SURV_podcast_08-09-22_1

brilliantly about the stresses within the American political economy. Founder of Sound Consulting, writing for Bloomberg, Opinion in the New York Times, and a former Fellow Reserve economist, and always interesting even if you don't agree with her. Claudia David blanche Flower published a working paper nb ER yesterday with some colleagues from Dartmouth, and it's real simple, he says, calm down. The labor economy is not hot hot hot.

Wages are not hot hot hot. You say that may be right, or the warriors may be right as well, and there may be a middle ground. And what we need is time to let things solve out. Claudia Sam wants to go out the X axis. How much time do we need to get this fixed? Yeah, that's that's a big question. So we are absolutely seeing a very disrupted economy begin to heal. That is one important interpretation of the job's report that we saw last week. We have a lot of hiring, We do have strong wage growth.

How else are you going to solve the labor shortage and bring workers back without paying them more? That is absolutely a piece of what we're seeing now. We see services becoming more prevalent in consumer spending. So a lot of the disruptions we saw appear to be unwinding. They gotta unwind faster than the Fed keeps going with the rates. So that's that's the big question. If we have enough time. The politicians, Claudia have a timeline which is based on

election days. You don't and we don't either. Is this an inflation story to be solved in quarters or years to be fully solved, it's a solution over years. I think we could and and are on track to be seeing some relief in the coming quarters. Uh If we don't see it, then we're we're going to a very weak recessionary place next year. Uh So, and that'll do

a good number on inflation if we get there. But I think a path that's really a healing that is um slow but steady pointed in the right direction gets us back to something like two percent in two or three years. This is not a quick turn in terms of, you know, turning back the lights on getting us back to a normal that that just takes takes time. But Claudia, the new normal is something people have been talking about,

especially with the participation rate remaining so low. And this is the reason why the likes of Danny Blanche Flower and others say there's more slack in this labor market than it may seem. Do you understand why there are so many people still not going back to work? Is it long COVID? Is it retirements? Is it all of the above. There's some very good research, though it is preliminary that we that the long COVID, just that piece of it could explain two tents three tents off the

labor force participation. Right, that's pretty close to a fifth of that gap that we've seen open up. So that's a piece of it. We know people still have care issues, you know, just the ability to be working. We've seen a lot of people unable to work as many hours as they want to because you know, they get sick, they have to come home, there's a lot, and then older workers that took this as an opportunity to retire,

some of them could have retired a lot sooner. So, Claudia, the reason why I bring this up is because all these issues are sticky issues, right. They're not going to bring people back in. You're not gonna necessarily see that participation rate go up. So when you talk about time, what is your fear that if the FED does back off or doesn't raise rates as quickly to allow some time, that it gets it wrong yet again, when it's ideological framework has been proven wrong or at least delayed again

and again. I think it's a matter of interpretation. The fed's baseline interpretation of what's happening in the labor market is running really hot. There are signs that demand is cooling all over the place, the business investment, the consumer spending. But when they look at that labor market, they're seeing hot not everyone right. Governor Waller has expressed some views about the vacancy rate coming down without unemployment rising. That

is clearly a correction of some structural issues. So the FED is open minded, as the FED always is. Their baseline has been looking at the labor market it's too hot, it's unhealthy, and that's what they're trying to cool down. It could be too much, well, Claudia to that point. Looking at the n f i B Small Business Optimism Survey that came out, fort pent of all owners reported job openings that they could not fill in the current period.

