Surveillance: Economy Weighs on Midterms

Joining us now, someone with terrific respect on this, Alan Ruskin, chief international strategist at Deutsche Bank, is well Ellen, I want to go to the path from ultra accommodative Stanley Fisher to accommodative, to an unmeasurable neutrality and to a Domini constant over at Missoo calls super restrictive, which is basically disinflation even with oil, even with ants. How close are we to restrictive? How close are we two super restrictive?

Great question, Tom, because I think you canscious look at this in terms of monetary policy. You have to look at it in terms of fiscal policy as well. And I think the most underrated element in terms of the policy stance is that fiscal policy from one was really the most stimulus we've ever had by Quantum's Yeah, I think it's a temper center GDP stimulus at that point for over those two years, about five times what a

large stimulus is. That's still reverberating, that's still showing up in excess savings, that still buffering the consumer, and to me, that is creating the underlying resilience. That means that interest rates can be much higher than they would otherwise be, and that interest rates look like they're much tighter than they are. An arch theme of your colleague David Folker's Lenda, who has been there will be for school stimulus clearly in Europe to rebuild Europe after an horrific or as well.

Do you see fiscal leveling, fiscal stimulus, or maybe even some form of dropped down in fiscal spending in America? Look, I think an it's gonna hinge on Tuesday and the events thereof, I think the anticipation is that fiscal policy is going to be a lot tighter going forward. I think the question there again is what are we going to see in terms of front loading from the lame dark section the session? In terms of you know, the death seeling. How much constraint is that going to impose?

But I think the anticipation will be that we will see tightening. But again, want to emphasize the fact that the lagged fiscal stimulus from twenty twenty and twenty one is still going to act as a buffer for three and four, so it's still going to be substantive. And I'm not that worried about the tightening on the school side. Okay, but there's a very strange confluence of bad news is good news for markets right now. And we can put fiscal spending in there. It's good we get bad data

because that means heilds will go down. It's good when we get less fiscal spending because it means bond yields will go down and perhaps ill cap inflation. At what point does that run out and people start to think, okay, wait a second, this isn't going to support the economy, and that is negative broadly for the dollar and for risk asses. Yeah, at Lisa, I think if you look at the past patterns whereby we've had a Democrat president with a divided Congress, you've seen as you might expect

that fiscal deficits tend to come down. You see bond heels well supported, but you also see equities and I tend to underperform, and you see the underlying economy the GDP numbers tend to be weaker. So um, I think you asked the right question there, that it does tend to add to underlying weakness, and that good news for the bond market is only going to fill to through to some extent. As far as the economy is concerned.

I don't think it's going to be sufficient, for example, to stop a recession, say by the time the end of three. We had been later on earlier in the show, earlier in this hour, and he was saying that he thinks that there is going to be a very big move up in risk assets because that there will be cutting of interest rates by the Federal Reserve, and we'll go back not to the same extent, but to a similar playbook as the one that we've come accustomed to.

Do you think that that is likely? Is that something that people can count on in the next twelve months or perhaps even eighteen months, even if it doesn't seem like it's on the horizon now, I think that's a very optimistic view. I think, you know, we're trying to establish all the things that Pal highlighted, which is where is the peak and what is the shape of the rate cycle at the peak? And increasingly that peaks just seems to drift up. You know, we're now at a

five percent handle. It's possible, and I think the stew is still to the top side of that. We're thinking in terms of the shape, and people felt the higher we got, the quicker rates would actually come down. In fact, now increasingly there's a feeling that rates won't come down quickly, that it's more like an inverted l at the top of of of the cycle. So to me, none of that is that optimistic from a necessary from a growth

cycle standpoint. Well, and if we dash to a hundred dollar brand again, is the hundred dollar a barrel brand? If we see it now at ninety eight dollars, is it the same is a hundred dollars the last time around? I think you've always got to, you know, just assess

what the overall backdrop, you know, macro backdrop is. I mean, I think it would be upsetting from a sort of a stagflation standpoint if we started to see oil prices move in the you know, in the so called a wrong direction from a stagflation standpoint, I think, you know, falling on a weakening economy. One would argue that perhaps to have even more negative effect, and it would have had in prior last two quarters. A general questionnaire, let's call it econ one oh one this morning, I believe

