Surveillance: Economic Recovery With Lavorgna

news flow. Let us move from TARJ with terrific earnings coming out. One of the great joys of T g T folks is they come out with just very crystal career headlines of their financial performance and as we well know, retail doing better than good target with a sustained thirty percent margin. They say that this year's operating margin well above two thousand, which twenty as well. We'll go into that as as we go along. So much of this

is the state of the American economy. A great student of this is a guy who I started reading Lehman Brothers years ago. He's one of those people that writes a three page economic report. You hate him because you actually have to read the thing. Joseph Lavorgnia joins us right now in the Texas after his public service to President Trump and the nation. Joe, wonderful to have you on. The great conundrum we have each day is the legs of the X axis. We've got a boom economy. How

long does the boom last? Thank you Tom for having me on. Everybody the boom lasts for a while. I mean, the household looks excellent. You've got very high savings RAITs, you've got very hell very high wealth positions, the labor markets improving. I mean, there's some frictions certainly in the economy, Tom, but the household looks great. I do worry that after one boom, we're gonna slow, perhaps more than people expect next year. But but a recession is still many years.

And what a when you get these recoveries. I know it was a pandemic led down term, but when you get these recoveries and now we're going to enter expansion mode in the second quarter with a big GP number. They're not measured in terms of months, they're measuring in terms of years, So it's going to last. Joe, I want to take your income statement analysis and the American economy. I want to fold it over to your former shop.

George Saravelos holding holding court with Deutsche Bank in London, and he notes the exterior dynamics, the trade deficit, the flow of funds within our financial system, and the foreign

owners of our bomb our bonds. Rather, do we risk instabilities as we come out of this boom economy when we look at the trade deficit or the current account surplus deficit, I'm more I'm more work right now the current account surplus, current acount deficit tom right now it's about three and a half percent's on its way to four. It was over six percent back in the mid two thousand's.

I'm more concerned, less about trade, but more about fiscal side, where we're going to run a deficit this year of about six a GDP, and if we get this four trillion extra and spending, we could see deficits in the ten to twelve percent range for quite some time. So I'm more worried about the federal spending much less so on the on On the international side, remember, imports are growing very strongly, are growing about but that's because the

demand is so strong. As per targets results the consumers robust, So worry more about the government's fiscal commitments much less so about the international side. What do you think needs

to adjust yields or foreign exchange. It will come through the foreign exchange market, because the FED is likely to depress yields of picture strakes where to rise, So that would be a risk, is that the dollar does soften Right now though the dollar, as you were saying earlier, just regarding the euro, the broad trade weighted dollar is about flat on the year. It's down from where it was last year, but that got a big surge because of the pandemic in the flight to quality. That's what

we saw during the Great Financial Crisis. But long term, the dollars still look stable. If the dollar was to collapse or plunge, that's a different story. But I don't see that right now in the cars that is, that's a risk, but I'd say it's a low probability. It's it's a risk though a fact that Joe, that you think maybe we're not considering enough, and that's not that the dollar collapses. I'm not in that camp, and I'm

not advocating even questioning that right now. I just wanted to going forward from here we have shifted from a dynamic whether the US has been importing disinflation, particularly from China, and that seems to be changing. Jug Well, here's the thing though, Jonathan. If you look at the goods sector of the economy, it's booming. It's a big kink if

you look at the growth. If you look at the dollar level, we're about I think fifteen percent above trend ten percent above trends, huge number where we've blagged asign the services side, So it doesn't surprise me that the imports are strong. We've depleted inventories, so manufacturing production is big. We're importing all sorts of goods and materials, which is

why commodity prices are booming. As the economy reopens and service spending comes back, you're gonna see those pressures on goods moderate, especially as factories get fully back up to speed. So what I see on the commodity pricing side is really this is a is a post pandemic price level adjustment, and we're gonna see this inflation on the good side dissipate. So I I would still argue where the disinflationary environment

not an inflationary environment. Can you elaborate on that, Joe, particularly when it comes to wages, the idea that we're actually starting to see wage pressures on the lowest end to even the higher end of the income spector. Sure the wage side, we are seeing lower and middle income wages rise. We still have under President Trump, actually right before the pandemic, at very strong wage growth. But broadly speaking,

I don't see much wage pressure. For example, if I look at the employment across the index, I see that we're growing only around three percent. We're actually trend through last year it actually slowed. If I look at the recent trends and average generally earnings, I don't see much acceleration there, and unit labor us are still growing under two percent. So there are some anecdotes and certain industries facing shortages. People certainly are having to pay up for labor.