So as what we're talking about realistically just an absence of hiring, but not necessarily businesses that are going to be outright firing people, especially as they've had difficulty bringing people back after layoffs during the pandemic. Right, a lot of the jobs that are missing are part time jobs. I mean, so we've seen an increase in the multiple job holders. We've seen people moving back from self employment into being employees. That was a very unusual pattern in

the crisis. The UH. The optimistic scenario is that the first place, if if businesses see demands slowing down, which it clearly is and it's been at an unsubstainably high pace, when they see it slow down, that they're going to go first to pulling job openings and not firing because they've learned, hopefully at this point, that if you fire a bunch of your workers, it can be hard to

bring them back. I think we gotta go because of breaking is Claudius sum thank you so much, particularly on inflation tomorrow on some of the labor linkage is that we see there as well. Let us give a little history here on one of the great great surprises of the last twenty years. They were those guys over in New Jersey and in our childhood they owned a piece of the rock and they would show you Gibraltar and

they were Prudential, and that's the way it was. Prudential became p JIM and with it they became truly one of our best best opinionated bond houses. These are bi side people managing bond money, full faith and credit, investment grade credit, which Lisa's expert in, and also of course distress debt. But more than anything, they have done it with an opinionated alan that is absolutely second to none, Lisa.

That includes a gentleman greeting us this morning. Yeah, Greg Peters, co, Chief investment Officer at p JIM Fixed Income, who is joining us at a time when the one conviction in markets had been longer term bonds and continues to be longer term bonds. And you've had such a fascinating view on this oscillating between conviction and not so much. Where do you stand on an area that has been a

haven amid near term concerns about inflation. Yes, so I think the bond market has just reflected the new reality after Russian made Ukraine coach lockdown. So we have seen and then we're still experiencing this inflation surge um and growth surge. And the thing that I'm focused on and we're focused on p GEM is as like everyone else to rollover in inflation. But I think that kind of misses the bigger question on the table is so what snacks?

And you know we were talking earlier, and I think the markets are entirely too comfortable with this notion we're just going to be a straight line down, smooth and easy right to the FED UH mandated zone. So I still think there's lots of room for volatilly, lots of room for rates to move both higher and lower UH and credit spreads to be much more volatile and wider.

On balance, that's exactly where I wanted to go. This conviction that people have that the FED will get to their two percent target that you can see in that conviction for longer term bonds. You can see this also and break even rates that have actually come down as the Fed job bones. Do you expect that to change that as we head into the end of the year and as people start to see a cooling office some of the inflation data, you get less of an inversion.

The two tents spread, and that ends up being bad from markets because that means the long end is increasing, yields going higher as people start to question the fasibility to get things under control. Yeah, so that's a good question. I think that there's a high probability that the high end rates have already been put into this market. A lot can change, So my conviction level isn't as high as it normally has, just given kind of the uncertainty

and the volatility, the unprecedented nature of it all. But I do worry about that. But but actually, Lisa, I kind of worry about the flip side of that, where once rates do come down, that markets get or not rates Inflation rates can come down, the markets get too excited over that, and they're declaring victory in the middle of the battle. And I think that's where the whip saw a moment could really come in uh in her investors in a meaningful way. Well, Greg, of course, it's

not just about getting inflation down. It's what it takes to get inflation down. And there is this narrative out there that if the data is looking okay, looking resilient, that means that the FED can hike aggressively in order detain inflation and land softly while doing so. But is it actually if the data is stronger, the FED has to be even more aggressive in order to actually get a handle on demand and bring prices down, and therefore a hard landing is inevitable. Yeah, that's kind of been

my narrative all along. I've always felt that this underlying strength of the economy no nominal GDP is really quite robust, which is why you're seeing I can be earning supplies through the upside, or at least not be as as poor as many thought or asserted. So yeah, to me, the stronger the economy, and this is a very strong economy and lots of different respects requires the FED to do more, which in turn means the risk of a

hard landing uh E is actually higher, not lower. So I know it's a perverse way to think about it, but that's kind of the viewpoint that I have. So if they have to do more, which is get the terminal rate to a higher level, what is your expectation about how long realistically they're going to be able to stay there before cutting, Because this market is still betting the cuts are going to come next year. Yeah, so the cuts in the marketplace, uh next year seem a

