Surveillance: Beware Bonds, Holland Says

that and to expand the conversation from there. Mike, good to speak to you. Thanks for joining us here on Bloomberg TV. What do you think a central bank policy can do against inflation right now? Because you say ahead of our conversation in your notes, you say there's too much money chasing too few goods, and so that makes me realize that the taper can't do much about the two few goods, but it can do something about the

too much money. So what kind of downward pressure can the FED bring to bear on inflation, given some of it is driven by those supply chain issues and such an an important question, and I'm not sure that Jerome Paul if he were sitting with you right now could answer that because he has all of these tools, which he employed brilliantly uh fifteen eighteen twenty months ago, UH and as as Uh started out one of the epic salvage of the U. S economy missions um that any

FED president has ever done, FED had has ever done. Right now, they are in a in a period where they are losing a little bit of confidence. In addition to their persistence with that word transitory and inflation. A couple of the FED presidents regional presidents have had to resign because of claims of some insight or whatever. But I think the luster is a little bit off the FED. I think that Paul has has shown that he can do well in trying circumstances. Right now. I think it's

pretty well in bred in the population. As Kayley was just saying, that we have inflation, particularly the wage price spiral kind of inflation from the seventies that is so inimical to to to a good economy. So he's got his job cut out for him. I don't think he would be able to answer the question is what will he do? Because they have lots of tools, some of which are can work well and depending on what tools

they use. How how would you put the odds of a policy mistake Mike, Oh, Kayley, that's a I don't even want to talk about it because with with the rates where they are now, which are at historic levels, historically bad levels for the Fed, they don't have much room to do anything with them. The supply of money, however, which is really talked about by the people come out of the show and talk about what the Fed can do,

and they're talking about rate heights and so on. I think it's the supply of money, which has been it's to to to a few goods chased by a lot of money is what causing this in the wage price BIRO is going to persist long after the services and and uh other kinds of inflation. Commodity inflation is already looking better. I think that the the viruses as of this morning officially being retired by the markets. I think inflation is the is the big bogey over the next

six to twelve eighteen months. Mike, what do you think would be the bigger event for the markets when the Fed ultimately does lift off and we get that first rate hike, or when q T begins and we actually start rolling off that balance sheet. Well, between the two, the balance sheet is it's it's the key. It's it's the amount of money going into the system. But they're both important because the market is is determined into a great deal by psychology. Psychology has been waning recently with

regard to the favoritism toward the Fed. So I think that they have to do smart things. But I think that in the end of the day, it's it's the supply of money which will be the key, the proverbial punch ball as it was Mike. I mean, for me, I have one question for you. Our bonds dead. I mean, if one more person tells me to get short duration, move up in quality, uh, you know, maintain ample liquidity, I may just blow my brains out. You know. For me, what serves the store as a store of value in

this environment? Well, Damian, I think beware, beware the bottom market. It's almost uh baked into the cake, the Christmas cake here that you can lose money in a meaningful way over the next twelve months. In terms of interest rates move up. I should say when interest rates move up, the Fed has to move interest rates up the bond market unless we go into a series recession caused by in part rates going up. The bond market is going

to have a very negative reaction. So you're gonna lose money, just a question of how much, and and and so. Then what about the risk of a policy ira, Mike, I mean, you know, I mean, do you think the Fed can actually taper without causing a tantrum this time around? I think, damon that the that Jerome Polo is very savvy. I think he watched the market. I think he'll do his best to avoid that. But I think unfortunately for us as investors and as citizens, uh, the possibility of

a mistake is relatively high. All right, thank you so much for joining us, my Collin, appreciate your Yes. Happy holidays to you, and thank you for joining us on a holiday week. Your time is even more valuable for that reason. Thank you for the insight. Matt Lizette, chief US economist at Deutsche Bank joining us now, he's gonna have smart things to say about all of this. What

do you read into these numbers, Matt? What can you take away from them that it's going to be useful as we think about the trajectory we're on into next year, it's the consumer gonna hold up? Is this going to be an industrial story next year? Give us your take, sure, thanks so much for having me. I guess I focus on two things from this morning's data. One has the inflation.