McDonald's I think there was one company that comes to mind, But royally speaking, I don't see much much wage pressure. And I think as an unemployment benefits expire in September, you're going to see more people come back to work. In factor, about twenty one states now that are limiting federal unemployment benefits, so to the extent that that was the fact that perhaps hurting labor supply, you're gonna stet labor supply come back in, and you're gonna see wage

pressures moderate. So this raises a question for the Federal Reserve and the actions that they should be taking right now. A lot of people have been critical, including Robert Kaplan of the Dallas Fed, saying that the Fed should act sooner rather than later to counteract froth in markets. You seem to be saying that they're doing the right thing, that they're holding tight, and that they should because these are transitory influence. What would you have to see to

change your mind? So you would need to see two things. You need see that wage pressure really start to sell rate some real cost pusher or demand poll wage inflation. I don't see that, but that's number one. Number two, you have to see inflation expectations, market expectations and consumer measures of inflation expectations really turn up. On the market side, they have. They're at about two and a half percent. If you look at five year five your phone slop rates,

but still that's not with energy prices. Up to two and a half percent inflation rate after a long period of undershooting is not very much. So you need wages, you need inflation expectations. That's what I need to say, Joe. Your career is a career of economic optimism. There's always a timeline, not of morning in America, but just a real clear right optimism on the US economy. Do we

massively misjudge now the X axis? Are we just flying blind on the durability or duration of this fiscal and monetary stimulus that we have where we grossly misjudge the positive benefits? Uh? Potentially, yes, Tom, we do. I am an optimist. The Cares Act, that the Second Care's Act was a two point three trillion dollar package, was unanimous. There believe there was one person in Congress that voted

against it. The Fed move with incredible lacrty. The economy is recovering clearly as you know where Washington is debating unprecedented fiscal stimulus or package spending initiatives U, and monetary policy has been very easy. So yes, there is this possibility U that we are creating some great risks for better for worse. We are we are testing modern monetary theory in real time, So yes, there is a risk. However, I will say that the dynamism of the US economy.

It's entrepreneurial spirit. Uh. If you look at the business dynamic data yes last year from the Census Bureau. I mean, there's a lot of incredible things that this economy does. So I'm still an optimist, but certainly there are risks. No question. Hey, judge, it's gonna catch you up. It's gonna see it come back. Saying Jennivoni that it takes as seek the chief economists of the amount US good

news on retail. Stephanie Whiston nailed it at Jeffrey. She joins us this morning where she's recalibrated on comp sales and stuff. Stephanie, I want to get out on the X axis too into the holiday season. Do you have any vision, any idea, any new information on where the retail juggernaut will be past August, past October. Yeah, that's a great question. I think. You know, we're seeing evidence that the consumer is interested in re engaging with retail.

Actually across the board, Walmart Home Depot made these target loads all beat handily and all signaling that compliment um has persisted. In Q two as we look to the back half, we're looking at a few key indicators. The first is back to school. That will be the next kind of signal of confidence that we're back into a cycle of normal. We didn't really have a back to school season last year. It was a very unusual back

to school period. So this year we're looking for those signs that not only the youth are returning to the malls into apparel retail, but are really going through the motions of a back to school purchasing cycle. We're also keeping an eye on what's happening in fashion. We've been in a bit of a fashion ruts for a number of years. We've been living in leggings and fitness apparel, and we're now seeing indications that she's exploring fashion again, that we might be seeing the early signs of a

fashion cycle. And then lastly, I think we're just looking at the strength and home. The home improvement has been so strong over the course of the last twelve to eighteen months, and home ownership is rising, So how durable is some of the investment in the home, and do we move from what we call hard home into stockholm as we get into the back half of the year as well, So all of those things are top of mind. For us looking at the consumer and how she is