little heroic to me. Uh so, Um that that's where I really disagree with the market. So, you know, once again, it's about the path, and I think the markets extrapolating the straight line lower and my strong suspicion is that you're not going to move in a straight line, and so those cuts that are being priced in the market

next year are unlikely to be fulfilled in my mind. So, Greg, given the lack of conviction about a specific trade that will be consistently a winning trade, and given your expectation that there is going to be more spread widening, where's the haven trade, where's the ballast when you start to look at investments. Yeah, So I think it's about relative value,

a risk neutral type of uh themes. And so one of the teams exactly Europe over the U S. So you know, we look at investment grade corporates, we see a lot more value, even with kind of the move tighter here in Europe than in the US. We see a lot of value and high quality structured products. These are assets that should do really well in the environment that, you know, the tightened type of recession risk. Uh and

and basically playing the front end of these predectors. So if you believe that these investments that you have will be quote unquote money good will not involved, then mining that front end is an area to get roll and carry, as we like to say in fixing. Come finally, Greg, obviously CPI tomorrow eight thirty am Eastern time. The print is hot, what happens the prince is cold? What happens? Well, So I think it's uh, you know, the market setting up for a lower print at least kind of in

uh in you know the whispers um so um. If it is, I think that is a decided risk off a type of environment. Uh. And if it's at or below, I think we continue to grind here through the course of the summer. Just one caveat I'd like to make though, is you know, August is a period of time where there's not a lot of informational content coming from the marketplace.

Liquidity is much more thin. A lot of investors are, you know, taking their mandatory two weekers, and so let's not read too much into what happens here Over the next couple of weeks. I think September will get a much better read on really the market, true market direction. Greg Peters, thank you so much, greatly appreciate it. This morning, Greg Peters with Pijam. It is the morning after a raid by the Federal Bureau of Investigation under search warrant. So not a raid, but a search of a former

president's private residence. It is unprecedented, Greg Villier, on short notice to this this morning. We're honored that the gentleman from a g F could join us. Greg. You and I remember in our ute water Gate. This isn't Watergate, isn't it? No, it's not. There are a lot of differences, and one is that, of course Nixon resisted all of this. And I would argue Tom that last night was a trifecta for Trump at three victories in in one one evening.

Number one, he's on the front page of every newspaper in America. He loves that. Number two he gets to play martyr. He's brilliant at playing martyr. And number three, the Republicans are looking pretty unified, and if you look at the quotes from everyone from Kevin McCarthy to obscure House members, they are all outraged that this happens. So

for I think it's a victory. If Democrats, independence and Republicans assumed that the Attorney General will in some point voice or act or begin a judicial process, does that get in the way of our electoral process this November or a November thirty months from now. It made to the extent that it might affect voting, but I don't think legally it will because Donald Trump specializes in in cases the drag on for seven eight years, so he'll appeal and appeal and appeal, and I think he still

could run. The key has always is moderate voters. Will moderates decide they've had enough, like many Republican moderates have decided. That can make a difference. But right now I think that this is a again, it's a plus for Trump. How much greg does this change the dynamic heading into the midterm elections, Because we didn't see some of the polls showing the Democrats had been gaining ground on the heels of lower gas prices and some of these legislative wins. Yeah,

that's really intriguing. I mean, you've got food and gas prices coming down, You've got Biden having a pretty darn good summer. So it's possible that maybe the Democrats losses will only be five or ten seats in the House. Maybe the Democrats will keep the Senate. But I can't see the House staying democratic. I think the House will flip. But Greg, what does it say in terms of President Biden's second two years of his first term, this idea that he will not be able to get that much

more legislation through. How do you sort of advise some of your clients in terms of what they can expect in response to a downturn, what they can expect in terms of debt reduction and some of these other issues that have been increasing talking points. It's gonna be a pretty meek agenda in the last two years. There's there's not not much left that they can get done. So for my clients in the financial world, that's a good story. Gridlock is a good story. They don't have much to