It's been the story of it will remain the story of that core PC data up point five percent month on month was was run in line with our expectations, but we see that the highest year of a year race since the late nineteen eighties. Uh. So that is in line with expectations, but just putting it into context how high inflation is at the moment and why the Fed will be tightening policy next year. The second I think is consumer spending, and and there we saw real

consumer spending flat month of month, below expectations. And really this is before omicron hits. It's before the child tax credit may may hit incomes uh in January if that's not renewed. And so we do see a consumer that that has looked a little bit more fragile. Fragile consumer sentiment has dipped late in the year, and so I think from a growth perspective, that does raise at least some of the downside risks on the consumer. Yeah, I mean my god. I mean, look at the core rate

four point seven. That's a bit of a surprise. I mean for me, you know, that's the high since two I mean, Matt, you know, what's your position on inflation as we get into the new year. I mean, should we expect you know, inflation as many are calling for, and certainly as the markets are pricing in to accelerate a little bit and then come often the second half of the year. What do you think they're sure? So

I think in the near term it is gonna get worse. Um, we do have we know some from some core goods items use cars, new vehicles, We're probably going to see some upward pressure there in the near term. I think in addition to that, housing costs in terms of rent and o E are are going to be continue to pick up. So the near term it does get worse. I think we are of a perspective that it will come down later next year, but that will remain very elevated.

So we have core PC inflation at around two point seven two point eight percent at the end of next year, that's still seventy eight basis points above the FEDS target. And it's exactly the reason that we expect them to raise rates at least three times next year. Yeah, Matthew, And I heard you hint at it. You know, housing prices and rents, you know that, and the supply bottlenext due to the do the om con variant. I mean, like,

what are your thoughts on those? I mean, like, you know, those are the obviously the two big factors that are going to drive inflation in the US come the new year. You know, where do you think? Sure? I think the key story, and as I saw you mentioned earlier is about the labor market and how COVID tends to impact that. What we've seen during the delta wave in previous waves is it tends to shrink the labor force. You tend

to see labor force participation decline. It tends to do that, particularly for those that are impacted by childcare, whether it's schooling or childcare and needs for for younger children. And so I think in the next few months, probably probably for the first half of this year, the labor force remains constrained. That means the labor market tends it will tend to look tight. Wages will continue to accelerate, uh, and that'll be a tight labor market that that is

feeding into inflationary pressures. I think as we get further out, I'm optimistic that labor force will come back. If you look at primate participation, it rose ninety basis points this year, and actually relative to last cycle, looks relatively good compared to where it was last cycle given the unemployment rate. So I'm optimistic that labor force will rise in the second half of next year and further out. But in the near term it's likely to remain constrained given omacrom

and the and the pandemic well and not. I wonder how the build up of savings plays in here as well, because obviously the fact that the consumer has a pretty strong balance sheet has allowed spending to continue to keep pace even as incomes don't necessarily with inflation, and that wage growth is still when adjusted for inflation, uh not where you know it might need to be in order for consumption to be that strong. Otherwise, ask the consumer starts to draw it down on those savings, which we're

already seeing. Is it going to take a complete removal of that buffer to drive people back into the labor force. Sure, So I think it's a very key question we have excess savings at around two point four trillion dollars. That's how much has been built up accumulated since the pandemic hit.

But I think the key point there is that that is heavily skewed towards the upper part of the income distribution UH and older, older age households, and so you have a large portion of the population of the income distribution that does not have excess savings that have been built up, and therefore I don't think that that is a key constraining force on them coming back into the labor force. I think what it does tell us is there are a number of factors that do tell you

that the consumer does have a strong balance sheet. Excess savings is one of them. That income ratios have fallen, debt service ratios are are quite low, and net worth is really elevated, but households are dealing with a number of shocks in the near term. Obviously, is one UH sentiment has been hit on that an income will be hit if we don't have the child tax credit renewed

next year. And I'm so glad you brought that up, because, of course, the reason we talk about such a high saving story is because we saw unprecedented fiscal stimulus that padded consumers wallets. When we think about build back better and that child tax credit specifically, is that if that doesn't happen, what are the growth implications of that? Sure, So we assume that it will be renewed next year, uh and if we're not renewed, that that would reduce

our growth forecast by thirty to fifty basis points. So we would go from thick three point six percent growth next year to something closer to three percent growth. It's material, is particularly material for the consumer, but in my mind, it's not something that moves us from you know, very very high, well above trend to something that sees the labor market begin to contract. So I don't think it has as big of implications for the Fed FED policy.

