Surveillance: Fed Day with Zentner

Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, and of course on the Bloomberg Terminent Laurence Somers was with us the other day, the Secretary of Treasury and obviously from Harvard University, and he wrote a blistering essay today in the Washington Post, and we will begin with that with the wonderful Ellen Setner of Morgan Stanley. The FETE is not internalized, the magnitude, the magnitude of its errors over the past year, is operating with an inappropriate

and dangerous framework. Professor Somers, with alan Stonemash, goes on to say, there can be no reliable progress against inflation without substantial increases in real interest rates, which means temporary increases in unemployment. Mazentner is with Morgan Stanley. Ellen, you know that the word magnitude is used differently by people like Xanner, people like Summers. How hard is it right now to gauge the magnitude of this moment, this march magnitude.

How hard is it to gauge the how muchness forward for you? The how much of nous? I love it? Uh So, look the the It's easy to get on the train of saying the feed is behind the curve. And I think there are folks on the FO m C that would agree that they're probably behind the curve. UM. But there are enough risks in the economy still and with renewed geo new geopolitical concerns, um, that does make

sense to start off with the basis point hike. You don't want to add to the volatility that's already in the markets. I think what we're going to see is that Chair Pal is going to leave the door open to the door. Then markets know that they can go in bigger increments at any time. But to say that the FED is operating under the wrong framework, I think it's just absolutely uh inconsistent with what we've heard from

the FED. I think it was pretty quickly that they abandoned the new framework when they went solely to focusing on UH inflation. Uh. I don't think they're operating on the under that old framework. The old twenty framework framework, and the headline there is Zentor pushing back against somers Ellen. I want to stay on magnitude, which goes to the reaction functions of the Fed. Can we have any predictable reaction functions given the mix of economic data the dynamics

of the American system? Are we literally with Chairman Powell flying blind out of this pandemic with the overlay of war in Ukraine? Yeah? So, uh, I mean flying blind? There is a good way to put it. Uh. You know, I think under this environment, it's absolutely appropriate to expect

high volatility to continue. Um Volatility equals uncertainty, and it means that you have monetary policy makers that are going to have to make decisions meeting by meeting based on the data that they have in hand and where they think it is likely going. You know, when you're when you're following financial conditions so closely, and when those are being impacted uh, not just by your own communication, but

uh of late by external sources. You know, it's it's out of your control and you just really have to watch and take it step by step, feel your way in the sand with your toes. Uh. And that's what the FED is going to be doing, and so I think Chap is going to underscore that in his Q and A session uh today, um. And that means that markets are going to have to really be nimble as

the FED is going to be nimble. That you could see twenty five basis points fifty fifty or all twenty five or what we do know is that they're hiking. The hiking cycle has begun, and there is a lot of room for them to get far in rate hikes without impacting the economy. And I think that's what is

most misunderstood by the market. Well, Ellen to that point, let's put some numbers on that that you expect we're going to end the year of three with a base of FED funds rate of two point six to five, well above where the tenure and frankly the thirty year are at this point. And you also expect quantitative tightening, not just a cessation of purchases of bonds, but actually the shrinking of the balance sheet to begin in May.

So here's what I'm struggling with, struggling with Ellen. If this is actually going to be effective FED tightening, why will that not translate to a slower growth paradigm that could potentially slow the trajectory of their rate hikes. Yeah, so it's it's a great question, Lisa, So they do. So here's the part of Summer's uh op ed that I do agree with. The Basically, he's laying out in a way that the Fed can um that their other

job is to raise the unemployment rate. Um. Now, it doesn't sound very good for policymakers to stand in front of the public and say, hey, we're we need to raise the unemployment rate, but that's part of their job. They have to create slack, and to create slack, you've got to slow the economy. So we do have the

economy slowing. Uh And we've taken growth forecast down for this year and significantly raised inflation forecast, but the economy is still growing well beyond its potential, which is in the one and a half to one point eight percent range. Uh And, so you are still gonna put downward pressure on the unemployment rates. At the very least towards the end of the year, we should start to see the

unemployment rate flat and out. If it doesn't, as policymakers have warned, then you could see an unemployment rate in the high twos, and that's still going to mean as the Fed has a lot more to do, so I think in order to slow the economy and help inflation cool, they are going to have to hike as much as we believe in Again, you all mentioned the market is expecting seven rate hikes this year is a basis point equivalent.

