Surveillance: Fed Reaction With Posen

theory behind all of these historic events. Adam, I want to take the alphabet soup of aggregate demand, aggregate supply, Hicksie and I s l M analysis and throw it out the window. What is the theoretical book of Chairman Powell? Theoretical book of Chairman palis actually been crety, honestly stated by him vice here Claire that nothers. First, you work on observables. You don't work on the stars like our star or priestar, wait till you see things. Second, that

means that you do reactive rather than preemptive policy. Third, you focus on unemployment, but not unemployment as missioned by you. Three, or you sick by labor force participation by what really constitutial employment. And fourth that you're assuming that expectations are well anchored and not forward looking, you're not going to jump. You put those four things together, which he stated very clearly,

and that gives you the strategy. And I'm posting what's so important here is the unknown and what the confidence of reading history is in particularly the forty seven boom out of World War Two, with all that inflation is supply comes on, we behave differently with excessive economic growth. What will be the nation's behavior given a seven percent g d P I think to seven percent GDP that's inherently going to be transitory, is not going to have

that big an effect. Tom and I realized this is somewhat contrariant we are, and this is of course what the feed is betting on, which is that this is a one time surge. The overshoot does not persistent, and the longer term inflation expectations are not persistent. Now, my colleagues a Living Blanche Ard Larry Summers are emphasizing two things.

First that the inflation is going to be pretty high as a result of this, and second that the FEDS ability to ride this out without raising rates, and to raise rates without breaking a lot of stuff is limited, and I think that's where the debate is, not how

much inflation we're going to get. The final point I would making this is my own point, is that the savings rate I expect to stabilize at a much higher rate than it was before the pandemic, just as the household savings rate stabilized at a higher rate after the global financial crisis. So we're gonna see volatility over the next year, and all this talk about pent up savings, but it's not ultimately going to leave us spend spend

spent atam. That final point is really important because I think that final point and your view on that variable, can be the difference between five six percent GDP growth and maybe seven and night, and it can be the difference between inflation ripping higher and inflation to your point just being a two percent story, Adam, how do you come to that conclusion about where the savings are, how they'll be spend, and how they'll be drawn down. Thank

you for saying that, Johnson. And my view is there's two components to this. I mean, there's still gonna be a transitional dynamic and there is pent up demand in one key area of services, which is healthcare, and we're already starting to see that from the insurers. There is a lot of stuff that mey or may not have been elected, that was foregone during the worst of the pandemic. So I do expect a huge surge in healthcare spending, and that catch up is going to be inflation, because

that's up the pent of the economy. But when we think about the savings rate, if you look at the history of major shots, you look at the history of the twenties and thirties, you look at the history for global financial crisis, what tends to happen in the US and a lot of other places. This is savings rate shoots up, comes back down. There's some messy dynamics, but

you plet tell at a higher rate of savings. Think about young people we all know who twice in ten years either have seen their opportunities go away, or known people who have the bad luck to graduate high school with college in the wrong year. That kind of world, these scards you just as our grandparents became thrift blinded after the depression. So I expect the household savings rate to be up a percent and a half, like to

six percent when it stabilizes after this crisis. Fascinating. At least you're not going to say this is probably one of the key variables right now for your round look, and I don't think it's been talked about enough. Yeah, the idea of spending and how much of this one point seven trillion dollars excess savings will be pumped into

the economy. Adam, there's also a question of the frictions in getting people back into the labor market, and there was recently a Project Syndicate essay talking of at how a lot of jobs got eliminated much faster because of the pandemic. And these are the low cost to low

skill jobs. What are you foreseeing. How much is the administration currently doing to ameliorate these frictions, to do training programs to help it so that people, particularly on the lower end of the income spectrum, can get back into the workforce pretty quickly. I think we've got to separate two things. You're absolutely right to focus on this issue because this is what economists referred to as scarring and this is the question both for inflation but also for

human welfare. How much of the workforce can quickly come back to full employment if the FED lights it. M and I would say it's a mixed bag to be perfectly honest. On the one hand, what we're seeing is labor force scarring in the US actually isn't as bad as we think. Human scarring like the children missing school or people missing medical care is very real. But the ability of lower income people in the US when giving

