Surveillance: Fed & Recession with Lacker (Podcast)

with the next one, is truly historic. A student of this, of the history of the nation's economics and the action of it, is a former Richmond Federal Reserve President, Jeffrey Lacker, and we're thrilled to Professor Lacker could join us this morning. Jeff Lacker, I want to go back to one of my heroes, a gentleman from Washington University at St. Louis, the laureate Douglas North, who codified the word ambiguity and also did a careful study of the dynamics the movable

parts of our economy. All of our listeners, all of our viewers, are drowning now in the dynamics of our economic world. How do we get control of it that has to do its job get inflation down. It's the institution with unique control over monetary conditions, the United States UM. Together with the fiscal authorities, they drive inflation, and the FED has got to do its job now uh and

do what it takes to get inflation down. I think Chairman Powell has been right in recent months since March to emphasize that maximum employment is going to be out of reach until we get inflation down, and we need to put concerns about the labor market on what it's doing a little bit to the side and focus on getting inflation down. That's gonna take reducing spending growth, producing nominal spent and the labor market will play out as

it will. Your shop Codified Economic History with Thomas Humphries one of my heroes. I've read every single page he's ever written. Right now, Thomas Humphries would be writing about comparing Volcer to Powell, Powell to Voker. He's not Paul Voker, right. So, Paul Volker was a um, a great central banker in an age of monetary mystique, an age in which central banks deliberately cultivated some obscurity and a distance from the public. They didn't want to be in the headlines unlessen you know,

they wanted to choose when they'd be in the headlines. Um, we're in a different day and age. Getting inflation down revealed to central bankers around the world the value of um managing expectations and the value to that of being transparent and communicating about what they're about, what they're trying to do. J. P See strikes me as better suited for the age of central bank transparency with Paul Boker

in terms of personal demeanor. The one big thing that Paul Boker had was the political the backing the political establishment in Washington and New York to get inflation down. They were fed up with it, and they were willing to take the pain. And he cultivated an appreciation of the pain that was needed, uh to withstand in order

to get inflation down. And I think J. Pale Is seems to have abundant um political connections and abundant skill in managing the FEDS political connections, and so he seems pretty well suited on that grounds to a delicate subject. But you've touched on and so let's go there. How political is this fat? Right? Now? Uh? So I think they understand that. Um, there's nothing that could damage their

credibility more than sustained inflation. Um. You know, they can take all the hits they want unemployment and the labor force, and climate change and and what have you, But uh, job number one is inflation. If they don't get that down, I think they realized there their political toast in some sense. So UM, I think that's true of any FED, no matter what people say about independence. I think it's true to refund. Are you convinced that wanting to tolerate a

recession to get inflation? Do? Yes? I do, and they should. Jeff, what kind of recession? Because the consensus right now is short and shallow. Do you share that, let's say, more constructive view of things. I'm tempted, given today's news, yesterday's news, to say a Mario dragging recession, you know, whatever it takes, because the um, the alternative to let your foot up off the break before inflation has come down, let it settled four and five. That's just a recipe for another

recession down the road. That's a recession for prolonged pain, making the agony younger and longer, stretching out over years. That's not good for the American public. I think they realized that, so they're gonna have to they ought to. What they ought to do is stick with it until they get inflation down to under three percent, say within spinning distance of two, and um go from there. Okay, So whatever it takes, what is it going to take?

What rate on Fed funds, rate on unemployment? Good question? So UM, I think the historical record is clear that they need to get the real federal funds rate out or above zero. So that banks the question right. So the real rate is the actual funds Fed funds rate minus expecting near term inflation. The best reads of that are about six percent. You've got the Michigan survey at five point to the New York Fed Consumer Survey, which is great, very good methodology at six point eight. Split

the difference at six percent. If near term expectations of inflation stay at six percent, they're gonna have to get there. If those near term expect patients start falling, then what we have in stores or rendezvous between the Fed funds rate and expected inflation. But I doubt that expected expectations are going to fall to three and a half or four by year end. So I suspect they're going to have to go higher than that, and how quickly would

