Surveillance: Fed's Dilemma With Reinhart

GDP statistic. I want you to frame right now the Bank of America guestimate of the path from a boom economy to a normal economy. How does that process look sure? And I think that's actually the big question. It's trying People are trying to figure out what the moderation and growth will look like because we know that nine percent growth, which is what we're tracking in Q two, is not sustainable.

So there will be a slow down, and the data is already indicating that um but it's slowly, you know, in a in a fairly manageable way, all things considered. So when you look ahead to the next few quarters, we very much believe the economy will be still growing well above trend trend being close to two so you'll see somewhere in the order of five maybe six percent g peak growth on average of the next few quarters. It's half the piece that we had in the second quarter.

But we can't imagine the economy will continue to grow with that type of piece, given in the capacity in the economy. Dovetailed Bank of America sellside research, your securities research into what you and Ethan are doing in economics. What is the corporate response to the economy? You imagine, well, I mean businesses are investing. Businesses are seeing consumers go

out and spend. They have cash on hand, and they were actively spending on all things good up until recently where there's been some slowing and now they're really embracing the services side of the economy. But without a doubt, the consumers out there participating in the economy, and when you see that as the company, you want to go out and invest and meet that demand. Um and that's very much still what we're seeing in the data flow.

That seems to be what Morgan Stanley's and I was saying also over the weekend when he says that he expects a red hot capex cycle to sustain global GDP growth above pre COVID levels. Why is that not necessarily the case as sort of portrayed by the bond market, or in other words, how inconsistent is the bond market

with some of these projections. Look, I mean, I know the last few weeks has been all this debate around fundamental and technical factors driving the bond market, But I think beyond that, you know, there seems to be this storyline or sentiment in the market that, yeah, we can have really strong growth and next few quarters by and that's still part of the payback from this incredibly artificial time in the economy around COVID and the and n's

doing stimulus. But what's the underlying trend? What's the structural trend? Has that changed? Are we going to return to this environment of slow under outlying growth. We're gonna return to an environment where demographics are still quite negative and depressing, where they're still disinflationary in psychology, and I think that that's starting to kind of spook the marketing. You can see in the longer end of the curve, and that's what the FEDS. Tom Barkin was talking about in Wall

Street Journal article that came out this morning. He really pointed to the employment of population ratio, this sort of participation rate is still being too low to justify tapering. How much, however, can the FED overwhelm some of these actual economic inputs with their stimulus. In other words, we even have to look at the fundamentals or the fundamentals

entirely the amount of liquidity pumped in by the Federal Reserve. Yeah, so, I mean that is the balance, right Is that the FED is you know, a heavy hands in the markets. And what the FED is doing today in terms of buying and what they are communicating for their future in terms of forward guidance and huge right. So, and it's not just a FED, it's a whole the central banks that are creating these types of challenges for getting a

clear signal of what's happening in the bond market. Um. But going back to your comments around what um Barkin said, I think that is super important when you consider where the underlying growth rate is in the economy. It's a supply side. How much capacity is there for the economy to continue to grow? And for that we rely on labor force participation people going out and working, and we rely on productivity, um, And those two factors I think are super important to keep an eye on when you're

thinking about the long run potential for the economy. Michelle, looking at you, like this research on chairman pals testimiar, you said the following, we look for him to sound relatively more davish than he did during the tune press. So why is that, Michelle? You know in the press conference, remember he's talking about having the committee and we know from the STP, but there are seven of them. The

officials are looking for a hike next year. So there are a lot of voices out there that we're growing kind of anxious about what they're seeing on the inflation front. And why did you get started with the normalization of policy? But we don't think Powell is in that camp of AI, and in the testimony to Congress, we think we'll get

a little more of a sense than that. And we also think in the testimony he's really going to reinforce how the fair thinks about maximum employment, which remember is were broad based um labor market recovery, one where the inequalities that we had seen over the last several decades could be resolved to some extent that is still really poor to I think what's your power is trying to accomplish with this new framework. Well, let's get into that.

I read the Monechy policy report that came out on Friday, which will service the basis for this testimony length to this week case. The line that jumped down to a lot of people, the post pandemic labor market and the characteristics characteristics of maximum employment may well be different from those of early What do you think againting at there, I think the idea they have, you know, changed the

definition of maximum employment. It's not just getting the U three unemployment rate down to call it four to four and a half percent. It's about getting an environment where that unemployment rate is down across the economy, um, where the employment of population ratio for prime working and individuals is back up as well across the time. You know, it's not gonna be perfect, right, and there's gonna be

a lot of challenges. At some point you're gonna really get this tension between the tightness and parts of the labor market versus the age, inflation or underlying price pressures. I know, I know what Jackson hole you've pushed then aside, You're gonna be out there, Michelle, probably under the white tent and the lawn chairs for the Saturday speech. Are you telling me we have a central bank committing social

policy now with monetary tools. Look, it's not social policy, and the fact would be very clear that they're not trying to you know, uh, move one part of the economy versus the other. Right, that's fiscal policy. Well, the fet is saying is in order to have a complete recovery, and one that we think we'll be able to, you know, can hinue because you have broad based wage growth, because you have the ability to seek broad based price pressures in the economy. It needs to be a complete recovery.