there are fourteen core CPI measurements in each country. Is there a value of looking at headline inflation now? Or do each of us have to find a core series we're comfortable with? And I think CORE was seen as helpful in terms of telling you what the underlying picture was, you know, where the natural gravitation would be over say a twelve month period when food and energy prices erratic

food and energy prices work their way out. But I think if you're asking questions about, you know, what is inflation doing for the average man in the street, then skip the CORE. I mean, you've really got to focus on the total inflation and uh, you know, it would be a travesty ready to start removing food and energy

from those kind of measures. But I think CORE for the economists trying to look say twelve months out, is still reasonable, and you've got his search country by country on the fraid time when you look country to country. I just want to wrap it up with this question about Europe. And we've been talking a lot about the US and the CYSCAL spending in the US and how

we're going to see the dollar progress. But at what point does Europe become attractive again considering how much it sold off, but also considering that it faces a much bleaker picture in many ways than the United States. Yeah. I mean, obviously a lot turns on the politics. So you had somewhat optimistic mentions of the US touching base with the Russians, which is you know, I think an egg people to think in terms of some sort of

Ukraine peace deal eventually. Um, that's not obviously an optimistic view of things. Um, so that's going to be crucial I think in terms of, you know, how you think about Europe going forward. Um. That being said, I think there's some built in resilience that we're starting to see from the economies. You are seeing uh an ability to navigate some of the energy shocks. So I don't think

it's all pessimism really in a way. But I think he's still gonna have to just wait for that political signal before it's a real buying opptuesing allan thank you as old white body. I appreciate your time and I'm resking that of Deutsche Bank right now and this is a joy. We truly begin our coverage with the Wendy Shiller, director of the tub and Center for American Politics and Policy at Brown University, with Greg Valier just a foundation

of what surveillance does on politics. Professor Schiller, I want you to address, as in your memo, the mid term messaging that has led us in the last forty eight hours to indeterminate polling. Give us the messaging dynamic red and blue versus the polling shock that we're going nowhere in the last two days. Well, it's interesting and sort

of a very late shift by the Democrats. We've talked about this before to the economy and also attacking Republicans on social security and medicare the problem with that charge of the Democrats as many people who are over the age of sixty five already voted. That's the biggest bulk of people who vote by mail, and also people being the age of sixty five, A lot of that early voting is coming from them. They care about the economy.

It's just a little bit too late, I think. And uh you know, they misplayed the abortion issue by over emphasizing it nationally and not being strategic about that. They did some redistricting decisions that we could talk about, we don't have time. In twenty we have that case in Rhode Island where they over districted, in other words, put too many Democrats in one district and left the end on their district vulnerable. So now we've got a potential for a Republican to be elected in Rhode Island for

the Congress. That hasn't happened in a long time. Uh So, I think. On the other hand, the Democrats had a lot of losses in the House, so you know, the damage actually might be mitigated and other problems can pick up a lot of seats and win control, but it won't necessarily look like eleven or twenty. Where are we on the tipping point where the mail and voting, the pre voting becomes more important than the Tuesday voting. That's

a really great question. Place like Pennsylvania, for example, we're all watching that states Senate race in particular. They start counting Tuesday morning, so you may not have that kind of blue wave red wave kind of thing going on. May take them a long time. There's about I think five and fifty thousand or six hundred thousand early votes by mail, but they start counting at least on Tuesday.

It's some other states, like Ohio, they accept mail and ballots for another ten days, So you know, if it's really tight in some of these states, it could be a while before we know the answers. But midterm elections are about a referendum on the party in power in the White House. Most of the time that party loses seats. You know, when you have such division, you're gonna switch control the chambers a lot more frequently. Years ago, we didn't have as much division, and so you know, it's

harder to flip control. But it is typical for the party in the White House to lose seats in a mid from election. Wendy's a referendum on this administration or is it a larger referendum. There is a story in Axios basically talking about how leading Democratic voices are saying the party has seen as too extreme and that this basically is a big clarion call for a rethink in

some of the messaging. More broadly, do you agree that that is the conclusion if the Democrats do face some pretty severe losses uh this particular week, Lisa, I think it's just so much more complicated than that. I would be cautious of overinterpreting the results of this particular election. People are concerned about inflation. It's still hard to get a new car. There's ridiculous inflation markups on new cars for example. I mean people's people feel it. They feel

