Surveillance: Fed History with Blinder

Princeton will grace the door of grandchildren. We speak to him before he celebrates Thanksgiving. He's the former vice chairman of the Fetain of course, always and forever with his Princeton University. Alan Blinder, your book is wildly accessible to review folks. There is Milton Friedman and Anna Schwartz a thousand pages, maybe eight under pages, as Alan Meltzer three thousand pages. This is, whatever your politics, the readable book of four hundred pages on a monetary and fiscal history

of the United States. Allen, how did you keep the book so short? What did you have to do to keep it under five hundred pages? It's a it's a very it's a very fair question. I think what you have to do is be the editor in chief. Uh, I do not have every detail that you could imagine if you read look at Alan Meltzer's book, you can almost go f O MC meeting by f MC meeting and see what everybody said. Uh Sadin I was gonna say, sadly,

I don't think it's sadly. You don't find that here, but you do find the basic storyline of what was going on with monetary policy and fiscal policy by the way, and what were the big issues of the day, and how were they resolved? Then sort of where we think we have answers, Well, those good decisions are bad decisions

to me. The singular distinction right now is your chapter four team, where you say, all together, now, it was unthinkable for Alan Greenspan to comment on the dollar, and with the various crises, the once in a lifetime crisis we've enjoyed, we now have a FED in bed with the Treasury talking about the dollar and frankly social policy

as well. Where do we go from our present altogether? Now? Well, I think in time this is not happening right away, but in time you're gonna see more of a separation between the Fed and the Treasury in that sense back towards the traditional UH system in the at least in the United States. Not around the world, by the way, but in the UH in the United States, the pandemic crisis just insisted that the Treasury and the FED um

you know, snuggle up together. Well that's a that's a bad metaphor, work towards the same goals and then not have any distance showing between the two of them. There were a liquidity facilities that the FED created, lending facilities that the FED created, back stoff by the Treasury. That kind of cooperation was dictated by the circumstances. Hopefully, we

all think we're going to get back to normal. Well back to normal was Vice Chairman Blinder speaking, and white smoke came out of the chimney in advance to let people know what was going to be said. Is there too much FED speak today? Allen? I don't think so. I mean, an elusive but reasonable goal, but it's elusive is to get the FED speaking with one voice. That's not so easy when they are nineteen members on the f O m C. But it's not been too bad.

I mean, there are other committees around the world that are speaking with many more conflicting voices than the f O m c UH does. But you know my view. People have often criticized the tendency to speak too much, in my view as if you've confused people by speaking too much, say more so they're not confused anymore. And by the way, without without any advice for me, J. Powell does that when he sees that the markets and other people are getting it wrong, he speaks up again

to help them get it right. And I'm blind to you're talking to finance wannabes at Princeton, and that's a wonderful and and and good thing. As you mentioned, Chairman Paul and others including Vice Chairman Brainerd try to speak in a safe manner, getting out to an ex post reality where they can react. The financial media, and frankly much of Wall Street is now in a parlor game of futures, trying to find not only the path up to a terminal rate, but then to game a pivot

to a more accommodative stance. You and I have never seen this. How do we extricate ourselves from this silliness? Well, I think you the federal extricate itself uh from by its actions at its words. Remember the jackson Hole speech of Chair Powell. The whole purpose of that was to shake out of the markets heads the notion that this would be a quick peek and they fed funds rate and then it was not coming down right away. I mean he said very he made it very clear that

that was not going to happen. And we don't think that's going to happen either. We're not going to get rid of the constant, incessant drumbeat of disparate chatter about the Fed coming out of market people. You know, that's their constitutional right, uh so to speak, and they will say what they say. But the clever people will keep their eye on the ball and uh and filtered through a lot of that noise and pay attention to what's really coming out of the fence mouth, and that mainly

means the FED chairman's mouth. All Blinder, one final question on your majesty of forty fifty sixty years of FED policy. There's the unknown unknown is out there, like Dr al Arion would speak of, and one of the great unknowns, thinking of the Laureate Paul Romer, is the effective technology on Alan Blinder's economy, do we actually really know what technology is doing to us right now, we most definitively don't.

