Surveillance: Fed Out of Ammo, Tipp Says

and of course on the Bloomberg Terminal. He writes, Uh, the team at pigam PJIM has had a terrific run here in the fixed income market because they have been supple, they've been able to move, and it's given them a really, really interesting track record. Robert Tipp joins us this morning. Robert Tip, the basic idea I'm hearing is yields if hit the high yield down price up. How opportunistic is the first six months of two thousand and twenty two.

Is it like the one or two other times we've seen so it's a great financial crisis where you can make total return in bonds. I think that that it is. I think it's a matter of what the relative benchmark is. We've we've passed the peak in in long term yields, and we're probably passing the peak in in the front end for yields now and the return on the bond

market is likely to exceed cash. We're likely to stay range bound, kind of centered around where we are right now, and so I think traders are going to have to be very skilled at trading that range. Investors are going to have a much easier time. That's the lesson from the past papers. That's the lesson from the earlier analogs and history that are like this environment we're in right now. My two calls there the long gun. I've heard that

call from you before. It was months ago and it's turned out to be right gunt in two year end. Do you think the highs on a ten year behind

us right now? We're well south of where we were at the highs of the year in Q one, pushing one eight at south of one four to you just said that maybe the peak at the front end might have behind us as well, But why right, yeah, I think so for for yields out to like your three year point for now, and then once you get twelve months down the road, if it turns out, you know, we're in that part of the probability spectrum of very strong economy, inflation staying high. Uh fat is really hiking

rates three times. Next year you're gonna have a stare step higher in the front end. But for now you're at that point where the fat has really shot all their bullets. They announced taper in November. Within a month basically an inter meeting move right to accelerate the taper,

which is really raises some questions. And the market has has moved on a one year one year basis and o I s so on average, where will the funds rate be on average over the year, you know, from point one years out to the point one year to two years out over one percent. That's a lot of rate hikes price in there. So now the market has to sit and wagh and I think it's unlikely they're going to push those bets further on the front end

of the curve. Robot think this is such a fascinating moment because the likes of Deutsche Bank are asking a question of the weekend last week into this week, how much work they need to do. Maybe they need to go even higher to tighten in an economy like this one. And you're saying they've shuttle their bullets already and they

haven't even really done anything yet. Robert, can you square reconcile what that debate sounds like from from your perspective, right, I mean, could be wrong on this, but you know, from from our perspective, the way this goes is by the time they have the information set to project the rate hikes that the FED is projecting to have the nerve to do the taper. Look at where we were at the end of December when they announced the taper

to begin in January, You're at three. By the time the Fed got around to hiking interest rates at the end of you're at two point on the tenure, you had a big By the time just before they were ready to really you know, get into the motive heights in, you were in the low ones. So you're in a very dangerous period where the feed is going to be an awake time. Uh. They've accelerated the taper against the backdrop of going into flu season, of the vacs, of

a new variant hitting of oil prices fawling. Uh. And uh you know so uh you know that. I mean, they did get one higher inflation number. But you also speak because I think this is so critical. Do you see the risk of a Discember eighteen repeat? We're just talking about it. This time around, they didn't have to back away from getting anywhere close to what people are talking about. I think that that power was on the right track of trying to keep the markets away from that.

He was trying to focus on the here and now. Uh And now they've lost that narrative a little bit. You've seen two weeks of stocks falling and yields falling.

So I'm assuming that there's been a learning curve and that he's going to see that and he's going to corral the committee and say, you know, if we want to have the flexibility to raise rates next year, if we think that's appropriate, we have to keep the markets on track, that we are pro grow with stable inflation, and that we're not going to have an imbalanced reaction as opposed to last time, which was, you know, we have a long way to go to neutral. How to

freak the market out? How do you think the FETE is factoring in the fiscal equation? Obviously we don't know what the final form of the buildback Better plan will actually look like, if it will even get past early next year. But if it does, and there's an inflationary aspect to you that does that force the feed's hand to some extent. Well, I think actually the fiscal is another factor that I would have put on the economically

negative sides. Right. It's not that we are having a little bit of stimulus kick in presumably in the years they had based on these programs that are passing. Now, the out the government will be spending through these programs is so much less than what we had in years past that effectively growth has been inflated over the last couple of years by a couple of things. One is the fiscal and then a related item of that, which was a spending down of the high savings rate that

that generated. So I think it's great. I mean, I think in terms of growth, that should cushion the deceleration and growth that you'd otherwise get. But it's not a big step up on the pistol side. It's a step down. Roberts Hip. That was a clinic send on best to correct and mind roberts Hippi for a page, Jim, Thank you, sir,