The Fed story. They will still be tightening policy, the labor markets should continue to improve, But it is a material impact on the growth outlet for next year. Matt. You're talking about three, possibly four rate hikes next year from the FED. Recessions are normally caused by the Fed raising rates. It's either higher rates or higher energy prices. To a certain extent, we could have both next year, how would you handicap the risk of a recession in

the United States? So, I think you have very interesting divergences right now between recession indicators. There's there's a few consumer indicators that we focus on closely. The look at either at the gaps between expectations and current conditions or the gaps between current conditions in the different surveys, and those look like recessions are very elevated call it over

the next year. On the on the other hand, if you look at YELD curve metrics, yes they have flattened, but they remained pretty steep and are suggesting recession risks are pretty muted around. I think you nailed it that the biggest risk here is the FED. That the FED has to respond more aggressively to inflation, uh, and that that does trigger the next downturn. That is not our

base case. We think that they raise rates as you mentioned three to four times, that they begin donewind the balance sheet, and that inflation comes down to supply bottlenecks begin to work themselves out. But the key risk here is UH, maybe their supply bottle necks do not work themselves out, or inflation expectations pick up or a wage price spiral begins to uh an anchor inflation, and that becomes self fulfilling in many ways, and that the FED

has to move more aggressively. It's a very difficult different environment than where we were pre COVID, where inflation was quite low when the FED started to raise rates and the labor market still had some room to tighten. Today, inflation is well above target, the unemployment rate is almost at the Fed's view of neighbor of the long run level, and so there is a great risk I think that they have to move more aggressively and that that does

raise recession risks. Probably not two, but as we look out into four man, I just have to pick up a little bit on what Kailey was alluding to earlier. You know, we had City Global Chief Economists Nathan Sheets on yesterday and he talked about the immense fiscal hurdle that the US is facing in the first half of this year. I mean two point seven trillion of fiscal stimulus last year. You know, how is this economy going to manage through without any of that? That's equivalent by

the way, as you well are aware of GDP. So that's a pretty big number that's not coming anytime soon, absolutely so. So I think what these traditional fiscal impulse measures miss is that a lot of the stimus that we had last year was saved. We noted about the two point four trillion dollars of excess savings that households have. There's a couple of hundred billion dollars of state and

local governments have not spent yet. And so I think those typical physical impulse measures of very elevated last year UH and very negative over the next year do overstate the case. I do think there's gonna be a lot more smoothing and the fiscal impulse given that a lot

of it was saved. But it does highlight the challenge we We've had an economy UH since COVID hit that has been you know, very significantly supported by massive fiscal stimulus and a FED policy that has been incredibly accommodative. Two we'll see a reversal of both of those things. We think that the economy can you know, weather that and still see growth well above trend, But it is an open question. And and just to go back to the last point, the key question I think for for

growth in the outlook remains. Can the Fed actually land this this uh you know, land this plane in a soft landing way and environment where inflation is as we saw this morning, at the highest level since the nineties. Great stuff, Matt Lozzettie of Deutsche Bank, thank you so

much for your insight. Appreciate it. Thank you for joining us, and Jane Fowley joining a Snatches, the head of effect Strategy of Rabbi Bank, got to ask the big question, Jane, as we come out of one into me too, does this incredible tail when that we've seen for the dollar this year continue into next year? I think it can certainly continue into the the initial few months and maybe wait until the Fed gets going with that interest rate

hiking net cycle. But you know, we've got to remember that there's an awful lot of good news priced into the US dollar, and the market has been becoming longer and longer of the the U S dollar, and in the last few months and since that, that trend really did get underway in June, and of course June was FOMC where the prospect of an interest rate hiking two was initially put on the table, and since then the market has become more and more optimistic about the possibilities

of interest rate hiking, and so there is a lot of good news in the price. I think that's why we're sort of glued to that one thirteen handling in eury dollar right now. I think we need this consolidation. I think perhaps we need some pullbacks before the market can can really make a decision about you know, don't we don't want to build on those long dollar positions more. You know what on earth can happen in order to to make me do that? So um, I think we

and have further to go. I'm not so sure if if the the the movement up in the dollar can can last a full year, though, so we understand the risks around European growth at this stage. One of the big stories that I think has kind of flown under the radar a little bit as we've watched what has happened with the FED, what's been happening with the fiscal programs in the United States, and of course O Macron has been this gas crisis in Europe. Energy prices are

super high all the way across the continent. They're coming down a little bit as we see the arrival of some lergy tankers from the United States. But nevertheless they remain very very high. We've got very little storage. We could potentially be in the same situation next year. And rather than this being an inflation threat, Jane, could this be a growth threat for Europe? And we underestimating the impact that this could have. Yeah, I think you said it.