We're expecting six basis point equivalent. It's really in three where we expect four additional hikes to get UH in that range of two and a half to two and three quarters per cent. That's where the market has it wrong. This economy is less sensitive to hire interest rates UH, and so the Feed is going to have to hike further in order to slow the economy enough and raise the unemployment rate enough. And we have to leave in that ammon center of Morgan Stanley, thank you right now.

We got to get to this and there's like eight ways to go here, including the news out of Chelsea and football. But on a serious note, we talked Abob Michael right now see I oh at JP Morgan Investment management of the note and Bob, I just want to tell you I have completed my bracket. And Gorgonzola is who I have going all the way to the finals. That's what I'm looking forward to. Put too much money

on Gorgons. Not go with Yale, folks, I had to go with Purdue because the woman from Produce signs my paycheck is as simple as that, Bob. On a serious note, Chairman Powell faces serious consequences of the decisions today and may fourth, what's his biggest focus to get to the autumn of this year. Well, it's interesting to me if you go back to January, who walked into this year surprisingly hawkish and that that caught the market off guard.

I'm looking for three things from the FETE today. I want to see if they're opening the door to fifty basis point hikes and how soon they'll do it. I'm also looking at um the quantitative tightening. How fast will they roll that forward? I think they should bring that forward to June. And then lastly, I want to see that trade off between growth and inflation. For sure, growth will slow down in the back end of the year, but if inflation is still high, I think the market

expects they may back off a bit. I think the market will be surprised how hawk as she is today and how focused on inflation he is today. Let's go through that point by point, Bob, and let's start with the dot plot and then we'll go to the news conference. The DOP plot for twenty three right now about six, just a little north of two. What kind of shift are you expecting that? Well, it's throwing darts today given

where all the data is. But what I'd like to see is I'd like to see the dots for the end of this year at two percent, and I want to see if anyone has the courage to put them at three percent at the end of That's that's what you want to happen. What do you think will happen? Oh, I think they'll do it. I'm certain they'll do it. I think they'll throw in a fifty at the main meeting and they'll do uh six basis point hikes at the other six meetings this year. So, Bob, where does

quantitative tightening fit into this? How much can they really execute a shrinking of the balance sheet? Oh? I think they'll announce it at the main meeting and do it in June. I think all of it gets pulled forward. Look, they've already made one policy error so far by letting inflation get to where it is. We're looking at the Dallas trim mean personal consumption expenditures, it's close to seven percent.

And that's without all the inflation that's going in the pipeline now that we're going to see over the next three to six months. So they've got a lot to do to lean into inflation. And I think what you're going to hear from them is that's their focus, even if it means sacrificing growth at the end of the year. Well, but Bob, that's exactly where I wanted to go, because you're saying that they've already made a huge policy error. But a lot of the inflationary inputs are far out

of their control. Their commodity driven. They also are driven by some of the pandemic era distortion. So at this point, is that the only tool they have to materially slow the economy even further than inflation will do naturally, nonsense. Not everything has been out of their control. There have been an awful lot of things that have been in their control. Look at the price of new homes, look at the cost of shelter, the cost of housing that's

gone through the roof. Why because if it costs more, but the cost to finance it remains close to zero. Guess what you can pay more. They should have hiked rates and stop purchasing mortgages six to twelve months ago, and that would have slowed down the housing market a bit. I think they've got a tough summer ahead because there's a lot of pent up demand yet to be satiated. That's going to happen over the summer. I see the toughest month for them to get through as July. Well, Michael,

you know this works. You do one, Mike, We've got a ton of money to put some work. What do you tell them now? What'd you put it? Well? As you know, we walked into this year somewhat conservative thinking at things, have gotten a bit of themselves ahead of themselves in the credit market and raise cash. Now we're putting it back to work. I think over the course of a couple of months, we've got a year's worth