behaving and looking where she's prioritizing her dollars. Effany, can you give us a sense of whether some of these companies are gaining market share or whether they're just exploiting the reality of an incredible savings glut in American households from pandemic checks and other aspects and the fact I haven't got out to spend. I mean, can you give us a sense of which will be the winners out of this pandemic spending boom. Yeah, it's a really interesting

question because I think there's there are two classes. There are going to be the survivors, those that make it through clearly, there are some that aren't going to make it through, and then there are these winners. And I think that the upper class of winners really has three basic characteristics. Number One, they've used the pandemic to accelerate

their omni channel initiatives. They were already underway. They pressed the gas pedal down and they effectively trained the consumer to adopt some of these click and collect curbside pickup models, which is actually not beneficial to margins. The second characteristic is that they upgraded their merchandise assortments. So they looked at the categories where they have clear, definitive advantages and

they pressed hard into those categories. And then third, and I think this is probably the one that's going to be the most curious to keep an eye on, is

how they are engaging with their consumer. How are they going beyond this the transaction, collecting data, personalizing the experience, customizing it because we do know that it's come out of this pandemic, there is a cohort of shoppers that wants to go back into stores, that wants to feel welcomed and that the shopping experience is at an elevated level.

Otherwise it's just easier to order online. So I think we're looking for those companies that have also spent time thinking about their store experience just as much as their digital experience. Raw materials, labor costs, solely the above has been a big concernfinitely. Just finally, just to come back to you and get a final comment on the price pressure that's coming through for some of these companies. What

does that look like for the retailers. Every single company has talked about rising wages of costs, particularly wage in place and but also has signaled that there is some product price in place and that's likely to come through. So we're also monitoring the cp I as we get through the middle part of this year and into the back calf I do think we're going to see a step function in consumer pricing. Stephaniely gotta leave it there, Thank you, come back soon. Great cool on Macy's Ye today,

what a rip that's been. Stephanie whistick there the Jeffreys equity analyst. You know there's some there's some interesting dynamics here on the inflation fears that are out there. We're gonna do that. John's gonna lead that off. But I to greet Michael Schoel and say good morning with market Field Asset Management. And Michael, we've had more emails on your love of new Tela than anything else. And we had an America in the sixties. In the sixties, Michael,

we obtained and Sanca. We're in Europe, they had new Tela and that speaks volumes about the Transatlantic divide that's there at each and every moment. Well, you know, I grew up in England as a kid with Lyles Golden Suit, which I continue to get to my children today. We didn't have enough teller in England. I mean, John, you know they didn't have to tell in England. At the same time, John Ferroll that Transatlantic dividers there is measured by tang and I had golden syrup to Michael, I'm

surprised you're giving that to your kids, though. I think we should probably move on and talk about this market. What I give my kids with breakfast, carry on. Tell what you give them goes in the taler, the stuff that goes the waffle things that go in the toaster, and maybe put some the tanner on wif things. John, those waffles, those widerful things are egges, okay, I said, And then I was called the eggoes the waffle things, just in case anyone in your might think they were

actually eggs. How about those markets? Markets were defensive this morning, Michael, Michael, just quickly your take on the price action this morning. You'll tire everything else, A lower crude euro equities you'll take this morning, please. I think we're in a bit of a corrector phase. I mean, it's obviously centered around you know that the sort of you know what we call hope, which stands for highly optimistic projected earnings, that sort of part of technology that everybody's sort of been

banking on so so furiously. And I think that that really is in what I would call a major correction at this point. And I think the overall market, you know, is responding to that. And I think this is typical in a in a major transition of leadership, you know, which is I think, away from technology and towards cechnicality. So you know, we'll have periods when everything kind of goes up and periods when tech and the sort of hope stuff leads us lower. You know, we're in the

latter right now. Why do you think that transition though, persists, Michael, that transition from leadership from the growth names big tech towards the most cyclical part of this market, you know, because I think the global economy post pandemic is radically

different to the global economy pre pandemic. And some of that is the director fact effect of the disease um and some of it is the radical change in in fiscal and monetary policy global I mean, we're really not looking at the same set of circumstances in May one, but we were in January January, and I think the market is slowly starting, you know, to look about so I mean, one example of how things have changed is, you know, we have CPI over four percent right now.

