Surveillance: Biden's Tax Plans With Hubbard

it can't get much stronger. White Well, it's already relatively overvalued if they look at it on a long term historical basis um. But uh, you know, we do expect it to continue to trade at these high levels. Not actually quite unusual. You look back historically when the dollar has been to its peaks, it's gone to these you know, peaks in the eighty five, in in uh two thousand two, and then it comes involved quite hard. That isn't what

we're seeing this time. And part of that is because of exactly what you've been talking about here, that where are you going to go to access growth in the world. It's really about the US, but it's also the place that you go to access safety, so you get the best of both worlds. So people are going to maintain overallocations US assets for the foreseeable future. Marvin, when do

deficits start to matter again? Well, I think we're getting to the point where they do matter, and I think it's more a question of the debt, not so much, um, the deficits. Let's remember that deficits are taking place pretty much everywhere, um, So it's not just a US issue. Um. What we're confronting right now is a very different situation from the past, or certainly the last decade, where countries were bailed out by following real interest rates. Now you're

not going to see following real interest rates. We're at the zero lower around or effective lower around for most countries on nominal rates, and the only way to get real rates to fall from there is a hyper inflation. So Marvin, with your dollar resiliency, do you assume then that the real yield doesn't claw its way back to zero, that we stay with a persistent negative real yield, So ultimately we should expect that really yields will start to

to pick up. Um. You know, we will see UM treasury yields start to pick up over the course of the next few years. Gradually, UM markets have already priced in a significant amount of the inflation that we expect. There's still room for that to go to get to the Fed's comfort zone in terms of where break evens uh go. But UM, we will see a rise in really yield, but it's not going to be anything um like what we've seen in the path. But remember that

just makes UM. To Lesa's point, the debt problems more pressing for countries around the world. And John, what's so important here? The cadence, So Marvin Bart at Berkeleys is the same cadence as Chairman Powell. The real note yesterday with Chairman Poue is his ex axis. Chairman Paul's timeline extends well out into two thousand twenty two. And that's what I'm hearing from Marvin Burd the Ft is totally committed to this. Marvin totally committed to this. And Shaman

pound one blink. Do you think everybody gets that now? Well, look, I think people will get that, and that's why we've had this pause in bond market markets over the course of the last month month or so. Right, Remember, we had a very intense sell off in the first quarter, a lot of altility assession, and since then bond yields you pointed out they've gone up a lot this week, but we're still basically trading within the same range we've traded for the last month, month or so. They're not

really going anywhere. That is the market accepting that, And now the next step is they need to see, well, is the economy going to be stronger than share Powell in the committee exact, or is it going to be in line with theirs? Or is there going to be some sort of disaster that's that's gonna take it down. And for that we're just going to have to wait for the data. And that's why we're range trading across

asset markets right now. Mom, And it's always good to see you got to catch up morv and Batley's head of Effects and am macro strategy, David Kelly, Whether this is JP Morgan and David Kelly, I'm gonna go to the bottom of this first look at g d P. In the nominal GDP statistic is ten point seven percent with the big prices paid statistic. Does that signal to you an inflation that is here or an inflation that's good to come, a little bit of both. Um I

think there is clearly inflation right now. You can see and things like lumber prices which don't feed through that much. But you can also see in the difficulty that businesses are having and hiring workers, they're going to have to pay up in terms of higher wages. I think we've got some bottle legs all over the place. I think you know, light vehicle sales are pretty strong, but the inventories are very low, and that's that is pushing prices up.

So I think we're seeing that right now. And in fact, one other thing in this report when you're actually with the numbers that's really interesting is inventories fell at an eighty six billion dollar annual pace in the first quarter. So if you think it's hard to find stuff, you're right. But what that's gonna do is going to cause manufacturing to crank up in the rest of this year. So I think you're going to see UM as inventories are restored over the course this year is just going to

add further to this economy. We had a savings rate over in the first quarter. That's more fuel. So I can see this economy really geared up to boom in the second quarter. I think we'll get better than ten percent growth annualized in the second quarter. Can these companies make that demand? David? The money question, and it's still racing to be bullish the sancuity market. Yes, I think so. But I think you've got to got to focus on

the cyclical sectors, the value sectors. I think they should They should do very well because this economy is going to accelerate fast here. I don't think interest rates are going to stay at this level. I think they have to go up with the pace of acceleration that would likely see over the next few quarters. How do you look at the data, David, Given the fact that people don't seem to trade off of it, what data are you looking at to determine whether this is something more

than transitory, whether these price pressures have legs. Well, you you almost have to have a new model of inflation. I mean, the problem is that the old rules in terms of exact you know, the Phillips curve and the relationship between money supply and inflation, they don't really work very well. So it is it's a complicated process, but you have to put together the pieces of it. And I think the wage part of it's very important. Um. And also the fiscal party. You know, the present Biden