One of the things, you know, economists aren't that great at forecasting, period, But one of the things we really cannot forecast, and it's not just us, nobody can forecast to your question, is the sort of changes in the

long run trend of productivity. These things happen now and then, not every year, not every two years, but they do happen, and they almost always hit us by surprise, and in some cases, even looking back over years or decades, we don't still don't understand quite what in the world happened. You know, the acceleration of productivity. I think we understand that that to do with companies learning how to use all those computers that are hanging around. But the nineteen

seventy three plus slowdown we still don't understand. Here we are in the year two and you know, productivity girls just slow down, and we don't know why. I will not mince words, folks checking it at under five in the pages. A Monetary and Fiscal History of United States from a time of John F. Kennedy is without question

the most readable FED history I've seen. Of course, Sir Alan Blinder of Princeton University, Allen, thank you so much for joining us before dinner with said grandchildren right now. One of the other stories out there is the ping pong ball known as oil. Jeffrey Curry provides leadership at Goldman Sect, and I can only think of the great Adam Saminsky at Deutsche Bank years ago. Here's a guy who actually goes into the Excel spreadsheets of figuring out

supply and demand. Jeff Curry, what do your Golden Sex Excel spreadsheets say about oil price next year based off the mystery of global demand? Well, we're definitely bullish come next spring, but what happens between now and next spring, that path is highly uncertain. You have China COVID cases surging, so you're getting forced lockdowns that were not planned um, which is impacting demand up to about one point two

million barrels per day. Coincidentally the same size as the OPEC cuts, So you know, I think that's important development. First time ever OPAC ever cut in anticipation of a demand loss. And then you have the G seven price cap, which just they keep rolling the dial and it gets milder and milder every day. You know. I mean it's you know, least enforceable through shipping insurance. And then you also have the cap coming out six five seventy, well about the sixty that really put the clamp on them.

Let's go back to your Chicago microeconomics. What is the elasticity or responsiveness of demand of China wakes up and moves forward and comes out of COVID. How rapidly will that demand pick up when and if well? I mean that's why you know, we're sticking to our guns of a hundred and fifteen dollar price target for next year, because when they do come out, um, they're gonna put a p a lot of pressure not only on oil

but the entire commodity complex um. And you can think about you know two is really being at an environment in which the second largest economy in the world, the largest commodity consumer in the world, was hibernating. So I think you're absolutely spot on. It's a game changer. Now. Their base case is that, hey, they're making the preparations today to reopen into Q But when do we learn in Hong Kong and Taiwan is that eventually it spirals

out of control. The cases you know, go up too quickly and then you get a forced reopening, and I think a lot of fear of that happening right now. One of the great realities is you're pull an all night or at the University of Chicago Curry teaching micro in Chicago years ago, you do that at Bevis. Lisa Bran was very familiar with the retro diner in Chicago. So the last from Chicago greets her colleague. All right, no need to just sort of relive those moments ahead

of Thanksgiving, Jeff. I am wondering, though, when you talk about the supply to demand dynamic and demand picking up with China on the supply side, how much of Russia's oil has actually been taken off the market, given the refineries in India and the exports over to Europe. I mean, it's relatively small and somewhere in that. You know, three to four hundred thousand barrels per day. You know our expectations. It grows modestly as the sanctions began to take place

and you have frictions and other issues involved. Um, but you know, it's nowhere near as large as what people anticipated. But the offset on that is the investment across the

space is far less than what people anticipated. Look at drilling in the US, expectations of US shale have been ratcheting down, decline rates in non opeq x US beginning to set, and so the supply problem of the underinvestment thesis, what we call the revenge of the old economy, is actually much stronger than we thought six months a year ago. And again, it's not just an oil story, it's everything