And that was the lesson that I think they learned, one of many in the last cycle that came out of the FED listens events is that if you don't have the economy, you know, increasing across the spectrum, it may end up not lasting or you end up damaging your long run potential even more. I look at this, Michelle, I got it, you know, Michelle, I'm just sort of dazzled by all the theory that's getting out. Can we go back to core values, core knowledge? How some house

the housing market? Michelle, I mean this is how you became famous. Do you believe in this housing rally or the suburbanistic outside New York. If I was by chance north and Westchester and if by chance I loaded the boat right now on one point seven five million, am I going to enjoy that at one point three million when this natural disaster is over, just by chance, just because by chance? Um? Right? Yeah? So for anybody moving to Westchester? Um No, So I think, um, I think

there's been a lot of movement. Clearly, there's been a lot of turn in the housing market. We've seen that in terms of the volumes um and part of that is because after the pandemic, people thought differently about where they want to live. It was very clear in the surveys. Part of it was because people had cash just spend if they weren't going out traveling, et cetera, so they went and bought goods. Housing is one of them. So there was definitely a distortion in the timing of the

housing market. And we're still picking up the pieces from that, because you can see that the supply side was not already to accommodate this big increase in demand. Quite the contrary, builders kind of froze when the pandemic hit naturally, so inventory was very low and demand just greatly exceeded expectations in that create this big price increase. It's not sustainable, we will see and we are already seeing demand pulling

from the highs at the end of last year. We are seeing now construction start to pick up, inventory levels start to pick up that and take some of the pressure off of home price appreciation. Are we going to see housing crash? No? Are we going to see uh further slow down? Yeah? I think so, And that makes sense. Home price appreciation should come off of these crazy high levels that just don't add up with what you're seeing

in the broader economy. Michelle love to catch up Michelle, Bank America looking ahead to a ky week with inflation TOTA tomorrow and of course Cham and Paus testimate a little bit later in the week. Right now, we start strong with a gentleman looking not only making the relative move in the market, but the absolute move as well. Skybridge Capital has been steeped in moving money to hedge funds,

trying to get big return this year. That's sport. Troy Gayski joins us right now, whether Italy or England, what is it for hedge funds? Right now given the confusion that we see out there, is it an up yere or down here? Yea, so far it's been a reasonable year. I think the most important point that we make to our clients is, just like broader markets, it's the first,

shelby last, and the last shall be first. What that means is that managers that outperformed last year mainly because they were long growth and secular growth stories have underperformed because you had about a four month under performance period there, and managers more focused on cyclical strategies like structure credit or distress credit of outperformed as economic strength has been

very pronounced. So you know, more broadly going forward, the market or the industry is still overweight secular growth, but a lot of these value places still we think have legs. Do you think the conviction around cyclical growth stories Troy how French down? Do you think that is if it exists? And so given what we've say now that the the last week cold it takes the move into bond market and it just completely upsets any confidence people have about where

they are in the equity market. Yeah, well again, sector rotation this year has been more critical than it has in the past, So first five months you had significant underperformance of growth versus value and cyclicals, and so no surprise obviously sicklically focused managers in which there are very few left by the way, because of the years of underperformance. UM,

they they had very strong starts. Last month, however you started see secular growth reassert itself and so you do have a very fragile dynamic between those factor rotations, and that continues to keep hedge funds up at night. Do they have the right balance? Are they two over their skis and one factor or the other? So let's talk about active management. Why do I need active management when the smpages seems to be doing old the hand work for me. Yeah, I'll tell you the FED keeps pumping

in liquidity. We have plus annualized growth rates. Obviously, you guys have been discussing where bond yields are. Um. You know, at the end of the day, active management, it's why do you have it? Part of it is the non correlation. So you have either stocks or you have bonds. Obviously bonds look even more so now like return free risk. Obviously, when yields get up to one point six one point seven, you had some upside or extremely low real return rates.