I think this is a growth threat and in many respects it really doesn't endorse that the very cautious stance of of Leguard at the ECB. You know, she has continuing to remain davish, continuing with this very supportive monetary policies and and I think this is one reason, you

know why she's you know, justified in doing this. And I think, um, you know, we've already heard reports um small businesses, bigger businesses really having to to shut her because of the additional costs that these energy prices brain. But also it's going to be a significant headwind to two consumers too, and I think that risk is only going to be highlighted, you know during the winter months there.

Some country Spain comes to mind, have taken some action to reduce the the the the bills on for for consumers, not coal, cert for industry and that will help, but this is certainly a significant headwind for for for business, business and consumers in the region. Good morning, Jane. I had a lovely chat with your colleague Christian Lawrence and Cross assid Strategy yesterday and one area of disconnect was China, an area that he tends to avoid at all costs.

What are your views on the REMIMBI in two. Well, you know, if you look at the Chinese economy, we know it's slowing, we know that are there are head winds there, and it's it's fairly normal. And if we had a floating exchange rate to see a currency weekend now.

I think one of the constraints for for China and in terms of the exchange rate was that the very very strong PPI inflation numbers that we were getting at but they've appeared to started to moderate, and I think this is really the key because if we do get you know, some indication that inflationary pressures are moderating in China, I think at that point the authorities could be more comfortable in allowing the exchange rate or the Chinese remember

to weekend. So I think we are probably gonna see certainly more talk of interest rate cuts if we don't see more interest rate cuts and in the next few months, and I think that too could be associated more with more expectation that they will allow the remember to slip against the U. S. Dollar. Well, in one area that is the void of surprise is Turkey. The lira, which had plummeted through eleventh to ten or earlier today, is now back through eleven. I mean, these are big figure

moves in the Turkish lirror. Clearly it's not owners participating, it's all driven by locals. What are your thoughts on

the lyric from the new year? You know, there was a very interesting report in the FT that this morning making calculations about the level of foreign exchange reserves UM and their calculation was that these had dropped by billions in a couple of days at the start of this week, and and and and the implication was was that we had the speech from President argon Um in the course of the week, we had this if you like this back door interest rate hike as far as retail investors

that were concerned, and the implication was is that we had intervention or they made intervention to to really exaggerate at the move. Of course, liquidity conditions are very very thin because of the Christmas period too, And and so you know that the takeaway from that is that the intervention was done at a time which could make her can look good, make his measures look good. And actually, you know that takeaway really does undermine the credibility of

the Turkish authorities even further. And I you know, do you think that unless we do get an interest rate hike, that the majority of investors, institutional investors at least in speculators, will continue to think that the Turkish lira remains very vulnerable.

Jane M Vladimir Putin this morning in his press conference talking about Turkey, talking about the impact that policy there is having, saying he doesn't want to repeat it in Russia, talking about the need therefore for rate hikes um that largely seems priced at the moment that nobilianur is going to potentially how to do more. But the real threat, it strikes me, for the ruble is is actually geopolitical and what is happening around sanctions, what's happening on the

Ukrainian border, what's currently price there? Do you think in terms of that geopolitical risk? Well, you know, there's there's a lot of interesting topics that you just brought up guying, and I think the first thing to say is that the credibility of the Russian Central Bank, you know, cannot in any way be compared to to Turkey, and the Russian Central Bank has a huge amount of credibility, So you know, that is one thing, and she's done an

extremely good job there in these last few years. But the other thing I think that's you know, worth pointing out with respect to the Russian ruble is that although we were talking so much over in the West about Ukraine, about the geo political risks, about the tensions between Russia and the US, and Russia and NATO, Russia and Europe for instance, actually if we look at the ruble, it does seem to be retty more driven by the oil price and so from from that point of view, we

haven't had an awful lot of geopolitical impact in there yet. Now. Clearly, I think if we were to have, you know, an increase in the tensions over Ukraine, that might change, but for the time being that's not being nor that is not a driving factor or right. Jane Folly of Rabble Bank always great to get your insight. Thank you so much for joining us. Happy holidays to you and yours. Let's bring in Jody Guests, vice chair at Emory University,