worry about. I don't see any new taxes coming for a long long time. I don't see any big new spending coming for a long time. The big crisis, I would argue, is geopolitical. There's a lot to worry about there. Yeah, well, on that point, Greg, this is a US United States of America where we're talking about the home of a former president being searched for documentation he may or may not have taken from the White House at the same time that we're expecting in a couple of weeks hearings

to resume on insurrection at the US capital. That to me looks like a democracy very much in some form of crisis. How does that play when we're trying to defend democracy in Taiwan. Yeah, it's a very very good point. And I think Trump, of course breaks all of the rules. That's always been the case with him, and I think it will will happen again. If if I would just say that Trump is still alive politically, and I would have guessed a few months ago that he'd be close

to finished, He's not finished. You can't underestimate this guy. And what about the other Republican potential candidates for they're realistically anyone who could beat him if he runs again. At this point maybe just Santis. You can't rule him out. I think after Liz Cheney lou Is his next Tuesday, she'll probably go to New Hampshire and see how things look for her as a candidate. There could be a dozen candidates, but if Trump runs, he'll clear the field.

Great value. You better leave it there. Thank you on short notice for joining us here on this most historic day for a shocked America again a search Warren and a search by the Federal Bureau of Investigation of a former president's residence. This is in Mara Lago, Florida, right now and hugely anticipated. Neil Dotta joins us. He's head

of the US Economic Research it renaissance macro research. But what's important there is, he writes, with a stiletto knife in his hands, slicing and dicing the zeitgeist there is out there. Neil Dotta joins us on our American economy. I love the way you go after consensus. What's consensus get most wrong? Right now? Well, I think the consensus right now is pivoting very uh feels like very quickly to peek inflation slower inflation. Um, you know, maybe the

FED backing off. I think that's probably a mistake. You think that that's a mistake, Neil, because you think that the FED is going to keep going and that inflation hasn't yet peaked. Well, I don't think core inflation is peaked. Lisa. There she is, tom My arch Nemesis. Now my best friend were on the same side of that. We're on the same side of the fence. Um. Yeah, look, I mean you know, at the end of the day, I

think things changed. At the June fform Sea meeting. The FED basically told us that I was willing to, um, you know, push the economy into recession to achieve its goals. And you know, we went from it's going to be challenging to achieve a soft landing, now it's going to be very challenging to achieve achieve a soft landing. I mean, um, you know, the path is narrowing. I mean they sort of use these kinds of you know, words to to basically demonstrate how difficult the task is going to be.

But you know, look, I mean the last employment report was a knockout, and you know, essentially we have inflation significantly above target. You heard Mike McKee. They're talking about unit labor costs. I mean, your labor costs are up a lot. You know, interestingly enough, during the pandemic, prices have actually been trailing in a labor costs, which in

my view means that there's more upside to prices going forward. Um. And despite the fact that price inflation is so elevated financial conditions, what have they been doing over the last couple of weeks while they've been easing so to me, that suggests that the FED has a lot more room to go. UM. I think the diet is cast now for a seventy basis point move at the September of Film Sea meeting, and they need to leave it on the table for the remaining two meetings this year. What

does that mean for equities? I know that you've been a big bull in terms of the corporate resilience and their ability to adapt and adjust. To use Tom's phrase, why is this time different? This moment different? When it comes to that, well, I mean and I mean equity markets. Um. When you think about it, fundamentally, it's really different by three factors, right, Lisa. It's interest rates, actual and expected earnings,

and the risk premium right. So the move in July, the nine burst in the SNP five last month, that was entirely driven by lower interest rates. So if I think the Fed's gonna keep hiking, I think interestings will go up, and you know, the economy is not out of the woods. I mean, we're gonna see residential investment contract in the third quarter. We're going to see capital