announced a lot of plans yesterday. If he gets that through Congress, you know, usually it's spending now, taxes later, um. And so I think you get more physical stimulus. And if you get that stimulus, you will I think have some inflation that sticks. And the really interesting point about this is, you know the federal reserves as well. It's probably transitory. But by the time they know whether it's transitory or not, we're in the middle of next year. So the question is how long can you wait to

be sure that it's transitory. That was a hatter of transitors. That was very good. Dr you're getting drunk, t K. He's going it, David Kelly. It was very transitory of you to come on and give us wisdom out to the third quarter or fourth quarter. With what we've seen in the last a week or even five days, do you have any clarity pest Labor Day of this year? Yeah, I mean I think I think we can see we can see the GDP story. I mean, this thing is

just going to keep on accelerating. We know we've got the funds, and we also know that we've got people, you know, anxious to get back to to doing normal things. And you know, I think the fourth quarter this year is the first quarter that's going to feel in any way normal, and I expected to be a very blockbuster quarter in terms economic activity. I think the holiday season will be huge. But you know, I think things get

much more murky when you get into twenty two. Just David Kelly, have to go back to the office soon. Is that July? Is that July line in the sand for you, David? I'm well, my second vaccine, I guess on May eight, two weeks later, I intend to go down to New York. We go. We look forward to seeing you, so hopefully can come back into the studio one day. I'd love to do that. That's the point in the next I don't know, several years. David Kelly

check mugan asid Management Chief Club with Strategies. Now Henrietta Trades joins his Veda partners here on the soire in Washington last night, Henrietta, I want you to explain in the white marbled halls of Washington how politicians line up their tax policy around as a president mentioned three tenths of one percent of taxpayers, why aren't they more representative

of the rest of America? You know, what are the interesting things I hear from senators and including the moderates, like, um, you know what Joe mansion is that they want to tax wealth like the tax work. So they have I think a lot of talking points around raising cap games, around raising taxes on top marginal rates. I think the real question is, you know, what can you functionally get the votes for with no margin for error? Where can you get those fifty votes then? And you know, I

don't see much movement as realistic. Maybe a couple of points here and there. Okay, this is really really important. Dan Balls steam Dan Balls in the Washington Post, so talks about the narrowest of majorities. When do we come to our senses that the president can't be bold? If we do, is it within hours days? Or do we

have to drag this into July? I mean, honestly, I think that you probably most investors should have seen that when you know, for instance, they couldn't pass the minimum wage hight votes see the fifteen dollars an hour, and they lost eight votes. I mean, I think July is probably a good time frame for when we'll start to recognize that we're going to be mostly deficit to financing

the costs of this bill. The administration and Democrats generally have been doing a great job of avoiding the conversation around reconciliation and deficiting races that will have to be authorized this bill, and that's because President Biden has rolled out this ambitious agenda to pay for it. So July seems right to me based on what we see from the budget committees. We know that Secret Pelosi is marshaling this bill through the House and they want to be

wrapped up by the fourth of July. I think reconciliation comes right after um. September is a possibility, you know, might be this headline risk that looms over us until September, But July september is my thinking as well well, the headline number, and most likely be in September after it gets pushed through the congressional sausage. My expectation is at the cost of this bill, which is currently four trillion dollars, the combo of the Infrastructure Bill and the family's plan

gets flashed by at least half. So to trillion is the maximum sticker shock spending number that goes moderates in the Senate can stomach. So the spend alone is going to come down by half, and that means the revenues needed to offset the cost are going to calm down by at least half. And we haven't even started about started talking about the deficit hike. So the real question

is going to be when do we see the spending level. Um, my expectation that that doesn't get discovered and earnest until the Senate starts to consider this bill, which will be July late July specifically, and then um, the deficit hike number again will be the other key input point to see how revenue we need. So all this is gonna just effectively wait till July. You can skip over the

next couple of months. The Housel pass a big bill that maybe is three four trillion dollars and then we can forget about that as soon as we get over to the Senate. Henrietta, if you look at equity trading, you can see that a lot of people don't believe that corporate taxes will be raised all that much. What do you think they will be looking at in September.