of repricing. We're looking at high yield for example, that we came into this year at an all in yield around four percent, we're now at over six percent. You look at investment grade credit spreads have gone up from eighty or ninety basis points to a hundred and fifty basis points. Yields are up one point three, so there's a lot of concern about what's going to happen to corporate America. In corporate Europe, we think they'll be more resilient than a lot of investors anticipate. And there's a

lot of cash on the sidelines. There was a lot coming into this year because of the d risking. More has built off build up. I think you're going to see that put to work in the second quarter. But Michael Friday evening seven pm, you're gaming Liverpool's next victory. I'm reading Kasman and Faroli cover to cover and Weekly Prospect. As you read your colleagues Kasmin and Faroli, what does it tell you, given higher yields, what foreign flows will do?

My problem with the dooming gloom of moving out to higher yields lower fixed ingram prices is the foreigners always show up, don't they? Yeah, they do, And you'll probably see some of that in the coming quarter. Because for sure, you're not going to see the Bank of Japan raise rates in here. For sure, the e c B, I think they'll still hike this year. But they'll talk it down until the back end of the year, so that money will look at the higher yields and come in.

That's probably why you don't get to three ten years treasuries over the next couple of months. Can you get there by the end of the year. I think with the inflationary pressures in the pipeline, you will get there. What would you like to see the cops at Chausea? Just as a Red Sox Liverpool man, would you like to see that happen? There are so many bad things in that question. First of all, I'm a Philadelphia guy, so it's the Phillies and now I'm a Liverpool supporter.

This is just a bridge too far from me. How did it happen? How did the Liverpool thing happen? Bob Um, It's a it's a very long story, but we have time. We I spent nine years in London. We landed in London the year that England beat Germany five one. Michael Owen scored a hat trick. We all looked at Michael Evan, who did he play for Liverpool? And that became our club and that was that. But Michael, thank you, sir,

our goal here for this invasion. This war, or as Mr Putin says, this special operation is to bring you guests of authority and earned expertise. Georgia is to the southern side, think Joseph Stalin. And it was one of Mr Putin's first wars in Russia. It was violent, in brutal,

with courage. Ian Kelly is the former US Ambassador Georgia, served in a very tenuous time, and he joins US now with his brilliant academics out of Colombia and his academics out of Northwestern this day, Professor Kelly, Ambassador Kelly, Welcome to Bloomberg. Wonderful to have you today. My book of the year is Angelus Stents Putin's World. You use it in class. What does Putin's world look like right now?

Putin's world looks very, very circumscribed right now. He started out telling the Russian people that they were going to be able to become fully participatory in international financial systems, be able to travel, be able to use UH and and hold in their banks foreign currency, be able to use H worldwide credit cards. And of course that has now come crashing down and UH. The Putin's world, as I say, is now very small. Let's let's go to

your expertise. And I don't want to make allusions here to Hitler and Putin and that that would be inappropriate, but I will suggest that all of his work, including his battles in Georgia, is with a Slavic certitude. You study the Slavic nations culture in language. Is that breaking down for Mr Putin right now? That certitude of the Russian Slavic experience. Well, I think that he made a serious mistake in thinking that the that the Ukrainians would

welcome their Eastern Slavic brothers. I think what he's trying to do in in Ukraine and what he has been doing with UH, with Yellow Rouse and to a certain extent Kazaks down where are many Russian speakers, is to try and create a Russian world, to create a Moscow centric community. UH. I don't think he wants to build the Soviet Union, but he does want to restore in Eastern Slavic homeland or or community. The idea that there

are borders between Russia and Ukraine UH pains him. And what even more pains him is the idea that the Ukrainians would want to orient themselves towards the West and not towards Moscow, Ambassador. As we sit here today, we are still getting a series of headlines saying that talks are ongoing and seem more realistic between Ukraine and Russia. Do you buy that, given that we cannot reset the clock and go back to where we were, that it means more NATO troops on the borders of Russia, that

it means a Ukraine that's living with this scarred history. Well, I think it's it was impossible for anyone, really, I think to see how there could be a diplomatic solution based on Putin's initial maximalist goal goals, which was the decapitation of the Ukrainian government and what he called the demilitarization of the Ukrainian armed forces, which he said, falsely, we're being controlled by the US and NATO. It's interesting that you're starting to see UM a change in the

rhetoric in terms of their goals. They're not talking about the de nazification of the government. They're talking more about Ukraine becoming neutral, in other words, not joining NATO. Uh