Thank you very much. Right now, with special ability. Sarah House is senior economist at Will's Fargo out of Tulane, and far more importantly with active work in the measurement of what we do in America. Sarah House in your books at Tulane and anything I've ever read, we've never had a China like economy. Is a nine percent or dare I say ten percent nominal g d P healthy for America? Well, I don't think it's as healthy as

as we would typically see. I mean, I think overall, these are good problems of the US is having right now, where what's getting us to practically a double digit pace of nominal GDP is inflation. But that comes down I think a lot to this such strong demand that we've seen, and so I think some of the problems we say we are seeing right now again, these these are in many ways good problems, but I think ultimately unsustainable, and that's why we expect growth to moderate over the course

of the upcoming year. Well, it's going to moderate through the upcoming year? Does a FED? I mean, the FED has to respond to nine nominal GDP right, Well, I think we've certainly seen that that shift where they've in many ways. I think the October CPI was awake call that this inflation environment is going to be somewhat longer lasting than they anticipated. And I think more importantly than

just the curation, it's the magnitude. So we're looking at seven percent c P I come Q one, and so I think we we have seen the Fed realize that in order for inflation expectations to remain close to two percent, that they do have to to make adjustments. And I think we'll see that very soon. I mean, John, what does Corporate America do with this? If they've got nine percent, They've got a company growing at three or four or five percent revenue growth is going to show eight or

nine percent revenue growth. They have to adapt to that. They've done that this year. They've done pretty well, haven't they. Looking forward, let's put all this together. A seven handle on c P I. You're looking for that in Q one, and we could come close to it a little bit later this week. You're looking for six point nine percent. Deutsche Bank said the following, Sarah, I'd love your response

to it. Surely more than a hundred and fifty basis points of tightening and needed to slow down eleven percent nominal GDP growth to a more sustainable four Sarah, this is the conversation and we're having at the moment liftoff to one thing. How much timing do we need to actually slow down this economy? That is a good question, and I think it depends on when it starts. So the earlier the FEDS starts, the less tightening we will ultimately have to see. But I think it's important to

remember some of the momentum that's already in trained. So we are getting further away from some of this fiscal support that really did super supercharge growth and inflation this past year, and so I think the tricky thing for the FED is that they're most likely to be hiking into a slowing economy, and so I think there's still a lot of uncertainty about how high ultimately rates have

to go. But I think what we've seen is the FED shifting towards painting that picture and kind of laying the groundwork for a faster taper, so they have the options to raise rates earlier, so ultimately they might not have to raise them quite as as high. You talk about a slowing economy, is there a risk that that will be exacerbated by the omicron variant? Have you been

able to model that out at all? So there's still so much unknown about AM and cron on that we haven't modeled it out in terms of what that's going to do to our Our upcoming GDP numbers are our inflation numbers, I think when we think of it in the directional sense, so it has the chance to dampen

GDP but intensify these supply chains. So UM might revive some of those stacklationary debates that we had in the third quarter that I think ultimately we've seen that with each successive wave, the impact of the economy has weekended. So businesses have been incredibly successful at adapting to this environment. Consumers are growing more comfortable, We have more tools in order to still carry on with our lives, whether that's vaccinations, boosters, therapeutics,

and just a great dose of COVID fatigue. And so I think unless we see some some really material um and scary headlines coming out of Omicron right now, we don't think that it's going to have a massive impact or really even a major done in terms of the

trajectory of the near termois economy. So you don't think the Omicron variant or even that mixed paper rolls report we on on Friday, would give the FED some cover to punt until I think it gives them a little bit of cover if they want to take it, but I don't necessarily think they will. As I mentioned, we saw beneficials really since that November meeting lay in the groundwork for potentially an even faster taper as early as

its meeting next week. And so I think when you look at what happened with the household survey, so the fact that we've seen the unemployment rate declined a full percentage point just over the over the past three months, we're staring, you know, pretty close to what the FED considers full employment over the long term. And of course, we still have this inflation issue that is not going away anytime soon and is actually going to get worse

before it gets better. I think that, um, I think that well, the Fed might be able to spin it. I think ultimately that that they'll most likely probably go ahead and accelerate the taper here soon. And now, folks on radio and television, the dumb question of the morning, I'll take that one, Sarah, I'm looking at, you know, unemployment in Nebraska. You're Louisiana. And then I'm sorry, we're almost back to February of two thousand twenty. Is this