it every day. This could just be a big example of bad campaigning by the Democratic Party. In terms of messaging. They had tons of money, Uh, and did they not emphasize what they should have emphasized, sort of average campaign one oh one. And in terms of democracy, if we have turned out, you know, we already have more early voting than we had in twenty eighteen, you know, by about a million votes already, and we don't even know

the folk than the burling voting. So if we have really big turnout and you say democracy is dying, that's a conflicting message. Again, So the Democrats have to be cautious. Everybody has to be cautious about interpreting the results of this particular election, but it is true that the Democrats did a lot that they say they did for a lot of the people who are not voting for the Democratic Party in November. And where is that mismatch most acute?

And how do they have to localize their messaging as they move forward? Well, especially when it comes to crime. And I say this living in New York City and living in New York and we have seen this become a huge campaign issue that actually makes this highly blue state suddenly on the ballot when it comes to the governor race. What's your interpretation of that? And I understand that there are single idiosyncratic messages, but is this just

a messaging issue or is this a policy issue? Well, I mean, you know, in terms of crime, you know, the irony for the Democrats are the frustration of the Democrats is that part of the violent nature of crime is that more people of guns. You know, it's just easier to get a gun and many more people have guns. That's dude to basically Republican slash n R a opposition to gun safety ledges slation. But the Democrats has lost

that message entirely. Uh. And it's true people want to be safe when they go into a supermarket or a movie theater or the subway, wherever they are, they want to be safe. And it's been typical that the Republicans have taken advantage of that in electoral terms. And there is also sort of a racial coded message in criminal sort of focusing on crime in some areas as well.

So the pushback by the Democrats against that messaging hasn't been exactly the right mix of messaging about security versus being you know, cautious on on using racist or stereotypical tropes on crime. So I think the Democrats have some work to do on messaging. They also have to pick

up who's gonna run their party. They have people who are you know, no offense, people in their seventies and eighties, you know, all good, but they have a fairly old bench, and the Republicans have a fairly younger bench, with the exception of Donald Trump, who who still has a lot of vitality, but nonetheless you had the governor of Virginia, you know, relatively young guy, probably has a future in

national politics. The Democrats have a befaired who is there who are their spokespeople and what age group are they are they picking from? And that's that's a big rethink for them, and they better do it fast. Wendy, thank you when they share that of Brandy Universtity, I think you missed at the end, Tom perhaps for the best. Wendy, thank you very much. We are thrilled to bring you. Dana,

I've senior equity research director at Wedbush. Daniel and I were talking about this, any clarity on sales the two fancy phones, with the phone war that's out there, T Mobile and all that. Am I right that the Pro and the Pro Max are selling like hotcakes? Look, I think demand on Pro has been unprecedented relative to what we're seeing in this macro. And I think you saw that with September results and even the guidance, and you see that even come out in China. But for apples,

we saw last night the issues not the man. It's the supply and oxous to the zero COVID in China. That's the gut punch that we're dealing with this morning. Okay, so wait, there on a scale and I don't mean to get Matthew here, Dan, but I think we do with the Bloomberg reporting. What percent of this is a about China lockdown? What percentages about demand of the phones underneath the pro in the pro Max. Yeah, so let's break that down in terms of the Bloomberg report. That's

really time. When you look at the iPhone fourteen class, I mean, that's really been a strikeout for Apple coming out of the gate. It s that's where you're seeing the lower production in terms of coming out of Asia. But but on the other side, the strength is coming out from fourteen pro. A typical mix is about sixty sixty five percent. We think it's closer to eight this quarter. That's bullets that's positive for a sp is positive from margins,

and that's really what the streets focused on here. So, Dan, I guess that you're rejecting this idea that this could be demand driven reduction in production. Is that correct that you think that that's uh, perhaps not a correct interpretation of Apple's announcement. Well, I mean if you look at just off the quarter, I mean when Cook gave guidance, and I think across big the last four or five years,

no one's in better in terms of forecasting. They're seeing strength and I believe the iPhones would still be up year of the year, but obviously in terms of the zero COVID shut then we think that probably takes off to potentially three percent iPhone unit demands. Issue it continues to be supply and I think that's are of the frustration for Cupertino in terms of what they're dealing with in China. Although you're not necessarily seeing people expect bigger margins.