in the commodity space. This is really important, Jeff, because a lot of people think that we've already seen the supply shock. We've already seen so many barrels taken off

the market because of the sanctions on Russia. What you're saying is that's not true, that we have yet to see the true supply constraints that have come from a lack of investment in the shale patch, a lack of investment by oil majors around the world, and now potentially some sort of disruption with Russia if they don't comply with the price caps being opposed by G seven allies. Is that your idea, when will it kick in the supply constraints that you predict. This is not a you know,

a tactical trading view. I mean two years ago in October, we called for a commodity supercycle and we still stand by that view. And a commodity supercycle is not an upward trend in prices. It's spike after spike after spike, and this is gonna go on and on until we have adequate investment to be able to grow supply. You need to grow um hydrocarbons, and until you have enough of green energy to be able to meet global demand. Right now, one of global energy still comes from hydrocarbons.

You can't go to zero there and expect the other to carry you. It's got to be an energy transition, and we need that investment. And then to do the green investment, you need the medals. You need to copper, the alley, the nickel, lithium, cobalt, silver, You need all of those minerals to be able to invest in the green capex to be able to solve the long run decarbonization.

So this is not a near term tactical view. We just came off the back of one of the spikes that was well underway before before the events in Russia, and we'll probably see another spike in three as China begins to to reopen. But in terms of solving this problem, it requires large scale capital investment and the tuns of trillions of dollars. And we're not even close backt we

haven't even scratched the surface yet. But by the way, the one point I want to say is this cycle is no different than the ones that we saw in the seventies and two thousands. It's the same kind of commodity supercycle UM. And what I actually I want to make a point. What preceded the seventies, the nifty fifty new economy, What preceded the two thousands, it was the dot combo. What preceded this one the Feng boom. That's

what we call the revenge of the old economy. New economy takes all the capital from the old economy, starts into the investment It needs to grow the supply base UM, which then shifts you into this supercycle environment. On the flip side, what do you say is the revenge of the supplied demand dynamic that when you hit a hundred hundred and twenty five dollars in barrel on w T I, demand instruction really comes into play. And we learned that over the past couple of months. How much does that

cap where oil prices could go. Well, it depends on where the dollar is trading. Um. You know, obviously in a really strong dollar environment, you know that the prices that in many countries around the world experience were all time highs. While in the US in a real term, the all time high and somewhere around a hundred and ninety back in two thousand and eight, um, and we

reached a hundred and thirty it wasn't even close. But for Europe, Pound, sterling, Japanese, yeah, and many of these other currencies around the world, they experienced all time high prices, so um, you know they to answer that question, you end up having asked where is the doll or trading now? I think the key view here in three is, you know,

you've seen a big run up in the dollar. As we see growth start to materialize in China and other parts of the world, we would expect the dollar to be going to taper off and then you could open it up more for dollar denominated commodities. But the big event in two was not the fundamental side of the commodities, but it was the dollar. Jeff, I want to jump to the Chinese wall here and I want to go

from Jeffrey Curry out to Neil Meta. You've got is any other firm has a cell side looking at individual companies? How do you link your world in these constraints that lead to a higher Brent crude barrel over to their world, which is single stock selection like his call, stunning call on x on mobile um. You know when you look at the UH way the equity has been training. They've been looking through this yes in the commodity price because

they're beginning to see that long term story. And by the way, x on versus Microsoft exemplifies this revenge of the old economy story. You know, Tom, you've been doing as long as I have. How many times have you seen Microsoft the largest company in the world, and how many times have you seen x on the largest company? Right? You go back to two thousand Microsoft on top x on nowhere you found and then you you didn't invest in oil and then you had that supercycle two ten

XN on top Microsoft on the bottle reverse. I've got eight other questions, but we don't have time for Jeffrey Curry, Thank you so much. With Goldman Sachs there let's dive into it right now. And what we do is, you don't kill two birds with one stone. We killed two turkeys with one stone, giving you the Thanksgiving angle. We do that with Troy Gayski, chief market strategist FS Investments, with a ton of experience of Global Wall Street in