American economy back to February of two thousand twenty. I think in the aggregate you could say that it's it's getting pretty close. Of course, there's tremendous variation where we've seen the growth is so different from where it would have been expected. So if you look at goods versus services, for for example, I think there's still a lot of questions when we look at the unemployment and the labor market is to what extent workers come back. We saw

some fine of that with the November jobs report. There's still a lot of questions, particularly over older workers those retirement age. Are those retirements actually permanent or do they come back? But ultimately I think we are barreling very quickly towards full employment, and that's also pushing the FED towards this more hawk is toad. It's not just inflationists that we are seeing the labor market rapidly tighten, and

those two mandates are in less tension. John Sarah earlier took some Barclays doom and blow them, and Barclays pushed against the doom and gloom and said they're optimistic. Why are we so angst ridden about a wonderfully buoyant American economy or is it normal to have OMG fears? Is we actually do pretty well? So I think it's it's natural to be perhaps more more conservative, or at least um more tune shoot to the downside risks than perhaps

that upside risk. I think the inflation backdrop right now

is is in many ways driving this. So even if if you look at the fact that UM labor income is up ten and a half percent over over the year, that gets lost in this conversation of you know, six percent plus inflation, so nobody really likes UM that the actual numbers change is very hard for households and businesses to plan, and so I think that overrides this this underlying real growth story that we continue to see very strong for you guys on radio, Sarah House has a

perfect Christmas tree, John, Is your Christmas tree that nice? It doesn't have to stole until up. If we're rating this Christmas tree, I have to say extra marks for the star on top. It's very difficult to balance the star on the topic. You've got, John, You've got a C Milan something up top. You know. I have a little ac Milan mascot on top of the Christmas tree. That's right, Sarah, thank you, House of West Farca. That's Christmas.

It's not allowed. The Christmas tree Tom to distract us from a really interesting call from Sarah House six nine on CPI this on they're looking for a seven handle for the first quarter. We stopped the show and we do that with William Lee. He is chief economist at Milking, but far more truly expert for the International Monetary Fund

on the Pacific RIM and China. Bill Lee, what do we get wrong in the United States of our stereotypes of what we think of is Jonathan Spencer's ancient China, the World War Two China, or what do we get wrong about present day China. We have this image of China as a monolithic behemoth that is moving in unison, and I think that's far from the case. Right now.

There's a huge amount of debate and dissension within China as the how to sustain growth, how to manage the property crisis they have there at the same time inspire the people to go out and spend in the light of their COVID shutdown policies. There's a lot of tension going on there and the UH and and even as we talk about our fiscal finances, there's has come to home to roosts and spades. China has to finance their their state local governments with property sales. They need construction

to sustain the GDP targets. At the same time they got a rate in debt, they've got a rate in a lot of credit growth. I have a really great respect for what Foreign Affairs has done on this, and particularly Daniel Kurtz fail and of course his expertise on George Marshall and China. Only what I hear from experts is the monolithic view of President g is just flat out wrong. How powerful is the Beijing leader? He's become more powerful. I think that's the key message that's gonna

come out of the next People's Congress. Uh Ji Jinping has done what no only to other leaders in China done Mausey dong and doping. He has become declared horror leader. And in doing that, he's he's essentially gotten rid of all of his opposition. His his anti corruption policies have really gotten rid of any kind of of of challenge those leadership, and his strategy is to consolidate by telling

the people of China. The Communist Party is going to deliver them safety, growth and in a better way of life by doing what Mound died, which is to say, turn domestic, turned inward to sources of growth as sources of of of export growth. And I think that he's gonna try to tell the world we will be a major power handle as as such. But at w t O he's also saying we're also an emerging market. We want the advantages of being an emerging market. A lot of tensions there, but we just want to jump in.

