times, and so you know, traditional kind of business cycle rules haven't really worked out
that well. But right now, what it looks like is, after a lengthy period, it seems to be you know, we're kind of approaching something closer to normal. And you know, frankly, the fact that corporate and consumer confidence is picking up at the same time. I mean, that's going to be good news I think for the economy, and you know, with respect to corporate confidence, that's going to be good news I think for business investment spending.
So where's your blended nominal GDP called twelve months forward? Are you at five percent nominal or is it a more normal three point four percent?
I love how you went out to the second decimal place there.
Well, that's raady hunting. Okay, first, let me explain this on television. We go to one decimal point on YouTube, Bloomberg podcast two decibel points at least, I'm mateo screaming time, go to three? Where are we?
So I guess you could say I'm at four point seventy five to five point two five.
How's that look at?
That?
That's nice? I mean, that's a solid nominal.
One more question for his done this? All right?
So Neil, real quick here the labor market. That's another pretty strong pillar in this economy. How do you think about the US labor market going forward?
I think right now the main story is that labor markets are sluggish relative to what we're seeing in the in growth. I mean, so either you believe that we have this sort of massive productivity boom in the first quarter, or you know, you should expect hours to pick up a little bit. You know. The truth is is that aggregate hours work, so that's the sum product of jobs
in the work week. It's basically been flat for the last three months or so, and during that time, the economy has been growing, you know, at a reasonably solid case, you know, something slightly about two percent to lengthen you know, I think particularly in the manufacturing, So I say that's probably something that will happen at inventory's restock.
Neil Dunet, thank you so much. Neils done it there with Ren Mack. And again we'll get that really nice sentiment displayed.
That he did. We'll put that on Twitter and try to get the LinkedIn.
Shorting us now with Bessemwheer of course for years with Bridgewater now part of the Bretonwoods Committee, we are thrilled to get a brief from Rebecca Patterson.
Rebecca to begin, are we beyond the pandemic? Oh?
I love that question. I mean obviously no, because I know what you're saying. We're never going to be on the pandemic. It's just becoming a flu that's going to have variations and it could come back in forms we can't even imagine right now. So no, But from an economic point of view, which is where I think you're coming from, Tom, and it's the lack of electricity, it makes me thinks more slowly. Yeah, I think we are. I think we can say that now. Does that mean
everything is completely normalized again? No, right, But are we back to really kind of business as usual from a macro point of view, yes.
I can't say.
There's no one in my universe folks who shifted from the quiet of Bestsemmer Trust over the cacophony of Bridgewater. There's no one, and she lived to tell the tale. Let's go conservative first, Rebecca, quiet money, three or five year return money. How do they participate in this bull market?
Well, you know, it was interesting yesterday we got data from ICI just showing fun flows and what struck me is that two things. One, in the week through February fourteenth, we saw forty three billion dollars leaving money markets, and obviously not all of that's going to equities, but it is redeployed, and I think a lot of that is to your point, the slower money, right, money that's being reallocated.
We're going to put a little more risk in the market, whether that's equities, maybe we're going to go out the curve on bonds. But the other data point from that report that was striking was the amount still in money markets, which is around six trillion with a T and obviously not all of that will leave, but as we get closer to the point where the Feds lowering interest rates and those money markets are looking less attractive. I think
that's going to be an ongoing support for markets. Maybe it's not the everything rally to the same degree we saw late last year, but it is an important measure of support that can keep equities going from here. Globally, but I think particularly in the US.
You know, Rebecca, I was kind of a time and place where that's sixty forty portfolio kind of made a lot of sense to me. Sixty percent stocks, forty percent bonds, and then boy, you know, twenty twenty two came along and just got crushed because you couldn't there's no place to hide a fixed income. A litt bit of better performance last year in fixed income thanks to November December, but this year we're just kind of back into the soup.
How do you think about fixing come into a balanced longer term portfolio.
Yeah, I still think bonds and I'm talking about treasuries, high quality corporates have a role in a longer term portfolio. I appreciate the point on the last few years performance. I think the last fews were the exception, not the rule, but in the short term. If we look over the next six months, a lot's going to depend on what's happening at the short end. How quickly the Fed does decide to lower rates. Obviously that's going to feed through
the whole curve longer term. While there might be a higher settling rate for yields, right if we have some of these structural inflation forces that push up inflation, push up the Fed's neutral rate, it's so called our star. You know, we might be looking at slightly higher rates for yields, but at the same time, if they're stable,
you can still make good money off them. We don't need yields to come down constantly like we had over the last few decades, which was lovely to make money and bonds and to use them as a diversifire.