they need to get there? I mean, six percent is still a long way away, even with the supersized hyps we've already seen. I don't think, um, I don't think slowing down the process does them a lot of good. Um. No matter what, whether they go you know, fifties or there's still going to be in a situation where the

effect on inflation is out into next year. They're going to have to make a judgment about when to stop without knowing whether they've done enough or not based on other indications and other calculations like the one I cited, Um and uh, so they might as well get get it done. They might as well get there fast. Jeff, do you look at the path back from this inflation to whatever is normal to three let's not get into

that now. Is having a smoothness a glide path, as Peter orzag would call it, or is it kinked where we get to a point we stopped, we try to figure out how to lower inflation next, etcetera. You know, if the if the Fed titans enough, I think we'll just see a gradual decline down. I think it'll sag over a couple of years. I expected to be relatively smooth. I don't have any reason to supect any jolts as an other shocks like more oil price problems in the Jeff.

How would they respond you think to that negative supply shock on the energy side, I'm interested in that, not just for the Federals Earth, but maybe more so for the e CP on the gas side of things. I don't know if you've followed that news conference yesterday with the GUARD, but then we all fail to establish what their reaction function actually is and how they'd respond to a negative supply shock that push gas prices higher and potentially growth lower. This is a a key area because

oil price shocks tend to cause unemployment. People think, well, you need to ease that's a reason to ease policy. But if you think about it more broadly, the central banks controlling the real interest rate, which is the incentive to save and delay consumption, delay spending for later. And if you get a supply shop, you want people to wait and consume later. So what you want to do is raise rates. Uh. At least one argument goes So there's a case that you know it doesn't. It doesn't

mean not staying the course of inflation. Interesting, Jeffrey got a cash shop jeff Nack of the former Richmond Fat president right now and this is really important. I line up Kenneth Rogoff with this book. The Curse of Cash is one of those courageous books written in the last number of years. There's our Steve Engel out of Hong Kong and the courage he has done and reporting some of the challenges of the p ccific rim and in securities analysis. There is Richard Greenfield who was tirred and

feathers years ago with a small upstart called Advantage. It wasn't funny at the time. Now we can look back with joy and we're thrilled that one of the leaders on media, rich Greenfield joins us today with Lightshead Partners on the challenges of Mr Musk and Chance to record rich just as a as a beginning point. Do the earnings today matter? I mean they matter from the standpoint of it's yet another signal that the online ad market is slowing. You saw it from Snapchat last night, You've

seen it from Twitter. There are now just the building series of signs that the economy is slowing and advertising is slowing. Whether that's inflation driven or just overall broader economic weakness, it definitely there. There's very specific Twitter challenges with Musk, but the overall macro environment is clearly weighing. We'll see the big bellweathers in Google and Facebook next week. But this is certainly not um These These are negative

data points, both of them for investors. Right now, Search, I gotta rip up the script here. Let's jump over the next week. Are we going to see the big boys and frankly including the Amazon advertising model, are they going to be diminished as well? I mean, look, Google has been talking about YouTube bearing some pressure. I think there's no doubt the connected TV AD market is certainly slowing. I think you're gonna hear that, whether it's from Fox

or Paramount. Like I think everywhere you look, connected TV is slowing. The TV market, especially local TV, is starting to slow. The economy is weakening. From the standpoint of advertising companies. Are you know companies are seeing top line growth slow? What do they do? They cut back on

the marketing spend. This is nothing. This is not a new I mean, you and I com have lived through multiple cycles over decades like this is what companies do when things start to slow, They cut their marketing spend. There's nothing shocking about it. The question is only how long will it last and how bad will it be? Is this a deep dark recession through twenty three where ads fen gets crushed or is this more of a shorter term phenomenon. We bounced back in twenty three, and

that's I think that's the big question. We don't know right now, but I definitely think you'll see Facebook or sorry Meta, I keep saying Facebook, We will see Metah certainly talk about a slowdown in a continued slowdown and ad revenue and probably give relatively underwhelming Q three guys, I don't think as bad as Snapchat, but I don't think it's going to be a great, great outlook. Well