With a stock move, slid down by three percentage points in a pre market some headlines crossing Katie, what do you see, Well, it's apportedly an SEC investigation that has been opened. This is according to a report from Rutters. You are seeing the subsequent move in Tesla shares and we understand from Reuters that this is probe is overclaims on solar panel defects, so related to that Solar City acquisition. I'm assuming, but we will continue to monitor Tesla. Of course,

we can't shake that off, can they. That's the Royteous report. Stocks down about three percent. We'll revisit that ended a

bit later. In the morning, I'm blowing back TV and radio, But I want to return to the leader of the Chinese Communist Party and trying to understand from your perspective how much strength he actually has in China right now, because on the outside looking again, we see these lifelong term limits for the Chinese leader, and then we try and figure out how much strength, how much control he actually has, Bill, how much control does he have a tension between what he does at the federal level, uh

and and what powered Beijing could exerve and what the local authorities are able to implement are are really two different things. The local authorities are caught in this place where they need revenues, so they've got to sell a lot of property. Beijing wants to crack down on property companies are expanding credit too much, and and they need to cut down on properly being the only source of savings for the people of China. So the fiscal authorities

have to expand the portfolio assets available. The local state local authorities want the property market to be the core place that that that they will get their financing from.

Lots of problems there. What I've always found amazing, Bill, is how much faith confidence they seem to have in the Chinese policymaker when they make a move and do things like this, that China has control that they can let some of the steam out and then they can support things again, tap the brake, support things again, keep doing it over and over again without making a mistake.

But as you look at things, what is the risk of a policy mistake as they try and engineer the inevitable self landing that is nearly always around the corner for China. When has it become something something else, something to worry about? But what does that look like? Keep an eye on what they've just done. They did a triple our cut, right they they they've cut the reserve requirements, which in the most mostly compous to say, that's expansionary.

That's gonna expand the growth of credit. At the same time, I just told you they're trying to de leverage like crazy. Now, how they're going to pull that off is something that's that's sort of important because they also have to accept that China's growth harget is going to have to reduce down to five percent or even below five percent plus this next quarter. We're expecting GDP to come in at

four nine. One of the things that the graphics and and the shift toward higher value added GDP activities is lots of manufact activities leaving China. That's the source of job growth for a lot of people. What are they going to do about that? Caley Lines mentioned two hours ago the modest uproar Bridgewater of Connecticut over Mr Dalio's comments on China. You're the kind of guy who sits in fancy offices in Hong Kong or in New York and advises Western commercial banking on the future of China

and Hong Kong. What is your advice to Western bankers who need to set up shop in the shadow of HSBC. That's the toughest job in the world, tom Um. I think everyone knows the strategy for Asia in general and China particularly is diversify. You cannot put all your as in that China basket, which everyone thought was such such a valuable basket, because my god, look at that population. We could just get a small share of that population,

We're gonna be rich. I think one of the things that we're learning is China wants to help its own financial institutions. China wants to have national champions in terms of its banking and financial system. I think the advice to to anyone, including my former colleagues, the city is start to diversify into sources of growth in the rest of Asia and the rest of Asia that has become less dependent upon China being the hub of the global supply chain. That's the that message is. I think it

has to get out. But unfortunately all of the major global banks from Jamie Diamond all the way down to whoever else wants to go to China is China remain their central focus because of the size of that domestic market, which I think has become less available to them. You can Singapore in the Lee family, can they be opportunists

to cure Oh. This is an absolutely phenomenal opportunity for Singapore and other financial hubs within Asia, which is to try to get that business to be where the entrepreeur, where the center of trade, commerce and finance in Ocon

and the rest of Asia. I think the rest of Asia is coming together and in a way trying to de emphasize the role of China, which China is finally against by becoming much more militaristic and at the same time the letting the US become a return to be a major power to try to coordinate the kind of trade and the global supply chain restructuring that's going on. Before you go, I just wanted to turn to the

Federal's eve quickly, looking ahead to next week. What are the spillovers of that Tina monetary policy faster taper to the rest of the world. Tom often talks about a central banker to the world doesn't have the same effect, the same spillovers maybe we used to talk about. Well, it still has that fill over because we are a major cog in the global supply chain. But one thing

that's underestimated is where the Biden appointments are going. I think one of the things that we have to watch out for is whether it said the warrant is going to appoint h a vice chair for supervision that will pervert the Federal Reserves mandate into being green and and

one of reducing climate gap. That expanded mandate is something I think UH could could really destroy the capital allocation mechanism of the banking system and financial markets in general, and that kind of distortion something the US economy may not be able to recover from. Thank you, sir, of Milkin with a strong opinion at the end there on

the federal serve, which we'll return to another day. And Rita sen is with energy aspects, and to make it clear, she is hugely qualified to look at the global dynamics here and fold them down to her microeconomics of university work of a few years ago, and a few other selected schools as well. We are thrilled to welcome you to Bloomberg in New York. Nice of you to be here. Here's what I saw on a thirty two page JP