Now UM, so if hedge funds are act the managers can out perform fixed income and high yield and provide some correlation benefit to equities. That's still the value proposition. It should be easier to outperform bonds going forward and equities at twenty two times two earnings. You know how

much more multiple expansions left there, Troy. One of the active decisions has been to go into bitcoite, and I know that you have been a pretty big proponent of that, and we've seen the bitcoins price basically have since the peak that we saw over in April. What did you do during this period of time? Yes, So for us, basically what we did is we trimmed the position in

order to keep it from growing further. UM. In our portfolios at then of the March is we had more outflows than inflows UM, and since then we've rotated a small amount of the capital into ethereum. We view the market pretty straightforward, is you know, bitcoin will be the market leader in terms of store value and ethereum at least so far as the market leader in terms of transaction transaction use. So we wanted a little bit of

diversification there. All in all, we have a nine percent position size, and when we look right now the on chain data, what is basically telling you is a lot of the strongholders are reasserting themselves and accumulating from those that got into the market late last year, and that is setting itself up for some type of supply shock very similar to what we had last October November. Um, so it's going to be a volatile asset, but it continues to be very non correlated, and we think the

risk reward is now skewed again to the upside. So Troy, perhaps there will be future gains. But when it comes to justifying active management to clients, how do you discuss your investment in bitcoin when it is volatile and sort of argue that this is a reason to go into the fund even though it is an unproven asset class, that it does have all of the ups and downs

that can be rather unpredictable. Oh yeah, look, I mean part of active management again is trying to identify Nassan asset classes that have asymmetric risk return and again we're in the non correlation business, or trying to generate returns that are differentiated from equities and fixed income. So so

that's what drew us to bitcoin initially. And then of course if you look at the broader macro environment of incredible money supply growth still record low, you know, ten year yields for instance, the adoption cycle that continues, we think that small part of our portfolio can provide non correlation and asymmetric upside. And then of course over time we have to manage that relative to other positions as we evolve. Tell me about earning season and the long

short structure. Right now, tech has researched. Yes, our hedge phones exposed to Apple and Amazon. Are they an afterthought from another time? And no? So you know we've talked about this in the past. Facebook and Google are more heavily owned, more visible. Yes, so those are those of the of the fangs or or the large cat make interesting. Yeah, the most heavily owned. And you know, the view there is that a lot of the antitrust action when it

come to pass that. You know, if you look at cash flow growth as well as earnings growth over time, you get a very reasonable multiple. Um. You know, Amazon is probably the third in the list. There hasn't been really heavy ownership of Apple um and you know, I keep pointing out the act if you look at a guy like Seth Klarman, who's one of the greatest value investors that I think any of us have ever seen.

You know, two of his largest ten equity names are Facebook and Google, which says a lot, right, and that it's very rare that you can have megacat tech stocks be viewed as value, which is sort of a reverse of the whole mindset of the market. You're an m I T engineer. Were you dazzled by our calculus earlier on the Carmen line and the difference between Brandson and Bezos. I'll tell you, honestly, I haven't focused on that in so long. It was like it was like a breath

of fresh air. I'm trying to memorize the equation. So I'll tell you guys a funny story. My first engineering class I ever took it un I T was actually fluid mechanics, and it really blew my mind. You went from you know, math calculus to real engineering and it was like, oh my goodness, this is really really hard. So that that was the was your textbook, Serisan Zamanski Uh, it was not. I don't remember exactly who the authors were,

but it was just tears. I won't even tell you what I got on my first test score because I'll never have you back on air again. But let me let me just tell you it wasn't an A. But I didn't finish you in the class, so I been white lone. It's good at you back in Troy. What we did in Alto Bumps look over here. Yeah, no, it's it's really great to be back here, and thanks for having me on. It's always chin a commercial break.

Vincent Reinhardt joins us. He is Melan Investment Management, chief economist and macro strategist, but far more is encyclopedic on the research paths plural that we have taken over the many decades leading the research effort at the FED a number of years ago, Professor Reinert, thank you so much for joining us, vincent Reinhart. When you look at the Leaguard Powell Nexus, how are they attached right now? They

share a love of ambiguity and of talking a lot. Uh, They'll take every platform they can, and right now they're both in the position of wanting to reassure markets that they are they know what they're doing. They have a new framework and they're putting that framework in place. For President le guard it's only a week old and that's why you see her UH and and pretty much all the ECB leadership have been been out and force over the weekend through this morning evince. The framework that they're

putting in place will be tested by data. Does the framework collapse when the data moves against these central banks? Uh? It will be a test of whether they're willing to follow through with what they've said they have UH. The features the similarities between the AT in the e c B or two fold. Number One is they interpret their two percent inflation goal is symmetric. That's news for the ECB. And second, it's outcome based, not outlook based, i e.