Rebecca Pattison with us, of course, with a good brief here into March into the rest of two thousand and twenty four, we're on YouTube Bloomberg Podcast. Thank you for signing up. I'm out in the chat there. I'm learning a lot about Aruba. The chat's fired up about Aruba that in a moment Apple car play, I don't think they have Apple CarPlay in a room.
I'm not sure, don't think so. Apple car play with us is well, Rebecca.
Our complex derivative strategies like interest rate parody, and I do not want you to talk about Bridgewater portfolios. That's unfair. But our complex derivative strategies by sophisticates now a way to create alpha or is it just a plain old vanilla buy it and own it market?
I think that risk parody strategies trying to equate the risk in bonds and stocks and have a portfolio that can do well in different environments. Again, the last few years, with that rise in bond yields, I think that tested those strategies. But if you look at them over the last thirty forty years, they have performed very well. And so and it's important to remember, you know, when we're talking about this, I think what you're getting at, Tom
really is having some leverage in bond markets. But these strategies, remember, aren't just about bonds using leverage. It's also about equities and commodities and credit and emerging market assets. So you're really looking at a pretty diversified portfolio here, and all those components are going to perform differently at different points. In time. If you hold it for a while, right, the correlations go to one for everything in moments of distress,
but over the longer term in different economic environments. I think having that diversification and using some derivatives to get there, I think can be a successful strategy.
Getting afterthought to empty the dishwasher is a correlation to one.
It doesn't happened yet.
So, Rebecca, how do you think about investment opportunities maybe outside the US. It's just kind of this economic exceptionalism of the US relative to say Europe and Asia, certainly China. I'm wondering are there opportunities outside of the US From an investment perspective.
I think there will continue to be opportunities outside the US as investors are squeamish about China and looking for other emerging markets to get diversification. We've seen capital going to places like Mexico, India, to a degree Indonesia. I think that's likely to continue barring some material negative change in their economic outlook. China is trying to get a little bottom in right now in their stock market thanks
to the so called National Team government entities buying. I am very wary of going there, thinking that you've got a sustainable rally ahead of US. Japan has been the winner. I mean Japan if you hedged out your currency risk of fifteen percent year to date, so blowing away the
United States. And I think those flows could continue. But I would be a little more cautious from here, not just because we've had an insane rally for the last month and a half, but when you think about what's driven this, big part of it has been strong economies overseas, China's slowing, Europe slowing, the US probably this year relatively speaking, slowing, and a big driver has been the yen. Yen above
one point fifty against the dollar. How much further can the yen go, not just because of possible intervention to push back from Japan, but also a shift in their monetary policy, and most likely the Fed's not raising rates again. So I think from here the Japan rally is likely to slow. And the question is, if you're not in it yet, do you want to put money in it? Maybe you get some diversification, but I think the return profile from here looks relatively more limited.
Important Commissary, we'll get Rebecca Patterson on you to extend this conversation, particularly paul a jump condition stronger yen would maybe upset the apple Cart. Rebecca Patterson for years with best Summer in Bridgewater with the Brettonwoods Committee. Thank you, stever shudos wanted in the door. We're gonna go wonky on you right now, folks. And this is like the brain tease for the Friday before President's Day weekend.
Ambiguity.
Okay, it's owned by Douglas North of Washington University's Saint Louis. He won the Nobel Prize for it, and that's sort of an institutional economics thing. But to me, ambiguity is if something moves, it can go this way or that way. And that's where we are right now with interest rates, in that something's moved in that rates are higher, inflation's higher or that, and there's this worry we're all gonna die if the Fed doesn't.
Cut interest rates in March.
But the ambiguity is if rates move higher, that's sign of a strong economy and they can't cut rates well because it's a strong economy.
You're right in indicating the fact that the economy is doing better than anybody anticipates. And I think that's a critical component here, and the reason why it's doing is the economy is much less sensitive to short term interest rates and it's ever been before because nobody really borrows at the front end of the curve anymore, even banks. Banks are not involved in making long term loans anymore.
Everything is then securitized. They do a lot of thirty day revolvers, and everything gets put into the securities securitized product market and redistributed and atomized and split around the investor community. So the reality is the very front end of the curve doesn't have the bang it used to for the economy.
Paul got it in.
I know you want to dive in here seriously, but I gotta go there. You said securitized. My theory is the financialization of a system has made most of the gains of the stimulus in the finance boom coming out of COVID go to the halves have knots or flat on our back.