Morgan power point. There is an assumption by the oil price balls then it will be different this time that shell oil production will not come in as oil price goes higher. What do you say on that? Yeah, I think the price elasticity of shell production has changed dramatically changed. This is not three or four years ago. No, it isn't, at least right now. It is And I was in Texas last week met with lots and lots of shell

producers and it's a very different mood. In fact, some companies who initially said they will grow by five percent, they revised it to zero percent and the share prices rose. So why would they increase production? But also they are facing huge constraints labor, equipment, steel shortages, so a lot of them are postponing rigs. Are they COVID constraints or is it something that clears With a better pandemic environment, The supply chain shortages will clear, but it will probably

still take a year. Right now, if you order a rig you have to wait over a year. Used to be three months. Those things should ease over time. But is there true in Saudi Arabia as well? Probably not as much, But then again they don't need as many rigs right. Shale just requires a lot more, but ultimately shareholders are not rewarding them to raise production. That's the biggest fundamental difference this time around. Okay, that's on the

shale side. When it comes to OPEC plus, they surprised the market to a large extent last week when they decided to proceed with a production hike in January. Do you think that means that they will then have to slow or dial back in the following months. I think a lot will depend on how demand is doing or the headlines you get because of the variant, the new variant and potential new flight restrictions. I think that is going to be absolutely critical in determining what Open plus

two UM. Given the fact that the group has UH the current meeting is still ongoing. In theory, they did in a journey very clever move, because essentially that means that you know, there's enough uncertainty amongst traders that they're not going to go necessarily show this market. UM. I wouldn't rule out a pose or a cut if demand numbers get worse and if the headlines get worse going into the fourth Joan meeting, what would you need to see that you can will consider a headline getting worse?

What is the real risk to demand from the omicreon variant? The w h O I believe are holding press conference this week. I think Open class will be listening to that very carefully. And I think for me, the critical thing is going to be how much more travel restrictions are we going to get in the next couple of weeks. A lot of countries are already already tightening up travel restrictions UM, and you know, we are in a constant conversation with OPEN member countries and ministers about the impact

on jet fuel demand and overall demand. I think they are going to be looking at that very very closely because on their own numbers, um Q one builds are huge, close to three million barrels per day. So any drop off in demand is just going to make that even worse so demanding. Lest just city is still they're still visible. And am I right? And unknown? Absolutely and unknown right now because you know, we just had started traveling. I mean, this is my first trip to the U. S AND's

March of last year. Now more testing required and just more it's a bit more onerous right now. Again, a lot of people were planning Christmas holidays. Let's see how much of that actually goes ahead. But I will say this, Look, there's a lot of pent up demand. I mean in Texas at least, traffic was as insane in Asia. Asia didn't have a summer this year. They were still in forms of lockdown. There is a lot of pent up demount amongst consumers to go out there and travel. So

what is your call on oil? As we speak to all these experts, some of them in the bright lights of major firms and all that. Just as to color, it is eighty dollars the new sixty dollars. Do you see a trend up to the headline grapping a hundred dollars of barrel. We've had eighty five two for over three years now. It was based on the thesis of underinvestment and that shale is not going to react in the same way. So we're not changing that. It's structurally Yes,

you're exactly right. Eighty is the new sixty. Now to get us two hundred dollars, we need an event. You know, there's plenty out, but I don't see us going to hundred dollars in the near term. Ultimately, COVID is still around and that's capping demand. So we really need to look through to when the real supply shortages kick in. That's when you can see hundred dollars. And we learned overnight Emoryta that Saudi Arabia is raising prices for buyrus in Asia. In the US, what kind of signal does

that send to you? So the sally OSPs the official selling prices, they are based on a formula. The formula was suggesting an increase in price, so it's not um it's not a surprise to us if any Yeah, you could argue that the increases a little bit more than the market was expecting, but again, going into this meeting, we were being told that, look, a pause could happen, even a cut could be on the table. And then then politics got involved, and you know, we saw what

OPE plus had to do. But Saudi Arabia, for one, is absolutely not keen to allow a surplus to build, increasing prices to keep consumers, suggest that look, they are going to keep a restraint on supplies sent. Thank you so much for joining us. Don't be a stranger. Wonderful to have you here in that New York can we hope to see you in London soon, soom soon. 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