for Rich to bring it back to Twitter. They did talk in the statement about those advertising headwinds, but they also said part of its reflective of uncertainty related to the acquisition of Elon Musk. What is your base case about what the verdict will be in that Delaware court in October? Is he going to be forced to buy

this company for share? We really do believe he's going to be forced to buy this company for Kaylee, he signed his he signed this agreement when the case in Delaware, which is going to be litigated on an expeditive basis, he already lost the push to push this out. I think the judge, My guess is the judge is gonna look at this and go The entire Elon Musk case essentially rests on this question of bots and did Twitter

disclose the proper amount of bots. The problem with that, Kayley, is when you read the merger agreement, it never talks about bots. There's no discussion of bots. It just relies on Twitter's public filings. And if you read Twitter's public filings, it says this is how we this is how we count bots, or this is how we count real users. But we could be wrong. So I think when you actually read the documents, it's very hard to see how Elon which is feels like he's got buyers remorse. He

just doesn't want to buy it anymore. Whether it's the martin, the environment, I have no idea. Well to that point, Rich, what happens to a company if someone is forced to buy it who doesn't want it? Well, first of all, it's happened before the specific performance, which is being forced to close a transaction that you signed back in the financial crisis. There is precedent for being forced to buy

a company. That's his problem, not Twitter. Rich Greenfield very quickly here, and I want you to take a broader Walter Pizak, Rich Greenfield view. Is their profit in streaming? Is it a durable business or do they compete it all the way spending two hundred million dollars on the gray Man. Uh. Tom, It's an excellent question. I think the way to answer it is right now, you are seeing one company make a lot of money, which is Netflix.

Netflix is generating six seven billion dollars of EBITDA, is generating a billion dollars of free cash flow and is going to make dramatically more free cash flow next year. Everybody else, whether we're talking about Disney or I mean Peacock, is losing two and a half billion dollars a year. Paramount Plus lost a billion in the last two quarters.

Everyone is just drowning in red tape right now. I mean, this is like a black hole of streaming because there's too many companies competing and they don't generate a significant amount of time spent in streaming Netflix of all time spent streaming on a connected TV YouTube. Everybody else is tiny. And that's the problem is they're all spending billions upon billions of dollars and they're not getting substantial viewership. That's the problem. I got ten more questions in no time.

Rich Greenfield, thank you so much for joining us with Walter at light Shed Partners. Right now, we're gonna look at this at the President of the United States. To John mentions, it is way way better than what President Trump confronted. Maybe age, maybe health, but also just virulence as well. Laurence Sour is expert in this field, Associate professor at Nebraska Their Medical Center and director of Special Pathogens Research Network. Lauren, I want to go to our youth.

I remember my mother dragging me in for boosters. It was no big deal. There was whooping cough, tetanus, there was dif theory, AD tap and T tap and all the rest of it. Why is our fear over a COVID booster shot so different than our fear over getting a detherial booster shot. To be honest him, I think a lot of it is politics and the conversation around

how the vaccine was developed. I think it's rare that we see the development of a vaccine play out in the public like this one has, where we're seeing every minutia of the step wise path, and where people are paying such close attention to the data that aren't scientists, that aren't clinicians, and they're sending out interpretations into social media, into the news media that might not be quite accurate

um or might be developing. And so I think changing the conversation about how vaccines are made and why we use them is really important, and bringing the trust back to the process, explaining what happened during the COVID vaccine, explaining how these are developed, and getting people back on

track with some of those vaccines you just mentioned. A lot of kids are have been delayed in getting their childhood vaccines because of the COVID pandemic, So bringing everyone back up to speed and getting that population healthy again. What would you like to see in terms of action from politicians to get us back to where we don't die from dithery a in one week like members of my family did in about nineteen o five. I think a huge piece is messaging the process um and why

it's important. So we need to have all of our politicians come out and talk about why vaccines are important for their children. UM. We can't have this vitriol, this

dialogue playing out in the public um sphere. And and recognizing that scientists have a higher level of training, clinicians have a higher level of training than you know, the average politician on how vaccines work, why we use them, and so the opinion of an individual in you know, let's just say, for example, a member of Congress is different than a physician researcher who's trained for twenty plus years to develop these vaccines, roll out the trials, um

and understand the data on how they work. Well, Lauren, as we talk about the messaging that vaccines work, what a lot of people see is I'm vaccinated and yet