Wait until we actually see it happen before responding. Key difference. ECB hasn't gone fed like in saying the goal is an average inflation UH unspecified average. Two. And the one thing where they're most similar is their unspecific. Central bankers like to pitch a really big tent because that's how they can get their governing committees together, the FMC and the Government Council, and so they use ambiguous words. They don't they'll tolerate and overshoot. But how long an overshoot,

how big an overshoot, we don't know. Well within the language is unambiguous. Concern about housing prices, the idea that we've seen a huge move in that on both sides of the Atlantic. We've seen this the Federal Reserve as well as from the e CPS. Christine Laguard, What do you expect, What measures do you expect from central bankers to try to tame housing prices or will they just say this is a necessary consequence to a policy that

otherwise helps the economy. Well, here's an irony. The c B wants to add uh owner's equivalent rent into their price index because it makes it go up up higher, So they're actually welcoming that little extra kick to inflation to get closer to their goal. What can they do, Um, there's monetary policy and regulatory policy in the same building. Expect to see them to tighten up where they can

in terms of supervisory restraint. If it's a it's a problem, it's a problem they would prefer to address from that side of the building right now, Um, They're overwhelming concern is a macro one the level of employment. UH, and therefore they're not going to adjust the setting a rate

nor their balance sheet UH to worry about housing. Fed's got an opportunity when it does start the taper, though, because it could slow purchases of mortgage backed securities by by a quicker pace than it could do treasury securities. That would be a way to send the signal. And that's something that I know a number of FED officials have actually discussed, and people are wondering whether that will be where they start. I want to dig into one thing that you said, which is they know that they're

pretty far away from their employment targets. And Tom asked the question earlier. Is the Federal Reserve trying to set social policy in some ways with its targets given the fact that it has such a multifaceted kind of definition of full employment. So I think that the reality is we're putting new new labels on old bottles. That's true both at the ECB and and in FED Reserved. ECB is going to adjust its and direct its policy toward climate change. Exactly tell me how you do that? UM?

I think in this environment, share pal has actually been at the forefront of explaining what the central Bank has always done in a way to to reach more people. And the way you reach more people is you talk about their economic circumstance. You don't focus on on aggregates. Economists can be can can can get apart from the real world by focusing on concepts and numbers rather than people's plight and share Pal has done a good job of reorienting the focus, but it doesn't change what they're doing.

It's this is brilliant and they're going to be tested. If we look at John Taylor at Stanford, if we look at Paul Krugman, it's it's cute wherever he's got a shingle out today. The Venn diagram of Taylor and Krugman does have a lot of overlap, but that overlap isn't an overt social policy. How do we have a social bank given the heritage from mc chesney Martin. So I think you're right there, Tom, and it is a fundamental problem in the design of organizations. The FETE is

incredibly opaque. Right if you give it a lot of goals, it doesn't have many tools to hit all those goals. And so how will you be able to govern the trade offs unelected officials are are making. Um, do you really want the interest rate to be somewhat different because j Pal feels it's better for climate change this month, or rather, when you give them more narrow focus, you can monitor them better on how well they're actually doing their jobs. That's right. Now. What does Chairman Powell not

want to say this week? To me? This is so much what not to say. He doesn't want to make news. He doesn't want to make your next show interesting, because if he makes news, then is he said something different? He said something that was surprising. He wants to say everything's on course, that they are worried about the pandemic. Of course they've sat there pleased with unfolding economic data. But there's a long way to go. Yeah, and he's got it. But he's also got to reassure you they

got the tools and fool kit. They'll do whatever it takes. So he's got a walk of fine line, Vince one thing that he keeps harping on. A number of other Fed officials as well, including Tom Barkin of Richmond, have talked about the participation rate and how low it has remained despite the economic recovery that we have. How do you expect the Fed to explain that the frictions that

seem to be taking a longer than expected time to resolve. Yeah, they usuld just the semi annual Monetary Report what Friday night, it did a good job of talking about those problems in labor market matching and Charepal talked about at the press conference too. Basically, we did the easy stuff last year where people who had positions went back to work when when market activity resumed. Now we're in the much harder process of labor market clearing, where people have to

find new positions, new jobs. The unemployed people now are job less. Uh. Some of the unemployed employed people last year had jobs. The businesses were just temporarily closed. And so now the matching takes time, and people frustrated by the match leave the labor force, People who retired don't come back, people go to off you know, um uh black market activities too, uh and and people get frustrated and and that's why it takes a while for this