If you look about another way, you know, any price earnings above twenty five means that the earnings yield of that company is no longer keeping up with inflation, you know, tree pandemic. You know, with cp I in in the mid ones um, everything in the SMP had had a comfortable real earnings yield. So we have a very different set of both market and monetary circumstances and economics circumstances

right now. When we talk about the market influences, I want to talk about the risk that has been introduced by bitcoin. Yes, we do have Bitcoin down significantly, and people are talking about how that's indicative of a risk

off move. And yet I've been looking this morning at PayPal, MasterCard, Tesla Square, some pretty big companies that have significant bitcoin exposure, and I'm wondering, at what point does a real draw down and bitcoin becomes something more systemic that a portfolio manager invested in U S equities has to pay attention to. You know, there is some crossover. I mean you know, three years ago when bit kind blew up, it really

didn't matter. But right now there is some real institutional money and some real wealth management money in in bitcoin, and of course there's a significant amount of market cap. As I said, I I think the Hope trade, you know it, which covers things like Tesla, uh, you know, is already in a in a a in a significant correction um and I think these stocks still have much

further to fall over over a period of time. And I think we you know, you know, it does have the potential to have sort of waves of panic attached, you know, waves of panic attached to it, But I don't think it's gonna undermine the cyclical forces which are also you know, which are also in place at this

point in you know, at this point in time. So I look ahead several months, I think there's quite a lot of cyclical equities in the US and global indexes like Australia and the UK which are very cycnically focused, which I think can be significantly higher, and there's scope for significantly lower places and a lot of the high

multiple portions of the US and global equity market. What is the profile of a panic in markets right now at a time when the Fed is keeping policies very easy and at a time of such incredible growth and earnings, well, you know, it's a it's a significant draw down in you know, in in prices, and you know it has been a fairly severe correction so far in these high

multiple names. You know, the good thing is you're losing money you only just made so you know, a lot of this stuff is still higher than it was towards the end of the fourth quarter twenty but the declines from one high is significant. But there's a lot of stuff down plus um in a couple of months, which which by any definition is is is a severe correction.

Now it's too early to say what what we end of today looks like, but you know, the sup you re sponding by going down one and a half two percent, there's a degree of panick in the market at that point. Michael, what's the opportunity in equities when you look at you know, sectors and the different factors that are out there, between small cap, MidCap international and a beleaguered e M. Where's the opportunity, As I said, I think in the cynical parts.

And you know e M is a good example, I don't like the MSc I Emerging market indexes a place to put money. But the reason is is because it's now dominated by Asian technology companies, which is not really what I want to own right now, but that some of the cyclical emerging market indexes still look just fine. Becauzil looks cheap, Mexico looks fine, Russia looks fine. They just don't have a lot of market cap. As far

as the overall index is concerned. You could say the same about the S and P. I don't think it's the best benchmark to be in, but the cyclical portions of it energy, materials, some of the financials, you know, I think looked just fine and and and Globally, I think the two developed markets would really stand out are the UK and Australia simply because of the makeup of their indexes. You know, the UK gives you a lot of materials and a lot of energy. Australia gives you

a lot of financials and a lot of materials. And I think the underlying efex is also going to battle. You know, the Aussie dollar looks very very cheap versus global commodity devices, and sterling is just coming out of its exit funk. I mean, Sterling is exactly where it was when the exit vote went the long way for

most people in Jueen two thousand and sixtifty six. Michael, Thank you, sir Michael Shell, Market Ferness and Management c e O. I think most Asians have this sense of otherness, and of course I felt that especially here on the mainland US. I mean I've had people Americans come up to me and say things to me like who are you really from, even while I was wearing our nation's uniform with American flag on my shoulder and US Army on my chest over my heart. Lieutenant Colonel from Illinois.

An important interview David ruben Stein with another wonderful and important peer to peer conversation. Look for that at nine pm tonight and Mr Rubinstein joins us right now on Tammy Duckworth. She is a politician, but far far more than that. It is a long, it's exceptional story, David Rubinstein from the Singapore School, the uh the Bangkok School. A father that moved around and moved around and moved around, and really there were some tough times to her war duty.