In other words, we're not hearing that perhaps Apple will raise the price of the iPhone fourteen in response to the lack of supply. So does this mean that Apple and a lot of companies kind of reached the end of how much they can offset some of these these pressures with higher prices. Yeah, it's a great point. I also think it speaks to why within the four walls of Cupertino, why it's so important from a chip and own their own ecosystem, and I think that's what Apple

has done. It gives them more flexibility on the supply chain and from a margin perspective, and that's something that's playing out more and more. But I think really the narrative is that iPhone four team pro despite opposite dark storm clouds is seeing strength despite what we see what I'd call it almost a nightmare. We have a large cap tech enemy season Dan, in the hallways of all these fancy tech people with their egos and their business

beliefs and all that. What's the difference between a hiring freeze and outright firings? Explain that body language, not company to company, but within the industry, within the culture you follow well in the valley, especially intact the last I call it sevent eight years. I mean a lot of these companies were hiring fifteen, twenty, sometimes thirty percent more employees per year. So in terms of a freeze, they were just used it. You need ten more engineers and

a project, you get it. Now, what you're starting to see clearly a slowing down. You're starting to finally see these culturalities come to just spending like ninety rock stars. But you're starting to see now cuts across the board because they really want to make sure that they get ahead. It's on margin perspective. I still don't be with his ominous. It's still more between a freeze and slight cuts. If

it continued, then it becomes a dark winner. Hey Dan, thank you, Dan, I said wet Bush still looking for two on Apple Jayler Richardson with his chief economists at ADP Research. And she's fabulous because not only working with a DP with a thumb and the pulse of American wages, but also her work on government economics. Thank you so much for joining today, Thanks for having you walked in and said, hey, stupid, this is what matters in the media, and this is no it's says it's Monday. It's stupid

Monday for me. But the media over weights technology because we've got technology in the brain and you're saying layoffs, it Lift or Apple wherever, it's not that big a deal. Well, it's a big a deal for the tech sector. It's a big deal for tech employees. But in terms of the overall workforce, tech information sector is about two. So when you so when you're talking about what's really the

heavy hitters in the labor force, its services. Services is when it comes to consumer facing services like leisure in hospitality, which no suffered the most during the pandemic, retail sector, that's important. Professional business services to all your accountants out there, that's important. Tech is mark what is this what is this service dynamic into this election coming off the ADP report, coming off the full employment reports on Friday. What's a

service dynamic right now? It's all about wages and it's all about leisure in hospitality really because it's that has been the big growth sector. Is interesting. In January of T one, wage growth and leisure and hospitality was the lowest of any sector we track. Now it's the highest, and it's been at double dudgets since the summer for a very long time. It's what's driving up wage growth.

But as that dynamic changes, you might see wages start to peter out in terms of acceleration, but still remain high at these elevated levels. We're all waiting for this supply side response, any sign of it whatsoever. Well, yeah, a little bit here and there, just the hint of it, walk us through it in pocket. I mean, there was a little bit of movement, and I'm talking about labor supply of course. Yeah, hopefully we're one. We we did see someone so many supply issues here, but we did

see some people move back into the labor market. In the fall. We had the promise of a normal school season and so that was helpful. But if you look at that labor force participation rate. It's still stubborn, and it retreated last month. That is an issue you because that suggests a bit more permanence to the fact that the work working age supply has, you know, shrunk, And what does that mean for growth going forward, not just when we get through this inflation cycle, but in the

years ahead. Well, this is the inflation cycle I wanted to talk about. So on the way up, inflation kick tie really really quickly. Do you consider it to be stickier on the way down? Is that the way this usually works out, It's stickier, and I think it's going to be more persistent. The Fed's already admitted that the persistence is much more than it has been in previous cycles, That the supply shortages, those dynamics globalization, you know, automation

that we're pushing inflation down, aren't. They don't have the same power they used to, And the demographic changes are not having the same power it used to to keep inflation low. So it's not it's not only likely that this inflation cycle is stickier, that it's also likely that future levels of inflation are more persistent than we've seen historically.