So that I think is significant UM. But whether or not it leads to a cessation of hostilities because uh, the the other the new demand that they put in as a recognition of Crimea and the eastern Ukraine enclave of of dom Bas And I can't see the Ukrainians giving up the sovereignty over a chunk of their territory. Ambasta can I just jumped in just quickly slightly off track where we just got a headline about how to

get Ukraine more military help. We've been trying to figure out why sending them mix would be considered an escalation. Why has the US declared that as an escalation if they were to do so. I think what it is is uh uh, the uh Poles wanted to send the the planes to uh Ramstein air Base and US air base in Germany and then have the planes flown in

from a US base in Germany. I think it's that particular, Uh you know, it's it's it's the origin of the planes, I think, which is giving UH Washington pause and I uh, I I think that they're they're overestimating the possible risk of flying from me from a US base. But it is my understanding of it. And thank you just for that clarification at the end there as well. In Kelly that the former US Ambassador to Georgia. If you are a gentleman from North Carolina state, you know the distance

from my seventy five from Knoxville down to Chattanooga. Yes, Dennis Gartman, in my bracket, I've got Knoxville playing Chattanooga. I'm gonna go for the romance of a South there in basketball. But the backdrop here in America, across our agricultural complex is the planting season. In the serious moment for Ukraine and their agriculture. We speak to the younger. The younger Dennis Gartman of the Kansas Kansas Board of Trade, Chairman of the University of Akron and Domin. Dennis, I

don't want to buy stocks today. I don't want to go long short. I want to talk to you from your ute and the Kansas Board of Trade about the planting season. How serious is that for Ukraine? Very serious, Tom, It's it's something that we have to pay very much attention to. Ukraine and Russia are about eight percent of the world's exports of wheat. The fact is the winner wheat crop, which is in the ground now is probably

deteriorating something fierce. Nobody's paying attention to it, nobody's being able to get into the fields to take care of it. It's coming out of dormancy, and it's going to be a greatly reduced crop. There will be a corn crop of some size, but it'll be demonstrably smaller than in the past. And the question shall be, well they get next year's winter weak crop planted in September and October November when that crop has to go on the ground.

So the wheat crop prices here in the United States have been on an absolute tear from the lower left of the upper right. They've dropped a little bit in the past several days, but it's been just a demonstrative, monstrous bull market led by week. Dennis, you and I have said in the boardroom of the New York Stock Exchange and talked about this. Can we monitor the Ukraine planting season by whether or are there other factors we can't observe, including the danger of Russian troops? Well, clearly,

the danger of Russian troops is one thing. That the ability to get the crop out of the ground and shift is another thing. Completely. Whether the port facilities that are so will be operative is is another question. Entirely. Will the rail facilities that have to move the crop from from the interior of the country to the to the ports is another question entirely. It's one question after another,

and confusion breeds contempt. Confusion breeds uh higher prices under most circumstances for a while, and then suddenly you see an increase in the planet acreage here in the United States, will probably see a big increase in spring weed planting here in the US to take advantage of the fact that wheat prices have gone so high. So it's a real question that it's something people are not paying much

attention to. The other thing we paid we need to pay attention to, is that here in the States, how high soybean prices are, and the fact that you're gonna have and how high fertilizer prices are, which means you're gonna have a huge shift probably three four or five million acres out of corn into soybeans because you need you don't need fertilizer for the bean prop and you

need fertilizer for the for the corn crop. This this could be the first time in twenty years that we actually plant more acreage to soybeans that we do to corn. Strange during strange circumstances. Indeed, Dennis, do you feel like the market is underestimating the elasticity of some of these agricultural commodities. Yes, yes, I think the market is underestimating. I think that we can still see demonstrably higher prices

over the course of the next year or two. As as I always tell people, watch what the term structures are doing in storable commodities. When the backwardations widen on on updates and then backwardations widen on down days, Also it tells you that the market still wants to go higher. So the answer to your question, yes, Dennis, has been a while, it's gonna catch up, particularly in this environment,