Is that close?
Well, I mean there is a certain degree of that. I mean, the big thing that's hurt the lower income households, which you're getting at, is the upward movement and inflation that really eroded away.
They're purchasing power.
The wealth effect is always going to gravitate up the income chain. But the real real damage that was done to lower income households was basically the rise in inflation, which even though we're talking about inflation rates coming down from nine percent to three percent type environment OG, that's great, the reality is prices haven't gone down, right, So these people still have the sticker shock when they go to the grocery store. And that's the end result problem. Their
wages haven't kept up with it. Real discretionary income in this country has actually dropped.
So that's exactly right. And that's if I'm a politician, if I'm the Biden administration, that's the tough cell I have. You know, I have a tough argument to make out there, because prices still are higher for a lot of folks, for a lot of items. That being said, if I'm the Federal Reserve, I'm kicking back here. We need to rush for a rate cut here, do I No, they
never really needed to rush. I mean, we had a tight labor market number one, which is what they want to say because they want to try to maximize social welfare to take the politics out of it. They want to maximize social welfare, give them the credit that they probably deserve.
That's number one. Number two, the inflation story is still not back to target, and it doesn't show any sign of quickly getting back to target. So why would you do anything the apple.
Cart dovetail your work with dominic constant, I mean constant you know's taken off the next five days.
It's like a a Ruber or whatever.
Ra shudos work in here, but dovetail the two of you or constum said, look, they got super restrictive faster than they thought.
Are we still super restrictive?
No, we're not super restrictive. And the reason for that really comes down to the fact that short term rates are not being transmitted into the financial sector the way they used to be. That's really the critical piece of the equation. Take take a look at the average household into average household, they've financed most of their debt into very,
very long duration liabilities. You look at their debt servicing costs, there's still at exceptionally low levels, lowest levels we've seen since the FED began publishing the data in seventy nine. I know where I was in seventy nine. I'm looking around the room, I don't think Lisa remembers anything about financial markets to Bob Marley, Yeah, So the reality is, you know, seventy nine is a long time ago. And then when you look at the level of household short
term debt, okay, it's at exceptionally low levels. Their duration structure is very, very long. So the net result it is not having the effect that you would have on the household sector. The corporate sector is even worse. Their debt service burdens back in the nineteen seventy two nineteen seventy three area. I know where I was there again too, Tom, do you remember where you were? I. So the reality
of the situation is these are incredible performances. And when you look at you talk to a CFO of any company in this country, and you talk to them about, you know, their debt servicing costs and the impact that the higher rates are having now on their ability to raise money. The answer is very very little impact because most of their debt is long duration, it's at very very low yield levels, and on average, corporate America is.
Actually paying down debt. You've talked about this eight times. What is tech doing?
Because like a free lunch exactly even the big tech comes coming into the bond market and borrowing. So, Steve, one of the stories we were talking about earlier today was when do we start worrying about the national debt and the deficits? We just have a story. The interest on our debt is now going to be greater than defense spending this year. I mean, is this now? I've heard this my entire lifetime, and we just keet kicking the can down the road. I'm looking for something to derail this economy?
Is that something?
You know?
You got to remember the desire of people to buy toward the willingness of people to buy treasury debt comes down to a question of where do you want to have your money invested? Okay, and when you look around the world, do you want to be in the UK? Do you want to be in Europe? Do you want to be in China? Maybe you're a little bit more comfortable with Japan given the currency story, than you've ever been since nineteen ninety, but three hours beyond that, we're
not really knowing what's actually going to happen there. So where else are you going to put the money?
Yep? Yep?
So the reality is this is what's happening with a lot of America. And then when you think about it, Japan runs four hundred and fifty percent debt to GDP, China is running it over three hundred percent debt to GDPAY. We and the rest of the industrialized world are runing around two fifty.
I got thirty seconds. Is it just as simple as Joe Stiglitz says, All we need to do is keep the growth rate going to pay for the fiscal idiocy Olivia Blanchard's books on.
This, Well, we are at the point now where it's hard to grow out of this deficit. Right, at some point we're going to have to that's the crux. At some point we tackle, but we don't have to tackle at all. What they're going to do eventually, which I hate to say this on radio and say it anywhere on TV, is the fact that I think what they're eventually going to do is lift the cap on Social Security taxes.
Now you're at my age, I'm trying to listen to people when they talk about this stuff.
Right, because you want to make sure you're retirement income is there, and they're.
Politically they're gonna punt that out a decade.