Rowlands School of Public Health, Department of Epidemiology. Jody, as we talked about all of these different forces at work, what in your mind is the most critical to focus on right now? Well, I think getting everyone boosted and if you've not yet gotten vaccinated, we certainly want everyone to get to vaccine, and we want you to get one with an m R and a series and then if you've been vaccinated in your six months after that vaccination,

we really do want to see people get boosted. We also want a layer a few other things on that though, because O macron is so incredibly transmissible, wearing a mask, a very good mask, when you're out in public is incredibly important, as is making sure that you're in ventilated spaces. And I don't think we've been talking enough about testing, although I do think that that conversation has been increasing, But knowing when to test, in which kind of tests

to use is very important. Okay, so let's just talk a little bit about that. Packs Lavia is this new drug that we have this new anti viral that we have from UH from FISA. You need to take it early. Therefore, you need to test in order to know when to take it. How should we be sequencing testing? Over here in the UK? We have a many, many, many lateral flow tests. I think I've got a box at home of kind of twenty or thirty of them. They give

them out at schools. So you use the lateral flow if you get a positive, then you go and get a PCR test which allows the government as well to sequence. It allows reporting around that. So how should we be thinking about testing and how that fits in with using

these anti virals. Well, I think right now, with omer crime spread across the United States and everyone getting ready to gather for holidays, we really want to be talking about how to use a rapid anergen test at home and recognize what it does and what it doesn't do.

It does not give you free rein for a week if you've had one negative rapid anigin, but it does make you feel comfortable that you're not going to be infectious if you're getting together with dinner with someone in their home, and so you know that window of time that you can use in a rapid anigin is appropriate for holiday gatherings if you test before you go, but if you're going to get together with friends the next day,

you need another test. And so access to rapid and engines and using them at home appropriately it's not something we've done very well in the United States, and we need to work on that. In terms of using anti virals, Then how did they slot in this this new drug packs of it? You need to take it within the first I don't know, two, three, four or five days of being of being hit with a macron. So, so how how do we make sure that we use this properly?

It's an expensive it's an expensive drug. What is it six seven hundred dollars for? For of course, how do we make sure that we're spending that money effectively? I think I saw that it's going to be maybe five thirty dollars in the United States. But it's got a

window as well. And you're right, you need to know that you have COVID in order to get this, and so you the best use of this new drug series is going to be to use it in the first three to five days of testing positive or on set of symptoms, and so um we also want to be using it. It works the best for people who are

at at risk for severe complications for COVID nineteen. So that's a group that are I hope would have a high sensitivity to wanting to test that folks who are living with underlying conditions, or our older age, or have things like diabetes and obesity and things that we know

complicate the course of COVID nineteen. That's really where're gonna see plex i woid work the best and where we see the best data so far, Jody, we spend so much time harping on the bad news related to the coronavirus, but there has been some incredible progress on the medical front.

I mean both specifically we you know we mentioned the fiser oral pill, but also you in the U. S. Army Walter Read Institute also announced yesterday that you know, they've made some progress in terms of a virus that not only affects you know, uh COVID, but also any stars sort of related UM disease. My question for you is what has you what advancements in epidemiology have you most excited? As we turned to two Well, I think, um,

you know, he's been a long two years. But what we've seen is people are paying attention to public health, and um, we don't normally lead with a lot of conversations about people even knowing what epidemiologists are. So that has definitely changed. But the passion of our students and what they're seeing as they as they learn about public health during this pandemic, I think it's really going to change the way public health moves forward. We're really focusing

on good science, communication and talking about inequities. COVID nineteen has consistently taken advantage of inequities and healthcare and access and and we need to be talking about that in order to be willing to do something about it. And so I think that that is one of the silver linings of COVID nineteen, is making us talk about it and making us face it. Jody, you know, I've also heard that oh Macon doubles the risk of being infected on a plane. You know, a lot of people are

traveling this holiday season. On myself, I mean, well, Tom King's not sending the private jet to come pick me up, so I'll be on a plane, um with a lot of other people on on Saturday. You know, for me, you know, how concerned should travelers be this holiday season? Well, omer crowd is much more transmissible than we saw with Delta, and we thought Delta was awammy um omercron when when it is in a space, everyone there is much more likely to get it than we've seen with other variants.

And airplanes have been very safe way to travel based on the way that air circulates, and in airplanes, we've not seen a lot of transmission from the actual airplane. It's more what you're doing to get onto that plane that has been a risk for people. And so you know, we're just working with something that's so much more transmissible. Now every place that you are with other other people is a bigger risk than it was even with Delta. A lot of factors that people are calculating into the

equation when deciding what to do this holiday season. Thank you so much to Dr Jody Guest of Emory University, and happy holidays to you and your zone. 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 Keene, and this is Bloomberg.