Dennis countyman that on this commonity market. What we're gonna do here is have a bit of a different conversation with David Rubinstein. This morning we celebrate his interview here with Mr Chesky. Let's do that quickly as we can. Who is Mr Chesky and why is he ger Main right now? Brian Chesky is one of the three people that started Airbnb, which is a phenomenon among young people

but also middle aged people now. And it's relevant now because as the world is changing, and people aren't coming to the office quite the much as much they used to. They're working remotely. More and more people are using Airbnb to kind of relocate themselves. And in fact, roughly of all the people that use air and B and B do it for thirty days or more, and half the people use it for a week or more. It's not like a one night kind of overnight thing like a

hotel might be. So it's changed completely the perception of what you do with your time when you're away from your home. You can stay a much longer period of time than you did before. And his company is doing quite well well. And the future of Airbnb in some ways hinges on the future of work from home, on the future of the ability to take a month and

go to Hawaii and spend it there. How much on Wall Street is that really going to be the story when you see the likes of Goldman, Sachs and even JP Morgan really emphasizing working in the office, well, J P. Morgan and Morgan's uh. JP Morgan and others are saying, come to the office. But these are very unique and unusual firms are centered in New York to financial service kinds of organizations. The average person doesn't work at Goldman

Sacks and JP Morgan. The average person might be can work from home, work can work from very remote sources. So it's changed the way people live and work. I don't think after the pandemic that we've gone through, people are going to come back to the office five days a week in the same pattern that we've had before. And Airbnb is gonna, uh, I think capitalize on that it already has. It's done quite well despite the fact that initially, when when the pandemic came about, all of

a sudden, Airbnb was in big trouble. People weren't traveling at all. Now it's rebounded and it's doing quite well. It's got a market value of about ninety two billion dollars now go ahead. So honestly, this has been a really interesting moment because we're talking about these work from

home trends. We're talking about the return to offices amid a new backdrop of crisis, right, and I wonder, as as the head of a company and trying to figure out as an investment company talking to other heads of companies, how are people rethinking their business plans on the prospect of more prolonged commodity prices of more prolonged disruption even beyond the pandemic. I think all employers are learning it's not as easy to get your people back to work

as you once thought. You just can't say come back to work and they all come back exactly five days a week the way they used to. So you also have a hard time getting employees now and many many companies, so you have to be more tolerant of what employees want to do. And employees have now tasted the idea that you can work at home a couple of days a week, or you can work remotely and in the whole. I think this is changing the way people will work

for quite some time in the future. Airbnb is taking advantage of that because it's providing homes or other apartments to people who can take away a week or a month or more from their place where they actually supposed to be in the office working. David yesterday, the announcement of the death after I believe a tenure battle, real illness for Michael Price, the great value investor. He used to wear his Yankees ring just to aggravate me on set.

Tell our audience worldwide this complete class act. Michael Price. Michael Price is one of the best value investors the country has ever seen. Obviously, Warren Buffett is probably the class of all value investors. Michael Price was trained by somebody else. Michael Price took over a firm many years ago from a mentor and built it into a powerhouse, and became not only a great philanthropist, but a good sports fan, as you know from his stake in the

New York Yankees. And what was important here was the grace of it in this modern day. The snark of the modern day, we've we've lost the grace that you would see of a Michael Price or John Templeton and the others. Both John Templeton and Michael Price didn't brag about themselves very much. Relatively modest people, and Michael Price wasn't a headline person. Most people in the investment world probably didn't even know him, and outside the investment world

probably very few knew him. But he was seen as a class act, a smart person, and he was very very philanthropic. David Rubinstein, thank you for joining us. Look forward to sting your particularly on Russia. 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