spending come down because growth expectations have softened. UM, inventories will likely be UM more negative, and particularly for you know, sort of durable goods industries, so you'll see an inventory liquidation of some kind. I'm assuming that's all negative for GDP growth, which is negative for for growth and earnings and so um. And so if if interest rates are going up and earnings estimates are coming down, uh, it's

hard to be optimistic about the equity market. And of course the equity market is one way the FED has to slow the economy down. Yeah. On the subject of earnings new obviously, the ability to retain profit margin in an inflationary environment like this one is predicated on the ability to pass on higher input costs to the consumer and consumers to tolerate those higher prices. Are we overestimating

the resilience of the U S consumer. Consumers have an enormous ability to take on higher prices, as evidenced by the fact that you know, look at how much excess savings they have. They I mean, the entire improvement in consumer spending in the first half of the year was driven by lower savings rates. But that can't last forever, right BINGO. So where does that leave us new? I mean, to me, it just leaves me more cautious on the economic outlook. I mean, and yeah, I'd be cautious on stocks.

I mean, I get that the equity markets have kind of ripped here. Um. You know, maybe a lot of the people that were, you know, thinking the way I do about things already sold back in June. But you know this isn't over yet. Um and uh you know that that that's my view. Um, but I definitely and I think one of that is one of those in this because the FED is not done yet, and you think about the rest of the world, the dollar is likely to go. I mean, I don't think the dollar

strength is over yet. I mean, you have you know, US economy holding up better than many of its major trading partners. You have the FED still hiking, that's obviously very dollable issues holding up better if we get a data inflation, if we get whatever the real economy will give us, and it doesn't sound like with productivity it's going to be all that much. That's still a sustained nominal GDP. So let's go to the data optimism. Can we say that Datta Data and Brammo agree to agree.

I think we could say that, folks, this is a rare occurring. But away from that, when you say to Brammo here in months, you're wrong. It's gonna because Dutta is optimistic. Can corporations adapt to this unique set of cards right now? Well, they're going to adapt, but Tom, that's gonna require some some pain for the economy, right. I mean, if you think about the first half of the year, you know, to me, for business you can.

It's the most interesting thing is this reconciliation between the fact that hours worked have been rising very robustly and output has not. So we've seen this big drop in productivity. So the question is how do companies re establish stronger productivity. That's going to require some combination of slower hiring, fewer hours worked, raising prices for fifty years has been total factor productivity to the rescue. Is it going to come to the rescue? Again? Technology isn't overlay. I mean it

takes time. I mean I don't see an investment boom out there right now. So so where is the productivity going to come from? I just want to get under us on a negative note, So Brandmo and daughter agree to look, I mean, this is this is the issue, is that a lot of people are looking at the financial conditions into X and Neil you mentioned this, and it's actually the least Uh, it's the least tight. It's

the weakest that it's been. It's a loosest that it's been going back to April, and it makes no sense. And this is in their case no and and but Neil you alluded to this. And this is where I think we agree. Is the Fed's gonna look at this and say I don't think so, and they're gonna push back. When do we get that pushback? Well, it could come

as soon as Jackson hole. Uh, it could come. At the September of mc um you started to see it, particularly among a lot of the regional manufact regional FED presidents, Right, I mean, they've been saying we're not done yet. Um. You know. Look, I mean the other thing, of course, is that they they'll often they'll try to be hawkish, but they sound doublish in the process. For example, Um, you know, they'll say something like, well, it's the markets too,

it's too soon to be pricing in cuts. Well, you shouldn't be pricing them in it all. So why even giving the market that that sort of language. Um, you know, I think what the Fed basically needs to say is that we have a singular focus on bringing inflation down. Um and uh, and we're willing to do what it takes in order to do that. And you know there are no cuts coming. I'm depressed. Neil, thank you so much.