What did she say to you about the war duty and where she is now in two thousand twenty one, Well, of course, now a United States Senator. She was considered by President Biden to be his vice presidential choice, and she came from very far away from that kind of life. She grew up with a fair amount of poverty in Thailand, in Hawaii, and then ultimately decided to become a helicopter

pilot and for the Illinois National Guard. She went over to Iraq and tragically she lost her legs in a helicopter um accident and as a result she had to rebuild her life. But since that time, she was elected to Congress, served in the Obama administration, and has mothered two children. David, the immediate point is Asia Americans and how they relate to the rest of this country. She

has a unique and important perspective. What did she say about anti Asian comments, Well, she thinks that despite the fact that she's the United States Center and gave a large part of her body to the United States government and effect through the tragic accident that occurred while she

was fighting on our behalf, um, she's still discriminated against. Clearly, she's in a different position than she was when she was younger, but she still thinks that discrimination against Asian Americans is fairly evident across the country and getting worse, and she's fighting trying to fight it. You know, one thing that's so great about your interviews is you always get to the human side of people who are in

places of high power. And I'm wondering if you can give a sense of how some of these images of some of these consequences Asian American discrimination and some of the social changes that have come from the pandemic have colored her views when it comes to pushing certain parts of the Biden administration's agenda. There's no doubt that the recent pandemic has focused more attentional on Asians. Many people uh in the United States think that everybody from Asia

is from China and effect and there. While there may be upset about China, they take it out against all Asians, and they shouldn't be taken out against anybody, really, because nobody in the United States really had anything to do with that who is an Asian American or Asian. But anyway, that's the way the life has involved. Sadly, I do think that she is determined to do more about it. And trying to do what she can as the United

States Center. But the most important thing is and to me that for all the things that she's had to go through, she doesn't seem to have any bitterness. You know, she lost her legs in an accident where she didn't have to go on that mission, She didn't have to go to Iraq. She volunteered. She didn't have to go on that mission that where the helicopter crash. She volunteered, and she basically put her life back together again. She and her husband had two children. Subsequent to that, she

got elected to Congress, and she's very relatively cheerful. I don't see how anybody can be that cheerful given what she's been through. But she doesn't really, uh, you know, have a bitterness that I would would have thought she would have had. It's an compelling story. Yeah, it definitely is. The other thing that she has happiness, even if she juggles a pretty big workload and a pretty big homeload.

And she talked a little bit about how it is challenging UH to go back and forth within both of those and it does speak to the Biden Administration's plan for child tax credits. And for other areas to help families. Can you give us a sense of how much mainstream support she sees this having versus some of the pushback where people are saying, stop trying to shoehorn in certain agendas into this broader issue that we have right now

fighting and emerging from the pandemic. Well, there's no doubt that the pandemic has been the main focus of members of Congress for a while. But I think now people are beginning to look at other issues, and clearly the tax issues and the infrastructure issues of things she's worried about and working on. But I think she has a unique voice. Um, she's one of the few people have served in Congress with these kind of tragic accidents that she's gone through. And she's living in full life now.

She's got two young children, she's married, Um, she's got responsibilities back in Illinois. She juggles all that and does it pretty well, I would say. And it's really an inspirational story about how somebody can come from very very modest circumstances, rise up in our country, have great sacrifices to the country, and not be bitter about what happened

to her And now she's serving the country. So it's a great human dimension story, and she wrote a great book about it, which I talked about in the In the interview, David, one phone question, what does she say about the future of her Democratic Party? When you're from Illinois, it's a certain democratic politics. What did she say nationally about the Democrats to two thousand twenty two? We didn't

really get into that. My guess is that she's from a state that's pretty democratic, and I think she reflects that the mainstream of that democratic thought. But I think she feels that better um bipartisan cooperation in Congress will be a good thing. She's trying to bring that about, but it's not easy to do. She is working across the aisles and certain things he cares about, and I do think she's a great symbol for that kind of cooperation. David,

Thank you for the time. David Rubinstein and Carlisle Group Quille founder and of course the interview with Mr Rubinstein, the Senator from Illinois, Tammy Duckworth, David Rubinstein, Peer to peer Conversations. 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 In. This is Bloomberg.