Will it be higher than they expect or will there be more enforcement of loopholes and just getting the actual taxes that they're charging A great point, I mean that enforcement mechanism. When you start hearing lawmakers talk about enforcement and collecting taxes that are due by beefing up the funding for the I R S, that should tell you all you need to know, which is we're not going to go after new taxes. We're not going to create

some new tax stream. We're gonna go after the ones we've already collected, trying to boost you know, fraud ways an abuse and and and call some earnings from that. Um I think what investors are stuck in right now is this um mentality that whatever the President says goes. So they here, you know, at thirty nine point six capital gains tax rate, and that's what they go to. And then you see a couple of advisors say, you know, maybe twenty eight. We'll imagine if the number is. I

think that's where we ultimately end up. But people are using their imagination effectively enough. Yet the same with corporate rates, it doesn't have to be. It doesn't even have to be five percent. It could easily be. And that's what the business community is pushing right now. You know, we

can handle a point or two. Don't take us all the way at twenty eight, and possibly don't take us all the way at twenty five, and those are options, and I think the street will spawn pretty favorably based off of what current expectations are, which still can be really high. If you're on the phone with folks, I agree the market is not pricing it in. But when you're on the phone with people talking about where tax rates are going to go, they're surprised at our thesis

that taxes will not rise that much. And then it just quickly. It wouldn't be the first time that we've had a week where we're drowning in fiscal news in America and we missed the foreign policy story that creeps up on us. What are we missing right now? At Sound of America? At Sound of Domestic Fiscal Policy? Man John I thought the part of the speech Laborite that

was most compelling was the China facing component. Um The U. S. China relationship is one that I think is going to be paramount in the back three years of the Biden administration. They're not going to pass anymore legislation after this bill, most likely except for a China facing component, so U S China relationships. That means everything from expert control restrictions beeping up to domestic subsidization of manufacturing in the high

tech sectors. Um, you know, monitoring the South China, see dealing with Taiwan, dealing with the EU and the UK to sort of combat China on a multilateral basis. That's the future. That's the next three years. Henrietta gotta catch up and registrates there of Vata Panas thank you, the Caterpillos CFO saying that they may not meet the one and use a demand due to a chip shortage. You saw this in Apple as they knock off three or four billion dollars a quarterly revenue because of a chip shortage,

holding back sales of the Mac and the iPad. You saw this from forward cutting production by fift planned production by in the second quarter. I want to bring it a man who knows this business far better than us p f Ago, the New Street Research head of Technology Infrastructure. Let's just start right there. What's happening at the moment, and why is this hitting some companies more than others. Okay, so on what's happening at the moment. Let's rewind back

to a year ago. A year ago, the world came to a stud everything stopped, and then you know guys working in the supply chain at like in in boundaries at chip manufacturers, like buyers planning for orders, they all went a very cautious role. And then at that point in time, the word split into you have you have players more into tech space who we are thinking, we have very important turns to take, like the cloud, the five jet turn, and we don't want that situation, that

temporary situation to stuff. So they kept ordering like there is more tomorrow. And then you have people who are more defensive, like the auto industry, like industrial supply chains, that were really scared about cash burn and like getting into trouble in such like a significant downturn, and they became very very cautious. Then right after that what happened. The word remained relatively slow, which is not great for

many people for like restaurants and things like that. But people staying at home, like white collar kept getting paid. Blue collars or like you know, like a service jobs got compensated with government with simil this money and a lot of money kept flowing into demand. You look at the results of that early yesterday, that was a massive, massive bit like iphen stays up sixty five percent own here. So demand is far outstripping the questions supply planning that

was made. Okay, So Pierre beautifully explained you are definitive on this out of Bernstein years ago. What is the fairly good timeline to where the logistics mass clears. So unfortunately, the core of the logistics mess is what we call legging edge uh logic chips. So that's the chips manufactured

by Global Foundries, by t SMC, by UMC. And the lead time to put out a new fab and have it up and running is at best, in ideal conditions, eighteen months and you should be more like thinking, you know, um uh, like even six more months like that, like twenty four months or a bit more. So we're going to hear that chip supply for the next couple of years.

Um And in terms of getting gets impacted the most and things like that, it's it's going to be very difficult to call because one chip missing on the mother board. You can't chip your iPad, one chip missing in your car. You can't manufacture your car. So it's going to be very random. You know, who gets hit, who doesn't get hit.

But of course, if you are like uh an Apple, your better position because you've been preparing for that better because you were working on your five transitions and others taking way more precautions in terms of supply than to can manufact You're just being focused on managing the downtown here. This is exactly where I wanted to go execution risk. As John was talking about earlier, how much is this something that corporate executives can get ahead of at this point?