the opportunity to find work is actually quite high. New research computerson done by my colleagues that me and ghn clough and co authors avas Young have been looking at entrepreneurship and we've seen a surprising surgeon entrepreneurship in the small business sector. There's more resilience there. That doesn't mean people shouldn't look after them, but there is more resilience

there and less scarring. That said, when you look at what's in the American Rescue Package or whatever it's called, the big package that just came from the Biden administration and Congress, most of it is short term and some of it is going to be about trying to extend the lifetime of jobs in restaurants, in hospitality and airlines that may not be there for the long term, and

so it goes kind of the other way. We still need more investment a couple of percentage a year, frankly, in what the Europeans call active labor market policies, helping to match people and make them more mobile to get to new jobs. Okay, but this is a really important point, Adam, because it seems to be that you're saying this is irregardless of the pandemic, and this is regardless of the pandemic,

irrespective of it. This is an important point. The idea here that the infrastructure plan cannot necessarily be billed as an extra stimulus to pull the economy out of the student out of the pandemic, but rather a shift in the economy and a way for the US to win in a world that's evolving towards five G and A and a different technology. Is that accurate in terms of

what the US ought to be doing with infrastructure? He said, I think you're right that what we've got and what I'm trying to get across is the infrastructure broadly, and that means such things as as heavy duty just building bridges. That needs shifting the green composition and the carbon intensity of our economy, and that means the human infrastructure of

making the best use of our people. That infrastructure is a long term issue, and that is something requires sustained spending, things that people can count on, things that businesses can plan for, and that requires financing that is not going to be paid for it how to debt on an ongoing basis, even if in general we would like to pay with debt for high return projects. Because of the amount we've had to spend for the for the stimula for the pandemic recovery, we've got to look at how

to finance that over the long term. If we get back to a world where we're confident there's not going to be a recurrence in pandemics and we have a process in the Congress that actually works, then you can start talking about these are net positive investments and so we can finance them over time. Adam, that was a clinic and we always enjoy your time, so it's great to catch up and posting that the President of the

Peterson Institute. What we are seeing now, folks, and this is so important, is our team at Bloomberg Surveillance trying to get us the best guests on the moment on inflation. It is David Rosenberg claimed at Maryland years ago for the partition of inflation the subsectors of inflation the dynamics, and David Rosenberg of Rosenberg Research has been heated in his disagreement on the certitude of a higher inflation. Mr

Rosenberg joins us this morning. David, in our comments before this interview, you went right to the heart of the matter, which is it's assumed supply will come on in a boom economy. You disagree. Well, actually think that the supply with the lag is going to come back. Obviously demand Look, we had a demand implosion last year, a temporary bout of deflation as the demand created, you know, much faster

than the supply did. Now this demand is going to come back at a faster rate than the supply side will. But look, it's all very temporary. I don't think that supply chains have been in disrepair for a permanent time period here. And of course we have the base effects that we're going to work off of in the next several months, and inflation will probably get the three and a half percent, maybe even a bit higher. Core will probably test two and a half percent. But again I

think it's just it's very temporary. And I guess that my comment would be that, look, the we've seen this before from the treasury market, UH, that it often will shoot first and ask questions later. We had we had ten of these huge checkups in yields from oh nine

to two thousand nineteen. We had several inflation scares, whether there were some commodities and oil and Barack Obama's infrastructure package, all the euphoria around the tax cuts, UH, and really the big story for the last cycle was that core inflation peaked at its lowest level in recorded history. So the question is, you know, are you going to focus on the trees? Are you going to focus on the forest past the trees? And right now the markets focused

on the trees. But I think the surprise will be by the end of the year, um, how low inflation and cor inflation is going to be after we get through this temporary spout. Let's focus on the map as well, And I think you're the perfect guest to do this with, so we appreciate having you on the program this morning. Just the composition of the inflation basket and the dominant factors within that, and how you expect those forces to

evolve in the coming year. Well, look, I think it's as that you had mentioned on the stilly set, we're going to be getting some goods inflation. We've already seen that already, the lagged impact of the prior weakness in the dollar, the run up in commodities, although they're not a very big share of the CPI or the core uh, they're still going to spill over. The service aside is

going to be I think what's most important. And we've talked before about the dominance of shelter and the rental components, but that's really just looking at the being count on the bottom up basis. The reality is this, when you're looking at what ultimately drives inflation, commodities and even the things we're talking about today like the huge spike and the silly sed prices and decked again again, that's manufacturing.