New York Wall Street. Troy, before we get to your sixty comments, I want to talk to you about the state of hedge funds. Given the stunning year we've had. How is eight twenty two and twenty doing. How are they in this year? Yeah, so it depends on the strategy, Tom. I mean, it's actually been a very good year for multi strategy solutions, whether they're daily forty act or whether

they're the classic QP structures. UM. There's been big dispersion across markets, particularly look at rates versus currency, or you look at trade opportunities like shorting mortgages versus treasuries. So that's been a very attractive place to be. UM. Systematic

trend followers have also had a very strong year. Uh, there's been huge trends as you know, whether it's the dollar or commodities or rates movie higher UM and and the strategies that struggled the most of course, wo been the growth oriented long short equity strategies that you know, got a little too over their skis in terms of growth and go go growth and perhaps got a little

too involved in privates and elevated valuation. So you know, in general, we think, you know, liquid multi strategy solutions continue to make sense. Uh, you know, and if you're going for income, you can look at things like f s c O, which we recently listed, which has income plus appreciation potential that trades out a discount to nav um. So a lot lots to do in the hedge fund space,

lots to do in the alternative space. And when you look at sixty in the heart of your note, we've had a lot of different conversations of bond price up, yield down. Is the big shock next year that's six comes back with a vengeance. Yeah, So coming back with

the vengeance to be a very strong term. I think one of our major themes, you know, our major theme for this year has been protect capital, don't be a hero, be in the Northwest squad in the fishing frontier right except lower risk, and either get a total return from income or through multi strategy solutions as we moved through

the cycle. Uh, the next theme over the next several years will be you know, cash flow is king in that you don't need price appreciation to make a reasonable return as long as you don't have a horrific recession where default rates skyrocket. Your law suggested, yield on cash flow should be pretty attractive. So that doesn't mean it's time to dramatically ramp up risk or or rotate back

aggressively in this sixty. What it means is, if you're going to accept risk in your portfolio and be in that northeast quadrant, make sure you're doing it in strategies that have ample income and that can provide a buffer and also give you positive convexity if next year it turns out better than we think it will. So where does bitcoin fit in considering that you were bullish on the asset class not so long ago. Yeah, well, look so again, Lisa, we talked about this and many times. Right,

bitcoin is the most cyplical asset on the planet. It goes through meteoric bowl markets like it did in UM. Eventually, as demand exhaust itself, UH supplies in elastic to price. Right. So whether bitcoins at a million dollars or a dollar come out a day. And that's the reason you have these huge cycles. So there's really two approaches to owning crypto, and when we talk about crypto bitcoin specifically, either have a tiny allocation your overall asset mix, ride the higher

highs and higher lows, or trade the cycle. But clearly, as the Fed continues to tighten monetary policy, um any directionally long asset is going to have a much more challenging environment than if one hold on a second Troy because what you're saying right now challenges the sort of existential angs that you hear across the board of people saying Bitcoin's done is all a Ponzi scheme, forget about it, And we've heard that for the likes even if deal

cush Cary of the Federal Reserve. How much are you pushing back against that, saying this is here to stay? And are you among those tracking when there could be a good entry point not necessarily bailing with all get out? Yeah? Look looks so, I mean it's same as it ever was. Right, Like,

bitcoin has incredible cycles. Uh, you know, medior gains, whether it's sixty four x or thirty two x or eight x in the last cycle and then draw downs, but it always survives because of the strength of the network UM. So we certainly think bitcoin will be around for the long haul. But it's very very volatile UM and you know, most of what's gone on here recently, it's just bad actors in space. It really doesn't speak to the negativity

or or negatively reflect on bitcoin itself. It more reflects negatively on some of the actors that were attracted to the asset class, which is incredibly unfortunate and and just calls for the fact that we need more regulation without a doubt. Try to ask you thank you so much with FS investments, Jennifer McKellen, she's just wonderful. She's ad a wonderful shop. Capital Economics think of them like x CIOs.