Well, we thought we thought they would do that with Medicare. They did it quicker than we thought. I don't think anybody on Capitol Hill right now has any interest whatsoever and dealing with the deficit. Neither the Democratic, neither candidate we're probably gonna Democrat, has any interesting DOLLI you're a star.
Out on carpool and on bloom Bloomberg podcasts, out on YouTube, Michael, thank you. There's somebody out there called It's me. I never trust that. I mean, who says it's me?
Is there? Handle?
And they're like, Steve is great more jamming. So by public acclaim of the chat stream on YouTube Bloomberg podcasts, you know, we're going back to seventy two with Steve shootout. Today's four day weekend front page headlines with Lisa, what do.
You got relations? Starting with the Wall Street Journal. This one stuck out to me because says the US government will soon spend more on interest payments than defense. The reason treasury yields sprung to multi year highs. It's putting pressure on the budget. So this is the Congressional Budget Office latest estimate. Here's what it shows. The US government expected to pay an additional one point one trillion dollars in interest over the coming decade, so that means those
costs are on track to surpass defends this year. One of the government expenses in the budget comes right below Social Security and Medicare. So it's really starting to worry. Wall straight at this.
We have a jewel of a resource for those of you ands in English as well. It's not fancy.
The Congressional Budget Office, the CBO can answer your fears about this.
I have a real fear about this. We knew this would have happened, it is happening. What's it mean? Mia McGinnis and others are brilliant at it. But we have a.
National treasure in the Congressional Budget Office which will try to explain.
The level of fear we should have. I don't know. Do you think it's an election issue?
I don't. I think so. It's nice, I don't think so, but it should be. But it's you know, this has been an issue just the deficit the nation that my entire lifetime, I don't know when to be.
Something like the pandemic sparked a little bit more of it because this set the rates.
Sure, yeah, yeah, I mean, I mean that just gets your attention when the interest on our debt is bigger than defense.
So there you go next, all right, New York Times, the New School is selling its presidential residence in Manhattan for twenty million dollars. So this goes to show you how much these schools are struggling right now. Okay, it's a nineteenth century brick townhouse in thew in Greenwich Village.
It's nice.
The interim president currently lives there. They have school functions there. It's been a part of the school for four decades. So the New School purchase it for nine hundred and ninety thousand dollars back in nineteen eighty four. So they made some upgrades and now it's going for twenty million dollars.
I tell the schools that don't have an endowment to fund them are really really this is.
What they're turning to their real estate.
It's a huge deal. I don't know where this goes.
I've been looking at the United Kingdom schools and they're basically broke. I mean, there's no nice way to put it. The formula doesn't work. And Paul, do you think we've reached a tuition peak where people are just even the fancy people that listen to Bloomberg.
I think I think we're getting there. It's definitely much more. In a conversation, I just would say, and I'm on the board of the Business school a Duke university, I think the economic model of higher education in this country is absolutely broken, faulty. You have to go in there, I think, and just cut cost because you're charging eighty four thousand dollars a year intuition rememboard, come on, please, and and that only covers maybe fifty to sixty percent
of the cost for a student. Something that cost structure's wrong, totally wrong.
It's it's something I don't know what it is. You got to have a duke basketball team or you can't get.
Them all right.
Financial Times saying there's gloomy times for the financial sector. We've heard about it. You know the bonuses. They did an annual bonus survey. They found a fifty eight percent of more than twenty six hundred respondents they expect their twenty twenty four payout to be lower or about the same. But the real question here is is what they're doing with that bonus. So a lot more saying they're using the bulk of it to actually pay down mortgages other
debts because they're anticipating, you know, lower bonuses. They also say that they're not getting paid as much, so they have to use that bonus in order to do that. Some are investing, you know, increasing their pension contributions. But that's a big thing. They say. The expenses are rising, childcare is getting more expensive. They're some paycheck to paycheck, there's that much.
I mean, that's what Matt Miller would say. So he has a couple of young ones right now, and coming back from Germany where that childcare was paid for and high quality childcare, he comes back here and you know, it's just it's a huge issue for young families, young young parents, more and more of an issue.
Oh sure, you're wondering if it's enough. You know, some some people, just the moms or dads stay home because it's cheap to stay home.
Chunk caught us all this, right, I think people that were conveniently ignorant.
Why are you looking at me?
We all learned in the pandemic that this is like the number one issue, and I assume we'll go.
I don't know what companies don't have, and I know there's a reason. I just don't know the reason why companies don't as part of their benefits package. Yep, very s percentage.
You know we'll have to see it at least. I'm tallo. Thank you so much.
This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.