I think again that's going to be very temporary. That doesn't tell you were inflation is going to be in twelve months or in five years. Yeah. I was just gonna say, the key is the labor market, and people tend to forget there was everybody's focused on inflations. They don't realize I guess that the set has a dual mandate, and people look at this forecast of a three and a percent unemployment rate, you know, three years from now, and they think, oh, well, we're going back to full employment. Um,

but that's not really what it's saying. I mean, you can look at a six point two percent unemployment rate right now and say, boy, that's not so bad. But you've got to remember over four million people of up the labor force in the past year, and we knew actually adjust for those people that left who could be unemployed if they came back into the labor market, if they don't find a job, the real unemployment rate is

actually close to nine. So just show me a cycle and entire cycle, not two months, not three months, not for must show me a cycle of inflation that didn't involve we will wages accelerating beyond productivity growth. That's what I'm waiting for. When that happens, I'll change in my call. But I'm not changing my call because of Philly said prices or because of what the THERB index is doing. It's going to come from the labor markets. It's you're thinking,

it's very much in live with the Federal Reserve. Then, so when it comes to the labor market, what are the data points do you think we should be focusing on, because the Federal Reserve ultimately is looking at the same place. Look, unfortunately, they only tell you, you know, the U three unemployment rate. Let's only tell you when people jump on the bandwagon. Oh well, look at this four and a half percent

year and three and a half percent by three. It's not that simple, uh, you know, So I would say that let's look at the U six. Let's look at the broadest measure of unemployment, and it's eleven point one percent. Right now, You're not gonna squeeze inflation on any durable basis within eleven p U six unemployment rate. And so I'll tell you if I see evidence that it's going to pull down towards or below eight percent, that would

be a telltale sign that work the employeed economy. Uh, if I start noticing, okay, and again this is looking at inflation broadly speaking, top down that we have to see real wasge growth exceed productivity. That will put more

gurmal upper pressure on inflation, not commodity. And so really those are the data points that I'm looking at right now, David, what's the concern among economists that they've failed to get the depth of the downturn in the wake of the pandemic, then the depth or the incredible surge that we got in in the recovery. The idea here that we could see employment pick up much more quickly than we have ever before. I mean, how much does that change your

outlook based on inflation? Okay, Well, you know there's a lot of assumptions there that employment is going to come back a lot more uh than was you know, previously thought. And of course employment is going to come back. But you know, the one thing that went up significantly last year at a time when we got the worst GDP number, UH, This n is business spending on automation UH and on software UH and on AI. And I think that a lot of business that realized this productivity actually boomed last

year in a horrible year for the economy. Question is, therefore, you know, how many of these jobs are going to come back? Does anybody really believe that everything is going to come back, you know, in one month or two months or three months. This pandemic is not over. The vaccination rollout is very encouraging. We're winning, We're really winning the battle. But you know, I think there's a lot of assumptions. Let's look what's happened in the Europe for example.

UM So, I don't think that everything is going to come back. Things will come back, but in a staggered way. It's not going to be like a snap of a finger. Now, let's not make any mistake here. We have tremendous physical stimulus. If we didn't have that UM nine hundred billion dollar package that was signed on December twenty seven, I can tell you just looking at the pattern of retail sales,

we were heading into a first quarter GDP contraction. So right now, what does the vitality in the economy When you think about it, it's really vaccine and fiscal stimulus basically. And the Fed's quite right on this that the fiscal stimulus is all very transitory, so it gives you this

initial jump in the data, but there's no fiscal multiplier here. Uh. And what I found very interesting was that when you look beyond this year's big boom in the economy, what does the FED really do to three on its GDP growth? It barely. So the fatis they're telling you this, and he's right, this is all temporary. Now, keep in mind one thing. I know that the market right now is pushing the FED and testing the FED and assuming that the FED is going to be forced in the moving

rate earlier full year earlier. But here's what I'll say, because pal spells that everything in their forecast is predicated on policy remaining where it is for the next several years. They basically told you this is our forecast based on us on policy today, but but on rags staying in policy, stating story com for an extended period. So they're basically telling you that, you know, post this year. And look, we we've had these economic booms before, go back to

nineteen eighty four. We had the same growth rate in nineteen four, going back to nineteen I mean, it's a very rare event to get say six or seven growth, incredibly unique. We've got to leave it there. Unfortunately, it's always great to get you on the show. Come back soon, Sir David Rosenberg of Rosenberg researched, and I'm going to rip up the script here. I know Lisa and John want to get to China with Dan tann Obami is truly are expert on sanctions, Dan, we have putin Biden.