You guys were talking about the supply issue in terms of workers coming back into the workforce, How can we understand the fact that the participation rate has not creeped up, that it is still actually going lower on a month to month basis if you look at the latest read why you know we all talk about economics that we forget that there's a huge psychological factor under undergrading this entire labor market. This was not just a supply shock, this was a people shock. And people over the last

two years are making different decisions. They're giving up that second job, they're deciding to live on one income, they're switching industries, and we've seen that in the quits rate. So in in combination, all these different decisions at the household level means that the workforce has become smaller, and so how do you get the workforce back up. Well, that you might have to rescale workers for different jobs, jobs that make it worth it to get off the sidelines.

So what does that mean in terms of inflation and how quickly it can really come down? We were talking about how, at least on the product side, we're seeing some some reasons to be optimistic about disinflationary forces, but not so much on the other side, based on what you're talking about, when do we get back to two Well, productivity is the fly in the appointment of the labor market.

We need more productivity and we haven't seen it. It's productivity that grows you out of this inflation stasis, right It's when more workers are more productive, creating more output. Right now we have more workers with the same output or producing less output. And that's not the way you grow out of inflation. That's really the issue. Friday out to Chad Jones, giant out it's at Stanford on productivity. And let me ask you, because you're you're you're weaning this.

I mean, it's what you've done for years, Neila, And that is how do you measure productivity of the new economy of work from home? I get that from a big corporation like ADP work from home is maybe countable. But other than that, are we flying blind in this vaunted productivity and analysis. You know, you've made a really interesting and really important point because over the last two years the economy has become even more digitized um and

so the standard measures of productivity may not hold. And maybe there's some good news on this side that we're actually more productive than we think. We're just not counting it right. But if that's the case, we should see that show up in GDP growth, right, And we haven't surveillance. We know we're more productive than you know analysis and they don't give us credit for we're just the hyperad. That's why we're asking the questions, LA, I need to

talk about policy then policy going forward from here? We aren't restrictive and how restrictive and how the how do we not? Great question? Um, we're restrictive in pockets. You can definitely see. Let's just put it this way. Where supply has been chronically short like in housing, the policy works. But the policy only works because there's not that many houses to be agen with and prices for skyrocketing already.

If there was a greater supply of housing, even a seven percent mortgage rate wouldn't keep the tail wind of demographics at Bay. But it's because that housing is chronically undersupplied that the rate is actually in is having an effect. So where you have supply shortages and a higher borrowing costs, you're seeing an effect. It's not happening in the labor

market though, And now unfair question for Monday. You don't the answers you want, but all of global Wall Street, watching us, listening on radio as well, want your update on the new ADP report. You know the pinion of this has been acted doctors, Andy and all. What's the knowledge base you have about the quality of your new improved ADP report. It's a different approach. We start with over million workers and we do something that is a

pivot instead of forecasting the Friday number on a Wednesday. Yes, we provide an independent measure based on ADP gliant base. And this is the future of data. This is how much timeline do you need? How much statistical and you need where you can say this has veracity. I think we're in that moment now. Really, we have a very expansive labor market. ADP pays one in six of US workers in the United to turn us into a commercial

But I'm not trying to. But you asked me, and this is this is how broadened because the corporate sector is delivering with high frequency data. We don't just get a read every month, we don't just get it once a month. We get it every day. And I think ADP is not alone with other companies that are getting reads on inflation, on productivity, and so when it comes to the future of data, it's not just going to be with government statistics. Go to the government as well,

corporate sector as well. I could sense the frustration. Does it frustrate you that if Wednesday doesn't forecast Friday, people just think it's useless. You know, I have lots of frustrations. Honestly, the data, Um, that's not it. Because what I can say when I have an independent metric is look, it's one of many. It's a supplement. Don't say this is a substitute. It's not, it will never be. But it's

another read on the economy. And at a time when the economy has become more complex, more affected by rate sensitivity and government debt and fragmentation globally, you need as many credible resources as you can get. And so we offer this to Wall Street. Take a look, disagree, like it, don't like it, figure out when it works for you.

But it is another data point for you to look at, like you clip this and push yeah, exactly, doing a fabulous Don't worry, we probably will thank you for coming in to thank It's going to see you in pest and Native Richards and that 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