Xios came out of Media Day one Jim and Michael Rocking, and same with Capital Economics Day one they published and everybody took him seriously as they should. Jennifer, you are readjusting in the next year you bring down the so called terminal rate. You're ratcheting down your interest rate. Guests in the March of next year discussed that YEES for

the UK. We we've just reduced our forecast. We had a relatively high peak and a five percent and that was partly following the mini budget the fiscal stimulus that we saw coming at that time. We've just revised that peek down to four and a half percent next year, partly partly because of that fiscal stimulus not coming and in fact turning to tightening orbit will be it a bit later on. Partly also because we're seeing some signs that perhaps the labor market isn't quite as tight as

it was. There are some signs in surveys of wage negotiations of a bit of a let up, so we're not quite as worried about the inflation. Can you take it over globally? Can you look at a mis guest here of a higher terminal rate will be off the mark next year? Yeah, Well, we thought for a long time that the US terminal rate will be a bit lower than priced into markets. We have a terminal rate

of for four seven, five to five. And there I think in the U S we' seeing much clearer evidence of crisis precious easing up and that the UK seems to be following suits a little bit in that regard, so labor market is not as tight as it was. There is science in then some of the PP elements that US consumer price inflation is going to come down further. So so we're pretty confident that the peak isn't too far off in the US, despite the fact that officials

still founding hawk ish. Jennifer, I gotta say, I gotta, I gotta kind of bother Tom here because he's raising questions about what we're cooking and that we might cook eagle, which is an endangered species. And then, uh, you know, catching me off guard. So I will catch you off guard and say, at this point, is the better than bad news in Europe, very bad news for what the ECB has to do for ECB officials to come out and hike more than people previously expected in the phase

of perhaps better stronger economic output. Yeah, I mean, I draw limited encouragement from from the recent European data. Industrial production has been a bit more zillion retail sales to some of that temporary factors. There are some statistical quirks in the Irish data that have been driving up Eurozone industrial production. And also I think there's simply a lag before Remember the ECB has not been hiking rates for long. There's going to be a lag before the effects of

the tightening of financial conditions start to come through. Also, the surveys that the p M eyes we've had this morning offered a little bit of relief, a slight uptick, but they're still pointing to falls in Eurozone GDP, so I think we are still heading into a recession. There's less evidence in the Eurozone of a let up in price pressures, so I think the ECB is going to need to continue hiking. So it is generally a bitty, pretty bad picture from the Eurozone's perspective. Let's be optimistic

for a second. Let's say China reopen, supply chains are normalized. How much of a boon does that give to Europe with both potentially lower supply chain pressures and higher economic activity. Yeah, that's a good point. I'm not sure it does give a massive boost. Although during China's lockdowns it's made huge efforts to keep to keep ports open to keep industrial production going, so the implications for global supply chains haven't

been as large as you might expect. Of Course, with virus numbers still picking up in China, I think eight city is now affected. It is looking as bad as as the first wave um of the virus. So it seems very unlikely really now that we're going to see the reopening that people were hoping for just a couple of weeks ago. I look at Jennifer just very quickly. Here the turmoil is centered on a stunning headline, one

of the great headlines of Bloomberg this year. The governor of the Bank of England modeling a two year recession. How does he extricate himself from that? Does he amend that in the next year? Um, well, yeah, it's it's yes if the data start to look persistently better. But I think on on the UK front, to retail sales, although they've rose a little bit in the in the latest data, they've not reverse the previous falls and I

think there's more, there's more to come. So I think probably Andrew Bailey is right to expect a fairly deep recession in the UK. We're expecting about a two percent Peter trough fall, which would be which would be quite weak. But of course if the data continue to surprise on the outside, then he can calibrate that and it would be well received. Optimism. We need on a Wednesday. Thank you Jennifer McQueen so much at Capital Economics. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and 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 Keen and this is Bloomer