They're eight hundred seventy miles between Crimea in Moscow. This is really getting serious. This language, the genetic and moral code of sanctions. What sanctions are we going to see from the White House? Thanks Tom, and we we've seen sanctions as of late related to the poisoning of navalny. There's additional restrictions that are about to come into effect to restrict exports of certain technology goods from the US to Russia, and an impending sanctions program next week related

to election meddling. I think the question though, that the market needs to be caused as enough. You know, if sanctions are designed to force a change in behavior with Russia, they've been extremely ineffective if you think about where these programs began, trying to get Russia to return Crimea to Ukraine, which is pretty clear at this point is not going

to happen. There's consistent theme here, though, Dan, whatever we talk about, and you're right to bring up in the middle of the last decade we all remember covering get so little has changed when it comes to Europe. Little has changed to the relationship the energy relationship specifically between Germany and Russia as well, and that's a consistent theme when it comes to Russia. When it comes to China, Dan, what can the US do about that and what do

you anticipate that will try to do about that? So it's unclear. There were some moves made in the last administration to attempt to thwart nord Stream too, and a little bit left over in the Biden administration, although frankly nord Stream too was nearly completed, so sanctions at this

point would have been somewhat moved. I think trying to get allies more on side for human rights issues and trying to tie that back to the broader geopolitical agenda will probably be more productive than attempting to go after the energy sector, especially with Europe so dependent on Russia. UM, but it's pretty clear there was a missed opportunity on nord Stream to where the US really could have gained allied support to try and stop the efforts to complete

the construction. All right, so let's move away from Russia and go to China. Given the fact that we're getting that meeting, that two day meeting an anchorage, is there anything likely to come of this or is it just going to be rhetoric yet again, the wide administration reiterating a lot of what Trump frankly did and said in our approach to China. Yeah, I mean I have this vision of some opening that's like Frankistance's best of this,

where everyone begins to air their grievances. I mean, certainly, this has been an interesting week. You've got sanctions that were just applied on additional Chinese law makers under the Hong Kong Autonomy Act for the further crackdown on the election process in Hong Kong. Although you did have last week a win, so to speak for a Chinese technology company where an injunction was filed in the U S Court that essentially reverse the restriction and investing on US

markets in that security. But then you also have shinjanang Um and some of the human rights sanctions that are now being levied by the EU on top of what the US has done. I think the the issue here is largely how will China respond? And they've built out their own sanctions programs. They build out law that enables UH penalties related to compliance with foreign sanctions. Really U S sanctions domestically, but I think looking for some sort of common ground is probably the best path forward on

some of these issues. But there's quite a bit of room between these parties down. These sanctions come out, these policies change, and you spend a lot of time with corporates multinationals trying to make sure they're in compliance with them. But as you said at the start of this conversation, the automate gulf of policy makers is to change behavior. And it comes back to a question. I know you've been asked many times, and I'm sure increasingly so more recently,

do you think sanctions actually work? So I do think sanctions work, but I think multilateral sanctions work, especially when you're talking about issues um in the human rights space of China, and I do think this is where you could end up seeing a much stronger multilateral response to try and deal with some of the forced labor challenges in China. You just saw yesterday a few other technology companies have suspended the use of some production manufacturing companies

due to the forced labor in shin Chang. You may end up seeing between multilateral response and actually corporate action where companies are voluntarily winding down production in a part of China that had been hugely productive for years. You could end up seeing some movement, But I think it's similar to what we saw with the Trump administration, where