You'll out of renaissance Macro. This is a joy. He has been so busy that we've just said to Admiral Strevidiz, will take you when we can get you, and we are thrilled to bring you worldwide now a gentleman of the United States Navy. And of course this on Taiwan and China, and the backdrop of this is my book of the Summer. I think it was a year ago, maybe two years ago. Two thousand thirty four, a novel

of the Next World War. Elliott Ackerman and one James Trevidis Admiral thank you so much for joining us UH this morning. I want to talk about the beginning in the South China Sea of your book, The ren Wry Incident, which is fiction and has planted out in two thousand thirty four. Are we getting to two thousand thirty four

faster than you thought we would? Kind of feels that way, Tom, And of course the book said in that year starts with a miscommunication, a miscalculation between navy destroyers and a Chinese fishing vessel. And it makes this point that I worry about. These are young people, these are young pilots, they are relatively young ship captains. They're not deeply experienced. It's not Tony Blinkin flying that hornet around. Um. There

is going to be that potential for miscalculation. So yes, I worry we are closer to that kind of miscalculation. In two thousand six, on the Ronald Reagan, a pilot landed off of Brisbane and on the aircraft carrier struck a ramp whatever a lot of damage. The pilot was okay. The aircraft was lost. Things happen at sea, you're the pro. What are the things that can happen to the Ronald

Reagan off of Taiwan that concern you? Well, certainly, the Ronald Reagan could be targeted by Chinese long range aircraft. They could be targeted, so it could be targeted by a like an EXO set missile like in the Falkland wars Um EXO Set kind of shorter range, but the equivalent of today's version of the EXO Set absolutely And the other they're worrying about out there are Chinese submarines. They're not as good as our submarines, but they're quite capable.

So yeah, there's a real threat to the Reagan and the ships that are supporting her. Thomas. Soon as we are done here, I'm gonna go download The Animal's next book, to Risk It All Nine Conflicts and The Crucible of Decision. That's gonna be my beach read this weekend, the Rickover

chapters outstand. Yes, I'm looking forward to that. So, Admiral, as we step back here with a little bit of perspective here, over the last couple of weeks, starting with Speaker Pelosi's trip to uh that region of the world. What are your views, what are your takeaways? Should she have gone, was it a good move there? And the

response by the Chinese. She first and foremost has every right to go there, and we can't put ourselves, the United States, in the position of allowing China to have a veto authority over anyone trying to go to Taiwan. I've been to Taiwan, visited with Madame, said the President. I'm not the Speaker of the House, which brings us to Yeah. It raised tensions considerably, and they remain at a very elevated level, particularly because of this de facto

blockade that China has put up around the island. But having said all that, I think tensions are going to go down over the next couple of weeks. Look, President, she has no interest in a big firefight out there, an incident, a seaking, a ship. It's not where this is headed. So look for tensions to come down into weeks ahead. I believe my history is Nimus and Sprague were in Hawaii and MacArthur was down in Australia and there was a raging battle of how to approach Japan.

This is a few years back, Sir and The answer is MacArthur one and up through the Philippines we went. Are we deployed now in the Western Pacific? And do we have to revisit This is before Strevid, this is a young whipper snap after the sixties. Do we need to revisit a base for our US Navy and the Western Pacific? I would argue we need to protect the bases we have, and that includes Guam. It includes uh superb bases in Japan, notably Southern Japan, bases in South Korea.

We've expanded a bit an added basis in Northern Australia. It would be great to get back into the Philippines. Secretary B. Lincoln met with Marcos Jr. Two or three days ago. Is that our first request? I think it's on the agenda and it Autoby. I sailed many times back in the not the sixties, Tom, thank you. As an elementary school in the sixties, but after I graduate Fromnnapolis in the late nineties, seventies and eighties, I went many times to uh Subic Bay to Clark Air Force Based.

These were gorgeous, important strategic basis. It would be terrific to get access back there. Well, all I will only suggest as you chose to serve the nation at the absolute bottom of morale for our military with your schooling at the Naval Academy. James Travitez, thank you so much.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keatinge In. This is Bloomer