I still have a positive case. And especially as we talk about a new variant now that we're being told of AIDS all immunity, whether you've previously had COVID, whether you're vaccinated, does that just raise the question of getting more boosters into arms or is that just essentially saying, Look, we have to resign ourselves to the fact that everyone will contract the virus. It's just a matter of how bad it is for them. Yeah, I think it's honestly

somewhere in between. I think we had a few missteps on the science side of potentially talking about sterilizing immunity early in the pandemic, especially since we didn't know exactly how the UM data would look, and so expecting people to to change their viewpoint from I'm going to get this vaccine and I won't need a vaccine and I

won't get sick to um. The vaccine is protecting you, but it's protecting you from getting really sick and possibly ending up in the hospital, are dying, And that conversation is continuing to play out. I think one eventually, once we get that that vaccine level really high in the population, the mild covid um will is what we'll start to see. So people will be vaccinated, they'll probably get on a regular vaccine schedule, and it'll feel more like the way

we we deal with the flu. And to be honest, people get really sick and they die every year from the flu um. But research continues on how to make better flu vaccines, how to make universal flu vaccines, and so that we'll probably follow that same path. So what's the appropriate policy response in a world in which people aren't getting as sick, but they still are getting sick, they could still be contagious. Does that mean masks forever?

Does that mean we're going to stick with the policy here at Bloomberg where you're out of the office for at least five days if you test positive. I mean, how do things have to evolve in that scenario? Yeah?

I think the first step is that we still have to do a lot of work to get our vaccination rate up, so UM reminding people that that they even if they have gotten vaccinated, that they need to get those boosters, pushing the federal government to bring that fourth dose to people, UM, continuing to do the studies on how we can get into that vaccine cadence and what's most appropriate. And then I think as we grow that natural immunity and the population or that vaccine immunity, will

see less and less of the masks. But for now, the cases are still quite high, and I think masking, especially indoors, is quite appropriate. Lauren, are we completely to where this virus is endemic, where it's like it's here, get over it, It's not moving I think it is here, um, and I do think it is endemic. But we we were talking about endemic like it's something we just resign ourselves to and accept, when in reality, we have lots of endemic diseases that we fight tooth and nail to

at bay. So dangy is a great example, UM, lots of fever is a great example. Maybe not in the United States, we don't talk about them in the same way, UM, but but across the world we fight endemic diseases because they still cause significant morbidity, immortality, and so UM, doing all we can to stop COVID spread and to fight COVID to protect our our people is still really important even if the disease becomes or is endemic. SAA, thank you.

I wonderful to hear from us O. White. It's been a while and that's good news, I guess, but we've missed you. The University of Nebraska Medical Census, Laurence, Sawada. Every week there's fruit basket down on the shore and you know the cake that you know, the Christmas like date cake thing cut a knife through, and gallons of ice cream, even cases of beer we get in sometime but then other times and I'll get the photo out

here soon on Twitter. You get a blue shirt that looks perfect on afterthought, because she hates the Red Sox as much as Doug Cass I ate the Red Sox. Got Cass, thank you so much for thinking of me. If you agree to wear that T shirt at the game, and I will as well because I have one. Obviously, I am now committing to taking you the World Series game between the Yanks and Houston in the Bronx. That

would be good, dog, Except there's a problem. Yeah, you haven't seen me since I was seven, and there's no chance this floated ticket is getting into that T shirt. Anyways, how about Disastros? I mean, before we get to the market, Uh, Doug quickly here, what is it like when when a team has their number Yankees betting one fifty one against the Astros? Take it easy. Record is still they're gonna meet the Houston. They're going to meet Houston in the World Series. We'll see. By the way, I am told

that they're actively um seeking Soto and Castillo. And if that occurred on the door, it's a it's an American Soota joins the Yankees. Well, it's like the Yankees are two and five against the Astros this season, so they're going to be I don't know. You obviously didn't take stats exactly good. Let's look at the stat right now, Doug Cass, of this nascent bull market we're in right now, what is the character of the up we've seen the