the East was trying to go alone. The Biden administrations trying to return to multi eyelateralism, which one of the most recent best example is getting rond of the negotiating teable a few years ago. Obviously you saw that gut blown up in the last administration, but I think multilateralism can work in these issues. Catch ups downtown of Boum have a Wiman Pounder and head of America's Anti financial crime right now, too quick, Michael Darter with us with

them camp partners. For those you on radio, you need to know that joining us this morning. Clause on the left on the couch sleeping, the Wimer on her and Mr Darta on the right as well. Michael. I want to work off Greg Jensen's note at Bridgewater today on a core fear of our listeners and viewers, and that is that we will have this debt, We will monetize the debt as we have since Roman times, and that will lead to a pernicious inflation. Is that inflation good

for equity? Markets. Well, Tom, I think we have the answer to that, which is no. So if you're truly in an easy money environment, meaning higher nominal growth to the extent that you're getting higher inflation, discount rates will go up. We're seeing that with higher expected inflation and market PE ratios, all other things equal will go down. And you're seeing that, I think most visibly in tech stucts in the Nasdaq one hundred, which is falling on its face here for a lack of a better term,

with higher market interest rates. Well, those corporations adjust to the reality of collapsing ratios, I think, so, I mean, I I believe a previous guest pointed out the fact that in a V shaped boom, reflationary and then ultimately inflationary, profits are also going to go up. And so that is one way for PE ratios to adjust down. But the other way is through lower equity prices. And you know we're seeing a you know, a combination of folks. So profits will be strong this year, but I do

think that equity markets are going to struggle. They've already priced in a V rebound. But what's not fully appreciated at this juncture. In my opinion, is the potential for long term interest rates to continue moving up, for inflation rates to go up, and then we're looking at the prospect of higher tax rates on corporations and capital gains and defense that's probably going to be forced to start tightening monetary policy next year. Not in Mike. This is

really important. And this leads to a big question, which is the weakness that we're seeing in the NASDAC. Will it persist and kind of bleed over into other areas of the equity markets that continue to be bit up and resilient in the face of higher yields. That's a great question. I think it will persist. I mean the forward valuations on the NASDAC, and this incorporates the big rise already in expected earnings, are almost six above what the average was for the last six years of the

last cycle. And some of are arguing that that can be justified based on where the rate structure is and where liquidity is, but we're even priced to perfection based on liquidity, and liquidity itself is above the pre COVID trajectory, and even adjusting for rates which are rapidly re converging with what we saw before the pandemic um. You know, the market's expensive, in particular tech stocks in the Nasdaq one UH continue to be over their skis on the

valuation basis, and so some caution is warranted. Yes, the outlook is very favorable and earnings are going to be strong, but these valuations are are likely to continue coming in in our opinion. All right, So that's about the NASDAC story. How about the rest of the university idea that there is more room to run based on the lagging gains that we saw lagging behind the big tech I mean, do you see that being hampered as well at some

point in very well would be. I mean even some of the so called value sectors have had a pretty appreciable run here since last summer, so their valuations have come up as well. But I think that the risks are far lower because the valuations are are lower. So I think this idea of a rotation um makes sense. But you know, with higher valuations, the expected future returns also should be lower. That's the way things typically work.

And I think you know where there is danger is in some of these markets that have been swept up into a speculative frenzy, not just of the nazac one trading at a double digit price to sales ratio, that's certainly danger. But the spack market, the so called Reddit trades crypto. So these would be areas I think. Is interest rates adjust higher that we can expect to see

a lot of volatility. What do you expect to see from larger company, more traditional corporate officers, Not people do one specks or Reddit or the rest of it, but a given toothpaste company or a given ball bearing company, whatever, whatever the sector is, Michael, what do you how do you think those corporate officers will respond to this historic moment of say eight percent g d P. Yeah, I mean, I think that the good news is that we are going to get a very strong v rebound in GDP

and in jobs. Um, the other side of that is with that strong the rebound in some potential overheating will have higher inflation and higher market interest rates. And so you know, it's a push and a pull. The push from strong profitability and strong businesses and then the poll from higher market interest rates and lower valuation. So that's what I think. You know, the the prototypical corporate officer is going to have to deal with this year Data Yo.

Always look in South smooth. It's tried to catch up sick Oh why Michael Data. M Campound is chape economist and market strategy. 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