part of the labor mark. Uh. This this part of labor market clearing, and that's why the Federal Reserve is going to keep policy accommodated for a long time. I at least through gonna catch you have to get that perspective, that framework for thinking about things right now, Vince Ryan Hot there they met an investment management chief economist and macroish strategists right now with an update, joshra Sharpstein, Johns Hopkins,

and Professor Sharpstein. I just really wanted to go to what came up, not once, not twice, but three times this weekend. Fauci says, there's a schism in America. It's a division to split, a rift, a breach, a rupture, a break of separation. What do you do on the delta viron variant if you're in a part of America that's seventy vaccinated, Well, there are parts of America that are vaccinated percent backaccinated, and those are the parts which are now seeing not only in increase in cases, but

an increase in hospitalizations due to the delta variants. So you know, it's like here we go again in those places, and you know it's really important to be vaccinated there. But more generally, it reflects um a big problem that that we're having having you know, having people ready for them. I get that, but what do we do in the parts of the country that are sixty seventy or even more percent vaccinated. Do we just go on with our lives or do we have to amend our lives because

another part of America's down at thirty eight percent. Well, as long as there are places that are thirty eight percent, the places that are at you know, seventy or eighty are going to be at risk. Now that people who are vaccinated right now are pretty protected, but what about people who have conditions that you know, the vaccine doesn't work so well for them, their immunocompromise for example, or children, or um, you know, some particularly older adults, to people

even if they're vaccinated in some cases. I apologize to interrupt, but this is a really crucial point that I really haven't heard before. The vaccine does not work for certain individuals. How many people are we talking about, Well, they're probably uh, you know, hundreds of thousands of not maybe a little bit more than a million something like that. Who have you know, such significant medical conditions that they're just not going to react to the vaccine. It may even be

more as you consider people and immun suppressive drugs. We don't know exactly how much risk they're at, but it looks like they're not responding to the vaccine as well, and some people may not be responding at all, so they have to worry that they're going to come in contact with somebody who is infectious. Now, if you're in an area without you know, very many cases, that risk is low. But as long as the virus is really spreading in parts of the country, you know that risk

is going to be there. Dr sharfs Sceine. I think the confusion also stems from the uncertainty around what the threshold is to return to normal life, and our the United Kingdom is struggling with this as well. Does it become, as John has talked about, a public health issue when we have individuals who might suffer, but as a whole, the health care system is not going to be torpedoed by a flood of cases. Well, I think it it matters that you know the health care system is going

to be stable. I think that does allow for um, you know a lot of things to return to normal, um, but it still makes it unfortunate for people who have to take extra protections if they're doing that, because you know other people haven't decided to be vaccinated. It's even worse for the people who haven't decided to be vaccinated because their at risk for getting very sick or dying. How close are we to an under twelve vaccine? UM? You know, I think you have to wait for the

studies to be done right now. The companies are looking for the right dose UM, to make sure that you know, they have a dose that is both able to create the protection but without you know, uh side effects UM. And so until we know, until we see the data, it's hard to say. The studies are going on, and I think we'll have probably the early readouts in the next couple of months, don't do I still haven't got a clear read on this. Why are we vaccinating children? Well,

we're vaccinating right now. We're vaccinating adolescents because they can get COVID, many of them have. They can get severe cases of COVID, they can pass it on to people in their peer group and and who are older. So you know, the COVID is as bad or worse, UM, you know, depending on the prevalence compared to a bad flue season. And we vaccine kids against flu, you know, UM, it's a horrible disease when kids get it severely and

they can have long COVID just like adults can. But if that points out, we don't shut things down for the flu, do we? But we are with this and if we are at a stage which you just alluded to, so and clarify if you want to where we can treat in this as flu, why aren't we treating it as flow? Well? I think going in to the fall, we're basically going to be We're gonna want kids to be vaccinated and they should be back in school. That's

what we do for flu. Dr Charfs And where have we gone wrong when we look at the political divide that we see Republicans who are more inclined not to get vaccinated and Democrats more inclined to get vaccinated. Where have we gone wrong when it comes to messaging on a public health level just based on the science. Well that's a great question because you wouldn't imagine a political divide and cancer treatment or political divide and how to

treat your ear infection. But suddenly we have what appears to be a political divide and whether to get a safe in a vector vaccine for a horrible and lethal illness. Um. You know, I think that the roots to that are probably uh, you know, complicated, but I think it's a very bad development that the right wing media have sort of adopted this as a political called arms that like, if you believe in, you know that you don't like the Biden administration, then you shouldn't get vaccinated. And that

message is just horrible thing for public health. It's really irresponsible. People should be able to make a decision to protect themselves based on the science and the facts. Doctor thank you, gotta leave it that doctor Sha shall stain that of Johns Hopkins University. 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