What are you looking forward to hear from corporate executives that they are going to do about it? Um, So you know it's going to be very difficult to get granular details about what they're going to to be able to do that. If the CFO Ford, you know, you know, you cannot really have his own and on the plan to secure like alternative supply for a very minor chip in their car, So, um, it's going to be very difficult to be able to do something about it. I

think what you have to do is to mitigate it. Uh. And then another perspectives that you have to keep in mind that is very important is that we are in this extreme situation where people braced for a downturn and actually spending increase. But as you know, the world reopened and you were talking about New York getting back to normal, people getting back into the cities that never sleeps in

bars and restaurants. This is actually going to flush down the amount of money going into consumer econics and potentially even going into the car industry. And so maybe the saving grace in this environment is going to be when demands normalize. It is apply going to have like massive quarters that they reverted yesterday for the next six months or nine months. Maybe not. Maybe things are going to cool down, and that's actually what's going to to accelerate

a return to normal. On the supply side of things are really smart as always, and I look forward to catching up again. I can't MANE told you about TESTA and then we get distracted by something else. We're gonna do that soon. I promised PFW to that New Street Research Head of Technology Infrastructure Joseph Feldban of Telsea Adviser to go up as a choice set. He wrote a brilliant note on Amazon to maybe three days ago. The ink is barely dry and he probably already has to

change the model. Joe Feldman, how do you approach Amazon this afternoon after what you witnessed from Google and Apple? Yeah, I think you're going to see some really good results out of Amazon, especially fourth quarter has in the first quarter so far is proven to be quite strong for really all the retailers, anybody selling to the consumer, and Amazon is going to be a big winner of that. I think they're Amazon a ws business has been strong even last night. They just announced a new deal with

Disney Plus. So they're continuing to be this juggernaut in the you know, retail and technology and just dominating out there. So I think our our numbers are probably going to go up. I think our models going to have to adjust again tonight after they report. I'm expecting good results. A juggernaut with a target on its back, and we saw it of an Apple trying to get ahead of that with a plan to do infrastructure spending in the United States, invest in new plants. Are we going to

hear something similar out of Amazon. I think they are. You know you you. They continue to invest in the future. They're getting closer to the customer with more facilities. UM, whether it's distribution or grocery. They're leveraging their technology and the stores. I think we're going to have contact with shopping at a whole new level because of the technology

Amazon has. Their distribution capabilities continue to improve. Like I said, the AWS, they're continuing to become more dominant there, and especially with more people working from home, and and you know, that's likely to continue to some extent that AWS becomes even more important to have things in the class. So I think they're going to continue to to to really push and lead the direction for most others, uh, in the in the consumer space for sure. There's also a

question on the employment space. Um. Amazon coming out today and saying that it was planning to raise wages for a lot of workers. Is it enough what you've seen so far fifty cents to three dollars an hour for most workers, this idea that Amazon has had so much pressure, including that unionization push. Yeah, I think that they have done a good job, better than most people expect. I think if you look at their average wage, it is pretty strong. Um. You know, and it's certainly above the

fifteen dollar mark. And I think that they've you know, been very competitive. I hear a lot of retailers talk about needing to compete with Amazon for for talent, uh, particularly in distribution UH and even at retail. So I think that, you know, Amazon has done a good job, and you know, people want to work at a company that's growing fast and has a lot of strong process backs ahead, Joe, I'm looking at free cash flow back five years. Here's the numbers, folks, six seventeen two six again,

and we model out to fifty two. We've gone from six gazillion to fifty two gazillion. In a long cup of coffee, Joe Feldman, when's the dividend? Where's the ship share? Buy back? Where's the stock split? When did these guys grow up and become a Dow component? Yeah, the stock split is something that seems nearer to us than than something,

you know, the others, the dividend or buy back. Uh. You would think that they are unstable enough footing at this point, and they've been able to show profitability quarter after quarter now for several years that they should be able to start to think about redeploying that cash to the shareholder in some some regard um. You know, I get it, you want to hold some cash and be able to continue to invest and do what they're doing.

But we're back, We're now that new territory, a new phase of growth for these this company where I do agree that you're gonna have to see some of that cash, Lisa. One, they've gone from four gazillion and like another long cup of coffee, which raises a question, Joe, what are they gonna buy? Well, they can buy whatever they want, I guess, but you know, they do have a lot of opportunity

to grow. I think their footprint to get closer to the customer, now, whether that's going to be through distribution facilities or grocery stores. I mean, a lot of our contacts in the real estate community, you know, indicate that that Amazon has been pretty aggressive trying to build out their grocery networks. You know. Now clearly they've more than enough cash to do that. I don't think they want to buy a retailer, though, I think they'd rather grow

it themselves organically. You know, maybe they could get some you know, leases or something, but it's not clear that that's where they would make acquisition. Well, I gotta say, Joe, when you say that they could buy anyone. Sure they have the cash, But I do wonder the anti trust push in Washington, d C. Is it just lip service

or is that a real threat for Amazon. I mean, you know, look as big as they are, you know, they've got this big guy in Bentonville that quite large themselves on the retail side of things anyway, you know, and they've got quite a few competitors in the cloud. I'm not so sure that they've got this monopolist of power out there that that people are concerned about. Um, there is pretty strong competition in the space of retail and technology. Joe Fellman, thank you so much. Thrilled to

have you on here early in the years. On day he is with Telsey Advisory. 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 and economics, finance and sument 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 Keane, and this is Bloomberg