last six weeks. It's been interesting. I mean, my my skepticism, which emerged late last year, has helped Sea Breeze performance slightly up for the year, a little commercial, but as we discussed last time on surveillance, I've turned more positive in June and I view that period as a likely low in the making, and my mantra continues to be

mild and brief. In the first half of the year, we moved from a period of gross an excessive speculation, elations, elation complacency on the part of most market participants, and the expectation of only positive outcomes, to a period in which speculation has been decimated, investors of the risk and the gross valuations have been reset lower. Fear in the VIX was rising, and the general consensus was mostly negative outcomes. In fact, and this is really important, the first half

disastrous market to decline. What about a big change in sentiment. Remember the term nattering nabobs of metivism. By the way Q Bramo on this, that was the WILLIAMS. Sapphire's term for a Spireau agnew speech. But that but the nave obs of negatism populated the investment seem uh and reminding me of Helene miss great quote there is nothing like price to change sentiment um. I think it's very interesting if people talk about positioning um, which is a non

fundamental analysis of the market. Some say it's non vigorous, but to some degree this has been a positive A position driven rally tradition. Position usually doesn't fit in my investment view, but it doesn't extremes. And let me very briefly explain the market volume is qua totative and passive trading. These products and strategies worship at the altar of price momentum. They know nothing about price everything nothing about value, everything

about price. The other of market volume is active trading, mostly hedge funds. They're the marginal buyer. So when price momentum shifts to the upside, as it recently has, the quant strategies following by that other twenty percent hedge funds have been a defensively positioned Remember the b of a bull bear indicative felt to zero and they're all off sides, um and uh so they come in. And what we've seen is that we witnessed the dual impact of both

passive and active players buying. Over the last several weeks, I believe we've set the loads of the year. That said, we've traveled long distance in a very short period of time. I sent you a chart, um in which this bear market rally was plus nine percent compare to the pre Is that is that is that? Is that what you call it, Doug? A bear market rally here? I well, that that's what people are calling it. What are you playing at that? Um more pronounced? You know, you know,

let me do a baseball analog. Okay. The market in the first half of two was like my cousin Sandy Kofax when he graduated from Cincinnati and joined the Dodgers. Both that Sandy and the markets were a mess. The SMP fell by over Nasdack. Sandy's first two years were as horrible as this year's first half. In the markets, he was you guys don't remember, but he was so wild. He averaged a walk and a half every inning he pitched.

In nineteen fifty five and ninety fifty six, he only pitched about fifty innings each year, and then things changed. He got his mojo, He's got his rhythm, he got his control in nineteen fifty nine. He went on from nineteen sixty one to sixty six, having arguably the greatest six years ever for a pitcher, finishing his career with

three of the less four years. So so the market in the last has been more like Sandy than say Troy Pitchers Byron Guardia, who was worth What do you say this weekend when you're having your eighty dollar brunch down in Florida? What do you say to someone the summertime summer bunch? Excuse me, Doug, What do you say to someone who says I'm comfortable in cash? I say to them that, uh, that there are substantive and underappreciated buffers.

They're going to serve as ballast to the U. S economy and are likely to lead to only a mild and brief recession and a less tragic impact on US corporate profits than the consensus increase in the expects. Things like the absence and large part of the sort of leverage positions and segments of the economy that have characterized previous deep economic cycles. Unlike fifteen years ago and in other previous economic downturns, our banking system is far less

leverage and has sizable cushions of liquidity and capital. No one talks about. Everyone talks about the problems, the woes facing the housing market, but no one talks about the sizeable unrealized embedded gains in the nation's housing stock and also the large unrealized gains in the U S stock market. And here's an interesting stature. The household liabilities to household net worth is at the lowest level in fifty two years,

and no one's talking about that. I will look that up and research that, Doug cast do quickly ten seconds. Amazon for long term, you've published that. What do you got now? Um, I wouldn't buy Amazon here. Amazon bases a number of headwinds going forward. I want to own it long term. Douglas Cass, thank you so much, greatly appreciate my T shirt. Yeah, I hate affect afterthought size she will love You're gonna 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